Burlington Coat Factory Warehouse Corp. v. Director, Division of Taxation

COMMITTEE ON OPINIONS

December 2, 2014

Michael A. Guariglia, Esq.

McCarter & English, LLP

Attorneys at Law

Four Gateway Center

100 Mulberry Street

Newark, New Jersey 07102

Jill C. McNally, Esq.

Deputy Attorney General

Division of Law

R.J. Hughes Justice Complex

P.O. Box 106

25 Market Street

Trenton, New Jersey 08625-0106

Re: Burlington Coat Factory Warehouse Corp. v. Director, Division of Taxation

Docket No. 007007-2013

Dear Counsel

This letter constitutes the court s opinion with respect to the parties cross-motions for summary judgment. The issue presented is the availability of the exemption from New Jersey Sales and Use Tax (SUT) for wrapping supplies provided by N.J.S.A. 54:32B-8.15 under the factual circumstances presented here.

For the following reasons, plaintiff s motion is granted and defendant s motion is denied.

Facts

Plaintiff, Burlington Coat Factory Warehouse Corporation ( Burlington ) is a Delaware Corporation with a principal office in Burlington, New Jersey. It is wholly owned by Burlington Coat Factory Investments Holdings, Inc. and is a member of an affiliated group of entities that owns and operates retail stores throughout the United States. It operates merchandise distribution facilities in Edgewater Park and Burlington, New Jersey.

Burlington s distribution facilities take delivery of and store merchandise from various manufacturers and suppliers. Thereafter Burlington removes merchandise from inventory, and packs and ships the merchandise to its affiliated retail stores, utilizing a common carrier for shipping.

In preparing the merchandise for shipping, employees may: wrap the merchandise in wrapping paper or bubble wrap; pack the merchandise in cardboard cartons; utilize Styrofoam peanuts in the cartons; seal the cartons and perhaps utilize coil straps to bind cartons together. (The wrapping paper, bubble wrap, cardboard cartons, Styrofoam peanuts, sealing tape and coil straps are hereinafter referred to as wrapping supplies .) Upon delivery, employees of the retail facilities unpack the merchandise and discard the boxes and packing materials.1

Burlington paid SUT on its purchases of the wrapping supplies and thereafter filed several claims for refunds asserting that the materials purchased were wrapping supplies eligible for the sales tax exemption of N.J.S.A. 54:32B-8.15. The Director denied the claims for refund on the basis that to the extent that the wrapping supplies were used for Burlington s internal use - shipping merchandise to the various affiliated store locations the exemption for wrapping supplies was unavailable because there was no separate delivery transaction with another party .

The Director issued final determinations in each of the three claims which were thereafter timely contested by Burlington in the instant complaints before the court.2 The parties cross-moved for summary judgment and the court heard oral argument from counsel.

II. Conclusions of Law

Summary judgment should be granted where the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show there is no genuine issue as to any material fact challenged and the moving party is entitled to a judgment or order as a matter of law. R.4:46-2(c). In Brill v. Guardian Life Ins. Co., 142 N.J.520, 523 (1995), our Supreme Court established the standard for summary judgment as follows

[W]hen deciding a motion for summary judgment under Rule 4:46-2, the determination whether there exists a genuine issue with respect to a material fact challenged requires the motion judge to consider whether the competent evidential materials presented, when viewed in the light most favorable to the non-moving party in consideration of the applicable evidentiary standard, are sufficient to permit a rational factfinder to resolve the alleged disputed issue in favor of the non-moving party.

The express import of the Brill decision was to encourage trial courts not to refrain from granting summary judgment when the proper circumstances present themselves. Township of Howell v. Monmouth Cnty Bd. of Taxation, 18 N.J. Tax 149, 153 (Tax 1999) (quoting Brill, supra, 142 N.J. at 541).

[T]he determination [of] whether there exists a genuine issue with respect to a material fact challenged requires the motion judge to consider whether the competent evidential materials presented, when viewed in the light most favorable to the non-moving party in consideration of the applicable evidentiary standard, are sufficient to permit a rational factfinder to resolve the alleged disputed issue in favor of the non-moving party. Ibid. at 523.

The court concludes that this matter is ripe for summary judgment. There are no genuine issues with respect to material facts in dispute between the parties.

III. Analysis

The review of this matter begins with the presumption that determinations made by the Director are valid. See Campo Jersey, Inc. v. Director, Div. of Taxation, 390 N.J. Super. 366, 383 (App. Div. 2007), certif. denied, 190 N.J. 395 (2007); L&L Oil Service, Inc. v. Director, Div. of Taxation, 340 N.J. Super. 173, 183 (App. Div. 2001); Atlantic City Transp. Co. v. Director, Div. of Taxation, 12 N.J. 130, 146 (1953). New Jersey Courts generally defer to the interpretation that an agency gives to a statute [when] that agency is charged with enforc[ement.] Koch v. Director, Div. of Taxation, 157 N.J. 1, 15 (1999). Determinations by the Director are afforded a presumption of correctness because [c]ourts have recognized the Director s expertise in the highly specialized and technical area of taxation. Aetna Burglar & Fire Alarm Co. v. Director, Div. of Taxation, 16 N.J. Tax 584, 589 (Tax 1997) (citing Metromedia, Inc. v. Director, Div. of Taxation, 97 N.J. 313, 327 (1984)).

