Westinghouse Electric Corporation v. Tully

PETITIONER:Westinghouse Electric Corporation
RESPONDENT:Tully
LOCATION:Environmental Protection Agency

DOCKET NO.: 81-2394
DECIDED BY: Burger Court (1981-1986)
LOWER COURT: New York Court of Appeals

CITATION: 466 US 388 (1984)
ARGUED: Nov 01, 1983
DECIDED: Apr 24, 1984

ADVOCATES:
Paul M. Dodyk – on behalf of the Appellant
Peter H. Schiff – on behalf of the Appellees

Facts of the case

Question

Audio Transcription for Oral Argument – November 01, 1983 in Westinghouse Electric Corporation v. Tully

Warren E. Burger:

We’ll hear arguments next in Westinghouse Electric against Tully.

Mr. Dodyk, I think you may proceed whenever you’re ready.

Paul M. Dodyk:

Mr. Chief Justice, and may it please the Court:

in this appeal, Westinghouse Electric Corporation challenges the constitutionality of the way in which the State of New York taxes the income of a domestic international sales corporation or DISC.

A DISC is not a typical business corporation.

It is a vehicle established under the Internal Revenue Code to permit the deferral of income taxes with respect to certain income from exports.

The income which may be attributed to a DISC and on which tax may be deferred is determined by a formula set forth in the Internal Revenue Code such as 50 percent of net income or 4 percent of gross receipts derived from exports.

DISCs typically perform no functions, own no property, have no employees.

A DISC is essentially an accounting segregation of a portion of a taxpayer’s export-related income for purposes of tax deferral.

The export-related income so segregated is essentially pure income separated from the costs which generate that income.

Those costs remain on the books of the business entities whose exports are in question.

Under the Internal Revenue Code as it was in effect during the relevant period, a taxpayer was essentially permitted to defer federal taxes on 50 percent of income allocated to the DISC until that income is distributed to the parent.

Turning to Westinghouse, Westinghouse and its affiliates are engaged in a variety of businesses, some of which exports products, a portion of the income from which during the relevant period was allocated by Westinghouse to the DISC.

During the years here in question, 1972 and 1973, approximately 75 to 80 percent of the Westinghouse DISC income was derived from Westinghouse exports, approximately 20 to 25 percent from affiliates of Westinghouse.

The record in this case establishes that the affiliates of Westinghouse did no business in New York.

It further establishes that the affiliates are autonomous, independently managed, and deal with Westinghouse on an arm’s length basis.

The State of New York does not treat these affiliates as unitary with Westinghouse and has not attempted to tax their income in recognition of the fact that they do not do business in the State of New York.

The tax practices here at issue arise from New York’s taxation of accumulated DISC income.

The particular tax involved is the New York corporate income tax.

The New York corporate income tax is a formula apportioned tax.

In determining the amount of income which the State of New York taxes, it first attempts to determine the taxpayer’s total income.

It then multiplies it by a fraction which is determined by the relationship of the taxpayer’s New York property, payroll and revenue to the total payroll, property and revenue of the taxpayer.

In determining the amount of a taxpayer’s income to be apportioned to New York, the state in this case added to the income of Westinghouse the total income of its DISC, including the amount on which federal taxes were deferred, and including the amount derived by reason of exports by Westinghouse non-New York affiliates.

Having determined the income apportioned to New York, the state then applied a tax rate of 9 percent to that income as allocated to the State of New York.

In computing the tax actually due, however, the court took another step, and that is, it permitted a credit with respect to 70 percent of the tax due on accumulated DISC income.

And it is that credit which is at issue in this case, because the State of New York, although it permits that credit, it permits it only with respect to exports which are shipped from a regular place of business in the State of New York.

More specifically, in calculating the credit, the New York statute requires the taxpayer to multiply its accumulated DISC income by a fraction of which the numerator is gross receipts shipped from New York, and the denominator gross receipts from exports shipped from all sources.

In this case the result was to limit the credit permitted Westinghouse to approximately 5 percent of the accumulated DISC income which New York taxed.

Of course, with respect to other corporations which have their base of operations in New York, such as General Electric, the credit is much greater.

