MERLITE INDUSTRIES, INC. - DETERMINATION - 02/28/95. In the Matter of MERLITE INDUSTRIES, INC. TAT(H) 93-30(GC) - DETERMINATION

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1 MERLITE INDUSTRIES, INC. - DETERMINATION - 02/28/95 In the Matter of MERLITE INDUSTRIES, INC. TAT(H) 93-30(GC) - DETERMINATION NEW YORK CITY TAX APPEALS TRIBUNAL ADMINISTRATIVE LAW JUDGE DIVISION GENERAL CORPORATION TAX - PETITIONER WAS ENTITLED TO ALLOCATE INCOME WITHIN AND WITHOUT THE CITY FROM ITS BUSINESS OF SELLING COSTUME JEWELRY BY MAIL ORDER SINCE IT HAD A REGULAR PLACE OF BUSINESS IN AN OFFICE LOCATED IN THE VERMONT HOME OF ITS VICE PRESIDENT FOR MARKETING BY VIRTUE OF THAT EMPLOYEE PERFORMING WORK CRITICAL TO TAXPAYER'S MAIL ORDER BUSINESS ON A FULL-TIME BASIS IN THAT OFFICE AND PETITIONER PAYMENT RENT AND EXPENSES FOR THAT OFFICE. FEBRUARY 28, 1995

2 NEW YORK CITY TAX APPEALS TRIBUNAL ADMINISTRATIVE LAW JUDGE DIVISION :: In the Matter of the Petition : : DETERMINATION of : : TAT(H) 93-30(GC) MERLITE INDUSTRIES, INC. : : : Schwartz, A.L.J.: Petitioner, Merlite Industries, Inc., 114 Fifth Avenue, New York, New York, filed a Petition with the Department of Finance (the "Department") for a redetermination of deficiencies for the fiscal years ended January 31, 1987, January 31, 1988, and January 31, 1989 (the "Tax Years") with respect to General Corporation Tax ("GCT") under Chapter 6 of Title 11 of the Administrative Code (the "Code") of the City of New York (the "City"). A hearing was held before Hearing Officer Alvin Bernstein of the Department's former Hearings Bureau on October 8, 1991, October 22, 1991, November 14, 1991, January 6, 1992, and February 5, Initial briefs were filed by the Department on February 6, 1994 and by Petitioner on February 7, Reply briefs were filed by both parties on April 5, The Department filed a sur-reply brief on July 7, Petitioner was represented by Robert Tolz, Esq. of Todtman, Young, Tunick, Nachamie, Hendler & Spizz, P. C. The Department was represented by Heloisa G. Rapaport, Esq. and Mary E. Gallagher, Esq. of its Office of Legal Affairs.

3 Pursuant to the provisions of sections 168 through 172 of the City Charter as amended by act of the New York State ("State") legislature on June 28, 1992, Ch. 808, Laws 1992, section 140, this case, which was pending before the Hearings Bureau on October 1, 1992, was transferred to the Tax Appeals Tribunal for determination. The undersigned, on notice to the parties, was designated to issue a determination in this case. ISSUE Whether Petitioner maintained a regular place of business in the home of one of its executives so that it could use the threefactor (property, payroll, and receipts) "Business Allocation Formula," provided by section (a) of the Code to allocate its entire net income ("ENI") within and without the City. FINDINGS OF FACT 1. Petitioner is a State corporation which is engaged in the business of selling costume jewelry and other incidental products such as perfume and watches via mail order. During the Tax Years, all of Petitioner's shares were owned by Alvin Meyer and members of his family. 2. Petitioner's headquarters were located at 114 Fifth Avenue, New York, New York (the "Headquarters"). The Headquarters were comprised of 16,000 square feet of leased space at which more than 100 employees, including executives and clerical staff, worked. Inventory was kept there; orders were filled from that location; and a letter shop from which mailings were done was situated at the Headquarters. 3. Petitioner's business operations consisted of four main functions: (a) the merchandising function which involved finding and selecting the products that were manufactured by third - 2 -

