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Lady Frances V, LLC v. Director, Division of Taxation

24 N.J. Tax 545 (2009)

TAXATION; SALES TAX — To qualify as a “non-resident” for purposes of the Use Tax Exemption, a company must be engaged in business entirely in interstate commerce and although some kinds of interruptions in interstate commerce may not trigger taxation if the company’s property being in the state in transit related, if there are other, significant business reasons for the property being in New Jersey, the exception will be nullified.

A Delaware limited liability company’s sole asset was a yacht it purchased to rent out as a charter boat. The company hired a captain and crew to manage and sail the yacht. In the spring of 2005, the yacht sailed from Florida to Virginia for repairs and upgrades. It then sailed to New Jersey and docked there in anticipation of the summer charter season. While the yacht was docked in New Jersey, members of the crew took vacations. In the summer of 2005, the yacht refueled in New Jersey, cruised in New York and Connecticut with the company’s members aboard, and continued on a summer charter. The yacht returned to New Jersey in 2006 where it underwent repairs. At that time, the crew resigned, a new crew was hired and trained, and the yacht set out on several charters.

The Director of Taxation found that the company was liable to pay a use tax for the yacht based on its purchase price. The Director initially determined that the yacht, which had been purchased outside New Jersey, was brought into New Jersey for the use by the company and its members. The Director later revised the use tax assessment based on the limited use of the yacht in New Jersey in 2005 and 2006. In opposition, the company argued that since the yacht was not used for recreational purposes, it was not subject to a Use Tax pursuant to N.J.S.A. 54:32B-6. It further argued that, as a Delaware limited liability company, it was a non-resident using the yacht solely in interstate or foreign commerce and was therefore exempt from the Use Tax pursuant to N.J.S.A. 54:32B-11(2). The Tax Court disagreed, finding that even though the company was a Delaware limited liability company, it was not a “non-resident” within the meaning of the statute because its activities in New Jersey went beyond the statutory definition of a non-resident. The Court noted that the company had little to do with Delaware except being organized there. Its books and records, except for those kept on the yacht, were kept in New Jersey.

The Court also found that in order to qualify as a “non-resident” for the purposes of the Use Tax exemption, a company must be engaged in business “entirely in interstate commerce.” On that point, the Court found that the company was not entirely engaged in interstate commerce because it stored the yacht in New Jersey, performed maintenance and repairs on it in New Jersey, and hired and trained a crew in New Jersey. Since those activities were something other than interstate commerce, the company was not exempt from Use Tax. According to the Court, some kinds of interruptions from interstate commerce may not trigger taxation in the state where the property rests if the interruptions are transit-related. However, if there are interruptions in transit for other business reasons, then the property would be subject to taxation. Applying its findings, the Court concluded there were three business reasons for the yacht to be docked in New Jersey, and they nullified the exception: (1) the yacht was docked in New Jersey because it was advantageous to the company and its owners to have the yacht close to home when not being chartered for trips; (2) the yacht underwent more than routine repairs in New Jersey; and (3) the company hired and trained a crew for the yacht in New Jersey. For these reasons, the Tax Court ruled the yacht was not entirely engaged in interstate commerce and was therefore subject to a Use Tax.


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