The basic result of New York’s limitation on the availability of the credit is that if a firm ships exports from New York, it will pay a tax of 2.7 percent on accumulated DISC income attributed to that shipment, but if it ships that export from New Jersey or any state other than New York, it will pay a tax of 9 percent.

Paul M. Dodyk:

But in terms of dollars, if you assume a corporation with $100 million of accumulated DISC income, 50 percent of which is apportioned to the State of New York, that taxpayer will pay to the State of New York a tax in the amount $4,500,000 if it ships from non-New York facilities, but if it ships from New York facilities, its tax bill will only be $1,350,000.

William H. Rehnquist:

Mr. Dodyk, what you’re saying is basically that the federal Constitution requires the credit New York extends you to be larger than it was calculated to be under the statute.

Paul M. Dodyk:

That is correct, Your Honor.

William H. Rehnquist:

I suppose you could win on that point and still be worse off financially if the case went back to the New York Court of Appeals after reversing, and the New York Court of Appeals decided that the New York legislature never would have enacted the credit at all if it knew that this was going to be the result.

Paul M. Dodyk:

Well, I guess in that case my client, Westinghouse, would be a very altruistic enforcer of constitutional principle.

Or some would have said I would have succeeded in shooting myself in the foot.

But in any event, that’s something for the Court of Appeals on remand to determine.

Byron R. White:

If you win.

Paul M. Dodyk:

Yes, of course.

Our argument is essentially a simple one, and that is, that any tax scheme which works that difference, which imposes a higher rate of tax on shipments which are made outside the taxing state than it does on the same equivalent shipment made inside the State of New York is an unconstitutional burden on the commerce clause because it discriminates against interstate commerce.

In this particular case we believe that the operation of the credit and its unconstitutionality is exacerbated by the fact that the State of New York requires the taxpayer to add to its income base the entire amount of DISC income, but excludes from the denominator of the apportionment formula the property, payroll and revenue of the non-New York affiliates whose shipments accounted for 20 to 25 percent of the DISC income involved in this case.

John Paul Stevens:

Let me ask right there, the shipments that originated in New York, were all of them made in interstate commerce?

Paul M. Dodyk:

Yes, Your Honor.

John Paul Stevens:

So then it’s really not a discrimination against interstate commerce; it’s a discrimination between two kinds of interstate commerce.

Paul M. Dodyk:

In a sense that is true.

And much the same was the case, of course, in the Boston Stock Exchange case where the Court observed, I guess for the first time, that even if one is dealing with a discrimination between two forms of interstate commerce, that is still a form of discrimination which the commerce clause proscribes.

Essentially, we believe that this case is governed by the Boston Stock Exchange case and Maryland v. Louisiana.

In Boston Stock Exchange, New York imposed a tax on any transfer of securities which had certain defined connections or contacts with the state of New York.

That tax scheme, however, included a deduction or I should say a credit and a limitation which was applicable if the transfer was executed on a New York Stock Exchange, so that the effect was that a transfer which was executed on the Boston Stock Exchange or some other stock exchange would bear a higher rate of tax than a transfer which was executed on the New York Stock Exchange.

And we submit that this case is no different.

In the Boston Stock Exchange case if you executed that transfer, you paid a higher rate of tax if that transfer was executed in Boston as opposed to New York, so here, if you ship the export from the port of Boston, you pay a higher rate of tax than you do if you ship that export from New York.

Similarly, in Maryland v. Louisiana, the State of Louisiana imposed a tax on the first use of natural gas coming into the state from wells located on the federal offshore properties, and it then built into the tax scheme a series of limitations in deductions which effectively limited the incidence of that tax to gas which was shipped out of Louisiana to out-of-state users, and this Court held that set of limitations to work an unconstitutional discrimination against interstate commerce.

Although obviously Appellees do not accept our characterization of their tax as discriminatory, they do not deny, they have never denied and cannot deny that the effect of that tax, economic effect, is to impose a higher rate of tax if an export is shipped from a non-New York facility as compared to one which is shipped from a New York facility.

Appellees have not cited a single case in which this Court has sustained a state tax which has that differential geographical impact, and to our knowledge there are no cases which do so.

Appellees’ response really consists of two basic arguments.

One is justification by reference to apportionment, and one is argument by analogy.

