Filing and Federal Public Law 86-272
Mary C. McLaughlin
combined return is based on a method for determining the
portion of total income of a unitary group of corporations
attributable to each taxpayer in the group. Requirements
for combined filing vary by state, but generally, to be
included in a combined group, the entity must be part of
a unitary group and meet certain tests such as stock ownership,
centralized management, and distortion. Even unitary members
that are not taxable by a state are included in the combined
report. This is in contrast to a state consolidated return,
where the unitary business requirement generally does not
apply. A state consolidated return is similar to a federal
consolidated return in which the income of a group of affiliated
corporations is reported.
to file on a combined or a consolidated basis depends on
the group’s taxable income, apportionment factors,
and whether the state requires combined filings for a unitary
group or allows the taxpayer a choice. Some states permit
either combined or consolidated returns but not both; some
allow both types of returns, and some states allow neither.
New York State does not allow consolidated returns, but
it does permit combined returns.
a state to tax income earned in interstate commerce, it
must be able to show a connection—or nexus—between
the state and the activities from which the income is derived.
The federal Interstate Income Tax Law (P.L. 86-272) prevents
a state from imposing an income tax on income derived within
the state from interstate commerce if the only business
activity within the state is the solicitation of orders
for tangible personal property, provided that the orders
are approved and filled outside the state. To be exempt
by virtue of P.L. 86-272, the activities of a foreign corporation
within New York State must be limited to the solicitation
of orders within the state, the orders must be sent outside
New York State for approval or rejection, and approved orders
must be filled by shipment or delivery from a point outside
New York State. In New York, “solicitation of orders”
includes offering tangible personal property for sale, pursuing
offers for the purchases of tangible personal property,
and ancillary activities— other than maintaining an
office—that serve no independent business function
apart from their connection to the solicitation of orders.
case involving Disney Enterprises, Inc. (Disney Enterprises,
Inc. & Combined Subsidiaries, New York Division
of Tax Appeals, Administrative Law Judge Unit, DTA No. 818378,
February 12, 2004), concerned the relationship between P.L.
86-272 and New York State’s combined return rules.
The primary question in this case was whether the New York
destination sales of certain Disney subsidiaries should
be included in the numerator of the receipts factor of the
business allocation percentage of the combined group, despite
the constraints of P.L. 86-272.
Vista Home Video, The Walt Disney Catalog, Inc., and Childcraft,
Inc., were members of the Disney New York combined group.
Each company had sales of tangible personal property shipped
to points within New York. In addition, Buena Vista had
salespeople who solicited sales in New York. The Buena Vista
salespeople did not carry inventory and were not allowed
to accept orders, collect money, or accept returned items.
Other than the cars used by its salespeople and the samples
and promotional items they carried, Buena Vista did not
store any inventory in New York or own or rent any property
in New York. The Disney Catalog and Childcraft did not use
salespeople to directly solicit sales and did not have any
payroll or property in New York.
to joining the Disney New York combined group, Buena Vista
had filed separate New York State corporation franchise
tax returns and reported a zero allocation percentage on
the basis of no nexus under P.L. 86-272. The Disney Catalog
and Childcraft had not filed New York returns prior to joining
the New York combined group. When these three companies
joined the New York combined group, they reported a New
York State allocation percentage of zero and reported that
none of their sales of tangible personal property shipped
to points within New York State.
audit, the New York State Division of Taxation included
the New York destination sales of these three subsidiaries
in the numerator of the sales factor. In addition, the audit
made adjustments to include payroll and property factors
for Buena Vista. Disney objected, maintaining that the three
corporations were not New York State taxpayers and had no
individual nexus with New York State.
to the conclusions of law, the Disney group displayed an
interdependence between entities which required that they
all be included in a New York State combined report. It
did not matter that some of the entities had no nexus individually.
There was evidence of shared management within the Disney
group, and the three entities benefited from activities
performed in New York on their behalf by other members of
the New York combined group. There was a synergistic relationship.
The court noted that the legislative history of P.L. 86-272
and related Supreme Court decisions showed that a state
may constitutionally tax the activities of a corporation
when those activities are part of a unitary business that
has sufficient nexus. It could not be concluded that the
only business activity conducted within New York State by
or on behalf of these three entities was the solicitation
of orders for sales of tangible personal property.
is the inextricable relationship of these three companies
to Disney’s unitary business that resulted in the
inclusion of their New York State receipts in the numerator
of the sales factor, and, in Buena Vista’s case, the
inclusion of New York State payroll and property in the
payroll and property factors.
C. McLaughlin, CPA, is a tax manager at Ciba Specialty
Chemicals Corporation, Tarrytown, N.Y.