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Sodexho Operations, LLC v. Director, Division of Taxation

A-1460-03T2 (N.J. Super. App. Div. 2004) (Unpublished)

TAXATION; SALES TAX—Where a company’s contracts with state agencies are principally for the provision of management services, its purchases of incidental goods that it supplies to the state agencies are subject to sales tax.

A service provider supplied management services for the food-services and housekeeping departments at various hospitals and educational entities, each of which was exempt from taxation under New Jersey’s Sales and Use Tax Act. Following audits, use taxes were assessed against the provider for its purchases of paper goods used in the company’s food-services operations, cleaning supplies used in its housekeeping operations, and furniture and renovation material used in its cafeterias and dining rooms. The provider challenged the assessments, claiming that the purchases were exempt from taxation either as purchases made by a procurement agent for the tax-exempt entities or as purchases made for resale to the tax-exempt entities.

The lower court rejected each of these arguments, determining that the provider’s agency relationship with the tax-exempt entities was insufficient to qualify for derivative tax exemption and that the statutory exemption for resale did not apply because the provider’s purchases were merely incidental to its objective of providing management services. As to the first argument, the lower court found that although the provider was the agent of its tax-exempt clients, the agency relationship was at the “principal-independent contractor end” of the agency spectrum, and not at the master-servant end. For that reason, it concluded that, as an independent contractor, the provider did not sufficiently stand in the entities’ shoes to avail itself of the use-tax exemption that the entities would have been entitled to apply had they themselves directly purchased the disputed paper goods and cleaning supplies. Thus, the court rejected the provider’s claim to a derivative exemption based upon agency principles.

As to the second argument, the lower court found that the true object of the agreements between the provider and the entities was for the government agencies to obtain the provider’s expertise in providing management services for their food service departments. Therefore, the lower court concluded that the sale for resale exclusion did not apply because the paper goods, cleaning supplies, and furniture and materials were not critical elements of the services that the provider provided, and the providing of these items was not the true object of the agreements between the parties. Rather, the provider’s purchases of these items were incidental to the true object of providing management services. Thus, the lower court rejected the provider’s arguments, holding that it was not exempt from paying taxes on the purchased items. The Appellate Division affirmed the decision based on the lower court’s analysis.


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