State of New York 

Court of Appeals 

OPINION 

This opinion is uncorrected and subject to revision 

before publication in the New York Reports. 

No. 34 

In the Matter of Walt Disney 

Company and Consolidated 

Subsidiaries, 

 Appellant, 

 v. 

Tax Appeals Tribunal of the State 

of New York et al., 

 Respondents. 

---------------- 

No. 35 

In the Matter of International 

Business Machines Corporation & 

Combined Affiliates, 

 Appellant, 

 v. 

Tax Appeals Tribunal of the State 

of New York et al., 

 Respondents.
- 1 - 

Case No. 34: 

Marc A. Simonetti, for appellant. 

Frederick A. Brodie, for respondents. 

Institute for Professionals in Taxation, amicus curiae. 

Case No. 35: 

Jeffrey A. Friedman, for appellant. 

Frederick A. Brodie, for respondents. 

CANNATARO, J.: 

 Under a taxation scheme in effect from 2003 through 2013, New York allowed 

corporations that paid franchise taxes in New York to deduct income received as royalty 

payments from members of the same corporate group, or family, in calculating their taxable 
 - 2 - Nos. 34 & 35 

- 2 - 

income. The deduction was allowed only if the royalty payment came from a related entity 

that had already paid a New York tax on the same income through operation of another 

provision in the Tax Law that required companies to add back royalty payments made to 

related entities for the purposes of calculating their own taxable income. 

 In these cases, the state Department of Taxation and Finance determined that 

appellants improperly deducted royalty payments they received from affiliates in foreign 

countries that were not subject to New York franchise taxes and, so, were not required to 

add those payments back on a New York tax return. Appellants challenge the Tribunal’s 

denial of the deduction as being contrary to the clear language of the statute and as violating 

the Commerce Clause’s prohibition on discrimination against foreign commerce. Because 

the Appellate Division correctly interpreted the statutes as permitting a tax deduction only 

where a related subsidiary was subject to the add back requirement, and because any burden 

on interstate or foreign commerce created by this tax scheme was incidental and did not 

violate the dormant Commerce Clause, we affirm.1 

I. 

 Corporations that do business in New York must pay an annual franchise tax (Tax 

Law article 9-A). During the years in question, corporations reported their article 9-A tax 

liability based on the greatest of four alternative bases, the most common of which was 

“entire net income” (ENI) allocated to New York (former Tax Law § 210 [1] [a]). At that 

1

 We note that the subject tax scheme was repealed over a decade ago and so our holding 

today has no direct applicability to the current scheme for taxing royalty payments between 

related entities. 
 - 3 - Nos. 34 & 35 

- 3 - 

time, ENI generally consisted of the taxpayer’s entire federal taxable income (FTI) with 

statutorily enumerated modifications that either added to or subtracted from the federal 

taxable income (see id. § 208 [9]). The portion of a company’s ENI that was taxable in 

New York was determined using the business allocation percentage (BAP) (id. § 210 [3] 

[a], [b]). The BAP was determined by, among other things, comparing a taxpayer’s 

business receipts from New York to its total business receipts from all sources (including 

related-member royalties) (id. § 210 [3] [a] [2]). For the purposes of BAP calculation, 

receipts from intangibles such as royalties on intellectual property (IP) were allocated to 

the jurisdiction in which the IP was used (see id. § 210 [3] [a] [2] [C]; see also former 20 

NYCRR 4-4.6). 

 Prior to passage of the subject tax scheme in 2003, royalty receipts were included 

in all taxpayers’ ENI. Large multinational conglomerates regularly avoided state taxes on 

income derived from intellectual property (IP). For example, a parent corporation2 would 

transfer its IP assets to a subsidiary holding company located in a jurisdiction that had little 

or no tax on income from intangible assets. The subsidiary would, in turn, license the IP 

back to the parent in exchange for royalty payments, which were typically excluded from 

the parent company’s FTI as deductible business expenses. The foreign subsidiary would 

2

 The terms “parent” and “subsidiary” are used throughout to describe related corporate 

entities for clarity and ease of description, however, for purposes of the Tax Law it is 

sufficient that the payor and payee entities are related through common ownership (see,

former Tax Law § § 208 [9] [o] [1] [A]; 208 [9] [o] [1] [B]). The parent/subsidiary 

distinction is not essential to the statutory or constitutional analysis. 
 - 4 - Nos. 34 & 35 

- 4 - 

not file a tax return in New York, and the royalty income would therefore not be included 

on any New York return.

 Seeking to capture taxes on IP income, New York enacted former Tax Law § 208 

(9) (o) which, among other things, created a process for taxing royalty payments between 

related entities. The express purpose of that process was to “eliminate tax loopholes 

concerning royalty payments” (Senate Introducer’s Mem in Support, Bill Jacket, L 2003, 

ch 686 at 9). In furtherance of that purpose, subsection two provided that “[f]or the purpose 

of computing [ENI] or other applicable taxable basis, a taxpayer must add back royalty 

payments to a related member during the taxable year to the extent deductible in calculating 

federal taxable income” (former Tax Law § 208 [9] [o] [2] [A]). 

Subparagraph (3) provided: 

“For the purpose of computing entire net income or other 

taxable basis, a taxpayer shall be allowed to deduct royalty 

payments directly or indirectly received from a related member 

during the taxable year to the extent included in the taxpayer’s 

federal taxable income unless such royalty payments would not 

be required to be added back under subparagraph two of this 

paragraph or other similar provision in this chapter” (former 

Tax Law § 208 [9] [o] [3]). 

 

These two provisions, working in concert, imposed a state tax on income used for royalty 

payments made to a related entity that might otherwise be tax deductible under the former 

taxing regime, but allowed the receiving entity to deduct those payments when calculating 

their New York State tax burden, thus avoiding companies including the same income on 

two different New York corporate tax returns. 
 - 5 - Nos. 34 & 35 

- 5 - 

 The statute was further amended in 2007 to provide three exceptions to the add-back 

requirement (L 2007, ch 60, § 1, part J, § 4). First, no add back was required if the two 

companies were included in the same combined tax report3 filed with New York State, as 

there was no risk of evasion (former Tax Law § 208 [9] [o] [2] [A]). Similarly, no add 

back was required if the royalty was ultimately paid to a non-related company for a valid 

business purpose, as again there was no risk that such payments would be used to avoid 

taxation (see id. § 208 [9] [o] [2] [B] [i]). Finally, an add back was not required if the 

related member making the royalty payment was organized under the laws of a foreign 

country with which the United States had a tax treaty ensuring that the royalty payments 

would be taxed “at a rate at least equal to that imposed by” New York (id. § 208 [9] [2] [B] 

[ii]). If a company was exempted from the add back requirement due to an enumerated 

statutory exclusion “or other similar provision”, it could not take advantage of the royalty 

tax exclusion contained in subparagraph (3) (former Tax Law § 208 [9] [o] [3]). 

3

 Under the then-existing law, any company that “own[ed] or control[led] either directly or 

indirectly substantially all the capital stock of one or more other corporations, or 

substantially all the capital stock of which is owned or controlled either directly or 

indirectly by one or more other corporations or by interests which owned or control either 

directly or indirectly substantially all the capital stock of one or more other corporations” 

were required to file a combined report covering those corporations if “there are substantial 

intercorporate transactions among the related corporations” (former Tax Law § 211 [4] 

[a]). It did not require a “corporation organized under the laws of a country other than the 

United States” to be included in a combined report (id. § 211 [4] [a] [5]). 
 - 6 - Nos. 34 & 35 

- 6 - 

II. 

