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Playmates Toys, Inc. v. Director, Division of Taxation

A-70-98, 1999 WL 1220059 (N.J. Supr. Ct. 1999)

TAXATION; REFUNDS—The Director of Taxation may recover a refund mistakenly made to a taxpayer for whom the statute of limitations for receiving such a refund has passed.

A taxpayer overpaid its corporate business taxes in 1989 and 1990, but it had a liability on its 1991 and 1992 taxes. When that liability was discovered during an audit, the Division of Taxation offset part of the overpayment against the liabilities, leaving no balance due to the State. A remaining balance in favor of the taxpayer remained after the audit, but the Division of Taxation could not refund that balance because, by statute, claims for refunds must be made within two years of the date the taxes had been paid. The taxpayer filed both a protest and an application for a refund. By mistake, the refund section sent the money to the taxpayer. Upon learning of the mistake, the Division of Taxation directed the taxpayer to return the refund. In response, the taxpayer filed an action in the Tax Court. The Tax Court held in favor of the Division of Taxation and the Appellate Division affirmed. The taxpayer had argued that the Division waived the statute of limitations by paying the refund. It also claimed that while an erroneous refund may be considered to be an underpayment of tax, there was no authority to recover the erroneous refund of an overpayment. Further, the taxpayer alleged that the taxing authorities could not re-assess the tax because the limitation periods for the years in question had expired. The Appellate Division pointed to case law holding that “where a government entity makes a mistake of law, a statute of limitation is not necessarily waived.” Further, it pointed out that as a matter of law the taxpayer did not rely on any waiver by the taxing authority. All the taxpayer did was retain the erroneous refund. Further, the Court held that the Director of the Division of Taxation had an inherent authority to recoup mistaken disbursements. The New Jersey Supreme Court affirmed the judgment of the Appellate Division adding only that the Appellate Division’s Judgment did not confer on the Division of Taxation an unlimited inherent authority to correct and revise erroneous tax determinations. “The powers of the Division are not boundless. Rather, given the administrative history of the Division’s earlier determination (communicated to the taxpayer) that the taxpayer was not entitled to a refund because of the statute of limitations, the recovery of the funds here is more akin to the correction of a clerical error that led to the mailing of a tax refund check to which the taxpayer was not entitled, rather than the correction of an error in judgment.”


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