- 18 - Doc. #496938 v.1
Business That Has a Sufficient Nexus to the State. Disney Enterprises (formerly the Walt Disney
Corporation) was the parent corporation of a unitary group and was indisputably required to pay
New York’s corporation franchise tax. In 1993, the Walt Disney Corporation requested, and the
New York Division of Taxation agreed, that it would file New York combined reports with all of
its active subsidiaries. Even without Disney’s desire to file a combined report, the court
determined that, due to the interdependent nature of Disney and its three subsidiaries in this case,
New York law required that they file such a report so that it did not distort its New York income.
The court then determined, based on New York law, P.L. 86-272, and the Commerce Clause,
that Disney must include the sales receipts from unitary group members in their New York
receipts for the purpose of assessing New York franchise taxes. First, the court held that New
York law required Disney to include its subsidiary’s destination sales in its receipts simply
because they were part of its unitary group. It stated, “The very status of being part of the
combined group provides the justification for the imposition of New York corporation franchise
tax on the fruits of their economic activity in New York, as measured by New York’s reasonable
apportionment formula as prescribed by statute and regulation.” Id. at *62. Second, the court
concluded that P.L. 86-272 permitted this outcome because Disney performed unprotected
activities in New York “on behalf of” their unitary members. Id. at *66. The three subsidiaries
and unitary members, Buena Vista Home Video, Childcraft, Inc. and The Walt Disney Catalog,
Inc., shipped tangible personal property to New York and, therefore, their activities did not
exceed the solicitation of orders. However, the court discovered that Disney and its subsidiaries
shared management responsibilities and that the subsidiaries clearly benefited from the
unprotected activities within New York, such as product promotions in many New York Disney
Stores. Third, the court held that the Commerce Clause did not forbid this outcome because New
York’s apportionment formula included the subsidiaries’ income in its preapportioned tax base
and, therefore, it was not “extraterritorial taxation.” Id. at *67-*68 (quoting Shell Oil Co. v. Iowa
Dept. of Revenue, 488 U.S. 19, 30-31 (1988)).
In re Alpharma, Inc., No. 817895, 2004 N.Y. Tax LEXIS 158 (Tax Appeals Tribunal Aug. 5,
2004). Unitary Apportionment is Constitutional, Rendering P.L. 86-272 Inapplicable to New
York’s Apportionment Scheme Alpharma, the parent company of the various unitary members in
this case, manufactured pharmaceuticals for the animal health industry and sold fine chemicals.
It did not lease or own any business property or equipment in New York during the years in
question (1993-1995) but employed a sales representative (Mr. Wagner), the head of corporate
information technology, to conduct business activities in New York. In 1992, Alpharma
requested permission to file a combined return for New York franchise tax purposes, describing
itself as a parent company comprised of divisions. New York Division of Taxation granted the
petition based on Mr. Wagner’s activities in New York. Even without Alpharma’s desire to file
a combined report, the court determined that, due to the “overwhelming synergy” between the
companies in this case, New York law required a combined tax return in order to avoid a
distorted computation of income to the state. Id.
at *10-*11. The court then determined, based
on New York law and the Commerce Clause, that Alpharma must include sales receipts from
unitary group members for the purpose of assessing New York franchise taxes. The court then
held that P.L. 86-272 did not apply to New York’s unitary apportionment scheme because
unitary apportionment was constitutional. Id. at *53-*54 (citing Shell Oil, 488 US 19). The court
also stated that New York’s use of unitary apportionment for the purpose of assessing a franchise
tax did not violate P.L. 86-272 because the franchise tax was not based on net income. It