They say that the constitutionality of the taxes was deemed because the tax is a properly apportioned income tax.

That argument, I submit, fails for two reasons.

First, as we have pointed out, the tax is not properly apportioned; and second, and equally important, apportionment is irrelevant to the reason why we are urging that the tax is unconstitutional.

The reason that the New York tax is unconstitutional is that it results in a higher tax rate if property is shipped from a non-New York source than if the property is shipped from a New York source.

Both owned by the same–

Paul M. Dodyk:

Pardon?

Warren E. Burger:

–Both owned by the same entity?

Paul M. Dodyk:

Yes.

Both owned by the same entity.

So even if the base of the tax were proper–

Harry A. Blackmun:

Mr. Dodyk, does that always follow?

Your income tax might well go up if you ship from New York, might it not?

Paul M. Dodyk:

–Well, it might well go up in the sense that you would have added payroll and property to the numerator if you established the facility in New York as opposed to having the facility established in New Jersey.

But I submit, Your Honor, that effect is going to be infinitesimal, because all you’re talking about here is establishing a warehouse and handling facility, the property and payroll of which are but a small fraction of the property and payroll which came together into the manufacture and shipment of the product in question.

So to the extent that the state relies on an offsetting increase, I submit that the underlying economics will not support the argument.

Now, the reason why the formula apportionment defense I think fails is because we’re not attacking at this point the tax based on its basis.

We’re not saying that formula apportionment is wrong; we’re saying that what’s wrong is allowing a credit to a taxpayer which turns on the locus from which the export is shipped.

And because that is the source of the unconstitutionality, we submit that the basis of the tax is simply irrelevant.

Or to put it another way, if you take a look at the Boston Stock Exchange case, which to my mind involved a very similar form of discrimination which was struck down, there was no question but that the State of New York could tax that stock transfer which was executed on the Boston Stock Exchange.

The Court accepted that there were sufficient contacts with the State of New York to permit the tax, but the unconstitutionality arose from the difference in the rate of tax applied because of where the transfer was executed.

Similarly, in Maryland v. Louisiana, the taxable incident was first use of natural gas within the state.

The federal government did argue that the first use also made the tax unconstitutional, but this Court rejected that argument and said for purposes of the opinion it assumed that the State of Louisiana had sufficient contact with the first use to permit it to impose a tax.

So that in both Boston Stock Exchange and Maryland v. Louisiana, the basis of the tax was a valid basis, just as the Appellees here argue formula apportionment constitutes a valid basis.

Now, the Appellees seek to avoid the governing force of Maryland v. Louisiana and Boston Stock Exchange by suggesting a distinction, and the distinction is that in Boston Stock Exchange and Maryland v. Louisiana you were dealing with a transactional tax in a sense, whereas here we’re not dealing with a transactional tax but with a formula apportioned income tax.

It’s true that distinction does exist in the facts of the cases, but Appellees have never suggested any reason why the difference in the tax base should make any constitutional difference.

And, again, I submit that difference, the difference between formula apportionment and transaction is irrelevant because the source of the unconstitutionality is the discriminatory impact which results from the application of the credit.

The argument by analogy, Appellees in amicus argue that since they could constitutionally take a variety of other steps to reduce the impact of state taxation that they should likewise be permitted to implement the credit scheme here at issue.

Appellees’ only authority for that proposition is an off-repeated quotation which they take from the Boston Stock Exchange case to the effect that states may use their taxing power to compete with other states for a share of interstate commerce.

And then Appellees in amicus go on to cite as alternative measures which they might constitutionally take: providing police and fire protection, providing investment subsidies, reduced taxation of exports, abolition of DISC income taxation, and indeed, abolition of the corporate income tax altogether.

I submit that the phrase relied upon from Boston Stock Exchange is far too vague to provide this Court with informed guidance for the resolution of the particular constitutional questions presented here.

To say that states may generally use their taxing power to compete for interstate commerce is to say nothing about the legality of a tax which results in higher rates being imposed on out-of-state export shipments as compared to in-state export shipments.

Moreover, that language appears only as a general reservation in the context of an opinion in which this Court struck down a taxing scheme which is very similar to the one we have here at bar.

