Source: https://supreme.justia.com/cases/federal/us/466/388/
Timestamp: 2019-04-26 06:12:48+00:00

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New York State Tax Commission sought to include the accumulated DISC income, computing appellant's taxable income by first combining all of Westinghouse Export's income with that of appellant, and then giving appellant the benefit of the DISC export credit for the 5% of Westinghouse Export's receipts each year that could be attributed to New York shipments. The Commission denied relief on appellant's petition for redetermination of the resulting tax deficiencies. Ultimately, after appellant had mixed success in the Appellate Division of the New York Supreme Court on its federal constitutional challenges to the New York taxing scheme, the New York Court of Appeals reinstated the Tax Commission's determination. Rejecting appellant's claim that the tax credit impermissibly subjected its export sales from a non-New York place of business to a higher tax rate than that on comparable sales shipped from a regular place of business in New York, the court held that the tax credit simply forgives a portion of the tax New York has a right to levy, such portion being determined by reference to shipments of export property from a regular place of business in New York, that this method satisfied due process, and that any effect on interstate commerce was too indirect to violate the Commerce Clause.
Held: The manner in which New York allows corporations a tax credit on the accumulated income of their subsidiary DISCs discriminates against export shipping from other States, in violation of the Commerce Clause. Pp. 466 U. S. 398-407.
(a) It is the second adjustment of the credit to reflect the DISC's New York export ratio, made only to the credit and not to the base taxable income figure, that has the effect of treating differently parent corporations that are similarly situated in all respects except for the percentage of their DISCs' shipping activities conducted from New York. This adjustment allows a parent a greater tax credit on its accumulated DISC income as its subsidiary DISC moves a greater percentage of its shipping activities into New York. Conversely, the adjustment decreases the tax credit allowed to the parent for a given amount of its DISC's shipping activities conducted from New York as the DISC increases its shipping activities in other States. Thus, the New York tax scheme not only provides an incentive for increased business activity in New York, but also penalizes increases in the DISC's shipping activities in other States. Pp. 466 U. S. 399-401.
by means of taxing measures that invite a multiplication of preferential trade areas within the United States, in contravention of the Commerce Clause. Whether the New York tax diverts new business into the State or merely prevents current business from being diverted elsewhere, it is still a discriminatory tax that "forecloses tax-neutral decisions and . . . creates . . . an advantage" for firms operating in New York by placing "a discriminatory burden on commerce to its sister States." Boston Stock Exchange v. State Tax Comm'n, 429 U. S. 318, 429 U. S. 331. Pp. 466 U. S. 402-407.
55 N.Y.2d 364, 434 N.E.2d 1044, reversed. BLACKMUN, J., delivered the opinion for a unanimous Court.
current basis, whether or not that portion is actually paid or distributed to them. § 995. Under the statutory provisions in effect during the calendar years 1972 and 1973 (the tax years in question in this case), 50% of a DISC's income was deemed distributed to its shareholders. 85 Stat. 544. [Footnote 3] Taxes on the remaining income of the DISC -- labeled "accumulated DISC income" -- are deferred until either that accumulated income is actually distributed to the shareholders or the DISC no longer qualifies for special tax treatment. § 996 of the Code, 26 U.S.C. § 996.
(the DISC's New York export ratio) by the parent's New York business allocation percentage; [Footnote 5] (3) multiplying that product by the New York tax rate applicable to the parent; (4) multiplying that product by 70%; and (5) multiplying that product by the parent's attributable share of the accumulated income of the DISC for the year. §§ 210.13(a)(2) to (5).
Westinghouse Export. [Footnote 6] In 1973, the income of Westinghouse Export was approximately $58 million; Westinghouse reported almost $30 million of that amount as deemed distributed income. [Footnote 7] Westinghouse, however, did not include the DISC's accumulated income in its consolidated returns.
The appellees, as the New York State Tax Commission (Tax Commission), sought to include in Westinghouse's consolidated income the accumulated DISC income; that is, the Tax Commission computed Westinghouse's taxable income by first combining all of Westinghouse Export's income with that of Westinghouse, pursuant to N.Y.Tax Law § 208.9(i) (B) (McKinney Supp.1983-1984). The Commission gave Westinghouse the benefit of the DISC export credit for the approximately 5% of Westinghouse Export's receipts each year that could be attributed to New York shipments. [Footnote 8] After applying the relevant allocation and tax percentages, the Tax Commission asserted deficiencies in Westinghouse's franchise tax of $73,970 (later corrected to $71,970) plus interest for 1972 and $151,437 plus interest for 1973. App. 42, 46.
the Commerce and Due Process Clauses of the United States Constitution. Westinghouse further contended that limiting the tax benefit of the DISC export credit to gross receipts from shipments attributable to a New York place of business violated the Commerce, Due Process, and Equal Protection Clauses. The Commission declined to entertain Westinghouse's contentions, on the ground that, as an administrative agency, it lacked jurisdiction to pass upon "the constitutionality of the laws of the State of New York." Id. at 47.