4 parties and which Petitioner offered for sale; (b) the marketing function which involved all steps necessary to locate potential customers and convince them to purchase Petitioner's products; (c) the operations function which included all activities involved in obtaining and processing orders from customers; and (d) the finance and accounting function which involved responsibility for all of the company's financial matters. 4. Petitioner sold its products to individuals who either wanted to make money by selling its merchandise to others or to save money by purchasing Petitioner's merchandise for their own use at what was represented to be the "wholesale" price. It made no difference to Petitioner whether its customers bought the products to resell them or for their own use, as the prices at which Petitioner sold its merchandise were the same in either event. 5. Petitioner did not employ salespeople or have any direct oral communications with any of its customers in order to sell its products. Petitioner obtained its customers and convinced them to purchase its merchandise solely through printed advertising material which it distributed in several ways. Petitioner's yearly advertising costs during each of the Tax Years, which ranged between eleven and fifteen million dollars, exceeded forty percent of its gross receipts for each year and was its single largest expense. Petitioner's capital and labor costs were minor in comparison. 6. Petitioner reached new customers using both display advertising in various publications and printed advertising flyers known as recruiting inserts ("Inserts"). The purpose of the display ads and Inserts was to solicit potential customers to request Petitioner's catalogue. Inserts were used much more extensively than display ads and Petitioner received over three million responses per year to the solicitations contained in the - 3 -

5 Inserts. Inserts generally reached potential customers by being: (a) included with someone else's product such as in packages of L'eggs hosiery; (b) included in mailings such as the Carol Wright mailing containing coupons from many different companies; (c) distributed along with offers from a record club to the record club's customers; and (d) included as free standing pieces in magazines and newspapers. Petitioner distributed over 200 million Inserts each year. 7. Once Petitioner received a request for its catalogue, it sent a mailing to that potential customer which typically included a description of Petitioner's offer, a catalog containing a description of its merchandise and its suggested retail price, a price list, an order form, and various sales aids. 8. An individual who responded to a first mailing received seven mailings per year containing different promotional offers. These offers typically contained various incentives such as a special discount, for the customer to purchase merchandise at that time. 9. Petitioner devised methods to allow it to identify which Insert and which point of insertion was responsible for causing a person to become a customer of the company. Petitioner constantly tested its Inserts and distribution methods to enable it to learn which Inserts and procedures yielded the best sales results. 10. Andrew Jarrell was a well known free-lance copywriter prior to his association with the Petitioner. From 1971 until early 1974, as a free-lance copywriter consultant, Mr. Jarrell worked for Petitioner as well as for other clients. During that period, Mr. Jarrell worked on an assignment-by-assignment basis with Petitioner but did not participate in Petitioner's marketing - 4 -

6 activities beyond writing the words of its "copy." Beginning in March of 1974, Mr. Jarrell began working exclusively for Petitioner, both as a copywriter and a marketing consultant. In 1978, Mr. Jarrell became an employee of Petitioner. During the Tax Years, he was Petitioner's Vice President of Marketing. 11. During the Tax Years, Mr. Jarrell was one of Petitioner's five highest paid employees. He participated in Petitioner's retirement plan and he and his family were covered by Petitioner's medical insurance plan. Mr. Jarrell was treated as Petitioner's employee for payroll tax purposes. He was not a shareholder of Petitioner. There is no indication in the record, nor has the Department suggested, that Mr. Jarrell was related by blood or marriage to Petitioner's shareholders. 12. In 1972, prior to his employment by Petitioner, Mr. Jarrell moved to West Newbury, Vermont. He continued to reside there during the Tax Years. West Newbury is a very small town in rural Vermont which has a post office, church, and a few houses located in the village. The town has no office buildings. 13. Mr. Jarrell preferred to work from his home solely for his own convenience and as a matter of his personal temperament. Mr. Jarrell insisted, as a condition of working for Petitioner, that he be permitted to work from his home. Petitioner strongly desired Mr. Jarrell's services and believed that it was in its best business interest to use Mr. Jarrell, rather than another individual, for marketing services. Accordingly, Petitioner reluctantly agreed to permit Mr. Jarrell to work from his home in Vermont. Over the years, Alvin Meyer, Petitioner's president and principal owner, complained about this arrangement but Mr. Jarrell insisted that his working from his home in Vermont was a non-negotiable condition of his employment. From time to time, Petitioner would test ads created by someone other than Mr. Jarrell, but Petitioner never found anyone else's ads to be as - 5 -

