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Praxair Technology, Inc. v. Director, Division of Taxation

404 N.J. Super. 287, 961 A.2d 738 (App. Div. 2008)

TAXATION — When the New Jersey Corporation Business Tax regulations are changed to include a taxation example, a party who had failed to pay taxes as would be required pursuant to the example will not be liable for a non-payment penalty before the example was promulgated if taxability of the transaction or activity in question was doubtful prior to promulgation of the regulation’s example.

A wholly owned out-of-state subsidiary of a New Jersey company appealed from a Tax Court order that had granted summary judgment in favor of the New Jersey Division of Taxation regarding the subsidiary’s liability for three tax years under the New Jersey Corporation Business Tax (CBT). The Director of the Division had also imposed a late-filing penalty and post-amnesty penalty on the subsidiary’s initial challenge to an assessment of its tax liability for a six year period. The Tax Court upheld the tax imposition for the three year period and all penalties imposed during the six year period.

The subsidiary was a Delaware corporation with its principal place of business in Connecticut. The company did not: (i) maintain an office in New Jersey; (ii) own or lease property or have employees in New Jersey; or (iii) otherwise have a physical presence in New Jersey. The subsidiary owned various patents, trade secrets, and technologies relating to the manufacture and use of certain industrial gases. These intangible properties were licensed to its New Jersey parent company. The parent company implemented the properties at various facilities in the United States, including facilities in New Jersey. The subsidiary received substantial licensing fees from the parent company for the use of these properties. It did not file CBT returns for six years.

The Appellate Division reversed the lower court’s decision relating to the initial three year period, and remanded the case for a recalculation of the penalty assessment for the three tax years. While the Court held that the State of New Jersey may tax in-state income from intangible property even if the assessed taxpayer had no physical presence in the state, it raised the issue as to whether the State implemented this power in a sustainable way.

The Court held the subsidiary was not doing business in New Jersey and was not subject to the CBT under the regulations that were in force during the first three tax years at issue. It noted that following that date, the CBT regulations contained a new example which arguably covered the subsidiary’s activities. The Court further noted that “[t]he subsidiary [did] not contend that it was not bound by the broadened understanding of the regulation’s impact effected by the [change]; only that it cannot be bound by the broader impact before the scope of the tax was clarified by the change.” Accordingly, the Court found the subsidiary could not be held liable for penalties assessed during the first three tax years, and remanded the matter for a recalculation of any penalties to be assessed for the subsequent three year tax period.

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