A. Walt Disney Company v Tax Appeals Tribunal 

The Walt Disney Company (Disney) is a multinational, diversified entertainment 

conglomerate organized under the laws of Delaware. Part of Disney’s business includes 

the development, ownership, and exploitation of IP assets through licensing to subsidiaries 

both domestically and internationally. Within the United States, Disney and its related 

entities filed a combined tax return in New York which, as laid out above, is an enumerated 

exception to the “add back” requirements of former Tax Law § 208 (9) (o) (2). 

Internationally, Disney’s foreign subsidiaries were each party to licensing agreements 

under which they were permitted to exploit Disney’s IP in exchange for royalty payments. 

The record contains no indication as to whether Disney or its subsidiaries paid any taxes 

on this income in these foreign jurisdictions. 

 From 2008 to 2010, Disney paid taxes on the portion of its income allocatable to 

New York business activity, which represented between 5% and 6% of its total taxable 

income for the years at issue.4 During those years Disney received royalty payments 

totaling $5,440,787,188 from foreign affiliates. For the 2009 and 2010 tax years, Disney 

deducted royalty payments received from all its foreign subsidiaries from its taxable 

income. Thereafter it filed an amended tax return for 2008 seeking a refund for foreign 

4

 Both Disney and IBM’s corporate tax in New York were determined via an allocation 

formula. Effectively, a corporation’s total receipts in New York were divided by their total 

receipts globally to determine how much business was fairly attributable to New York. A 

tax was then assessed on only that portion of the corporation’s taxable income. 
 - 7 - Nos. 34 & 35 

- 7 - 

royalty income. Disney was audited by the Tax Department, which denied its refund 

request and issued a notice of deficiency in the amount of $3,995,551. 

B. IBM v Tax Appeals Tribunal 

 International Business Machines Corporation (IBM) is a multinational technology 

and consulting company organized under the laws of New York. IBM operates in more 

than 170 countries worldwide, primarily through locally incorporated subsidiaries. The 

subsidiary responsible for international operations is IBM World Trade Corporation 

(WTC), a Delaware corporation headquartered in New York. IBM transferred the entirety 

of its foreign assets to WTC and granted it a non-exclusive license to use certain IP. The 

various foreign subsidiaries paid royalties to either IBM or WTC for use and distribution 

rights to IBM’s software, hardware, and for the right to provide services related to IBM 

products. 

From 2007 to 2012, IBM and its US subsidiaries filed combined returns in New 

York, avoiding the need to add back any royalty payments. IBM paid the franchise tax on 

its New York-portion of its taxable income, which was about 5% of its total income for the 

years at issue. During that time, IBM received a total of $50,682,369,689 in royalty 

payments from its foreign subsidiaries. As with Disney, there is no indication in the record 

that any foreign taxing authority required any of IBM’s foreign subsidiaries to add back 

the royalty payments made to either IBM or WTC, or any evidence as to any tax liabilities 

imposed on its subsidiaries. IBM took deductions for royalty payments received from its 

subsidiaries for the 2011 and 2012 tax years, and subsequently requested refunds for taxes 

paid on that income for the years 2007 through 2010. In response the Tax Department 
 - 8 - Nos. 34 & 35 

- 8 - 

audited IBM, denied its refund requests, and issued a notice of deficiency for the 2010 to 

2012 tax years, as well as interest charges and penalties. 

C. Administrative Proceedings 

After deficiencies were assessed, both corporations challenged the denial of their 

royalty tax deductions and the notices of deficiency with the New York State Division of 

Tax Appeals. In each case, following a hearing, an Administrative Law Judge (ALJ) 

determined that, under the plain meaning of the statute, the deduction authorized under 

former Tax Law § 208 (9) (o) (3) only applied where the royalty came from a subsidiary 

that had been subjected to the add back requirement contained in subsection two. The ALJs 

opined that the deduction did not discriminate against out-of-state interests as it was only 

permitted after a related company had already paid an in-state tax. Thus, the ALJs denied 

the petitions and sustained the notices of deficiency. The Tax Appeals Tribunal (Tribunal) 

subsequently affirmed both decisions. 

Appellants challenged these determinations by commencing CPLR article 78 

proceedings in the Appellate Division. The Appellate Division affirmed the determinations 

and dismissed the petitions, holding in separate decisions that the plain meaning of the 

statute supported the Tribunal’s decision and that there was no differential treatment 

between in-state and out-of-state commerce (see Matter of Walt Disney Co. & Consol. 

Subsidiaries v Tax Appeals Trib. of the State of N.Y., 210 AD3d 86, 89-92 [3d Dept 2022]; 

Matter of International Bus. Machs. Corp. & Combined Affiliates v Tax Appeals Trib. of 

the State of N.Y., 214 AD3d 1125, 1126 [3d Dept 2023]). Appellants appealed to this Court 

as of right pursuant to CPLR 5601 (b) (1). 
 - 9 - Nos. 34 & 35 

- 9 - 

III. 

 Contrary to appellants’ contentions, the Tribunal properly interpreted the statute. 

This Court’s “cardinal function in interpreting any statute should be to attempt to effectuate 

the intent of the Legislature, and where the statutory language is clear and unambiguous, 

the court should construe it so as to give effect to the plain meaning of the words used” 

(Matter of 1605 Book Ctr. v Tax Appeals Trib. of State of N.Y., 83 NY2d 240, 244 [1994], 

quoting Doctors Council v New York City Employees’ Retirement Sys., 71 NY2d 669, 674-

675 [1988]). The plain meaning of the statutory language is clear: “[A] taxpayer shall be 

allowed to deduct royalty payments directly or indirectly received from a related member 

during the taxable year to the extent included in the taxpayer’s federal taxable income 

unless such royalty payments would not be required to be added back under subparagraph 

two of this paragraph or other similar provision in this chapter” (former Tax Law § 208 

[9] [o] [3] [emphasis added]). By its plain terms, the statute allows parent taxpayers to 

deduct royalty income only if that money had already been included on a New York tax 

return through an add back to the subsidiary’s income. 

Although the statute provides that a deduction will not be granted if one of the 

statutory exceptions to the add back requirement applies, it goes on to state that the 

deduction will not be permitted if an add back is not required under a “similar provision” 

in the chapter. Given that the operative language applies only to “corporations subject to 

tax under this article,” i.e., corporations subject to tax in New York, the deduction was 

clearly only available to corporations receiving royalties from related entities who were 
 - 10 - Nos. 34 & 35 

- 10 - 

subject to the add back, not those that would be subject to the addback if they were they 

subject to New York taxes, as appellants suggest. 

Even if the statute were not clear on its face, which it is, we consider the objectives 

sought to be achieved by the legislature (see Matter of Petterson v Daystrom Corp., 17 

NY2d 32, 38 [1966]). Notwithstanding that ambiguities in tax statutes should “be 

construed in favor of the taxpayer and against the taxing authority” (Quotron Sys. v 

Gallman, 39 NY2d 428, 431 [1976]), our main goal is to “give a correct, fair and practical 

construction that properly accords with the discernible intention and expression of the 

Legislature” (1605 Book Ctr. 83 NY2d at 244-245). In enacting the deduction and add 

back scheme at issue here, the legislature was attempting to close a loophole by which 

international corporate groups avoided paying state taxes on royalty payments between 

related members of the corporate group (see Senate Introducer’s Mem in Support at 5, Bill 

Jacket, L 2003, ch 686 at 9). 

