Federated Department Stores, Inc. v. Gerosa, 16 N.Y.2d 320 (1965)

A state tax allocation formula for businesses engaged in interstate commerce will be upheld if it provides a rough approximation of a just allocation of income to the state, even if the formula is imperfect or produces seemingly anomalous results under certain hypothetical scenarios.

Summary

Federated Department Stores challenged New York City’s method of allocating its interstate business income for tax purposes. The company argued the allocation formula was unfair and unconstitutional because it could increase the tax burden even as out-of-state receipts increased. The New York Court of Appeals upheld the formula, reasoning that while not perfect, it provided a “rough approximation” of a fair allocation of income to the city. The court emphasized that the formula’s impact on Federated’s actual business operations was reasonable, as it only attributed approximately half of the allocable business to sales made in New York resulting in out-of-state shipments to the New York activity.

Facts

Federated Department Stores, a Delaware corporation, operated 42 retail stores across 11 states, including three major department stores in New York City (Abraham & Straus, Bloomingdale’s). These NYC stores engaged in interstate commerce, delivering goods to customers in New Jersey and Connecticut. New York City imposed a business tax, and the Comptroller devised a formula to allocate interstate business income to the city for tax purposes.

Procedural History

Federated Department Stores challenged the Comptroller’s allocation formula via an Article 78 proceeding. The lower courts upheld the Comptroller’s determination. Federated appealed to the New York Court of Appeals.

Issue(s)

Whether the Comptroller’s allocation formula for taxing interstate business activity in New York City was fair, reasonable, and constitutional, even if it could theoretically lead to increased tax liability as a taxpayer’s out-of-state receipts increase.

Holding

Yes, because the formula provided a “rough approximation” of a just allocation of income to the city, and its application to Federated’s actual business operations was deemed reasonable.

Court’s Reasoning

The court acknowledged the imperfect nature of any general tax allocation formula, stating that it must use artificial assumptions to accommodate diverse business enterprises. The court emphasized that perfection is unattainable and that the formula only needs to provide a “rough approximation” of a just allocation. While the court recognized the theoretical possibility that the formula could increase a taxpayer’s tax burden even as out-of-state receipts increased, it found that in Federated’s case, the formula’s application was reasonable. The court distinguished General Motors v. District of Columbia, noting that the Supreme Court case turned on statutory interpretation, not constitutional issues. The court stated, “The power of taxation on the local activities of large enterprises ought not to be viewed narrowly.” The court noted that Federated’s attack was based on hypothetical scenarios rather than demonstrated unfairness in the actual impact of the tax assessments. The court quoted Butler Bros. v. McColgan and reiterated that the formula must be “fairly calculated” to assign to New York the proportion reasonably attributable to business done there. The court also noted that the Comptroller retained the power to make adjustments or provide alternative methods of apportionment if the formula operated unfairly in specific cases. Judge Van Voorhis dissented, arguing that the formula was arbitrary and lacked a rational basis, particularly because it could increase taxes on interstate receipts as out-of-city receipts increased, and vice versa.