7 effective. Accordingly, Petitioner concluded that it was better to employ Mr. Jarrell, even though he insisted on working from his home, than to employ someone else who was willing to do the work that Mr. Jarrell performed from the Headquarters. 14. Mr. Jarrell's office (the "Vermont Office") was a nine foot by twelve foot room on the second floor of his home. The Vermont Office was converted from a bedroom prior to the time Mr. Jarrell became employed by Petitioner. He initially furnished the Vermont Office at his own expense. Once Mr. Jarrell became employed by Petitioner, Petitioner paid for any new equipment as needed. During the Tax Years, the Vermont Office contained two desks, two chairs, a typewriter, an air conditioner, and a telephone, all of which were paid for by Petitioner, as well as a reading lamp which was owned by Mr Jarrell. Petitioner reimbursed Mr. Jarrell for the cost of office supplies and other incidental expenses. 15. In 1981, Petitioner entered into a month-to-month lease with Mr. and Mrs. Jarrell for the Vermont Office. The rent under the lease was initially $50 per month. Towards the end of the Tax Years, the rent was increased to $300 per month. No explanation was provided for the rent increase. 16. There were two telephone lines in Mr. Jarrell's home. One was listed in the local telephone directory as Petitioner's telephone number. Bills for this line were sent to Petitioner's Headquarters from which they were paid. The other line was listed as Mr. Jarrell's personal telephone number and Mr. Jarrell paid for this line. Both lines could be answered from Mr. Jarrell's office as well as from other locations in the home. 17. Petitioner rented a post office box in West Newbury, Vermont at which it received mail. Mr. Jarrell rented a separate post office box in West Newbury for his personal mail

8 18. There was no sign outside Mr. Jarrell's home indicating that it contained an office of Petitioner. There was no separate entrance in Mr. Jarrell's home that could be used to reach the office. No inventory was stored in the Vermont Office, nor were any business meetings held in this office. Mr. Jarrell did not meet with customers at this office or anywhere else. No other employees of Petitioner used this office. 19. Mr. Jarrell did not maintain business insurance for his home. It does not appear that Petitioner maintained any insurance coverage for Mr. Jarrell's home. 20. Except for occasional incidental use by Mr. Jarrell's family members of the office typewriter in the evenings or on weekends, the Vermont Office was used only by Mr. Jarrell in connection with his work for Petitioner. 21. The closest town to West Newbury at which space in an office building was available was Bradford, Vermont, eleven miles away. To get there from home, Mr. Jarrell would have had to travel part of the trip over dirt roads that were impassible during difficult weather conditions. At one point Petitioner suggested that it obtain office space in Bradford at which Mr. Jarrell would work. Mr. Jarrell was opposed this idea because it would have inconvenienced him and not provided any perceived benefit to Petitioner. 22. Mr. Jarrell originally had been issued business cards that listed the Headquarters address and telephone number. When he used those cards, he crossed out the address and wrote in the address and telephone number of the Vermont Office. At some point, Mr. Jarrell was provided with business cards that listed the address and telephone number of the Vermont Office, but it - 7 -

9 was not clear whether this change had occurred by the end of the Tax Years or in a later period. 23. Petitioner apparently had stationery which listed the address of the Vermont Office but it is unclear whether this stationery was in existence during the Tax Years. In any event, Mr. Jarrell had very little need for Petitioner's letterhead and may have needed to use it at most only twice a year. 24. Decisions concerning Petitioner's marketing policy were made by its Marketing Committee which consisted of Alvin Meyer; his son, Geoffrey Meyer; Arnold Braff, Petitioner's Executive Vice President and Chief Operating Officer; and Mr. Jarrell. The Marketing Committee discussed new marketing ideas, devised tests to try to improve current marketing efforts, examined possible new ventures from a marketing point of view, and evaluated the general direction of Petitioner's business. 25. The Marketing Committee held meetings at Petitioner's Headquarters three or four times per year. These meetings were intensive and lasted a few days each. Mr. Jarrell came to the City to attend each of these meetings. Petitioner paid for Mr. Jarrell's travel, hotel, and incidental expenses connected with these trips. 26. In addition, the Marketing Committee had weekly scheduled telephone conferences in which Mr. Jarrell participated, although the conferences were not held during weeks in which Alvin Meyer was unavailable. Mr. Braff kept notes of decisions made at these meetings so that the appropriate individuals could be assigned the work necessary to implement these decisions. 27. Mr. Jarrell as a full-time employee of Petitioner worked a regular work week during normal business hours. From - 8 -

10 Monday through Friday, Mr. Jarrell's work day typically began at 8:30 a.m. when he went to the Post Office to get the day's mail. He would return to the Vermont Office by about 8:50 a.m. and begin working on pending matters. Mr. Jarrell frequently would telephone Mr. Braff in the City a few minutes before 9:00 a.m. to discuss business matters. He generally spoke with Mr. Braff and/or someone else in Petitioner's Headquarters several other times during each day. His workday continued until 4:30 p.m. or 4:45 p.m., with a brief mid-day break. On Saturday, Mr. Jarrell would pick up the business mail and might spend a short time reading it. He took approximately ten vacation days per year, a day or two at a time, and did not take off as many days per year as Petitioner's company policy permitted. 28. Mr. Jarrell had ultimate responsibility for all of Petitioner's advertising space in magazines and other publications (display advertising). Anyone who wanted to sell advertising space to Petitioner was required to contact Mr. Jarrell in the Vermont Office. Mr. Jarrell received communications at the Vermont Office from salespeople from various publications both by telephone and by mail. During the Tax Years, Mr. Jarrell had contact with between 100 to 200 publications. Mr. Jarrell determined the publications in which and when to advertise, and negotiated the price of advertising space. Once Mr. Jarrell made a decision to purchase advertising space in a publication, he would advise a clerk in the Headquarters to prepare the paperwork needed to place the ad in a specific publication at a particular rate. Mr. Jarrell also was responsible for writing the copy that appeared in the display ads. He generally prepared a sketch of the art work that accompanied the copy and oversaw the work of the artist who created the final drawing. 29. Mr. Jarrell also had primary responsibility within the company for marketing analysis. Petitioner ran various tests to - 9 -

