J&J SNACK FOODS SALES CORP v. DIRECTOR, DIVISION OF TAXATION

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-0

J&J SNACK FOODS SALES CORP.,

Plaintiff-Appellant,

v.

DIRECTOR, DIVISION OF TAXATION,

Defendant-Respondent.
__________________________________________

September 18, 2015 20156

Before Judges Lihotz, Espinosa and St. John.

On appeal from the Tax Court of New Jersey, Docket No. 004986-2012, whose opinion is reported at 27 N.J. Tax 532 (Tax 2013).

A. Fred Ruttenberg argued the cause for appellant (Flaster/Greenberg P.C., attorneys; Mr. Ruttenberg, on the briefs).

Jeremy M. Vaida, Deputy Attorney General, argued the cause for respondent (John J. Hoffman, Acting Attorney General, attorney; Melissa H. Raksa, Assistant Attorney General, of counsel; Richard D. Del Monaco, Deputy Attorney General, on the brief).

PER CURIAM

Plaintiff J&J Snack Food Sales Corp. appeals from the decision of the Tax Court granting summary judgment to the

Director of the Division of Taxation (Division) and holding plaintiff's purchase of parts for pretzel-warming machines ultimately distributed out-of-state was subject to "use tax" under the Sales and Use Tax Act (Act), N.J.S.A. 54:32B-1 to -55. See J&J Snack Foods Sales Corp. v. Dir., Div. of Taxation, 27 N.J. Tax 532, 536-37 (Tax 2013). Upon our review in light of the record and governing law, we affirm.

I.

On an appeal from summary judgment, we recite the facts in the light most favorable to plaintiff, the non-moving party, giving it the benefit of all reasonably-drawn inferences. Robinson v. Vivirito, 217 N.J. 199, 203 (2014). The record discloses the following facts and procedural history.

Plaintiff is a New Jersey corporation, with its principal place of business located in Pennsauken.1 It produces food and beverages for resale to retail supermarket customers and the food service industry, and is the largest manufacturer of soft pretzels in the United States. Plaintiff's pretzels are sold, either frozen or unfrozen, through food service providers such as sports stadiums, amusement parks, movie theaters and retail stores.

In furtherance of its business, plaintiff developed the Model 2000 pretzel warmer (Warmer), which was designed to thaw frozen pretzels. Plaintiff loans the Warmer to customers who purchase a sufficient volume of pretzels per week. Lower-volume customers must purchase the Warmer. When it loans a Warmer, plaintiff enters into a "Location Agreement" with the customer. The Location Agreement requires a refundable deposit2 and states the equipment loaned: (1) must be used solely for the "sale and promotion of [plaintiff's] products"; (2) "is the property of [plaintiff]" and can be removed only by one of its authorized representatives; (3) can be removed or replaced "at any time for improper use"; and (4) must be displayed in a "prominent place to aid in the promotion and sale of [plaintiff's] products." Plaintiff's sales department internally conveys requests from customers for Warmers on an as-needed basis. Based on those requests, out-of-state vendors then supply the parts, and plaintiff's service department in Bellmawr assembles and tests the Warmers. The assembled Warmers are then shipped, usually the next day, to customers both in New Jersey and out-of-state. Thus, plaintiff does not maintain an inventory of the assembled Warmers or parts.

In April 2008, the Division initiated an audit of plaintiff to evaluate its sales and use tax remittances for the period of April 1, 2004 through March 31, 2008. The Division previously audited plaintiff's predecessor in 1992. In the course of the prior audit, the Division examined the purchase of parts for an earlier version of the Warmer, which the predecessor characterized as a "marketing and promotional aid[]." The Division ultimately concluded "only the . . . promotional and marketing equipment which is delivered to . . . New Jersey customers for use in this State is subject to the New Jersey Sales and Use Tax." It based its determination upon the ruling in Cosmair, Inc. v. Director, Division of Taxation, 109 N.J. 562 (1988). Since then, plaintiff has paid use tax only for those Warmers sold or distributed to New Jersey customers.