 Appellants’ proposed interpretation of the law would not accomplish this goal, and 

in fact would result in the opposite outcome. Corporate families with subsidiaries out of 

state would be permitted to take a tax deduction without first paying a New York tax on 

the royalty money. By simply domiciling their subsidiaries outside New York, corporate 

groups would be able to perpetuate the very same tax loophole the challenged legislation 

seeks to avoid. Although counsel for Disney suggests that the legislature actually intended 

this incongruous result, neither appellant points to any authority supporting this 

interpretation. As both the plain language and the explicit legislative purpose behind the 

statute support the Tribunal’s interpretation, we see no reason to disturb that determination. 
 - 11 - Nos. 34 & 35 

- 11 - 

IV. 

Appellants argue that this construction of former Tax Law § 208 (9) (o) facially 

violates the dormant Commerce Clause. They must therefore “surmount the presumption 

of constitutionality accorded to legislative enactments by proof beyond a reasonable doubt” 

(Matter of Moran Towing Corp. v Urbach, 99 NY2d 443, 448 [2003] [internal quotation 

marks omitted]). To do so, they bear “the substantial burden of demonstrating that in any 

degree and in every conceivable application, the law suffers wholesale constitutional 

impairment. In other words, [appellants] must establish that no set of circumstances exists 

under which the [law] would be valid” (id. [internal quotation marks and citation omitted]). 

The Commerce Clause of the United States Constitution provides that “Congress shall have 

Power . . . [t]o regulate Commerce with foreign Nations, and among the several States, and 

with the Indian Tribes” (US Const, art I, § 8 [3]). Although “phrased as a grant of 

regulatory power to Congress,” the Commerce Clause “has also been interpreted as 

effecting a ‘negative aspect that denies the States the power unjustifiably to discriminate 

against or burden the interstate flow of articles of commerce’ ” (American Tel. & Tel. Co. 

v New York State Dept. of Taxation & Fin., 84 NY2d 31, 34 [1994] [internal quotation 

marks omitted], quoting Oregon Waste Systems, Inc. v Department of Environmental 

Quality of Ore., 511 US 93, 98 [1994]), including “prohibiting certain state taxation even 

when Congress has failed to legislate on the subject” (Oklahoma Tax Commn v Jefferson 

Lines, Inc., 514 US 175, 179 [1995]). Indeed, the dormant Commerce Clause precludes 

states from “discriminating between transactions on the basis of some interstate element” 

(Boston Stock Exchange v State Tax Commn, 429 US 318, 332 n 12 [1977]), meaning that 
 - 12 - Nos. 34 & 35 

- 12 - 

states “may not tax a transaction or incident more heavily when it crosses state lines than 

when it occurs entirely within the state” (Armco Inc. v Hardesty, 467 US 638, 642 [1984]) 

or “impose a tax which . . . provid[es] a direct commercial advantage to local business, or 

. . . subject[s] interstate commerce to the burden of ‘multiple taxation’ ” (Northwestern 

States Portland Cement Co. v Minnesota, 358 US 450, 458 [1959]). 

Generally, to withstand a challenge under the so-called dormant Commerce Clause, 

a state tax (1) must be “applied to an activity with a substantial nexus with the taxing State,” 

(2) must be “fairly apportioned,” meaning internally and externally consistent, (3) may not 

discriminate against cross-border commerce and (4) must be “fairly related to the services 

provided by the State” (Complete Auto Transit, Inc. v Brady, 430 US 274, 279 [1977]; see 

e.g. Westinghouse Elec. Corp. v Tully, 466 US 388, 402 [1984]; Matter of Zelinsky v Tax 

Appeals Trib. of State of N.Y., 1 NY3d 85, 90 [2003], cert denied 541 US 1009 [2004]). 

With regard to foreign commerce, the United States Supreme Court has identified two 

additional prongs: “first, whether the tax, notwithstanding apportionment, creates a 

substantial risk of international multiple taxation, and, second, whether the tax prevents the 

Federal Government from speaking with one voice when regulating commercial relations 

with foreign governments” (Japan Line, Ltd. v County of Los Angeles, 441 US 434, 451 

[1979] [internal quotation marks omitted]). “[A] proper [dormant Commerce Clause] 

analysis must take the whole scheme of taxation into account” (Halliburton Oil Well 

Cementing Co. v Reily, 373 US 64, 69 [1963]). Appellants’ narrow argument is that former 

Tax Law § 208 (9) (o) fails the discrimination prong, because it facially discriminates 
 - 13 - Nos. 34 & 35 

- 13 - 

against out-of-state commerce, and does not pass the internal consistency test. Appellants 

have failed to meet their high burden to demonstrate such discrimination. 

A. 

 With respect to the discrimination prong appellants have failed to show that the 

subject tax scheme is facially discriminatory against out-of-state commerce, that it in any 

way mandated “economic protectionism”, or that it was a “regulatory measure[] designed 

to benefit in-state economic interests by burdening out-of-state competitors” (National 

Pork Producers Council v Ross, 548 US 356, 370 [2023]). At the corporate group level, 

Tax Law former § 208 (9) (o) treated groups with related members who did not pay taxes 

in New York the same as those with related members who did. The scheme (1) required 

payors of dividends to add back to their taxable income royalty payments to related 

corporate members that were deductible under federal law and (2) allowed recipients of 

royalty payments to deduct them from their taxable income unless the payor was not 

required to add them back to their taxable income. The result was a scheme where, if the 

payor was a New York taxpayer and no exceptions applied, the income used to make 

royalty payments only had to be included in the payor’s taxable income. When a non-New 

York taxpayer made royalty payments to a New York taxpayer, that income had to be 

included in the payee’s taxable income. In each case, the income only had to be included 

on a New York tax return once, resulting in a neutral economic impact on the corporate 

group as a whole. As is astutely noted by the concurrence, Tax Law former § 208 (9) (o) 

is not discriminatory inasmuch as it “is not a measure that imposes benefits or burdens 
 - 14 - Nos. 34 & 35 

- 14 - 

depending upon where a business is located, where goods are produced, or where payments 

are made” (concurring op at 2). Rather, “it is fundamentally a tax filing requirement (id.). 

 This case is distinguishable from cases in which the United States Supreme Court 

has found facial discrimination in a taxation scheme. In Kraft, the Court invalidated a tax 

scheme that allowed Iowa corporations to take a deduction from taxable income for 

dividends received from subsidiaries incorporated in Iowa, but not those incorporated 

elsewhere (see 505 US at 77). Unlike here, the Iowa scheme contained no add-back 

requirement. This meant that if the subsidiary paying the dividend was in Iowa, the 

corporate group faced no tax liability for the dividend, whereas if the subsidiary was 

incorporated abroad, the entire dividend was treated as income and taxable (see id.at 77-

78). Similarly, in Westinghouse, the Supreme Court found a violation where a tax credit 

for a corporate parent increased when its subsidiary shipped goods from within New York 

and decreased when the subsidiary shipped goods outside the state (see 466 US at 400-01). 