The various alternative tax and incentive schemes which New York adduces as being… justifying analogy are all distinguishable in that none of them involves a tax which weighs more heavily on out-of-state shipments than in-state shipments.

Of course, a state may choose to abolish taxes on DISC income, on export income or on corporate income altogether; but in none of those cases does the state create a tax, the rate of which differs depending on the location from which the export is shipped.

Paul M. Dodyk:

Were New York to exempt a certain category of income such as DISC income or export income from tax, that income would be exempt from New York State tax whatever the point of origin.

Here, however, the undeniable and undenied effect of the New York credit scheme is to impose a tax which is levied at a rate of 9 percent on DISC income derived from out-of-state shipments and a rate of 2.7 percent on New York-based shipments.

None of the hypothetical constitutionally permissible analogies suggested by Appellees involve any such discriminatory effect.

None of the authorities relied upon by Appellees sanction such discrimination.

To the contrary, as I have said, Boston Stock Exchange and Maryland v. Louisiana, the principles of which are governing here, mandate the invalidation of any tax scheme which results in a state levying heavier taxes on a transaction because of its out-of-state locale.

Thank you, Your Honor.

Warren E. Burger:

Mr. Schiff.

Peter H. Schiff:

Mr. Chief Justice, and may it please the Court:

My view of the case that Mr. Dodyk has argued is very different from what I understand the case to be and what the facts to be.

As a matter of fact, it seems to me a good part of what Mr. Dodyk has argued are the issues on which you relate to the second issue in the jurisdictional statement with respect to which you dismissed it for being insubstantial.

It seems to me it’s the law of the case that the… New York was perfectly proper in viewing Westinghouse and the Westinghouse DISC on a unitary basis.

Nevertheless, a good part of the argument that I’ve heard just now and in their briefs seems to challenge the application of the unitary principle.

Admittedly, it is done by the back door in relation to the credit, but it seems to underlie the claim that somehow New York is taxing out-of-state income or is… because they claim that we are… about the credit, that the measurement of the credit is wrong because we base it on DISC income related to shipments from a place of business in New York, but that we don’t give it credit if the shipments are from a place outside New York, assumes that we are somehow taxing income that is outside the state.

Now, what New York has done here in applying the three-factor business allocation formula which this Court so recently reaffirmed in the Container case, was to only tax New York income.

Now, once it’s determined what the overall amount of New York income is, we submit that it was reasonable for New York to apply a credit only to that portion of the accumulated DISC income, and that’s the DISC income for which the federal government provides a tax break, is to try to ascertain what of the total amount of DISC income is reasonably attributable to New York.

Because in the first place in applying the business allocation formula, as our Court of Appeals has said, New York is only taxing New York income.

And I think it would be a strange policy indeed, whether the commerce clause or any other provision of the Constitution, to say that we have to give a credit on income that we have never taxed in the first place.

Byron R. White:

Well, isn’t that upside down, though, really?

If… if all of the DISC income had arisen from shipments from New York, there had been the same unitary income but the tax would… you wouldn’t have had any tax on the DISC.

Peter H. Schiff:

No.

The… the credit is only–

Byron R. White:

Well, anyway… anyway your credit would have applied to all the DISC income, wouldn’t it?

Peter H. Schiff:

–Well, no, no.

The credit applies… well, it might if everything is from New York and if all the DISC income is–

Byron R. White:

That’s what I said.

That was my hypothetical.

Peter H. Schiff:

–Well, that’s–

Byron R. White:

So you would have collected less tax if all of the DISC income had been from New York.

Peter H. Schiff:

–Well, the objective–

Byron R. White:

Wouldn’t… wouldn’t you?

Peter H. Schiff:

–I think probably so.

The objective–

Byron R. White:

Well, probably.

That’s the whole purpose of the credit.

Peter H. Schiff:

–The objective of the credit is to some degree track the credit that’s being given by the federal government, but that–

Byron R. White:

It sounds peculiar… it sounds peculiar that your credit is trying to identify the income attributable to New York so you can tax it, when in fact you find out the income attributable to New York, and you don’t tax it.

You give it a credit.

Peter H. Schiff:

–Well, we give it a lesser rate, but I don’t see what’s peculiar about that.