11 compare the effectiveness of different display ads and Inserts. The results of these tests were compiled in detailed reports that were sent to Mr. Jarrell for analysis. Mr. Jarrell was sent a large, detailed report, as well as a few smaller reports, each week. These reports were sent to the Vermont Office by mail or by courier. An important part of Mr. Jarrell's responsibilities involved analyzing these reports to enable Petitioner to make changes that would improve its marketing strategies. While the Marketing Committee as a whole made the final decisions as to how to modify advertising materials, Mr. Jarrell took the lead in suggesting those changes. 30. Mr. Jarrell also was Petitioner's primary copywriter. In addition to writing the copy for the display ads, he was responsible for writing the copy that appeared in the Inserts and the direct mail pieces sent to customers. 31. A typical Insert or advertising mailing began as an idea conceptualized by the Marketing Committee. Typically a project started with the preparation of a project schedule that indicated who had responsibility for which aspect of the project. The basic idea would then be expressed as a "writer's rough" prepared by Mr. Jarrell. This was a sketch showing Mr. Jarrell's idea of the layout of the flyer. Mr. Jarrell then would prepare the exact text of the copy for the ad. The copy would be marked up by an artist who was responsible for suggesting what type faces should be used. Then an artist would translate the idea into visual form and would prepare a comprehensive layout (comp). The comp contained the copy in the actual type face in the proper position on the page along with detailed drawings of the accompanying art work. The comp would be sent to Mr. Jarrell for approval to see if it adequately executed the idea. If Mr. Jarrell approved the comp, the ad would go into production. Sometimes several versions of the comp would be prepared until

12 one was approved by Mr. Jarrell. Mr. Jarrell worked on 100 to 200 such projects per year. 32. In 1981, Petitioner applied for and was granted authority to do business in the State of Vermont. Petitioner's certificate of authority from Vermont contains a line for "place of business in Vermont" and this line contains no entry. However, the application for authority that Petitioner filed with the State of Vermont does not request this information. 33. For each of the Tax Years, Petitioner filed Vermont Corporate Income Tax Returns and paid the amount of tax that was computed to be due thereon. Vermont imposes its corporate income tax on income allocable to Vermont under a three factor formula 1 similar to that under the GCT. Under those computations, 0.09 percent of Petitioner's income was subject to tax in Vermont during each of the Tax Years. Petitioner's receipts from Vermont ranged from approximately $32,000 to $62,000 per year during each of the Tax Years. 34. Petitioner filed Form 3L, City GCT Returns, for each of the Tax Years on which it allocated its ENI within and without the City based on the three factor formula. Under this computation, approximately 67 to 68 percent of Petitioner's ENI was allocated to the City and was subject to tax in each of the Tax Years. Petitioner's receipts from the City ranged from approximately $590,000 to $1,100,000 during the Tax Years. 1 In the case of an S corporation (such as Petitioner), Vermont's tax is imposed on income distributed or distributable to non-resident shareholders under the federal S corporation rules. These amounts differed slightly from ENI computed for purposes of the GCT

13 35. Petitioner was not required to and did not file income 2 tax returns in any state other than the State and Vermont or any municipality other than the City. Petitioner's total receipts ranged from approximately $23,000,00 to $37,000,000 during the Tax Years. 36. The Department issued a Notice of Determination, dated October 9, 1990, to Petitioner asserting the following GCT deficiencies: 3 TAX YEAR ENDED PRINCIPAL INTEREST TOTAL 1/31/87 $49,604 $19,413 $69,017 1/31/88 95,705 27, ,303 1/31/89 179,671 31, ,463 TOTAL $324,980 $78,803 $403,783 In computing this deficiency, the Department allocated 100 percent of Petitioner's ENI to the City. 37. On January 4, 1991, Petitioner timely filed a Petition for redetermination of the above deficiencies. 38. During the course of the hearing, Petitioner conceded that the Department was correct with respect to a minor adjustment for the Tax Years ended January 31, 1987 and January 31, 1988 which allocated Petitioner's investment income from cash on deposit by using Petitioner's business allocation percentage ("BAP") rather than its investment allocation percentage ("IAP"). 2 The State returns are not in the record and it cannot be determined whether the amounts of income allocable to the State exceeded the amounts allocable to the City. 3 Computed to October 15,