By predicating the tax credit on the extent of a subsidiary’s in-state export activities, it 

created a direct incentive to move business into New York, and therefore violated the 

dormant Commerce Clause by imposing a discriminatory burden on other states’ 

commerce. 

 Helpful to our analysis is the New Hampshire Supreme Court’s consideration of a 

virtually identical taxing scheme in General Elec. Co., Inc. v Commissioner, N. H. Dept. 

of Revenue Admin. (154 NH 457, 914 A2d 246 [2006], cert denied 552 US 989 [2007]). 

That Court rejected a constitutional challenge to New Hampshire’s similar tax scheme 

because, viewed as a whole, the tax did not discriminate against commerce but rather 
 - 15 - Nos. 34 & 35 

- 15 - 

sought to tax each corporate group one time. This “taxing symmetry” ensured that 

corporations were only paying state tax on subsidiary income once and, as such, there was 

no differential treatment between companies that received the deduction and those that did 

not. So too here, there is no differential treatment on the corporate group level and the 

challenged taxing scheme is thus not facially discriminatory. 

B. 

 Nor does the challenged scheme violate the United States Supreme Court’s internal 

consistency test, which instructs courts to assume the challenged tax scheme applies in 

every jurisdiction in order to determine if such application would inherently result in 

impermissible interference with the flow of commerce (see Container Corp. of America v 

Franchise Tax Bd., 463 US 159, 169 [1983]). 

“By hypothetically assuming that every State has the same tax 

structure, the internal consistency test allows courts to isolate 

the effect of a defendant State's tax scheme. This is a virtue of 

the test because it allows courts to distinguish between (1) tax 

schemes that inherently discriminate against interstate 

commerce without regard to the tax policies of other States, 

and (2) tax schemes that create disparate incentives to engage 

in interstate commerce (and sometimes result in double 

taxation) only as a result of the interaction of two different but 

nondiscriminatory and internally consistent schemes. The first 

category of taxes is typically unconstitutional; the second is 

not” (Comptroller of Treasury of Md. v Wynne, 575 US 542, 

562 [2015] [citations omitted]). 

 The tax here falls within the latter Wynne category. Even if every other jurisdiction 

applied the same tax scheme found in former Tax Law § 208 (9) (o), there would be no 

impermissible burden on interstate commerce. Subsidiaries that did not pay taxes in New 

York would be subject to a hypothetical foreign add-back requirement when making 
 - 16 - Nos. 34 & 35 

- 16 - 

royalty payments and their New York taxpayer corporate parents would be entitled to a 

hypothetical deduction for the portion of taxes apportioned to that jurisdiction, but not a 

deduction in New York. In this scenario, because the intellectual property is being used in 

the foreign country, that income would not constitute New York business receipts, and 

therefore would not be allocated to New York for purposes of calculating the parent 

company’s BAP. In other words, although the income would be added to the parent’s total 

taxable income, it would result in a lower percentage of that total income subject to New 

York corporate tax.5

 Indeed, it appears that appellants’ true objection is to the system of income 

apportionment itself, and that their objection to “double taxation” here is more properly 

viewed as a repackaged challenge to that method of taxation. They argue that because 

royalty payments from foreign subsidiaries were taxed by New York (in that they were 

added to the total taxable income for the corporate parent), the corporate group would 

suffer a “double tax” if a foreign jurisdiction also taxed the payment through an add back. 

But the central premise of this argument is flawed. Because the internal consistency test 

requires us to evaluate the “tax scheme as a whole,” we must also take into account New 

York’s aforementioned system of calculating the portion of total income taxable in New 

5

 The reverse, of course, would be true for calculating a parent’s franchise tax in a foreign 

jurisdiction. Any royalty payments received from New York subsidiaries would not be 

deductible from total income when calculating the foreign tax burden as the subsidiary 

would not have added back its income in the foreign jurisdiction. However, the addition 

of such income from IP used in New York would also necessarily reduce the corporation’s 

income attributable to that jurisdiction. 
 - 17 - Nos. 34 & 35 

- 17 - 

York. Under that system, the addition of foreign income to a corporate parent’s total 

income is not equivalent to subjecting it to corporate taxation in New York. 

 In the realm of internal consistency, because of the system of allocation, relocating 

intellectual property to New York could increase, decrease, or have no effect on a 

company’ total taxable income depending on factors entirely independent of the add back 

scheme. Rather, whether a corporate group faces a greater or lesser tax burden as a result 

of receiving foreign royalty payments will depend on the amount of such payments 

received as well as the percentage of their total income attributable to such receipts. “[T]he 

appropriate measure of discrimination is comparison of similar circumstances, and the 

circumstances chosen to illustrate [the discrimination] seem ordinary rather than 

extraordinary and likely rather than unlikely” (Appeal of Morton Thiokol, inc., 254 Kan. 

23, 37 [Kansas 1993]). Appellants have failed to show that, under the internal consistency 

test, the challenged tax necessarily discriminates against interstate commerce in its 

ordinary application. It is simply not sufficient to show that sometimes, in some situations, 

the conflicting laws may result in a greater tax (see Moran Towing Corp, 99 NY2d at 448). 

 On the contrary, it is well settled that, while not perfect, the apportionment of taxes 

does not violate the Commerce Clause (see Shell Oil Co. v Iowa Dept. of Revenue, 488 

US 19, 30 [1988]; Matter of Disney Enters. Inc. v Tax Appeals Trib. of State of N.Y., 10 

NY3d 392, 400-401 [2008]; Brady v State of New York, 80 NY2d 596, 603 [1992]). 

“[W]hen apportioning a [corporate] group’s in-state taxable income, a state may look 

beyond its borders and take into account income of companies not subject to its jurisdiction. 

. . In doing so, the state is not deemed to have taxed that income but instead to have used 
 - 18 - Nos. 34 & 35 

- 18 - 

it to determine the tax base fairly attributable to the group as a whole” (Matter of Disney 

Enters., 10 NY3d at 400 [citations omitted]). Regardless of what tax may be applied to 

royalty payments in a foreign jurisdiction, the mere inclusion of such payments to a parent 

company’s total taxable income does not result in an unconstitutional burden on interstate 

commerce as with each additional foreign dollar added, the portion of that company’s 

income attributable to New York State will decrease. And “although the total tax assessed 

in the end may not be exactly equal. . . the state’s taxation methods need not apportion 

income perfectly; the Federal Constitution does not require mathematical exactitude, only 

a rough approximation” (General Electric Co., 154 NH at 470 [internal quotation marks 

and brackets omitted]; accord Illinois Central R. Co. v Minnesota, 309 US 157, 161 

[1940]). 

 As New York’s tax scheme would not result in duplicative taxation in all (or even 

most) situations, it is not inherently discriminatory. To the extent that duplicative taxation 

may sometimes occur, it is the incidental result of “the interaction of two different but 

nondiscriminatory and internally consistent schemes” (Wynne, 575 US at 562). 

 Accordingly, in each case, the judgment of the Appellate Division should be 

affirmed, with costs. 
- 1 - 

WILSON, Chief Judge (concurring): 
 - 2 - Nos. 34 & 35 

- 2 - 

 Disney and IBM, petitioners here, have advanced two arguments: first, that former 

Tax Law section 208 (9) (o) (3) should not be interpreted as the Department of Taxation 

and Finance has interpreted it; and second, that under the Department’s interpretation, the 

statute violated the Commerce Clause of the United States Constitution. I agree with the 

majority’s (and the Department’s) reading of the statute. I also agree that the statute does 

not violate the Commerce Clause, though for different reasons than those relied on by the 

majority. 