Westinghouse then brought suit in the New York Supreme Court for review of the tax determination, again raising its constitutional claims. The case was transferred to the Appellate Division. That court, by a 3-to-2 vote, found the portion of the law that requires accumulated income of the DISC to be added to the consolidated return, § 208.9(i)(B), to be an unconstitutional burden on foreign commerce. 82 App.Div.2d 988, 440 N.Y.S.2d 397 (1981). The Appellate Division based its holding on the fact that Congress intended to exempt DISC income from current taxation. Id. at 989, 440 N.Y.S.2d at 399-400. This decision made it unnecessary for the court to consider the constitutionality of New York's geographical limitation on the DISC export credit, because the credit applies only to accumulated DISC income. The Appellate Division, however, went on to reject Westinghouse's constitutional challenges to New York's taxation of deemed distributed income. Ibid., 440 N.Y.S.2d at 400.
not preempt a State from taxing a DISC. Id. at 372-373, 434 N.E.2d at 1047-1048. The court also rejected Westinghouse's argument that the State lacked the jurisdictional nexus necessary to satisfy the minimal due process standards on which the right to tax must be predicated. Finally, the court rejected Westinghouse's claim that the credit provided for in § 210.13(a) impermissibly subjected Westinghouse's export sales from a non-New York place of business to a higher tax rate than that on comparable sales shipped from a regular place of business in New York. The court noted that the credit was devised by the State to provide shareholders of DISCs with state tax incentives akin to those enacted by Congress. The only difference was that, while Congress had chosen to provide the benefit in the form of a tax deferral, the New York Legislature had elected to use a credit. Id. at 374-376, 434 N.E.2d at 1049-1050.
The court acknowledged that the credit was intended to ensure that New York would not lose its competitive position vis-a-vis other States, since other States were also expected to offer tax benefits to DISCs. It traced the steps required in calculating the tax credit and concluded: "Obviously, the business allocation percentage plays an integral role in computing the tax credit." Id. at 375, 434 N.E.2d at 1050. Use of the business allocation percentage, the court reasoned, ensures that, in taxing DISC income, the State is taxing only that DISC income that has a jurisdictional nexus with the State. The credit simply forgives a portion of the tax New York has a right to levy. Id. at 376, 434 N.E.2d at 1050. The portion of the tax to be forgiven is determined by reference to shipments of export property from a regular place of business in New York. The court was of the opinion that this method satisfies due process, and that any effect on interstate commerce is too indirect to run afoul of the Commerce Clause. Ibid. .
U.S. 1144 (1983), and we now reverse the judgment of the New York Court of Appeals in that respect.
The Tax Commission seeks to convince us that the DISC tax credit forgives merely a portion of the tax that New York has jurisdiction to levy. All the accumulated income of a DISC is attributed to its parent for tax purposes. Under unitary tax principles, however, if the parent has a regular place of business outside New York, the State will not actually tax the full amount of the accumulated income. Only a portion of the parent's net income (which includes the accumulated DISC income) will be subject to tax in New York. That portion is determined by reference to a business allocation percentage determined by averaging the percentages of in-state property, payroll, and receipts. See N.Y.Tax Law § 210.3 (McKinney Supp.1983-1984). This Court long has upheld, subject to certain restraints, the use of a formula apportionment method to determine the percentage of a business' income taxable in a given jurisdiction. Container Corp. v. Franchise Tax Board, 463 U. S. 159, 463 U. S. 169-171 (1983); see Illinois Central R. Co. v. Minnesota, 309 U. S. 157 (1940); Hans Rees' Sons, Inc. v. North Carolina ex rel. Maxwell, 283 U. S. 123 (1931); Bass, Ratcliff & Gretton, Ltd. v. State Tax Comm'n, 266 U. S. 271 (1924); Underwood Typewriter Co. v. Chamberlain, 254 U. S. 113 (1920).
process releases the State from the constitutional restraints that limit the way in which it exercises its taxing power over the income within its jurisdiction.