During the scrutinized audit period, plaintiff distributed to customers, without charge, a total of 10,318 Warmers, while selling only 752. The purchased parts and the completed Warmers were not considered or reflected on plaintiff's books or tax returns as "cost of goods" sold. The cost for the parts and labor were treated as a marketing expense.

Although the Division's auditor determined that no sales tax was due as plaintiff's food sales were all for resale, he noted that plaintiff was indeed paying use tax erroneously recorded by plaintiff as sales tax on marketing equipment sold or loaned to its New Jersey customers. The auditor concluded that purchased parts sent to New Jersey were subject to use tax, pursuant to the definition of "use" in N.J.S.A. 54:32B-2(h), regardless of whether the assembled Warmers were ultimately shipped to out-of-state customers. The auditor further found plaintiff's practice of loaning the Warmers, rather than giving them away, was distinct from the facts in Cosmair.

As a result, plaintiff was assessed $258,226.99 in use tax for the untaxed purchase of parts used for the Warmers assembled in New Jersey. Plaintiff filed an administrative protest challenging the assessment and paid the entire assessment under protest, pending review.

Upon review of the audit's findings, the Division's Conference and Appeals branch agreed with the auditor, but adjusted the assessment, exempting printed advertising and promotional materials shipped out of state and providing plaintiff a $5,237.09 credit. On April 10, 2012, the Director issued a Final Determination upholding the use tax assessment of $252,989.79.3 The Director held that the Warmers were not promotional and marketing materials under N.J.S.A. 54:32B-8.39. The Director also concluded the exemption under N.J.S.A. 54:32B-8.13(a) and N.J.A.C. 18:24-4.4(a)-(c) did not apply because the Warmers were "not manufacturing equipment."

Plaintiff filed the instant lawsuit in the Tax Court contesting the Director's Final Determination. The Division moved and plaintiff cross-moved for summary judgment on the issue of plaintiff's liability for use tax on its "out-of-state purchases of parts which are shipped to [plaintiff] in New Jersey and assembled . . . before they are sold or distributed to [plaintiff]'s out-of-state customers." In its complaint, plaintiff argued that: (1) mere storage and withdrawal from storage of the Warmers plaintiff manufactures in New Jersey exempts the Warmers from use tax; (2) the Warmers are use tax exempt because plaintiff uses the Warmers as part of the manufacturing and processing of pretzels; (3) the Division should be equitably estopped from its assessment because of its 1992 Final Determination; (4) the Division should not be permitted to assess plaintiff use tax on the Warmers based on the equitable principle of laches; (5) N.J.S.A. 54:32B-6(c) is not applicable to use of the Warmers and is not controlling since the Warmers are otherwise exempted under the Act as indicated in (1) through (4) above; and (6) Waltrich Plastic Corporation v. Taxation Division Director, 5 N.J. Tax 320 (Tax 1983) is not applicable to the plaintiff's use of the Warmers.

In a comprehensive written opinion, Judge Mala Sundar rejected each of plaintiff's claims. She first noted N.J.S.A. 54:32B-6(B) applies only "if items are the same kind of tangible personal property . . . and are offered for sale by [the user] in the regular course of business." She found J&J was not selling Warmer parts and does not do so during the normal course of its business. She determined J&J's purchase of Warmer parts was not exempt under N.J.S.A. 54:32(b)-8.13, which exempts from use tax any "machinery" because the parts did not qualify as "machinery, apparatus or equipment." It was further determined the Warmers are not used in J&J's production of frozen pretzels; rather, they have "an incidental use, namely, as a sales/marketing device. . . ."4

Lastly, the court rejected plaintiff's proposed application of equitable estoppel or laches. It concluded the 1992 determination was an erroneous application of the law, plaintiff did not establish any detrimental reliance, and there exists no extreme circumstances to overcome the public's interest in tax assessments, or to require the application of equitable estoppel. Further, it concluded laches did not apply because the Division did not prevent plaintiff from appealing the 1992 determination, and the Act neither bars the Division from auditing prior tax years nor precludes it from auditing the same taxpayer more than once.5

The Tax Court therefore upheld the Director's Final Determination that plaintiff's purchase of the Warmer parts was subject to use tax. This appeal ensued.

