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Stryker Corp. v. Director, Division of Taxation

168 N.J. 138, 773 A.2d 674 (2001)

TAXATION—A New Jersey manufacturer that ships its products out of state at the behest of its wholly-owned subsidiary must include those sales in its allocation factor under the New Jersey Corporation Business Tax Act.

A Michigan corporation (Company) operated a facility in New Jersey that manufactured orthopedic replacement knees and hips. A subsidiary of Company (Subsidiary), a New Jersey corporation, was the exclusive retailer of Company’s New Jersey-manufactured products. Subsidiary never handled Company’s finished products, instead Company shipped the products directly to Subsidiary’s customers. This arrangement is known as a “drop shipment” transaction. The New Jersey Department of Taxation (Department), after auditing Company, issued a notice of assessment informing Company that it owed unpaid corporate business taxes. This deficiency was the result of Company only paying taxes on revenue receipts for shipments made to Subsidiary’s New Jersey customers and not for shipments made to Subsidiary’s out-of-state customers. Company filed an administrative protest. Thereafter, the Department sent Company a final determination letter setting forth an assessment including accrued interest. Company filed a complaint in the Tax Court appealing the final determination of the Department. The Tax Court affirmed the assessment albeit on different grounds. The Tax Court held that the sales were not within N.J.S. 54:10A-6(B)(1) because Company made no “shipment” of products to Subsidiary. However, the Tax Court found that the income derived by Company from Subsidiary fell within N.J.S. 54:10A-6(B)(6), namely “all other business receipts earned within the State.” The Appellate Division affirmed the Tax Court judgment. The Supreme Court began by recognizing that the Corporation Business Tax Act (CBTA), N.J.S. 54:10A, imposes a tax on every foreign or domestic corporation, not otherwise exempt, “for the privilege of having or exercising its corporate franchise in this State, or for the privilege of doing business, employing or owning capital or property, or maintaining an office in this State.” In the case of a corporation that “maintains a regular place of business outside this State other than a statutory office,” such a corporation is to be taxed only on that portion of its income and worth that approximates the contribution that tangible assets and employees located in New Jersey and receipts earned here have made to the corporation’s entire net income. The CBTA established a formula for apportioning the income of out-of-state corporations to New Jersey (this formula was since modified in 1995) which required Company to multiply its entire net income by the average of three fractions (the denominators of which were the Company’s entire property, business receipts, and payroll, respectively and the numerators of which were the Company’s New Jersey property, business receipts, and payroll, respectively). The only dispute in issue was the value of the numerator for Company’s business receipts fraction. Company first argued that the CBTA is not internally consistent because it would subject multi-state manufacturers to double taxation on drop-shipments. The doctrine of internal consistency requires that a tax be structured so that it will not result in multiple taxation if applied by every state. The Court rejected this argument on the premises that Company’s products are delivered directly to Subsidiary’s customers and not a wholesaler; therefore, the tax is based on the destination of the customer which can only occur in one state. The Court then concluded that “the place to or from which a shipment is made is not relevant to a determination of whether receipts must be included in the numerator of the receipts fraction. The issue is solely whether the receipt was earned by the taxpayer within New Jersey.” Here, Company was located in New Jersey, and sold merchandise located in New Jersey to Subsidiary, also located in New Jersey. Thus, the disputed receipts are “other business receipts” within the meaning of N.J.S. 54:10A-6(B)(6) because they are receipts from a category of transactions which the statute differentiates from those enumerated in subparagraphs (b)(1) and (B)(2). The Court went on to say that Subparagraph (B)(6) should be interpreted broadly as a catch-all provision to plug any loopholes within the other subparagraphs of the CBTA.

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