The Supreme Court has directed courts to accord great respect to the Director s application of tax statutes, so long as it is not plainly unreasonable. Metromedia, supra, 97 N.J. at 327. See also GE Solid State, Inc. v. Director, Div. of Taxation, 132 N.J. 298, 306 (1993) ( Generally, courts accord substantial deference to the interpretation an agency gives to a statute that the agency is charged with enforcing. ) However, judicial deference is not absolute. An administrative agency s interpretation that is plainly at odds with a statute will not be withheld. See Oberhand v. Director, Div. of Taxation, 193 N.J. 558, 568 (2008) (citing GE Sold State, supra, 132 N.J. at 306); Advo, Inc. v. Director, Div. of Taxation, 25 N.J. Tax 504, 511 (Tax 2010).

Plaintiff seeks exemption from the sales tax pursuant to N.J.S.A. 54:32B-8.15, which provides in pertinent part

Sales or use of wrapping paper, wrapping twine, bags, cartons, tape, rope, labels, nonreturnable containers, nonreusable milk containers, and all other wrapping supplies when such use is incidental to the delivery of any personal property . . . are exempt from the tax imposed under the Sales and Use Tax Act.

The determination of a transaction s eligibility for exemption from sales tax pursuant to N.J.S.A. 54:32B-8.15 requires a two-step analysis. First, one must determine whether the materials purchased in the initial transaction are wrapping supplies under the statute and second one must determine whether the use of such materials was incidental to the delivery of personal property. Global Terminal and Container Services, Inc. v. Director, Div. of Taxation, 9 N.J.Tax 152, 159 (Tax 1987). See also Quest Diagnostics, Inc. v. Director, Div. of Taxation, 21 N.J. Tax 484 (Tax 2004), aff d 387 N.J. Super 104 (App. Div. 2006), certif. denied 188 N.J. 577 (2006).

Burlington contends that the wrapping paper, bubble wrap, cardboard cartons, Styrofoam peanuts, sealing tape and coil straps all qualify for the exemption from the sales tax. The Director does not dispute that the materials were wrapping supplies, and thus satisfy the first step of the analysis. Instead, the Director argues that the wrapping supplies were not incidentally used in any separate transactions involving deliveries of tangible personal property by Burlington.

The Director s position requiring a separate transaction for qualification for the exemption was first published in the Division of Taxation s Winter 2001 issue of State Tax News which stated

the N.J.S.A. 54:32B-8.15 exemption may be claimed even if the purchaser of the supplies is not selling the property that is being delivered, as long as the items are used in an identifiable transaction with another party, e.g., boxes purchased by a moving company for use in moving its customer, and plastic garment bags purchased by a dry cleaner for use in wrapping its customer s cleaned garments. Wrapping supplies purchased for internal use by a business to move property from one location to another are not considered eligible for this exemption because there is no separate delivery transaction with another party.

[State Tax News, Winter 2001]

The Director maintains that the transactions for which the wrapping supplies were used by Burlington were to deliver the merchandise internally to Burlington s affiliated retail stores and therefore were not identifiable transactions with another party . The Director contends that Judge Kuskin s decision in Quest Diagnostics, Inc. v. Director, Div. of Taxation, supra, 21 N.J. Tax 484 supports this position.

[T]he use of wrapping supplies to deliver tangible personal property to oneself is not the type of use envisioned by the Legislature in enacting N.J.S.A. 54:32B-8.15 or by the analysis in Global Terminal, supra, 9 N.J.Tax 152. The statutory reference to the use of wrapping supplies incidental to the delivery of any personal property refers to a delivery to a third party while the tangible personal property remains enclosed in the wrapping supplies. The statute does not confer an exemption where the ultimate destination of the tangible personal property and, therefore, the wrapping supplies, is the purchaser and initial user of the wrapping supplies.

[Id. at 494-495.]

The difficulty with the Director s position is that while Burlington and the retail stores are affiliated, they are separate legal entities for all purposes3. Neither Burlington nor the Director were able to provide the court with any information as to the legal or tax effect of the receipt of the merchandise by Burlington, or the subsequent delivery of the merchandise by Burlington to the affiliated retail stores. That is if Burlington acquires title to the merchandise when it is received by Burlington and placed into inventory, the subsequent delivery of the merchandise to the retail stores would constitute a sale and, presumably, a qualifying identifiable transaction with another party . If instead Burlington is merely a warehousing entity and acquires no ownership interest in the merchandise when received by it, the subsequent delivery to the retail stores appears to be similar to services rendered by a moving company, another identifiable transaction approved by the Director in the Winter 2001 issue of State Tax News. In either case it appears that there is a separate identifiable transaction qualifying for the second step of the analysis and the availability of the wrapping supplies exemption.