The key to explaining why former Tax Law section 208 (9) (o) (3) does not offend 

the dormant Commerce Clause is to understand it for what it is and what it is not. It is not 

a measure that imposes benefits or burdens depending upon where a business is located, 

where goods are produced, or where payments are made. Instead, it is fundamentally a tax 

filing provision. The availability of the deduction depends on whether the subsidiary is a 

“New York taxpayer,” not on whether the royalty payment or any aspect of the corporate 

group’s business crosses jurisdictional lines (Walt Disney Co. and Consol. Subsidiaries v 

Tax Appeals Trib., 210 AD3d 86, 90 [3d Dept 2022]). A transaction between two New 

York taxpayers, which petitioners label an “intrastate” transaction, may be between a 

French corporation and a Chinese subsidiary, so long as both related members file taxes in 

New York. A transaction between a New York taxpayer and a non-New York taxpayer, 

which petitioners label an “interstate” transaction, may be between two Delaware entities, 

only one of which files taxes in New York. 

 As these examples illustrate, because former Tax Law section 208 (9) (o) (3) is 

purely a tax filing provision, it does not necessarily tax “a transaction or incident more 
 - 3 - Nos. 34 & 35 

- 3 - 

heavily when it crosses state lines than when it occurs entirely within the State” (Armco 

Inc. v Hardesty, 467 US 638, 642 [1984]). Rather, it creates complex second-order 

incentives that sometimes favor and sometimes disfavor interstate business operations. By 

conflating the requirement that the subsidiary file tax in New York with a requirement that 

the subsidiary be incorporated in New York or make royalty payments here, petitioners fail 

to properly account for those incentives. When the statute is understood for what it is, 

“[n]either record evidence nor abstract logic makes clear whether the overall effect...would 

be to increase or to reduce existing financial disincentives to interstate travel” (Comptroller 

of Treasury of Maryland v Wynne, 575 US 542, 563 n 7 [2016] [citation omitted]). 

Therefore, petitioners have not shown that the statute violates the dormant Commerce 

Clause. 

I. 

 Former Tax Law section 208 (9) (o) (3) states that: 

“For the purpose of computing entire net income or other taxable basis, a 

taxpayer shall be allowed to deduct royalty payments directly or indirectly 

received from a related member during the taxable year to the extent included 

in the taxpayer’s federal taxable income unless such royalty payments would 

not be required to be added back under subparagraph two of this paragraph 

or other similar provision in this chapter.” 

 A royalty payment is “required to be added back under subparagraph two of this 

paragraph or other similar provision of this chapter” only if the payor is a New York 

taxpayer. If a payor corporation does not file a New York corporation franchise tax return, 

it is not required to do anything under subparagraph two or any provision of the chapter 
 - 4 - Nos. 34 & 35 

- 4 - 

governing New York corporation franchise tax. And because such a payor would not be 

required to take the add-back, the recipient may not take the deduction. 

 Setting constitutional concerns aside, I agree with the majority that this is the most 

straightforward interpretation of the statute. The statutory scheme was enacted to address 

a tax loophole when royalties were paid by a NY-taxpaying parent to a subsidiary1 in 

another jurisdiction which did not tax royalty income, thereby insulating the income from 

taxation. However, the reading advanced by petitioners would create a concomitant 

loophole when royalties are paid by a non-NY taxpaying subsidiary in a jurisdiction with 

no add-back to a NY-taxpaying parent. This is not what the legislature intended. Indeed, 

petitioners do not claim that the legislature intended to create the exemption conferred by 

the reading they offer. 

 Instead, they argue that the Tax Department’s interpretation would facially 

discriminate against interstate commerce in violation of the dormant Commerce Clause of 

the United States Constitution (US Const, art I, § 8, cl 3). Therefore, petitioners contend 

that we should construe former Tax Law section 208 (9) (o) (3) as they propose, to avoid 

the proffered constitutional infirmity (see Overstock.com, Inc. v New York State Dept. of 

Taxation and Fin., 20 NY3d 586, 593 [2013]; H. Kauffman & Sons Saddlery Co. v Miller, 

298 NY 38, 44 [1948]). As explained below, I conclude that former Tax Law section 208 

(9) (o) (3) does not violate the dormant Commerce Clause, and therefore I have no basis to 

1

 Although I use “parent” and “subsidiary” because the parties here fit these labels, nothing 

turns on them. The scheme of deductions and addbacks in former Tax Law § 208 (9) (o) 

covered all “related members” without regard to parent or subsidiary status. 
 - 5 - Nos. 34 & 35 

- 5 - 

construe the statute other than the way in which it plainly reads, just as the majority and 

the Department have read it. 

II. 

 At issue in these appeals are royalty payments made by affiliates to their ultimate 

corporate parents for use of intellectual property owned by the parent. As the Tax 

Department has consistently maintained and the Third Department reaffirmed, the 

availability of the deduction for such payments turns on whether the royalty payor 

(affiliate) is a “New York taxpayer[]” (Walt Disney Co., 210 AD3d at 90). If the royalty 

payor files a New York corporation franchise tax return (regardless of where the payor is 

located), it is required to take the add-back and therefore the deduction becomes available 

to the recipient (parent). If the royalty payor does not file such a return, it is not required 

to take the add-back and therefore no deduction is available to the recipient. 

Although that rule is quite clear, petitioners have misapprehended it. A “New York 

taxpayer” is not the same as a corporation domiciled in New York, nor is it the same as a 

company that receives royalty payments in New York or does business in New York. It is 

merely a corporation that files a tax return in New York. 

Thus, for a parent corporation to receive the deduction, the subsidiary need only file 

a New York tax return. Because petitioners have brought a facial challenge, they bear the 

burden to “establish that no set of circumstances exists under which the Act would be valid” 

(United States v Salerno, 481 US 739, 745 [1987]). However, the record here fails to show 

that IBM and Disney could not have obtained the deduction they seek, because the record 
 - 6 - Nos. 34 & 35 

- 6 - 

does not contain any indication of whether their foreign payor subsidiaries filed or 

attempted to file New York tax returns. Petitioners have never even asserted that their 

foreign payor subsidiaries could not have filed tax returns in New York, or that some 

untoward consequence would befall them if they had done so. If their subsidiaries had 

taken the add-back on New York tax returns, each parent could have claimed the deduction 

without changing anything about the corporate group’s business operations. Although 

almost all would agree that filing tax returns is burdensome, it is not the sort of burden that 

violates the Commerce Clause—and no party contends that it would. 

The statutory provisions discussed by petitioners do not suggest that the payor 

subsidiaries were barred from filing their own New York tax returns. Even were we to 

examine provisions never mentioned by petitioners, the issue is not obviously resolved. 

The statute governing corporate taxation does not speak in terms of which corporations are 

permitted to file tax returns, but rather in terms of which corporations are required to do so 

(see former Tax Law § 209). In the most general possible terms, a corporation is required 

to pay franchise tax if it is “doing business” in New York state (see id. [1] [requiring a 

corporation to file a tax return “[f]or the privilege of exercising its corporate franchise, or 

of doing business, or of employing capital, or of owning or leasing property in this state in 

a corporate or organized capacity, or of maintaining an office in this state”]); Wurlitzer Co. 

v State Tax Commn., 35 NY2d 100, 104 [1974]). The record at least implies that Disney 

and IBM’s foreign payor subsidiaries did not do business in New York during the relevant 

period, and therefore were not required to file a corporate tax return. 
 - 7 - Nos. 34 & 35 

- 7 - 

However, that does not mean that they were not allowed to file such a return. 