I mean we can only… we would only–

Byron R. White:

Well, usually when you identify income as originating in the state, that’s when you tax it.

Peter H. Schiff:

–But we’re only taxing income in the state in the first place, Your Honor.

Byron R. White:

Oh, I understand that.

Peter H. Schiff:

And the question then is do we have to tax the DISC income at the same rate as all other New York income, and that’s all that the division here involves.

Other business income which… that’s related to New York which isn’t DISC income we rate… we tax at the 9 percent level.

If it is DISC income or if we have an investment tax credit or some other credit, it is a somewhat lesser rate.

Now, let me also point out that the credit here… Mr. Dodyk keeps talking about we tax it at 2.7 percent.

If he had used the figures in the record as applied to Westinghouse rather than deriving hypothetical examples throughout his brief, the effective tax rate on the accumulated DISC income which is derivable from the record in 1972, one of the years in question here, was approximately 8.69 percent; in 1973 it was about 8.65 percent… the fact reflected by the actual size of the credit here.

The size of the credit in 1975 that they are objecting to and apparently they want to pay more is about $2,500.

In 1973 it was about $6,000, even though Westinghouse was paying an overall corporate income tax in New York of about a million dollars for the two years combined.

And I suggest in response to a question that Justice Rehnquist asked that the… that if Westinghouse were to win in this case, that it would be, in terms of the questions that have been left open by this Court, an invalidation of a DISC credit in its entirety with the result that yes, indeed, Mr. Dodyk would be shooting himself in the foot because his client would be paying about $10,000 more for the two years here in question.

Whether he could then change the New York legislature’s way of determining the credit I do not know, but I don’t think it is a legislative question.

The issue here is whether the DISC credit is invalid or not and not how it was computed.

They did not preserve any arguments, as far as I can see, in this Court or even in the court below.

John Paul Stevens:

While you’re pausing, is it correct that the purpose of the credit is to make the… or to provide a motive for these special export companies to have as much business originate in New York as possible?

Peter H. Schiff:

Yes, absolutely.

John Paul Stevens:

In other words, the purpose–

Peter H. Schiff:

Or at least to not lose any more business than necessary.

John Paul Stevens:

–The purpose is to have a direct impact on the way goods are shipped overseas.

Peter H. Schiff:

Well, in terms of the goods that are shipped, Your Honor–

John Paul Stevens:

Well, at least that the business transactions–

Peter H. Schiff:

–It’s a question of really of where… I would say it’s a question of where Westinghouse does it business, because the question isn’t really where it is shipped.

–Your purpose is to–

Peter H. Schiff:

We are… obviously, the purpose of the credit.

Thurgood Marshall:

–Are you trying to escape the word “commerce”?

Peter H. Schiff:

No.

I think I’m trying–

Thurgood Marshall:

That it would affect commerce?

Peter H. Schiff:

–Well, it may affect commerce.

I think any credit does.

And the differentiation between state taxes in one state and another always is liable to affect commerce.

New York, unfortunately, is a state which has some of the highest taxes in the country, and recognizing that the–

Byron R. White:

But at least those high taxes normally affect everybody the same.

Peter H. Schiff:

–Well, I think they affect everybody the same.

Byron R. White:

But this one doesn’t.

Peter H. Schiff:

Oh, yes, it does.

It does.

Byron R. White:

Well, I don’t know–

Peter H. Schiff:

Everybody who is doing business–

Byron R. White:

–I know you pay more taxes if you ship from New Jersey than you do if you ship from New York.

Peter H. Schiff:

–No, not to New York.

You don’t pay it to New York, because you’re not paying any taxes on what is being shipped from New Jersey.

That would be an incident of the New Jersey taxation, not an incident of New York taxation.

Now, this is… could I–

Byron R. White:

That… that… but in your unitary scheme you attribute all that income to the parent, and you take all that DISC income into–

Peter H. Schiff:

–We’re applying the unitary principle just the way it’s been applied regularly.

Byron R. White:

–So you’re taxing the DISC income that originates in New Jersey at a higher rate than if it originated in New York.

Peter H. Schiff:

Well, Justice White, if–

Byron R. White:

Well, isn’t that so?

Peter H. Schiff:

–No, no.