The Director argues however that the fact that the retail stores affiliated with plaintiff are separate entities, separately formed, with separate identities, is nothing more than form over substance and that since exemptions from tax are to be narrowly construed (Amerada Hess Corp. v. Director, Div. of Taxation, 107 N.J. 307, 319-320 (1987) aff d, 490 U.S. 66, 109 S. Ct. 1617, 104 L. Ed. 2d 58 (1989)), the relief sought by the plaintiff should be denied. Yet the Director has provided no factual or legal basis for a determination that the separate existence of the various retail store facilities should not be respected. Just as a taxpayer must accept the tax consequences of its choice in organizing its affairs (Higgins v. Smith, 308 U.S. 473, 477, 60 S. Ct. 355, 357-58, 84 L. Ed. 406, 411 (1940); Old Mission Portland Cement Co. v. Helvering, 293 U.S. 289, 293, 55 S. Ct. 158, 160, 79 L. Ed. 367, 371 (1934); Gregory v. Helvering, 293 U.S. 465, 469, 55 S. Ct. 266, 267-68, 79 L. Ed. 596, 599 (1934)), so must the Director where, as here, there are no facts to support a determination that the separate identities have not been respected by the taxpayer. See Coppa v. Director, Div. of Taxation, 8 N.J. Tax 236 (Tax 1986) (absence of any purposeful business activity defeated taxpayer s claim that there was a legitimate business purpose in forming corporate entity); See also Seaview Demolition & Rental Co. v. Director, Div. of Taxation, 4 N.J. Tax 541 (1982), aff d o.b. 6 N.J. Tax 254 (App. Div. 1984), certif. denied, 97 N.J. 606 (1984) (commonality of shareholders, officers and directors did not overcome the respect accorded to the separate identities of the separate entities).

Nor does a review of the statutory language provide support for the Director s position. The construction of a statute begins with an analysis of its plain language. Merin v. Maglaki, 126 N.J. 430, 434 (1992). [T]he goal is to divine and effectuate the Legislature s intent. State v. Shelley, 205 N.J. 320, 323 (2011). [T]he best approach to the meaning of a tax statute is to give the words used by the Legislature their generally accepted meaning, unless another or different meaning is expressly indicated . Public Service Elec. & Gas Co. v. Woodbridge Twp., 73 N.J. 474, 478 (1977). In the absence of any explicit indication of special meaning, words of a statute are to be given their ordinary and well understood meaning. Levin v. Parsippany-Troy Hills, 82 N.J. 174, 182 (1980). When the Legislature s chosen words lead to one clear and unambiguous result, the interpretative process comes to a close, without the need to consider extrinsic aids. Shelley, supra, 205 N.J. at 323.

There is nothing in the provisions of the Statute which would limit the wrapping supplies exemption to transactions between related parties, unlike N.J.S.A. 54:32B-8.53 which limits the exemption for sales tax from rentals of tangible personal property to transactions between related parties. Neither does the statute require the denial of the wrapping supplies exemption in a related party transaction similar to N.J.S.A. 54:10A-4(k)(2)((I) which denies the deduction of interest expense paid to a related member or N.J.S.A. 54:10A-4.4(b) which requires the add back of otherwise deductible intangible expenses in related party transactions. Clearly the Legislature would have provided for the denial of the deduction in a related party transaction had that been intended.

The statutory language is clear. Nothing in the statute would prohibit the application of the wrapping supplies exemption of N.J.S.A. 54:32B-8.15 to a transaction between related parties. Further, nothing in the statute would require or permit the court to disregard the separate legal status of the affiliated retail stores, nor do the facts support such a result. While courts generally accord administrative agencies deference in their interpretation of statutes which they are charged with enforcing, that agency may not, under the guise of interpretation, extend a statute to give it a greater effect than its language permits. GE Solid State, supra, 132 N.J. at 306 (citing Hawthorne Fabrics Inc., 41 N.J. 521, 528 (1964)).

The court finds that the Burlington s use of the wrapping supplies (as conceded by the Director) to deliver merchandise to its affiliated retail stores was a use incidental to the delivery of personal property to third parties. Thus both steps formulated in Global Terminal have been satisfied and the exemption of N.J.S.A. 54:32B-8.15 is available.

Conclusion

Plaintiff s motion for Summary Judgment is granted. Defendant s cross-motion is denied. Judgment will be entered accordingly.

1 Although the Director disputed that plaintiff established the materials were discarded upon delivery to the its affiliates, the Director conceded the materials constituted wrapping supplies under the statutory definition and the dispute is not material to the resolution of this motion.

2 The Director also denied Burlington s claim for refund for the SUT paid for labels, hangtags and postage, which Burlington also appealed in this action. After Burlington filed the within motion for summary judgment which included those assessments, the Director conceded those issues and they are no longer a part of this appeal.

3 At oral argument the Director conceded that there was no evidence to contest the separate legal identities of Burlington and the various affiliated entities.

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