Whether a company that does no business in New York could file a corporate franchise tax 

return in order to achieve a tax deduction for a related member is a novel question, but 

nothing in the record suggests that any payor affiliate of Disney or IBM ever sought to do 

so or even inquired about doing so as a way to permit the corporate parent to take the 

deduction. Although we can imagine arguments against a subsidiary’s ability to claim the 

add-back on a New York franchise tax return,2 petitioners have not raised any such 

arguments or shown on this record that former Tax Law section 208 (9) (o) (3) created 

anything more than an administrative burden. 

For that reason, both appeals fail. If the payor subsidiaries could have filed New 

York corporate tax returns, which would have required those subsidiaries to “add back 

royalty payments to a related member” (former Tax Law § 208 [9] [o] [2]), petitioners have 

no case, because the parents could have then taken the deduction on their tax returns and 

would have been treated exactly the same as a New York parent corporation with a New 

York subsidiary. Because petitioners have not even attempted to demonstrate that they 

could not have obtained the deduction they seek by merely having their affiliated foreign 

2

 Former Tax Law § 208 (3) defines “taxpayer as “any corporation subject to tax under this 

article.” Tax Law § 209 at some points uses “subject to tax” as a synonym for “required to 

pay tax” (see former Tax Law § 209 [4] [certain corporations liable to tax under other 

sections are not “subject to tax under this article”]). It is possible that a corporation that is 

not “subject to tax” would not be a “New York taxpayer” able to claim the royalty addback 

under former Tax Law § 208 (9) (o) (3). 
 - 8 - Nos. 34 & 35 

- 8 - 

payors file a New York tax return, there is no basis on which to hold former Tax Law 

section 208 (9) (o) unconstitutional. 

III. 

For the sake of argument, though, let us assume that the Department would not have 

allowed Disney and IBM’s foreign payor subsidiaries to file New York tax returns even if 

they had tried, presumably because they do not do business here. On that assumption, 

Disney and IBM’s Commerce Clause arguments still fail. 

Disney and IBM have often conflated the “New York taxpayer” requirement with 

a requirement that the subsidiary be domiciled here or receive royalty payments here. 

However, there is plainly no requirement that a corporation must be domiciled in New 

York or make or receive royalty payments from or in New York to be required to file a 

New York corporate tax return. A corporation that transacts business in New York is 

required to file a New York tax return, even if it is not incorporated in New York and its 

business has nothing to do with royalty payments. 

Notably, a corporation may file a franchise tax return in many jurisdictions, even if 

it is incorporated in or allocates royalty payments to relatively few of those jurisdictions.3

When a corporation is taxed in multiple jurisdictions, its net income is allocated to each 

jurisdiction for tax purposes depending on the portion of taxable value created in that state 

(see former Tax Law § 210 [3]; see generally Oklahoma Tax Commn. v Jefferson Lines, 

3

 The parties agree that at the relevant time, receipts from royalty payments for intellectual 

property were allocated to the jurisdiction in which the intellectual property was used. 
 - 9 - Nos. 34 & 35 

- 9 - 

Inc., 514 US 175, 186 [1995] [describing the constitutional requirement that no state tax 

more than its fair share of interstate commerce and discussing possible methods of 

apportionment]). 

When we remember that the deduction at issue is based on the location of tax filings, 

not the location of incorporation or royalty payment, Disney and IBM’s characterization 

of “intrastate” and “interstate” transactions falls apart. Disney and IBM often refer to New 

York related members as if they operate solely in New York and receive royalty payments 

in New York.4 But a “New York taxpayer” for purposes of this deduction is simply a 

corporation, wherever located and receiving payments, that does sufficient business in New 

York to require it to file a franchise tax return. A payment from a “New York” subsidiary 

to a “New York” parent, which the petitioners describe as “in-state” or “intrastate,” is 

simply a royalty payment between two companies that both file returns in New York, 

regardless of where the companies are based and where the intellectual property and royalty 

payments are used. Although petitioners’ definition of “intrastate” does cover payments 

between New York related members (as long as they both pay New York tax), it also covers 

a royalty payment from France to China as long as it is between two New York taxpayers. 

Conversely, a payment from a “Foreign” payor to a “New York” recipient, which 

petitioners describe as “interstate,” is a payment from a company that does not pay tax in 

4

 At certain points, Disney acknowledges that the tax is not related to the transaction but to 

the subsidiary’s presence in the state. However, Disney also conflates this understanding 

with understandings of the tax based on the location of payments or of incorporation, and 

significant portions of its argument rely on that conflation. To the extent that Disney argues 

that merely distinguishing between New York taxpayers and other subsidiaries violates the 

dormant Commerce Clause, I address that argument in Part V infra. 
 - 10 - Nos. 34 & 35 

- 10 - 

New York to a company that does, regardless of the location of the companies and where 

the payments are made. Petitioners’ definition of “interstate” covers a transaction between 

a Delaware payor and a Delaware recipient, so long as only the former pays corporate 

franchise tax in New York. 

 An example makes the error in petitioners’ definition transparent. Petitioners 

suggest that the availability of the deduction turns on whether the corporate group 

participates in interstate or intrastate commerce. But consider a situation in which Disney, 

a Delaware corporation, receives a royalty payment from Magical Cruise Co. Ltd., which 

is incorporated in the United Kingdom. Disney files a corporate franchise tax return in New 

York, but Magical Cruise does not. For Disney to take the royalty deduction, Magical 

Cruise must file a tax return in New York. That is the only requirement. If Magical Cruise 

begins doing business, totally unrelated to any royalties, that requires it to file a corporate 

franchise tax return in New York, Disney may take the deduction. But if Magical Cruise 

reincorporates in Delaware and moves all its business there, Disney still may not take the 

deduction, because Magical Cruise still does not file a New York tax return. It is irrelevant 

that the entire royalty transaction is now intrastate (Delaware to Delaware). Conversely, if 

Magical Cruise files a New York tax return, it is irrelevant to Disney’s deduction status 

that the royalty payment is still transmitted from the United Kingdom to Delaware. The 

issue is only whether the payor is a “New York taxpayer.” 

 This is not a mistake or even an unintended consequence of the Department’s 

position, but the straightforward result of the Department’s view of the statutory policy. 

The Department’s view is that the legislative intent of the deduction was to counteract 
 - 11 - Nos. 34 & 35 

- 11 - 

double taxation that the legislature had caused via the add-back requirement in Tax Law 

former section 208 (9) (o) (2), and that it was not intended to be available in other 

situations. As to that proposition, the majority and I are completely in agreement. This is 

entirely consistent with the view that the deduction would be available when the add-back 

provision is invoked and unavailable when it is not, regardless of the location of the 

payments or corporations. There is no reason the Department should object to Delawarebased Disney taking a deduction on a royalty payment from a United Kingdom subsidiary, 

so long as that subsidiary adds back the payment under section 208 (9) (o) (2). 