II.

We review a ruling on summary judgment de novo, and apply the same standard governing the trial court. Davis v. Brickman Landscaping, Ltd., 219 N.J. 395, 405 (2014). Thus, we consider, as the motion judge did, "'whether the competent evidential materials presented, when viewed in the light most favorable to the non-moving party, are sufficient to permit a rational factfinder to resolve the alleged disputed issue in favor of the non-moving party.'" Id. at 406 (quoting Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995)). Absent any genuine issue of material fact, we must then decide whether the trial court correctly interpreted the law. DepoLink Court Reporting & Litig. Support Servs. v. Rochman, 430 N.J. Super. 325, 333 (App. Div. 2013). We review issues of law de novo and accord no deference to the trial judge's conclusions on issues of law. Nicholas v. Mynster, 213 N.J. 463, 478 (2013).

"Our courts 'generally defer to the interpretation that an agency gives to a statute that agency is charged with enforcing.'" Waksal v. Dir., Div. of Taxation, 215 N.J. 224, 231 (2013) (quoting Koch v. Dir., Div. of Taxation, 157 N.J. 1, 8 (1999)). As such, "[t]he Director's 'interpretation of the operative law is entitled to prevail, so long as it is not plainly unreasonable.'" Ibid. (quoting Metromedia, Inc. v. Dir., Div. of Taxation, 97 N.J. 313, 327 (1984)). This is due to the Director's recognized "expertise, particularly in specialized and complex areas of the Act." Ibid. (citation and internal quotation marks omitted). Our deference to the Director is not without limit, however, "'as the courts remain the "final authorities" on issues of statutory construction.'" Ibid. (quoting Koch, supra, 157 N.J. at 8). Similarly, while we "recognize the expertise and discretion of the Tax Court[,]" deferring to its factual findings in light of its specialized knowledge in the field, we nevertheless review its grant of summary judgment de novo. Id. at 231-32.

N.J.S.A. 54:32B-6(A) provides

Unless property or services have already been or will be subject to the sales tax under this act, there is hereby imposed on and there shall be paid by every person a use tax for the use within this State of 7%, except as otherwise exempted under this act . . . of any tangible personal property or specified digital product purchased at retail . . . .

[(Emphasis added).]

N.J.S.A. 54:32B-2(h), in turn, defines "use" to include "the exercise of any right or power over tangible personal property, . . . services to property or products, or services by the purchaser thereof. . . ." Under the Act, this includes "the receiving, storage or any keeping or retention for any length of time, withdrawal from storage, any distribution, any installation, any affixation to real or personal property, or any consumption of such property or products." Ibid.

The Tax Court determined plaintiff's purchase, assembly and distribution of the Warmer parts in New Jersey fell within the Act's broad ambit and were therefore subject to a use tax, regardless of whether they were shipped to in-state or out-of-state customers. We agree.

Plaintiff first challenges the application of N.J.S.A. 54:32B-6(A) by arguing the Tax Court erred in presuming its purchase of Warmer parts was a "retail sale." N.J.S.A. 54:32B-2(e) defines "retail sale" as "any sale, lease, or rental for any purpose, other than for resale, sublease, or subrent." (emphasis added). Plaintiff alleges the Warmer parts are purchased for resale, "as a component part of a product produced for sale by the purchaser," whether the Warmers are loaned or sold and, therefore, no use tax applies.

However, plaintiff did not present this argument to the Tax Court, notwithstanding that the opportunity to do so was available. We note that plaintiff consistently argued two separate theories, in the alternative, for the Warmers' exemption from the use tax, each denied by the Tax Court. We will decline consideration of an issue not properly raised before the trial court, unless the jurisdiction of the court is implicated or the matter concerns an issue of great public importance. Zaman v. Felton, 219 N.J. 199, 226-27 (2014) (citing Nieder v. Royal Indem. Ins. Co., 62 N.J. 229, 234 (1973)). Neither situation exists here and, therefore, we decline to consider plaintiff's contention on this point.

