84 N.Y.2d 31 (1994)
A state tax law violates the Commerce Clause of the U.S. Constitution if it facially discriminates against interstate commerce by providing a direct commercial advantage to local businesses over similarly situated interstate businesses and the discriminatory treatment is not justified by a legitimate local purpose that cannot be achieved through nondiscriminatory means.
Summary
American Telephone & Telegraph (AT&T) challenged a New York State tax law, arguing it discriminated against interstate commerce in violation of the Commerce Clause of the U.S. Constitution. The law allowed local telephone carriers to deduct access fees from their income after these fees were paid to them by long-distance carriers like AT&T. However, the statute required interstate carriers like AT&T to deduct the access fees from their total interstate and international receipts *before* apportioning to New York, while wholly intrastate carriers could claim a dollar-for-dollar deduction. The New York Court of Appeals agreed that this pre-apportionment deduction for interstate carriers unconstitutionally discriminated against interstate commerce because it favored local carriers.
Facts
Prior to 1990, AT&T included access fees (charges imposed by local telephone carriers for long-distance calls) in its New York taxable income but received no deduction for these pass-through costs.
In 1990, New York amended Tax Law § 186-a, requiring local carriers to include access fees in their tax base and allowing long-distance carriers to deduct those fees.
AT&T paid taxes under the amended law, deducting access fees from its total interstate and international receipts *before* apportionment to New York.
AT&T then sought a refund, arguing it should be allowed to deduct access fees only from its New York revenues. The refund was denied, and AT&T sued, claiming the tax law was unconstitutional.
Procedural History
AT&T sued the New York State Department of Taxation seeking a declaratory judgment that Tax Law § 186-a (2-a) was unconstitutional.
Supreme Court denied AT&T’s motion for summary judgment.
The Appellate Division reversed and granted AT&T’s motion, finding the law violated the Commerce Clause.
The New York Court of Appeals heard the case on appeal as of right due to the constitutional question.
Issue(s)
Whether Tax Law § 186-a (2-a), which requires interstate long-distance carriers to deduct access fees from their total interstate and international revenues before apportionment to New York, violates the Commerce Clause of the U.S. Constitution by discriminating against interstate commerce.
Holding
Yes, because the pre-apportionment deduction for interstate carriers creates a direct commercial advantage for intrastate carriers and the state failed to show that the discriminating methodology advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives.
Court’s Reasoning
The Commerce Clause prohibits states from unjustifiably discriminating against or burdening the interstate flow of commerce. “‘Discrimination’ simply means differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter.”
The court focused on the practical operation of the statute. It found that the pre-apportionment deduction effectively treated similarly situated long-distance carriers differently based solely on the percentage of their property located within New York.
A wholly intrastate carrier could deduct all of its New York access fees, while an interstate carrier like AT&T was limited to its apportionment percentage (5.04% in AT&T’s case), even though both reported 100% of their New York taxable income.
Since access fees are fixed, traceable to New York, and essentially already apportioned, the pre-apportionment deduction created a direct commercial advantage for intrastate carriers.
New York failed to demonstrate that the discriminatory methodology advanced a legitimate local purpose that could not be achieved through nondiscriminatory alternatives. The court noted that the New York access fees are quantifiable and easily measured.
Therefore, the court concluded that the discriminatory calculation method was not practically necessary and unconstitutionally offensive. The court cited *New Energy Co. of Indiana v. Limbach*, 486 U.S. 269 (1988) to reinforce this principle.