63 N.Y.2d 193 (1984)
When a statute contains an unconstitutional provision, the court must determine whether the legislature would have intended the statute to be enforced without the invalid part, considering the legislative intent and purposes to decide which measure would have been enacted if partial invalidity had been foreseen.
Summary
Following a Supreme Court ruling that parts of New York’s Tax Law regarding Domestic International Sales Corporations (DISCs) were unconstitutional, the New York Court of Appeals addressed the severability of the invalid provisions. The court held that clauses (2) and (3) of section 210(13)(a) of the Tax Law were unconstitutional but the remainder valid. This extended the DISC tax credit, formerly limited to New York exports, to all DISC accumulated income attributable to the parent corporation, irrespective of export location. The decision balanced the state’s need for revenue with its goal of incentivizing business activity within New York.
Facts
Westinghouse Electric Corporation, a Pennsylvania corporation operating in New York, challenged tax deficiencies assessed by the New York State Tax Commission. The deficiencies arose from Westinghouse’s failure to include accumulated income from its wholly-owned DISC subsidiary in its “entire net income.” New York’s tax law at the time taxed parent corporations on their share of DISC’s deemed distributions and accumulated income, offering a tax credit intended to mirror the federal tax deferral on accumulated income. The credit calculation favored companies exporting from New York. The Supreme Court later found this credit scheme unconstitutional as it discriminated against exports from other states.
Procedural History
The Appellate Division initially ruled in favor of Westinghouse, finding the tax on accumulated DISC income an unconstitutional burden on interstate commerce. The Court of Appeals reversed, upholding the tax and credit scheme. The U.S. Supreme Court granted certiorari limited to the constitutionality of the DISC tax credit and reversed, finding it violated the Commerce Clause. The case was remanded to the New York Court of Appeals to determine if the invalid portion of the statute could be severed.
Issue(s)
Whether the unconstitutional portion of the New York Tax Law concerning DISC tax credits could be severed from the valid portions, and if so, what would be the effect on the remaining statute?
Holding
Yes, the unconstitutional clauses (2) and (3) of section 210(13)(a) of the Tax Law can be severed because extending the tax credit to all of a shareholder’s accumulated DISC income that has a constitutional nexus to New York substantially furthers the dual legislative purposes of raising revenue and encouraging business activity in the state.
Court’s Reasoning
The court applied the principle of severability, emphasizing the need to discern the Legislature’s intent had it foreseen the Supreme Court’s decision. The court identified two equally important legislative objectives: raising state tax revenues and providing an incentive for DISC formation and operation in New York. The court considered correspondence from the State Departments of Commerce and Taxation and Finance and the Division of the Budget which demonstrated those concerns. Invalidating the entire tax scheme would undermine the revenue objective, while eliminating the credit entirely would discourage business activity. The court noted that, while the statute lacked a general severability clause, the Legislature foresaw the potential invalidity of taxing DISC accumulated income and provided that deemed distributions would still be taxed. The court quoted People ex rel. Alpha Portland Cement Co. v. Knapp, 230 NY 48, 60 stating: “The principle of division is not a principle of form. It is a principle of function. The question is in every case whether the legislature, if partial invalidity had been foreseen, would have wished the statute to be enforced with the invalid part exscinded, or rejected altogether.” The court found that invalidating only the discriminatory portion of the tax credit, effectively extending the credit to all DISC accumulated income allocated to New York, best served both legislative goals. This approach would continue to generate substantial tax revenue while providing a strong incentive for export-related business in New York. The court emphasized that this interpretation aligns with the Legislature’s intent to provide a tax incentive comparable to the federal legislation and maintain New York’s competitive position. The court also cited the Division of Budget Report, highlighting the incentive for increased manufacturing as another justification for the decision.