Disney Turns to the Supreme Court To Save Them From Paying Taxes

In his novel The Octopus, author Frank Norris compared the railroad of the Old West to a multi-armed aquatic creature in that the railroad touched every aspect of life. The Walt Disney Company could be considered the modern version of the railroad.

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There are very few aspects of modern life that Disney isn’t involved in. As such, Disney is involved in tax law nationwide and worldwide.

Disney is currently arguing before the Supreme Court over a complicated New York tax law that requires them to pay additional fees on income the company on the royalties fees it earned from licensing its intellectual property. Disney argues that the New York Court of Appeals wrongly applied the commerce clause to taxes on the royalties fees.

Disney argued in its court filing: 

Multiple state courts of last resort now hold that, to show that a state law textually discriminates against interstate or foreign commerce, a challenger must also show that there is no set of circumstances under which the law would operate evenhandedly.

Hundreds of millions of dollars in tax liabilities turn on the decision below in New York alone, and that is just the tip of the iceberg, given that numerous state high courts have made the same basic mistake.

So, what does this mean in real language? If Disney is successful in front of the United States Supreme Court, it would bring millions in back taxes to New York, and more states would come forward seeking those same taxes from Disney.

What’s At Stake?

The argument is incredibly complicated, but so are most tax laws. Disney was able to take advantage of those complicated tax laws to pay significantly less in state tax in New York.

Here’s how it essentially works: Disney would create a shell company to license its intellectual property in other countries instead of being taxed directly for the money it made from those licenses. Disney also got a tax deduction for moving money between two entities it owned.

Think of it this way: Disney was able to move money around between companies that it owned to lower its state and federal taxable income. This is a tax loophole that most international corporations use to save on federal and state taxes.

New York changed the law and allowed the New York Department of Taxation and Finance to tax Disney for royalties it made from tax years 2003 to 2013 that they used to deduct from their New York state tax.

Disney’s case was denied by New York’s highest court and is now before the United States Supreme Court. If Disney loses this case, it could owe as much as $64 million in back taxes to New York, which would open the floodgates to other states, charging Disney a larger tax liability.

Disney is arguing that other states have found the company not liable for its entire net income and wants the Supreme Court to apply the standard used in Ohio, New Mexico, and Rhode Island to lower its taxable income.

Either way, this case shows just how convoluted the tax laws governing international corporations are and how easily they can skirt taxation in the United States.

Should Disney get a tax break for money it made on its products overseas?