We next turn to plaintiff's argument that the Tax Court erred in concluding that laches and estoppel did not apply. Both laches and estoppel are "not lightly invoked . . . especially in tax matters, where the public interest is so vitally affected." Mayfair Holding Corp. v. Township of N. Bergen, 4 N.J. Tax 38, 41 (Tax 1982). "Estoppel is an equitable doctrine, founded in the fundamental duty of fair dealing imposed by law . . . to establish equitable estoppel, plaintiffs must show that defendant engaged in conduct, either intentionally or under circumstances that induced reliance, and that plaintiffs acted or changed their position to their detriment." Knorr v. Smeal, 178 N.J. 169, 178 (2003) (citations and internal quotation marks omitted). Application against a government entity is justified in limited and extreme circumstances, and only in the absence of any "prejudice [to] essential governmental functions." Prime Accounting Dep't v. Twp. of Carney's Point, 421 N.J. Super 199, 212 (App. Div. 2011) rev'd on other grounds, 212 N.J. 493 (2013) (citations and internal quotation marks omitted).

Plaintiff argues detrimental reliance based on the 1992 audit conclusion that use tax was not due on the parts. However, as the Tax Court noted

It is difficult to agree that Taxation's interpretation of Cosmair and application of the Court's holding to the facts in J&J, is a "knowing and intentional misrepresentation" which induced J&J to continue its non-payment of use tax on Warmer parts at issue . . . it is not as if Taxation deliberately sat by and allowed J&J to continue its non-payment of use tax and then decided to audit J&J for the same.

The Court has noted that the Division's change in position does not invoke estoppel. See Airwork Serv. Div. v. Dir., Div. of Taxation, 97 N.J. 290, 297-98 (1984), cert. denied, 471 U.S. 1127, 105 S. Ct. 2662, 86 L. Ed. 2d 278 (1985). Although plaintiff's reliance on the audit was found to be a credible one, that reliance simply did not rise to the requisite level to warrant estoppel and therefore the court did not err in its conclusion.

Likewise, laches is an equitable remedy "'invoked to deny a party enforcement of a known right when the party engages in an inexcusable and unexplained delay in exercising that right to the prejudice of the other party.'" Prime Accounting, supra, 421 N.J. Super. at 212 (quoting Knorr, supra, 178 N.J. at 180-181). A claimant must prove that the "'delaying party had sufficient opportunity to assert the right in the proper forum and the prejudiced party acted in good faith believing that the right had been abandoned.'" Prime Accounting, supra, 421 N.J. Super. at 212 (quoting Knorr, supra, 178 N.J. at 181). The court's determination that the Division was not barred from auditing prior tax years conducted within the statute of limitations nor foreclosed from auditing the same taxpayer more than once was correct. Here, there are no facts to support an inexcusable delay on the Division's part that would invoke the remedy of laches.

We conclude the Tax Court correctly held that the audit failed to provide the extraordinary or extreme circumstances which outweigh the strong public and governmental interest in the collection of the tax imposed by the Legislature.

Affirmed.

1 Plaintiff is a wholly-owned subsidiary of J&J Snack Foods Investment Corporation, which, in turn, is owned by J&J Snack Foods Corporation, a publicly-traded company listed on the NASDAQ National Market System.

2 The Tax Court noted that both parties agreed that the deposit was rarely, if ever, collected. See J&J, supra, 27 N.J. Tax at 539.

3 The total amount was comprised of $164,457.23 in use tax, $8,222.88 in penalty, and $80,309.79 in interest.

4 On appeal, plaintiff has abandoned the argument concerning the manufacturing exemption provided in N.J.S.A. 54:32B-8.13.

5 The court did, however, hold that it would be inequitable for the Division to impose interest and penalty.