Not–

Byron R. White:

Why isn’t it?

Peter H. Schiff:

–I mean I think… I think that the–

Byron R. White:

Well, you give a credit to one and not another.

Peter H. Schiff:

–Well, if I understood what you were just saying, when you apply the apportionment principle, of course, in some sense, as Mr. Dodyk points out in his reply brief, if the 5 percent business allocation formula is applied, you could say your taxing some New Jersey income, some California income.

Byron R. White:

Well, that isn’t the point.

Peter H. Schiff:

But that’s… that’s not the point.

Byron R. White:

No.

I wasn’t trying to make that point.

Wouldn’t… wouldn’t Westinghouse have paid less tax to New York if all of its shipments, all of its DISC shipments had been from New York?

Peter H. Schiff:

If all of its DISC income and all of its–

Byron R. White:

All of the… all of the… all of the… all of the shipments in international trade had been made from New York.

Peter H. Schiff:

–If the… there had been a place of business… that is, a manufacturing company or a warehouse that Westinghouse was… through which it was generating its income, if that is where the exports are coming from, yes.

If they… if they ship–

Peter H. Schiff:

But it’s not a question of where the port of embarkation is.

Byron R. White:

–No.

If they ship… if they… if instead of having a warehouse in Delaware they had one in New York and made the shipments from there, they would have paid less tax.

Peter H. Schiff:

If all the incidents were in New York, I think as we point out in our brief, it is likely that there would be more income to New York.

There would also be more cost.

New York might or might not make more or less tax.

And one of the problems we have with Westinghouse’s presentation is they have made absolutely no factual showing on this record.

They’ve been purely hypothetical.

Now, I think the teaching of this Court–

John Paul Stevens:

Yes, but, Mr. Schiff, can I interrupt you again?

At page 26 of your brief you say,

“The purpose of giving the tax credit is to prevent export business being driven out of New York. “

You say,

“The credit is designed to maintain export business in New York. “

Peter H. Schiff:

–Absolutely.

It’s totally–

John Paul Stevens:

Well, then, it must… it must make a difference where the export business is.

Peter H. Schiff:

–Well, the hope is… well, if they do some New York export–

John Paul Stevens:

You stand by those statements, I take it.

Peter H. Schiff:

–Of course.

If they do some New York export business, if they are generating some of their income from New York business, and that’s being exported… because that’s the only thing that the DISC credit relates to… we will then apply a lower tax rate to that income, which we think is totally consistent with this Court’s language in the Boston Stock Exchange case and other cases like the Bowers case which permit states to give credit to try to compete.

Now, there is a major difference between our tax and the credit in this case and the Boston Stock case and the Maryland against Louisiana case.

In those cases… in the Boston case it was clear that New York was… while it was… it was attempting to tax extraterritorially, I think.

We are imposing a tax on the stock transfer, but we oppose the full tax, but it varied depending on whether the transfer was being accomplished through an out-of-state stock exchange or a… the New York Stock Exchange.

There was, however, enough incidents to tax it in New York because the transfer of the stock certificate, I think, was happening there, so that we were discriminating depending on where part of the transaction happened.

In this case the only thing that we tax in applying the unitary principle is New York income, and then we only apply credit to the New York income.

As a matter of fact, it’s a very, very conservative credit because we use these two percentages, which means that the credit boils down to something like a quarter of one percent.

Harry A. Blackmun:

Of course, that doesn’t make it valid or invalid, does it?

Peter H. Schiff:

No, it doesn’t, except that in terms of the effect on commerce, the degree of it is also relevant.

It’s not done in pure abstract terms, Your Honor.

It is done in practical terms.

But in any event, we are not taxing extraterritorially, and the same thing was true in Maryland against Lousiana.

There, Louisiana–

Byron R. White:

I didn’t think that was the issue in the case.

I thought–

Peter H. Schiff:

–In which case?

Byron R. White:

–This one.

About whether you’re taxing extraterritorially.

Peter H. Schiff:

I think… I think… well, I have to–

Byron R. White:

If you want to get an… you might have something if you want to set up that straw man, but I thought it was a case of discrimination.