Here, Westinghouse argues that the State of New York has sought to exercise its taxing power over accumulated DISC income in a manner that offends the Commerce Clause and the Equal Protection Clause of the Fourteenth Amendment. This challenge is not foreclosed by our holding that New York's allocation of DISC income is constitutionally acceptable. See 459 U.S. 1144 (1983) (dismissing for want of a substantial federal question Westinghouse's challenge to method of allocating DISC income to parent). "Fairly apportioned" and "nondiscriminatory" are not synonymous terms. It is to the question whether the method of allowing the credit is discriminatory in a manner that violates the Commerce Clause that we now turn.
"provide a positive incentive for increased business activity in New York State," Budget Report, at 18, but also it penalizes increases in the DISC's shipping activities in other States.
"'the Commerce Clause was not merely an authorization to Congress to enact laws for the protection and encouragement of commerce among the States, but by its own force created an area of trade free from interference by the States. . . . [T]he Commerce Clause, even without implementing legislation by Congress, is a limitation upon the power of the States,'"
"[n]o State, consistent with the Commerce Clause, may 'impose a tax which discriminates against interstate commerce . . . by providing a direct commercial advantage to local business.'"
Boston Stock Exchange, 429 U.S. at 429 U. S. 329, quoting Northwestern States Portland Cement Co. v. Minnesota, 358 U. S. 450, 358 U. S. 458 (1959). See also Halliburton Oil Well Cementing Co. v. Reily, 373 U. S. 64 (1963); Nippert v. Richmond, 327 U. S. 416 (1946); I. M. Darnell & Son Co. v. Memphis, 208 U. S. 113 (1908); Guy v. Baltimore, 100 U. S. 434 (1880); Welton v. Missouri, 91 U. S. 275 (1876).
"'much room for controversy and confusion and little in the way of precise guides to the States in the exercise of their indispensable power of taxation.'"
Boston Stock Exchange, 429 U.S. at 429 U. S. 329, quoting Northwestern States, 358 U.S. at 358 U. S. 457. In light of our decision in Boston Stock Exchange, however, we think that there is little room for such "controversy and confusion" in the present litigation. The lessons of that case, as explicated further in Maryland v. Louisiana, 451 U. S. 725 (1981), are controlling.
encouraged the development of local industry by means of taxing measures that imposed greater burdens on economic activities taking place outside the State than were placed on similar activities within the State. In Maryland v. Louisiana, the Court held that Louisiana's "First-Use" tax -- which imposed a tax on natural gas brought into the State while giving local users a series of exemptions and credits -- violated the Commerce Clause because it "unquestionably discriminate[d] against interstate commerce in favor of local interests." 451 U.S. at 451 U. S. 756. Similarly, in Boston Stock Exchange, the Court held unconstitutional a New York stock transfer tax that reduced the tax payable by nonresidents when the tax involved an in-state (rather than an out-of-state) sale, and applied a maximum limit to the tax payable on any in-state (but not out-of-state) sale. See 429 U.S. at 429 U. S. 332. The stock transfer tax was declared unconstitutional because it violated the principle that "no State may discriminatorily tax the products manufactured or the business operations performed in any other State." Id. at 429 U. S. 337. The tax schemes rejected by this Court in both Maryland v. Louisiana and Boston Stock Exchange involved transactional taxes, rather than taxes on general income. That distinction, however, is irrelevant to our analysis. The franchise tax is a tax on the income of a business from its aggregated business transactions. It cannot be that a State can circumvent the prohibition of the Commerce Clause against placing burdensome taxes on out-of-state transactions by burdening those transactions with a tax that is levied in the aggregate -- as is the franchise tax -- rather than on individual transactions.
indistinguishable from one that would apply to New York shipments a tax rate that is 30% of that applied to shipments from other States. [Footnote 10] We have declined to attach any constitutional significance to such formal distinctions that lack economic substance. See, e.g., Maryland v. Louisiana, 451 U.S. at 451 U. S. 756 (tax scheme imposing tax at uniform rate on in-state and out-of-state sales held to be unconstitutional because discrimination against interstate commerce was "the necessary result of various tax credits and exclusions" that benefited only in-state consumers of gas).
The Tax Commission contends that the DISC export credit is a subsidy to American export business generally, and as such, is consistent with congressional intent in establishing DISCs and with the Commerce Clause. We find no merit in this argument. While the Federal Government may seek to increase domestic employment and improve our balance of payments by offering tax advantages to those who produce in the United States, rather than abroad, a State may not encourage the development of local industry by means of taxing measures that "invite a multiplication of preferential trade areas" within the United States, in contravention of the Commerce Clause. Dean Milk Co. v. Madison, 340 U. S. 349, 340 U. S. 356 (1951). We note also that, if the credit were truly intended to promote exports from the United States in general, there would be no reason to limit it to exports from within New York.