14 39. During the course of the hearing, the Department conceded that its adjustment for the Tax Year ended January 31, 1989, by which Petitioner's investment income was allocated using its BAP rather than its IAP, was erroneous. The Department submitted a revised computation of tax due which took this revision into account and updated the amounts of interest claimed to be due. That computation, which represents the amounts remaining in issue, is as follows: 4 TAX YEAR ENDED PRINCIPAL INTEREST TOTAL 1/31/87 $ 49,604 $28,848 $ 78,452 1/31/88 95,705 44, ,161 1/31/89 166,128 56, ,256 TOTAL $311,437 $129,432 $440, By letter, dated February 16, 1990, to the auditor who conducted the audit of Petitioner's GCT returns for the Tax Years, Petitioner requested that the Department exercise its discretion to disregard the property and payroll component of its BAP and to allocate Petitioner's ENI within and without the City based entirely on the receipts factor. During the course of the hearing, the Department suggested that a proper method of allocation might be to disregard the receipts factor entirely and to allocate Petitioner's BAP based only on the payroll and property factors. The parties, however, subsequently stipulated that if Petitioner is permitted to allocate its income, the regular three factor BAP formula should be used. STATEMENT OF POSITIONS Petitioner asserts that it is entitled to allocate its ENI 4 Computed to December 31,

15 within and without the City because it has a regular place of business at the Vermont Office in the home of Mr. Jarrell. It asserts that this location was continuously maintained, occupied, and used by Petitioner's employee, Mr. Jarrell, who carried on Petitioner's business in a regular and systematic manner at this location. Petitioner also contends that the phrase "regular place of business" should be construed in the same manner as the phrase "doing business" for purposes of determining nexus to impose a tax. Finally, Petitioner asserts that the Department's interpretation of the regular place of business requirement is unconstitutional under Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977). The Department asserts that the Vermont Office should not be considered Petitioner's regular place of business for several reasons: (a) There was no separate entrance or sign outside Mr. Jarrell's home identifying it as Petitioner's office; (b) Petitioner did not advertise this location as its place of business; (c) none of Petitioner's business assets or records were stored there; (d) no employees, other than Mr. Jarrell, worked at this office; (e) no business insurance policy was maintained for this space; (f) the Vermont Office was much smaller than the Headquarters and only one employee worked there; (g) the Vermont Office was not crucial to Petitioner's business; and (h) Mr. Jarrell's services were not crucial to Petitioner's business. The Department asserts that since Petitioner's business was selling merchandise and not copywriting, what Mr. Jarrell did in the Vermont location did not constitute the carrying on of Petitioner's business in a regular and systematic manner. The Department further asserts that the Vermont Office cannot constitute Petitioner's regular place of business because it was maintained for Mr. Jarrell's convenience and not for Petitioner's benefit

16 CONCLUSIONS OF LAW Section of the Code imposes the GCT for the privilege of "doing business, or of employing capital, or of owning or leasing property in the city,... or of maintaining an office in the city." Section (a) of the Code permits a taxpayer to allocate business income within and without the City unless the taxpayer does not "have a regular place of business outside the city other than a statutory office." Former Reg. sec (now 19 RCNY 11-63(b)(2)) (the "Rules") defines a regular place of business in pertinent part, to be "any bona fide office (other than a statutory office), factory, warehouse, or other space which is regularly used by the taxpayer in carrying on its business." In determining whether a corporation has a bona fide regular place of business outside the City, no single factor is determinative. See Arthur I. Maier Associates, TAT(E) 93-2 (UBT), 94-1 NYTC CT-110 (NYC Tax Appeals Tribunal, September 2, 1994) [dealing with a similar requirement under the City Unincorporated Business Tax ("UBT")]. Among the factors that historically have been looked to by the courts in deciding the identical issue under the now repealed State place of business 5 requirement are whether the taxpayer: (1) held itself out as doing business at the claimed out-of-state office; (2) had a source of income from the claimed out-of-state office; (3) filed income or franchise tax returns and paid tax in the other state; (4) had business capital and income with a situs in the other state; (5) had full-time employees at the claimed out-of-state 5 Most appellate case law involved the regular place of business requirement contained in the State corporate franchise tax statute prior to that requirement's repeal in Since the language of the City's regular place of business requirement tracks that of the former State requirement, due weight is afforded the State decisions when interpreting the parallel City regular place of business requirement