Peter H. Schiff:

–Well, but I… I, with all due respect, I do not see how we get to discrimination in this case if we are not taxing, as they suggest, extraterritorial values in the first place, or giving a credit extraterritorially.

The statement made is that we should not be giving a credit to New York DISC income because we are taxing… would be taxing out-of-state DISC income at a higher level.

Now, that seems to me to assume that we are taxing something out of state in the first place, and we are definitely not doing that.

I must admit, and this may be my problem, I have had difficulty in understanding what the issue in this case is, because from our perspective the formula applied after… to the total income means that we are only taxing New York income.

William H. Rehnquist:

What is… what is the formula upon which you include the income of the DISC within your tax?

Peter H. Schiff:

It’s the three factor business allocation formula, Your Honor.

William H. Rehnquist:

And it… but it… it’s treated as being… the whole outfit is unitary, isn’t it?

Peter H. Schiff:

It’s treated as if the… it’s really combined, I guess, but it’s the Westinghouse Electric and Westinghouse DISC are treated as being unitary.

Byron R. White:

Except you don’t include… does that include DISC?

Peter H. Schiff:

Well, we include everything, all the income and all of the property, receipts and payroll of those companies.

What Westinghouse would have us do is to go behind the companies that are being treated in the combined income, which is something that is not done in application of the business allocation formula.

Now, we do, if Westinghouse claims that by not going behind it there is something unfair in the application of the business allocation formula, which is, I think, truly what they are arguing here.

New York tax laws, we have pointed out in our brief, would have permitted them to try to show some unfairness as it relates to the facts of this case.

They haven’t made any effort to do that.

They–

William H. Rehnquist:

Well, is your position basically that your formula that includes the DISC within the income that’s taxed to Westinghouse is supposed to compute out only New York income?

Peter H. Schiff:

–That is exactly our position.

William H. Rehnquist:

And, therefore, when you’re giving credit, you ought to be able to credit only on the basis of New York income.

Peter H. Schiff:

That is exactly our position.

You said it much better than I.

But that is our… our position in a nutshell.

And–

Sandra Day O’Connor:

But isn’t New York in fact, even though it’s calculating a total tax on all the company’s business in New York, isn’t New York multiplying that by the fraction of the company’s total export business that’s conducted in New York rather than simply the fraction of the company’s New York business that’s export-related?

Peter H. Schiff:

–Well, in terms of the original allocation, the only formula that’s used to determine what income is taxable is the business allocation formula, and then in determining the DISC credit, we multiply it by both fractions.

It’s a very conservative way of doing it, but as far as I have been able to figure it out is that we want to make sure that, a) we’re only taxing New York income, and that we’re only applying the credit to New York income; and b) that the income with respect to which we give a credit is only DISC income as opposed to income generated from other sources.

Now, I have to tell you that the net result is a very small credit.

I think we could have given a larger credit.

And I think that’s what Westinghouse wants, but frankly, that doesn’t amount to any constitutional infirmity.

But that’s exactly what we do, Justice O’Connor.

I did want to distinguish the Maryland-Louisiana case because there, too, Louisiana was taxing extraterritorially and giving a credit solely to Louisiana so that the tax really wasn’t being paid in Louisiana but was paid on the same gas every place else.

But there was no question that there was an extraterritorial tax which could only be done if it was in a nondiscriminatory fashion.

Here, as I have said, there is no extraterritorial tax.

The credit is… I think the concept of it is perfectly reasonable as well as its application.

For these reasons I ask for an affirmance of the court below.

Warren E. Burger:

Do you have anything further, Mr. Dodyk?

Paul M. Dodyk:

Just a moment, Your Honor.

I think the central thrust of Appellees’ argument is that because the income which is being taxed here is in some sense New York income as determined by formula apportionment, they can proceed from that basis to structure credit which clearly discriminates against non-New York shipments.

Paul M. Dodyk:

I submit to the Court that the transaction in Boston Stock Exchange was accepted by the Court as a New York transaction; that the first use tax in Maryland v. Louisiana was accepted by the Court as a Louisiana transaction, but that did not justify in grafting on to that properly based tax a set of limitations which had a geographically discriminatory effect.

Thank you, Your Honor.

Warren E. Burger:

Thank you, gentlemen.

The case is submitted.