British Land (Maryland), Inc. v. Tax Appeals Tribunal, 85 N.Y.2d 139 (1995)
A state’s formula-based tax on income is unconstitutional if it unfairly attributes income to the state that is disproportionate to the business transacted within the state, particularly when the factors driving the income’s generation occurred primarily outside the state.
Summary
British Land (Maryland), Inc. challenged New York State’s corporation franchise tax assessment on the gain from the sale of its Baltimore property. The New York Tax Appeals Tribunal determined that British Land operated a unitary business in New York and Maryland, thus justifying the state’s apportionment formula to tax a portion of the Baltimore property sale. The New York Court of Appeals reversed, finding that the application of the statutory formula resulted in an unfair taxation of extraterritorial values because the factors leading to the property’s appreciation occurred predominantly in Maryland before the company established significant operations in New York.
Facts
British Land (Maryland), Inc., a Delaware corporation, purchased a Baltimore office building in 1973. In 1982, the company acquired an office building in New York City. In 1984, it sold the Baltimore property for a substantial gain. The New York Department of Taxation and Finance sought to tax a portion of the gain, arguing that the company operated a unitary business across state lines. Key factors contributing to the Baltimore property’s appreciation included an improved economic climate due to the Baltimore Harbor Redevelopment Project, sound management, renovations, and acquisition of the fee interest. These factors primarily occurred before the company’s significant activities in New York.
Procedural History
The Department of Taxation and Finance issued deficiency notices. British Land appealed to the State Tax Appeals Tribunal, which upheld the assessment. The Appellate Division confirmed the Tribunal’s determination. The New York Court of Appeals granted review due to substantial constitutional questions.
Issue(s)
Whether New York violated the Due Process and Commerce Clauses by taxing a disproportionate share of a corporation’s gain from the sale of out-of-state property, when the property’s appreciation was primarily due to factors unrelated to the corporation’s in-state activities.
Holding
Yes, because the application of the statutory formula resulted in the taxation of extraterritorial values by unfairly attributing income to New York that was not generated by activities within the state.
Court’s Reasoning
The Court of Appeals acknowledged that a state can tax a proportional share of a multistate corporation’s income if it operates a unitary business. However, this power is limited by the principle that a state cannot tax income unfairly attributed to activities outside the state. The court determined that the Tax Appeals Tribunal correctly identified the New York City and Baltimore real estate activities as part of a unitary business. However, the court found that British Land presented “clear and cogent evidence” that the statutory formula resulted in taxation of extraterritorial values.
The court emphasized that the factors primarily responsible for the Baltimore property’s appreciation occurred before British Land’s significant activities in New York. “In this respect, therefore, and particularly because the single gain from the sale of the Baltimore property so dwarfed petitioner’s other net income, clear and cogent evidence supports the conclusion that two thirds of petitioner’s $13 million gain on the sale of the Baltimore property ‘cannot in fairness be attributed to [petitioner’s] activities within [New York] State.’ ”
Additionally, the court noted the distorting effect of the vast difference in value between the New York and Baltimore properties on the apportionment formula. The court remanded the case, directing the Tax Appeals Tribunal to redetermine the allocation of British Land’s income to more fairly reflect its business activities in New York.