17 office; (6) was licensed to do business in the other state; (7) paid rent or utility bills for the claimed out-of-state office; (8) had a telephone listing at the claimed out-of-state office; and (9) had one or more signs bearing its name at the claimed out-of-state office. See Alconox, Inc. v. State Tax Comm., 114 A.D.2d 575, 577 (3rd Dept., 1985); Adirondack Steel Casting Company, Inc. v. State Tax Comm., 107 A.D.2d 924, 925 (3rd Dept., 1985); Matter of Psychological Corp. v. State Tax Comm., 99 A.D.2d 905, 906 (3rd Dept., 1984); Matter of Micro Computer Corp. v. State Tax Comm., 65 A.D.2d 867 (3rd Dept., 1978); and Matter of UPG Properties. v. State Tax. Comm., 64 A.D.2d 316, 319 (3rd Dept., 1978). Although Petitioner did not have a sign outside Mr. Jarrell's home or a separate entrance to Mr. Jarrell's office, it met all of the other above-mentioned formalistic factors. It held itself out as doing business in Vermont since sales representatives from various publications who wished to sell advertising space to Petitioner were referred to Mr. Jarrell in Vermont. Petitioner had receipts from sales made to customers located in Vermont ranging from $32,000 to $62,000 per year during the Tax Years. It filed income tax returns in Vermont and paid the amount of tax that was computed to be due on those returns. Petitioner was licensed to do business in Vermont. An employee who was one of Petitioner's key executives worked fulltime at the Vermont Office. Petitioner had a lease for the Vermont Office and paid rent for the space. Petitioner had a telephone listing in its name for the Vermont Office. The missing formalistic factors, that there was no separate entrance or sign, and no advertisement of the office, and that there apparently was no business insurance policy on the premises, are not sufficient in light of the other indicia to indicate that the Vermont Office was not a regular place of business

18 The Department would like to disregard the existence of the Vermont office essentially because the Headquarters was much larger and was the base for many employees, while the Vermont office was admittedly small and was the base for only one employee. However, the law does not require a comparison of the relative sizes of a taxpayer's locations in order to determine if one of them is a "regular place of business." The Department thus inappropriately seeks to impose an additional requirement that is not imposed by the Code, the Rules, or the case law. The Department also would have the Vermont Office disregarded on the grounds that orders were not filled from that office and Petitioner did not meet with customers at that office. The Department notes that Petitioner's business is selling jewelry and that it receives orders and payments in the City, not Vermont. The Department asserts that since Petitioner's business is selling jewelry and not copywriting, Mr. Jarrell's activities in Vermont were not involved in generating Petitioner's income. This argument is unpersuasive. The record amply establishes that Petitioner did not meet with customers at any location. The clerical function performed in the City of processing orders received by mail would not have generated revenues if Petitioner had no customers. Mr. Jarrell's marketing functions were crucial to Petitioner's ability to obtain customers and to make sales to them. What Mr. Jarrell did was an integral part of Petitioner's overall income generating business operations and was as essential as any performed at the Headquarters. The Department next argues that Petitioner failed to prove that the employee in Vermont, Mr. Jarrell, was critical to its marketing function. The Department cites no authority for the proposition that for an out-of-city office to constitute a "regular place of business," a bona fide employee who works at that office must perform a critical function for the business; nor is there any such requirement in the Code or Rules. However,

19 even if this were a requirement, the Department's assertions are not supported by the record. The Department concedes that the function of deciding how to advertise products and market them using Inserts was an important part of Petitioner's business operations. The Department simply is wrong in its assertion that it was Mr. Braff who performed these responsibilities. The record clearly indicates that this was a key part of Mr. Jarrell's job. The Department also asserts that the Vermont Office cannot be a regular place of business because Petitioner failed to establish that the location outside the City was critical to its business. The Department notes that Petitioner did not lease space in Vermont for the specific purpose of basing its employees there and indeed would have preferred that Mr. Jarrell work in the City. Again, the Department cites no authority for the proposition that a bona fide out of City office must be critical to a taxpayer's business, nor is there any such requirement in the Code or Rules. The law merely requires that the taxpayer regularly carry out its business at the location in issue. In this case, the record is clear that Petitioner, using its sound business judgment, decided that Mr. Jarrell's services were so valuable to it that it was willing to be inconvenienced by permitting him to work in Vermont and that by Mr. Jarrell's working there, Petitioner's business was regularly carried on in the Vermont Office. It is not the function of this forum to second guess such a legitimate business decision. Finally, the Department asserts that the Vermont Office should not be considered to be Petitioner's regular place of business because Mr. Jarrell chose to work there for his own convenience and was not required by his employer to work in his home in Vermont. To support this position, the Department cites Chomyn et al. v. Tully, 65 A.D.2d 889 (3rd Dept., 1978); Gross et al. v. State Tax Comm., 62 A.D.2d 1117 (3rd Dept., 1978); Page

