Westinghouse Electric Corporation v. Tully

• Decision Date: 24 April 1984
• Docket Number: No. 81-2394,81-2394
• Citation: 80 L.Ed.2d 388,466 U.S. 388,104 S.Ct. 1856
• Parties: WESTINGHOUSE ELECTRIC CORPORATION v. James H. TULLY, Jr., et al
• Court: U.S. Supreme Court

466 U.S. 388

104 S.Ct. 1856

80 L.Ed.2d 388

WESTINGHOUSE ELECTRIC CORPORATION

v James H. TULLY, Jr., et al.

No. 81-2394.

Supreme Court of the United States

Argued Nov. 1, 1983.

Decided April 24, 1984.

Syllabus

The Internal Revenue Code of 1954 (IRC) was amended in 1971 to provide tax incentives for United States firms to increase their exports, and for that purpose special tax treatment was provided for a "Domestic International Sales Corporation" ("DISC"), a corporation substantially all of whose assets and gross receipts are export-related. Under the IRC, a DISC is not taxed on its income, but instead a portion (50% for the tax years in question in this case) of its income—"deemed distributions"—is attributed to its shareholders whether or not actually paid or distributed to them. Taxes on the remaining income—"accumulated DISC income"—are deferred until that income is actually distributed to shareholders or the DISC no longer qualifies for special tax treatment. In response to these amendments, the New York Legislature enacted a franchise tax statute requiring the consolidation of the receipts, assets, expenses, and liabilities of a subsidiary DISC with those of its parent corporation. The franchise tax is assessed against the parent on the basis of the consolidated amounts. The statute also provides for an offsetting tax credit, the result of which is to lower the effective tax rate on the accumulated DISC income included in the consolidated return to 30% of the otherwise applicable rate. The credit is limited to gross receipts from export products "shipped from a regular place of business of the taxpayer within [New York]." The credit is computed by (1) dividing the DISC's gross receipts from property shipped from a regular place of business in New York by its total gross receipts from the sale of export property; (2) multiplying that quotient (the DISC's export ratio) by the parent's New York business allocation percentage; (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 DISC's accumulated income. Appellant Westinghouse Electric Corporation, a manufacturer of electrical products that is qualified to do business in New York, has a wholly owned subsidiary, Westinghouse Electric Export Corporation (Westinghouse Export), that qualifies as a federally tax-exempt DISC. On its 1972 and 1973 New York franchise tax returns, appellant included as income an amount of deemed distributed income equal to about half of Westinghouse Export's income, but did not include its accumulated income. The 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. 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. 399-401.

(b) A State cannot 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 New York franchise tax—rather than on individual transactions. Nor may a State 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. 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, 331, 97 S.Ct. 599, 608, 50 L.Ed.2d 514. Pp. 402-407.

55 N.Y.2d 364, 449 N.Y.S.2d 677, 434 N.E.2d 1044, reversed.

Paul M. Dodyk, New York City, for appellant.

Peter H. Schiff, Albany, N.Y., for appellees.

Justice BLACKMUN delivered the opinion of the Court.

In this case, we are confronted with the question of the constitutionality of a franchise tax credit afforded by the State of New York to certain income of Domestic International Sales Corporations.

I

The tax credit in issue was enacted as part of the New York Legislature's response to additions to and changes in the United States Internal Revenue Code of 1954 effectuated by the Revenue Act of 1971, Pub.L. 92-178, §§ 501-507, 85 Stat. 535. In an effort to "provide tax incentives for U.S. firms to increase their exports," H.R.Rep. No. 92-533, p. 9 (1971); S.Rep. No. 92-437, p. 12 (1971), U.S.Code Cong. & Admin.News 1971, p. 1825, Congress gave special recognition to a corporate entity it described as a "Domestic International Sales Corporation" or "DISC." §§ 991-997 of the Code, 26 U.S.C. §§ 991-997. A corporation qualifies as a DISC if substantially all its assets and gross receipts are export-related. §§ 992(a), 993.¹ Under federal law, a DISC is not taxed on its income. § 991. Instead, a portion of the DISC's income—labeled "deemed distributions"—is attributed to the DISC's shareholders ² on a 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. 544.³ 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.

Enactment of the federal DISC legislation caused revenue officials in the State of New York some concern. New York does not generally impose its franchise tax on distributions received by a parent from a subsidiary; instead, the subsidiary is taxed directly to the extent it does business in the State. See N.Y. Tax Law § 208.9(a)(1) (McKinney 1966). Given the State's tax structure, had New York followed the federal lead in not taxing DISCs, a DISC's income would not have been taxed by the State. See New York State Division of the Budget, Report on A. 12108-A and S.10544, pp. 1, 5-6 (May 23, 1972), reprinted in Bill Jacket of 1972 N.Y.Laws, ch. 778, pp. 13, 17-18 (Budget Report). A budget analyst reported to the legislature that if no provision were made to tax DISCs, New York might suffer revenue losses of as much as $20-$30 million annually. Id., at 20. On the other hand, the analyst warned that state taxation of DISCs would dis- courage their formation in New York and also discourage the manufacture of export goods within the State. Id., at 18.⁴

With these conflicting considerations in mind, New York enacted legislation pertaining to the taxation of DISCs. 1972 N.Y.Laws, chs. 778 and 779 (McKinney), codified as N.Y. Tax Law §§ 208 to 219-a (McKinney Supp.1983-1984). The enacted provisions require the consolidation of the receipts, assets, expenses, and liabilities of the DISC with those of its parent. § 208.9(i)(B). The franchise tax is then assessed against the parent on the basis of the consolidated amounts. In an attempt to "provide a positive incentive for increased business activity in New York State," however, the legislature provided a "partially offsetting tax credit." Budget Report, at 18. The result of the credit is to lower the effective tax rate on the accumulated DISC income reflected in the consolidated return to 30% of the otherwise applicable franchise tax rate. The DISC credit, significantly, is limited to gross receipts from export products "shipped from a...