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decided: April 24, 1984.



Blackmun, J., delivered the opinion for a unanimous Court.

Author: Blackmun

[ 466 U.S. Page 390]

 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.


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), 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

[ 466 U.S. Page 391]

     gross receipts are export-related. §§ 992(a), 993.*fn1 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*fn2 on a

[ 466 U.S. Page 392]

     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.*fn3 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 discourage

[ 466 U.S. Page 393]

     their formation in New York and also discourage the manufacture of export goods within the State. Id., at 18.*fn4

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 regular place of business of the taxpayer within [New York]." § 210.13(a)(2). The credit is computed by (1) dividing the gross receipts of the DISC derived from export property shipped from a regular place of business within New York by the DISC's total gross receipts derived from the sale of export property; (2) multiplying that quotient

[ 466 U.S. Page 394]

     (the DISC's New York export ratio) by the parent's New York business allocation percentage;*fn5 (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).


The basic facts are stipulated. Appellant Westinghouse Electric Corporation (Westinghouse) is a Pennsylvania corporation engaged in the manufacture and sale of electrical equipment, parts, and appliances. Westinghouse is qualified to do business in New York, and it regularly pays corporate income and franchise taxes to that State. Among Westinghouse's subsidiaries is Westinghouse Electric Export Corporation (Westinghouse Export), a Delaware corporation wholly owned by Westinghouse, that qualifies as a federally tax-exempt DISC. Westinghouse Export acts as a commission agent on behalf of both Westinghouse and Westinghouse's other affiliates for export sales of products manufactured in the United States and services related to those products. All of Westinghouse Export's income in 1972 and 1973 consisted of commissions on export sales. On both its 1972 and 1973 federal income and New York State franchise tax returns, Westinghouse included as income, and paid taxes on, an amount of ...

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