20 v. State Tax Comm., 46 A.D.2d 341 (3rd Dept., 1975); and Speno v. Gallman, 42 A.D.2d 627 (3rd Dept., 1973). These cases all arise under the State personal income tax law and address the question of whether a non-resident employee who works in the State but chooses to do some of his work at home out of the State for his own convenience, and not as a requirement of his employer, may allocate his own income for personal income tax purposes within and without the State. Those cases are inapplicable to the instant situation. Here a taxpayer chose to set up an office at the home of a key employee in order to be able to employ and retain that individual. The key employee was not an owner of the taxpayer nor related in any way to the owner of the taxpayer. If anything, the decision to set up an office in someone's home caused great inconvenience to the taxpayer. In addition, Mr. Jarrell worked in the Vermont Office on a regular, full-time basis, whereas the employees in the cases cited above did most of their work in the State and worked only sporadically at home. The instant case also differs from cases such as Cohen, Inemer & Borofsky, TAT(E) (UB), 94-1 NYTC CT-183 (NYC Tax Appeals Tribunal, October 19, 1994) where an accountant who was a partner of an accounting firm whose office was in the City chose to work at home occasionally for his own convenience. In that case, it could not be determined from the record whether the accountant met with clients at his home or merely returned to that location after visiting a client and perhaps did occasional paperwork in his home office. In Cohen, Inemer, supra, the Commissioners of this Tribunal explained that: The existence of an office in the home of an employee or partner who occasionally does taxpayer's work there does not transform a "home office" into a regular place of business for the taxpayer. This is not to say that a taxpayer can never establish that it has a regular

21 place of business outside the City at an office in the home of an employee or a partner. However, it is clear that a taxpayer must show more than that there was a separate room in a home which was furnished as an office and at which the employee or partner occasionally performed work for the taxpayer. Significantly, a taxpayer claiming a regular place of business at such location must maintain records clearly documenting which of its activities took place at that office. [Emphasis added.] Thus, it is clear that the mere fact that an office is located in someone's home does not mean that the analysis stops there. See also, Arthur I. Maier Associates, supra, where the Commissioners of this Tribunal recently stated:... it appears that the requirements imposed on the putative "place of business" are intended to satisfy two requirements: to ensure that the New York taxpayer does business there and to further ensure that the location is indeed intrinsically linked to the said taxpayer. [Emphasis added]. The record clearly indicates that Mr. Jarrell more than occasionally performed work for Petitioner at his home. Rather, he worked on a full time basis in the Vermont Office on specific marketing functions. There also is no doubt that Petitioner did business in Vermont and that the work Mr. Jarrell performed was intrinsically linked to Petitioner. Petitioner sold its merchandise by mail order. It had no sales staff. The only way it attracted new customers and sold its products to existing customers was via print advertising. Mr. Jarrell, Petitioner's Vice President of Marketing, was responsible for writing the copy and dreaming up the concepts for virtually all of Petitioner's print advertising. In addition, Mr. Jarrell supervised artists and others who actually put his ideas into printed form. Mr. Jarrell also was responsible for overseeing and interpreting the results of the ongoing testing programs by which Petitioner could

22 continuously monitor which of its ads were effective and which should be changed. These marketing functions went to the heart of Petitioner's business operations. If these functions had not been performed, it is unclear how Petitioner would have sold any merchandise. As it happened, these functions were performed at a fixed location in Vermont. They were performed "regularly and systematically" since Mr. Jarrell worked full-time year round at the Vermont Office. Under the guidance set forth in applicable Rules and case law, the Vermont Office thus constituted a bona fide office within the meaning of section (a) of the Code. Moreover, the results in this case should be no different than if Petitioner, over Mr. Jarrell's objection, had rented office space in Bradford, Vermont at which Mr. Jarrell was to work. Mr. Jarrell would have gone to work five days per week for seven or eight hours each day, except when the roads were impassible due to bad weather. He would have done exactly the same work that he did in the room set aside in his home. The key factor is not whether a business location happens to be in a home. Rather, what is important is what work was done at that location and how regularly the work was done. The Department has articulated a concern that if Petitioner is deemed to have a regular place of business outside the City, and thus is permitted to allocate its income within and without 6 the City, over thirty percent of its income will not be taxed by 6 The Department apparently added the amount of Petitioner's income allocated to Vermont and to the City and concluded that over thirty percent of Petitioner's income will go untaxed by any State in each of the Tax Years. It cannot be determined from the record whether Petitioner was required to pay tax to the State on a greater percentage of its income than it was required to pay to the City. However, it is likely that Petitioner had at least some sales in the portion of the State that is outside the City and

