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Campo Jersey, Inc. v. Director, Division of Taxation

390 N.J. Super. 366, 915 A.2d 600 (App. Div. 2007)

TAXATION — Any products sold on a vendor’s premises are taxable and the determination as to whether it is intended that the food be consumed on the premises is based on the suitability of the food for immediate consumption and the habits of customers at the vendor’s location, even if the vendor does not lease or own a nearby location at which the products may be consumed.

Two separate franchisees operated concession booths at a sports arena and a shopping mall, respectively. Both had conflicts with the Division of Taxation regarding the application of sales tax to their products, and the two cases were consolidated.

The first franchisee had a license to sell cookies and brownies from mobile carts inside a sports arena. The license agreement provided that the arena’s general concessionaire would perform all the labor involved in preparing and selling the items, and gave no right to the franchisee to use any areas of the complex for sale or preparation.

The franchisee paid sales tax on its concession sales for three years. It then learned of a letter from the Division of Taxation to the franchisor’s tax advisors stating that the franchise’s sales of baked goods and non-carbonated beverages were not subject to sales tax, since they were packaged to-go and not considered products for immediate consumption on the premises. The letter noted that as a general rule, the stores were located in shopping malls, in areas without facilities for seating or consumption.

Rather than rely on the letter to the franchisor’s tax advisor, the franchisee sent his own inquiry to the Division of Taxation. The division replied stating that baked goods sold and packaged for take-out, as well as non-carbonated beverages sold by the can or bottle, were not subject to sales tax. The franchisee understood the reply to mean that it did not owe sales tax, as it had no “premises” at the arena for product consumption. It therefore stopped paying tax on its sales of baked goods at the arena.

The second franchisee leased a booth-style store in a shopping mall, and sold pretzels and drinks at the store as well as from a cart in the mall. Common areas in the mall were under the owner’s exclusive control, and did not have furniture to allow food consumption. The franchisee’s president stated that most sales occurred after general meal hours, as shoppers were leaving the mall and taking a snack to go. The president estimated that seventy-five percent of the franchisee’s sales were for outside consumption. The franchisee did not collect sales tax on its pretzels, believing that its only “premises” were the cart and the storefront, so that all customers consumed the products off the premises.

The Division of Taxation disagreed with the franchisees, and concluded that their “premises” included the facilities that customers had to enter in order to make a purchase. The division assessed sales tax deficiencies against both franchisees. The franchisees appealed to the Tax Court, which found in favor of the Division of Taxation.

The franchisees appealed, arguing that the lower court erred in broadly defining the statutory term “premises” to include the entire facility in which their businesses are located. The Appellate Division rejected the argument and affirmed the lower court’s decisions.

The Court noted at the outset that the 2005 version of the governing statute, which was enacted several years after the franchisees’ auditing periods, exempts bakery items from the sales tax. Because new statutes are applied prospectively, the Court declined to apply the 2005 version of the statute to the case. The version of the relevant statute that was in effect during the audit period imposed sales tax on receipts from the sale of food and drink where the sale is for consumption on the premises where it was sold.

The Court went on to explain that all transactions under the statute are taxable unless the vendor or customer establishes otherwise. While there is no statutory definition of “premises,” the Court stated that the division’s regulation for taxing sales of prepared food and drinks defined “premises” as the entire space and facilities in which the vendor conducts business, including, but not limited to, parking areas for in-car consumption, counter space, chairs, and benches. The regulation stated that determining whether products were sold for consumption on the premises was based on their suitability for immediate consumption and the habits of customers at the vendor’s location.

The Court explained that statutory interpretation begins with a statute’s plain language, which should receive its ordinary meaning as long as the legislature did not have a different intent. Courts defer to the interpretation of the agency charged with enforcing the statute, as long as such interpretation is not plainly unreasonable. The Court stated that regulations by such an agency are presumed to be reasonable, unless the challenging party shows them to be arbitrary, capricious or unreasonable. It concluded that the division’s assessment of a tax deficiency against the franchisees was an ordinary application of the regulation, and the division did not exceed its delegated authority since the regulation was consistent with the meaning and purpose of the governing statute.

Regarding the franchisee in the shopping mall, the Court noted that all of the sales were of pretzels that were taxable because they were prepared foods that could be eaten right away. The proportion of sales for consumption inside the mall was a factual question, and the lower court’s findings are not generally disturbed. Additionally, the Court stated, tax assessments are presumed to be correct, and the franchisee had the burden of proving otherwise. It found that it was within the tax court’s discretion to determine that the franchisee’s sales were not exempt from taxes, and the franchisee did not present any documentation to support its claim that most of its sales were to customers leaving the mall. Since the franchisee did not present sufficient evidence to challenge the assessment, the Court found that the division was not arbitrary for assessing tax on all of its product sales.

Regarding the vendor in the sports arena, the franchisee argued that interest and penalties on its assessments should have been waived due to its reasonable reliance on the two Division of Taxation letters. While the division waives penalties and interest attributable to a taxpayer’s reliance on erroneous written advice from an employee of the division, the Court found that neither letter erroneously advised the franchisee. It found that the first letter was not directed towards the franchisee’s business, and relied on the taxpayer’s assertion that its baked goods were to be consumed off the premises. With regard to the reply letter to the franchisee’s inquiry, the Court found that reliance on the letter was not justified, as it merely accepted the franchisee’s representations that it operated a retail bakery and sold baked goods for take-out. The division determined, and the Court agreed, that this was an inaccurate description of the business, based on omission of the fact that sales were based on customers’ attendance at events which charged admission. Therefore, the franchisee’s reliance on the letter was unreasonable.

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