"is incorporated under the laws of any State and satisfies the following conditions for the taxable year:"
"(A) 95 percent or more of the gross receipts (as defined in section 993(f)) of such corporation consist of qualified export receipts (as defined in section 993(a)),"
"(B) the adjusted basis of the qualified export assets (as defined in section 993(b)) of the corporation at the close of the taxable year equals or exceeds 95 percent of the sum of the adjusted basis of all assets of the corporation at the close of the taxable year,"
"(C) such corporation does not have more than one class of stock and the par or stated value of its outstanding stock is at least $2,500 on each day of the taxable year, and"
"the qualified export receipts of a corporation are --"
"(A) gross receipts from the sale, exchange, or other disposition of export property,"
"(B) gross receipts from the lease or rental of export property, which is used by the lessee of such property outside the United States,"
"(C) gross receipts for services which are related and subsidiary to any qualified sale, exchange, lease, rental, or other disposition of export property by such corporation,"
"(D) gross receipts from the sale, exchange, or other disposition or qualified export assets (other than export property),"
"(E) dividends (or amounts includible in gross income under section 951) with respect to stock of a related foreign export corporation (as defined in subsection (e)),"
"(F) interest on any obligation which is a qualified export asset,"
"(G) gross receipts for engineering or architectural services for construction projects located (or proposed for location) outside the United States, and"
Subsequent to the tax years in question, the law governing DISCs was changed to decrease the amount of DISC income given preferential treatment. The Tax Reform Act of 1976, Pub.L. 94-455, § 1101(a), 90 Stat. 1655, limited DISC benefits to taxable income attributable to gross receipts in excess of 67% of the average export gross receipts in a 4-year base period. DISCs with adjusted taxable income of $100,000 or less are exempt from that provision. §§ 995(e)(3) and (f) of the Code, 26 U.S.C. §§ 995(e)(3) and (f). The Tax Equity and Fiscal Responsibility Act of 1982 Pub.L. 97-248, § 204(a), 96 Stat. 423, increased from 50% to 57.5%, for tax years beginning in 1983, the portion of DISC income deemed distributed to the DISC's shareholders. § 291(a)(4) of the Code, 26 U.S.C. § 291(a)(4).
The State considered two possible methods of DISC taxation. Under the first, a DISC would be taxed directly on its income. Use of this method would encourage formation of DISCs outside the State, so that New York would obtain no tax revenue from them. A direct tax on DISCs would also engender administrative costs. In general, New York uses federal taxable income as the base from which to determine income taxable by the State. Since a DISC would have no federal taxable income, a method of determining a DISC's taxable income for state tax purposes would have to be devised. Budget Report at 18.
A corporation's business allocation percentage for New York tax purposes is computed according to a formula set forth in N.Y.Tax Law § 210.3 (McKinney Supp.1983-1984). The percentage is, basically, the average of the percentages of the corporation's property situated, income earned, and payroll distributed within the State.
The Tax Commission was willing to allow Westinghouse a $2,569.77 credit for the 4.771297% of Westinghouse Export's 1972 receipts attributable to goods shipped from New York ports, and a $6,098.22 credit for the 5.523182% of the DISC's 1973 receipts attributable to New York shipments. Id. at 46.
The DISC credit allowed is computed by multiplying the percentage of the DISC's export revenues derived from New York shipments (100%, 50% or 0%) by the parent's New York business allocation percentage (40%); multiplying that product by the parent's New York tax rate (10%); multiplying that product by the credit percentage (70%); and, finally, multiplying that product by the amount of the accumulated DISC income attributable to the parent ($500).
"hold that a State may not compete with other States for a share of interstate commerce; such competition lies at the heart of a free trade policy. We hold only that, in the process of competition, no State may discriminatorily tax the products manufactured or the business operations performed in any other State."
429 U.S. at 429 U. S. 336-337.
In an attempt to illustrate the insignificance of the size and practical effect of the credit at issue, the Tax Commission reminds us that rejection of the credit will have little effect on Westinghouse's tax bill for 1972 and 1973. In fact, in the absence of the credit, Westinghouse will owe approximately $8,500 more to the State of New York. See n 8, supra; Tr. of Oral Arg. 20. This amount appears insignificant when compared to Westinghouse's New York tax bill of approximately $1 million for the 1972-1973 period. See ibid. Although the extent of the discrimination does not affect our analysis, we note that the controversy here is hardly over a de minimis amount when considered from the perspective of the amount of credit Westinghouse forwent because its DISC shipped the majority of its goods from ports outside New York. Westinghouse received $8,500 in credit because only 5% of its DISC's exports were shipped from New York. A similarly situated corporation whose DISC had conducted 100% of its export shipping from New York would have received a credit of approximately $170,000.

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