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Tax Law

Lost in customs: New York Tax Appeals Tribunal disallows deduction for royalties paid by foreign nontaxpayer affiliates

On Aug. 6, the New York Tax Appeals Tribunal held that royalties received from a foreign affiliate are taxable and are not subject to New York’s royalty income exclusion provision under former Tax Law § 208(9)(o)(3).

Prior to its amendment, Tax Law § 208(9)(o)(3) provided for a deduction for royalties received from a related member unless the royalties would not be subject to addback under New York’s royalty expense addback statute (the “exclusion provision”). The taxpayer received royalty payments from foreign affiliates that were not New York taxpayers, and therefore the payments were not added back by the foreign affiliates. The taxpayer asserted that the exclusion provision allowed a New York taxpayer to deduct royalty payments received from its foreign affiliates because they were the type of payments that would be subject to the addback provision if the foreign affiliate had been subject to New York tax. The Tribunal disagreed, however, holding that the deduction was improper because payments from a nontaxpayer foreign affiliate “would not be required” to be added back under the royalty addback provision since that affiliate was not subject to New York tax.

The Tribunal also concluded that former Tax Law § 208(9)(o)(3) did not violate either the dormant Commerce Clause or the Foreign Commerce Clause as applied to the taxpayer because the statute only applies “to entities with a shared economic interest wherein the benefit of a deduction for one such related entity is always offset by the cost of an expense add back to another related entity” and thus does not discriminate against interstate or foreign commerce.

In the Matter of the Petition of The Walt Disney Company and Consolidated Subsidiaries, N.Y. Tax Appeals Tribunal, Dkt. No. 828304 (Aug. 6, 2020).