 To summarize, the Department’s interpretation of former Tax Law section 208 (9) 

(o) (3) does not disallow the deduction when a royalty payment is interstate. Rather (still 

holding to the untested assumption that a corporation that does no business in New York 

could not file a New York tax return), it disallows a deduction for royalty payments from 

a corporation that does not do business in New York, regardless of the locations of the 

payor or recipient. The question is whether that violates the dormant Commerce Clause. 

 

IV. 

Petitioners allege that the Department’s interpretation facially violates the dormant 

Commerce Clause, meaning that it “inherently” discriminates against interstate commerce 

(Wynne, 575 US at 562) and is “unconstitutional in all applications” (City of Los Angeles, 

Calif. v Patel, 576 US 409, 418 [2015]). 

Under the Complete Auto test, a tax is constitutional if it: 

(1) “is applied to an activity with a substantial nexus with the taxing State”; 
 - 12 - Nos. 34 & 35 

- 12 - 

(2) “is fairly apportioned”; 

(3) “does not discriminate against interstate commerce”; 

(4) “is fairly related to the services provided by the State” (Complete Auto Tr., 

Inc. v Brady, 430 US 274, 279 [1977]). 

 Here, the issue is whether the scheme of royalty deductions and add-backs set out 

in former Tax Law section 208 (9) (o) discriminates against interstate commerce. 

Comptroller of Treasury of Maryland v Wynne, the most recent Supreme Court case to 

address this issue, suggests that whether a scheme of taxation discriminates against 

interstate commerce depends on application of the internal consistency test (see 575 US at 

562). 

 The internal consistency test “looks to the structure of the tax at issue to see whether 

its identical application by every State in the Union would place interstate commerce at a 

disadvantage as compared with commerce intrastate” (id., quoting Jefferson Lines, 514 US 

at 185). A tax that fails the test is “typically unconstitutional;” a tax that passes is typically 

not (Wynne, 575 US at 562-563). A primary contention of petitioners, especially petitioner 

IBM, is that former Tax Law section 208 (9) (o) is unconstitutional because it violates the 

internal consistency test. 

 The internal consistency test requires the hypothetical application of New York’s 

tax scheme to every jurisdiction.5 In that hypothetical, every jurisdiction would follow the 

related member add-back provision in former section 208 (9) (o) (2). Thus the royalty5

 Although Wynne refers to the test in the context of interstate commerce, it also traces the 

use of test to Container Corp. of Am. v Franchise Tax Bd., 463 US 159, 169 [1983], which 

dealt with foreign commerce. Petitioners contend that the internal consistency test applies 

to international commerce and the Tax Department does not dispute that proposition. 

Therefore, we assume that the internal consistency test applies here. 
 - 13 - Nos. 34 & 35 

- 13 - 

paying subsidiary would have the payment added back to its income no matter where it 

files tax,6 and will always be taxed on that money. Therefore, whenever the royalty 

recipient does not receive the deduction and is required to pay tax on the same money, 

there would be some level of multiple taxation. The multiple taxation would be avoided 

when the payor files in the same jurisdiction as the recipient. Just as New York permits an 

income deduction when the royalty payor files in New York, Delaware would permit an 

income deduction when the payor files in Delaware, and the United Kingdom would permit 

an income deduction which the payor files in the United Kingdom. Under that regime, the 

incentive is for the royalty payor to file a corporate franchise return in every jurisdiction 

where the recipient does so. 

 The internal consistency text asks whether application of that regime “would place 

interstate commerce at a disadvantage as compared with commerce intrastate” (id. at 562, 

quoting Jefferson Lines, Inc., 514 US at 185). Disney and IBM argue that it would. If a 

New York company receives a royalty payment from a New York subsidiary, both 

taxpayers will file in the same jurisdiction and the money will only be taxed once. 

However, if a New York company receives a royalty payment from a foreign subsidiary, 

the foreign subsidiary will be required to add the money back, the New York company will 

not receive the deduction, and the money will be taxed twice. 

6

 The payor would not receive the add-back if the transaction implicated the exclusions in 

former Tax Law § 208 (9) (o) (2), but the parties agree that these exclusions are not relevant 

here. 
 - 14 - Nos. 34 & 35 

- 14 - 

 In analyzing that argument, we must first remember that what petitioners describe 

as a “New York” company is merely a company that does business in New York. For 

example, petitioner Disney is a Delaware corporation—even if the tax regime incentivizes 

Disney to do business in New York, this seems to favor interstate commerce, not intrastate 

commerce. Similarly, it is not true that Disney is necessarily disincentivized to receive 

royalty payments from foreign corporations—if the foreign corporation pays New York 

tax, such a payment is favored. 

 More directly, because the tax is not on interstate transactions but rather relates to 

the location of filing, it is not difficult to find situations where a corporation would benefit 

from receiving a foreign royalty payment rather than an intrastate one. For example, 

consider a New York corporation that does business in both New York and the United 

Kingdom, with 90% of its receipts in the United Kingdom and 10% in New York.7 The 

corporation has a subsidiary solely operating in New York and a subsidiary solely operating 

in the United Kingdom. If the corporation receives a royalty payment from the subsidiary 

in New York, it will be able to take the royalty deduction in New York but will not be able 

to take the deduction in the United Kingdom. If the corporation receives a royalty payment 

from the subsidiary in the United Kingdom, it will be able to take the deduction in the 

United Kingdom but not New York. 

Faced with that choice, the corporation is better off receiving the royalty payment 

from (and taking the deduction in) the United Kingdom, because it has a higher allocation 

7

 The allocation of net income to different jurisdictions in which a corporation does 

business is based on receipts, not profit (see former Tax Law § 210 [3] [a]). 
 - 15 - Nos. 34 & 35 

- 15 - 

percentage in that jurisdiction. After the deduction is taken, the net income of the 

corporation is multiplied by the allocation percentage (which at the time in New York was 

based on receipts) to determine taxable income in that jurisdiction. In this example, the 

allocation percentage would be 90% in the United Kingdom and 10% in New York. 

Therefore, if the deduction is taken in the United Kingdom it will be multiplied by 90%, 

but if it is taken in New York it will only be multiplied by 10%.8 In general, whenever a 

business has a higher allocation percentage in a foreign jurisdiction than in New York, it 

will be preferable for the taxpayer to deal with a corporation that pays tax in that 

jurisdiction. Therefore, under the internal consistency test, the taxation scheme will tend to 

favor payments from a subsidiary located in a jurisdiction where the recipient’s allocation 

percentage is the greatest—which could either be an interstate or an intrastate transaction. 

Because under some circumstances the tax favors foreign commerce, petitioners cannot 

show that it facially discriminates against foreign commerce (see Patel, 576 US at 418; 

Wynne 575 US at 563 n 7). 

8

 For a numerical example, we can imagine that both jurisdictions calculate the net income 

of the corporation to be $500. The United Kingdom will tax $450 and New York will tax 

$50. 

If the corporation is receiving a royalty of $100 from a subsidiary, it can get a deduction 

of $100 in the jurisdiction where that subsidiary files tax. If it receives the royalty from a 

subsidiary filing in the United Kingdom, the United Kingdom will calculate the 

corporation’s net income at $400 and tax $360. New York will still calculate net income at 

$500 and tax $50. The total taxable income in both jurisdictions is $360 + $50, or $410. 