23 any state or municipality. The Department's approach to preventing this perceived inequity is to assert that Petitioner has no out of City regular place of business. However, the Code is clear. If Petitioner had a regular place of business, the tax base upon which the GCT is imposed is an allocated tax base. The statute does not provide that income not taxed in any other state or municipality is to be "thrown back" to and taxed by the City. Further, since the City is a municipality and not a state, it is fairly certain that in the case of any large national business subject to City taxation, a significant amount of income will not be subject to municipal (vis-a-vis-state) level income taxation. It is axiomatic that statutes that impose a tax must be strictly construed and are not to be given a wider scope than their language justifies. N.Y. Statutes (McKinney's) 313(b). This forum will not impose a throw-back rule where none is legislatively provided. Petitioner also raises two additional issues, that: (1) the term "regular place of business" in section (a) of the Code must have the same meaning as the term "doing business" in 7 section of the Code for purposes of nexus to tax; and that, therefore, the Department's estimate of untaxed income may be somewhat overstated. 7 Petitioner asserts that the requirement in the Code that a taxpayer must have a regular place of business outside the City to be permitted to apportion income apparently arises from the view held by some authorities during the early part of this century that a foreign corporation is not subject to a state's franchise or other corporation business tax unless it maintains a place of business in the state. See, Hellerstein & Hellerstein, State Taxation, Vol. I (Corporate Income and Franchise Taxes), 2d Ed. (WG&L 1993), 8.02[3][b], pp Petitioner believes that since the contemporary understanding of nexus to tax has expanded (e.g., so that its operations in Vermont clearly would be taxable by that state), the interpretation of "regular place of business" should similarly be expanded

24 (2) the Department's interpretation of the regular place of business requirement would violate the Commerce Clause of the 8 Federal Constitution as interpreted by the United States Supreme Court in Complete Auto Transit, supra. 9 However, since it has been found that Petitioner had a bona fide office outside the City, these issues need not be decided. Under Petitioner's analysis, if a taxpayer's activities in another jurisdiction outside the City were such that the other jurisdiction would have nexus to impose a tax under rules equivalent to those set out with respect to the City's nexus to tax rule 19 RCNY section 11-03, (a rule that had not yet been promulgated during the Tax Years) those activities should be considered a "regular place of business" and the taxpayer should be permitted to apportion its income within and without the City. The Department does not directly address this argument. 8 U.S. Constitution, Article I, 8, clause 3. 9 Petitioner contends that all but the first prong of the four prong Complete Auto Transit test would fail under the Department's interpretation of the regular place of business requirement and that this Tribunal is obligated to construe the statute and rules, if at all possible, to avoid a finding of unconstitutionality. Under Complete Auto Transit, supra, for a statute to pass muster under the Commerce Clause, it must: (1) be applied to an activity that has a substantial nexus with the state; (2) be fairly apportioned to activities carried on by the taxpayer in the state; (3) not discriminate against interstate commerce; and (4) be fairly related to services provided by the state. Among other arguments, Petitioner asserts that there is an impermissible risk of multiple taxation of the same income. If every jurisdiction had a statute like the City's and interpreted it as the Department suggests, theoretically, a taxpayer might be taxed on 5,000% of its income if it had a small office, sufficient for nexus, in each of the 50 states, but no large office in any of them. The Department asserts that there is no danger of multiple taxation of the same income because Petitioner's activities in Vermont were insufficient to create nexus for that state to tax Petitioner. The Department further asserts that if Vermont did have nexus to tax Petitioner, the Department could use its discretion to allocate Petitioner's income to the City such that the income subject to tax in Vermont would not also be subject to tax in the City; i.e., unconstitutionality can be avoided by use of a throw-back rule

25 ACCORDINGLY, IT IS HEREBY CONCLUDED THAT Petitioner had a regular place of business at the Vermont Office located in Mr. Jarrell's home and thus is permitted to allocate its entire net income within and without the City under the three factor formula. For the reasons set forth above, the Petition of Merlite Industries, Inc. is granted and the deficiency asserted in the Notice of Determination, dated October 9,1990, is cancelled except to the extent necessitated by the adjustments required pursuant to Finding of Fact 38, supra. DATED: February 28, 1995 Brooklyn, New York MARLENE F. SCHWARTZ Administrative Law Judge