If it instead receives the royalty from a subsidiary filing in New York, New York will 

calculate the corporation’s net income at $400 and tax $40. The United Kingdom will still 

calculate the corporation’s net income at $500 and tax $450. The total taxable income in 

both jurisdictions is $450 + $40, or $490. 
 - 16 - Nos. 34 & 35 

- 16 - 

Petitioners fail to address that issue, which is especially concerning because the 

scheme of taxation plausibly favors foreign commerce even as applied to them. IBM urged 

at argument that the correct application of the internal consistency test holds the plaintiffs 

constant and changes only the taxation schemes of the relevant jurisdictions (see 

Hellerstein and Hellerstein, State Taxation § 4.16 [1] [c]; In re Alternative Minimum Tax 

Refund Cases, 546 NW2d 285, 290 [Minn 1996]). But it appears that if we do so, Disney 

and IBM would benefit from engaging in additional foreign or interstate commerce, not 

additional intrastate commerce. 

 IBM is a New York corporation with numerous subsidiaries throughout the United 

States and foreign jurisdictions. During the years in question, about 5% of IBM’s net 

income was allocated to New York. That means that 95% of IBM’s net income was 

allocated to other jurisdictions. Essentially the same facts are true of Disney.9

 If there is any jurisdiction where IBM has a higher allocation percentage than in 

New York, IBM would benefit from receiving the royalty payment from that jurisdiction 

rather than from New York. Given that IBM’s income is only allocated 5% to New York, 

this could plausibly be the case. For example, if 10% of IBM’s income is allocated to 

Canada, under internal consistency IBM would be tax-advantaged by receiving a royalty 

payment from a Canadian taxpayer, in which case its deduction is multiplied by 10%, rather 

than receiving a payment from an in-state New York taxpayer and having the deduction 

9

 Disney is a Delaware corporation, but assuming internal consistency the exact same 

analysis can be repeated with regard to Delaware. Disney’s allocation percentage in New 

York during the years in question was also approximately 5%. 
 - 17 - Nos. 34 & 35 

- 17 - 

multiplied by 5%. Therefore, for a corporation like IBM for which New York is only one 

of many relevant tax jurisdictions, it is not at all clear that intrastate royalty payments are 

tax-advantaged. 

 Taking this line of reasoning further, the internal consistency test does not require 

that we assume each subsidiary does business in only a single jurisdiction. IBM would be 

best off if it received the payment from a subsidiary that did business not only in Canada, 

but also in New York and all other jurisdictions where it does business, because then it 

would benefit from a deduction in every place it is subject to an add-back. That even higher 

level of interstate business would advantage the corporation even further. 

 In short, although it is theoretically possible (again, assuming under internal 

consistency that every jurisdiction requires an add-back) that the former tax regime could 

create double taxation despite the clear legislative intent to avoid this, for petitioners and 

those similarly situated any double taxation would operate as a penalty for corporate groups 

that do not conduct sufficient interstate business, rather than a penalty for those who 

conduct too much. This is demonstrated by the fact that the action which petitioners portray 

as tax-advantaged, receiving all royalties from related members within New York, would 

not in fact eliminate double taxation for them assuming internal consistency. Rather, 

petitioners would need to ensure that the related members file franchise tax returns in each 

of the numerous jurisdictions in which petitioners do business. I do not read any of the 

Supreme Court’s Commerce Clause jurisprudence to suggest that a state may not enact a 

law that tends to favor interstate or foreign commerce over intrastate. 
 - 18 - Nos. 34 & 35 

- 18 - 

 I do not suggest that the short-lived scheme of taxation created by former Tax Law 

section 208 (9) (o) (3) is necessarily fair or sensible—the risk of double taxation in 

jurisdictions where payors (for whatever reason) do not file is unnecessary and could have 

been easily been eliminated, for example by a credit for taxes paid in the foreign 

jurisdiction. However, given that “[n]either record evidence nor abstract logic makes clear 

whether the overall effect of such a system would be to increase or to reduce existing 

financial disincentives to interstate” business transactions,” it does not violate the internal 

consistency test (Wynne, 575 US at 563 n 7 [citation omitted]). 

V. 

 Disney also argues, independently of the internal consistency test, that former Tax 

Law section 208 (9) (o) is unconstitutional because it premises a tax deduction on a 

geographic determinant. However, the presence of a geographic determinant is not 

sufficient to show that a tax facially discriminates against interstate commerce. For 

example, a tax that explicitly states that intrastate activity will be taxed more heavily than 

interstate activity is premised on a geographic determinant. However, it does not “place 

burdens on the flow of commerce across [] borders that commerce wholly within those 

borders would not bear”—rather, it does the reverse (Jefferson Lines, 514 US at 180; see 

American Trucking Associations, Inc. v Michigan Pub. Serv. Commn., 545 US 429, 434 

[2005] [upholding such a tax]). 

Here, the tax deduction does depend on a geographic distinction between New York 

and non-New York taxpayers. However, this does not violate the dormant Commerce 
 - 19 - Nos. 34 & 35 

- 19 - 

Clause unless by operation of that geographic distinction, there is “incentive to engage in 

intrastate rather than interstate economic activity” (Wynne, 575 US at 561). Although it is 

possible to construct situations where the geographic distinction in former Tax Law section 

208 (9) (o) (3) incentivizes intrastate commerce, in other situations, including quite 

plausibly petitioners’ actual situations, the geographic distinction incentivizes interstate 

commerce. Therefore, we cannot say that the tax discriminates against interstate commerce 

merely because it speaks in geographic terms (see Kraft, 505 US at 80 n 23 [noting the 

need to evaluate comparators who are “most similarly situated” (citation omitted)]; Wynne, 

575 US at 563 n 7 [stating that where the effects of a tax may cut in either direction, an 

“empirical showing” is needed to determine whether interstate commerce would be at a 

disadvantage]). 

VI. 

 Understanding that the deduction in former Tax Law section 208 (9) (o) turns solely 

on tax filing status highlights several fatal flaws in petitioners’ argument. First, petitioners 

have not contended, much less shown, that their payor subsidiaries could not have filed 

New York tax returns, which would have obtained the exact deduction petitioners seek. 

Second, the tax burden has nothing to do with whether a royalty transaction is intrastate—

an “intrastate” corporate group is simply one where the payor and recipient do some 

business in the same jurisdiction generally. Third, a corporate group may have the lowest 

possible tax burden if it operates in 1, 100, or 1000 jurisdictions, so long as there is 
 - 20 - Nos. 34 & 35 

- 20 - 

operational symmetry between the payor and recipient. Fourth, if we assume internal 

consistency, the drive towards symmetry would tend to encourage petitioners and those 

similarly situated to increase the jurisdictions in which their subsidiaries do business rather 

than decreasing the jurisdictions in which the parent does business, favoring interstate 

commerce. For these reasons, petitioners have not shown that former Tax Law section 208 

(9) (o) discriminates against interstate or foreign commerce in violation of the dormant 

Commerce Clause. I would therefore affirm the holding of the Appellate Division, though 

on these different grounds. 

For No. 34: Judgment affirmed, with costs. Opinion by Judge Cannataro. Judges Rivera, 

Garcia, Singas and Troutman concur. Chief Judge Wilson concurs in result in an opinion, 

in which Judge Halligan concurs. 

For No. 35: Judgment affirmed, with costs. Opinion by Judge Cannataro. Judges Rivera, 

Garcia, Singas and Troutman concur. Chief Judge Wilson concurs in result in an opinion, 

in which Judge Halligan concurs. 

Decided April 23, 2024