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Stryker Corporation v. Director, Division of Taxation

333 N.J. Super. 413, 755 A.2d 1200 (App. Div. 2000)

TAXATION; SUBSIDIARIES; DROP SHIPMENTS—Where a manufacturer drop ships products from New Jersey to points outside the state for a corporate subsidiary, the value of the shipments can be used in determining the manufacturer’s corporate taxes even though this would not be the case if the subsidiary were merely a division.

A manufacturer of artificial hip and knee parts had facilities in New Jersey and other states. It sold products to customers located throughout the United States through a wholly owned subsidiary that operated out of the same facility. The sales company’s computers transmitted customer orders to the manufacturer’s computers. The manufacturer packed the products and shipped them products directly to the sales company’s customers without any intervention by the sales company beyond submission of the orders. The sales company never took possession of the products. It billed its customers, retained a portion of the receipts, and remitted the balance to the manufacturer. The payments from the sales company to the manufacturer included a profit for the manufacturer. Even though the operations of the two companies were very closely integrated, both the manufacturer and the Division of Taxation agreed that they should be treated as separate entities for purposes of the Corporation Business Tax. For the purposes of that tax, where a company maintains offices in New Jersey as well as in another jurisdiction, an “allocation” is done. That way, only that portion of the company’s entire net income that is roughly proportional to the contribution that tangible assets and employees located in New Jersey and receipts earned in New Jersey make to the corporation’s entire net income are taxed. This led to a dispute as to whether the receipts of the sales company were to be considered in their entirety as receipts of the manufacturing company in New Jersey. Essentially, the manufacturer argued that the “criterion for allocation of sales receipts to New Jersey is the customer’s location and, therefore, that its sales to [its sales company] for orders which were drop-shipped to customers outside of New Jersey [did] not generate New Jersey receipts as defined by” the applicable New Jersey tax law. Basically, the taxing authority claimed that all of the sales were made by the manufacturer to its New Jersey sales subsidiary in New Jersey, and that the revenue therefrom was entirely allocable to New Jersey. The manufacturer sought to ignore the presence of the sales subsidiary in the transaction, the effect of which would be to treat the manufacturer’s sales as being made to out-of-state customers.

Under the state’s theory, “constructive shipments occurred when [the manufacturing company] allocated specific merchandise to [the sales company’s] order, and then shipped merchandise on behalf of [the sales company].” Both the taxpayer and the taxing authority acknowledged that the taxing statute did not contemplate three-party drop-shipment transactions. The Court, however, considered itself required “to interpret the statutory provisions, and apply[ them] to the facts at hand, in accordance with legislative intent.” With this as background, the Court looked at the New Jersey Sales and Use Tax Act, N.J.S. 54:32B-1 to -29. Under that statute, “[a]ny transfer of title or possession or both, exchange or barter, rental, lease, or license to use or consume, conditional or otherwise, in any manner or by any means whatsoever for a consideration, or any agreement therefore, including the rendering of any service, taxable under the act, for a consideration or any agreement therefor” constitutes a “sale.” Therefore, for sales tax purposes, mere transfer of title is sufficient to subject the transaction to tax. “Shipment” or transfer of possession is not required. Under N.J.S. 54:10A-6(B)(1), a “shipment” is made to a point in New Jersey only when actual transportation of merchandise and transfer of possession occurs. “The concepts of constructive delivery and constructive shipment asserted by [the Division of Taxation] are inconsistent with the actual physical transfer which the word ‘shipment,’ as used in this statute, implies.” Consequently, the Court held that the manufacturing company made no physical transfer to its sales company of the products which it sold to that company and then shipped to the sales company’s customers. Based on that analysis, therefore, the sales to the sales company would not have been includable in the numerator of the manufacturing company’s receipts fraction under subsection (B)(1).

But this did not end the issue. The Court then set out to determine whether exclusion of the receipts from subsection (B)(1) prevents taxation by New Jersey of those receipts, or whether another provision of N.J.S. 54:10A-6(B), particularly subsection (B)(6), was applicable to the receipts. Here, the Tax Court felt that the out-of-state authority cited by the manufacturing company, which suggested that the statutory provisions similar to section (B)(1) were conclusive as to the taxability of receipts from certain tangible personal property were, in general, not binding on the Tax Court, nor were they instructive as to the proper interpretation of N.J.S. 54:10A-6(B). Here, the Court found that the Corporation Business Tax Act was of broad scope and that while the Act did not contemplate three-party drop-shipment transactions, it did not prohibit inclusion of the sales and the receipts fraction of the receipts generated by such transactions. Under subsection (B)(6), the place to or from which shipment is made is not relevant to the 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, the Court concluded that the law was applicable to the manufacturing company’s receipts from sales to its sales subsidiary involving direct shipments to the sales company’s out-of-state customers. The manufacturing company was located in New Jersey and sold merchandise located in New Jersey to a customer also located in New Jersey (its own sales company). The sales company made payments for the merchandise in New Jersey. The transactions generated the manufacturing company’s receipts for New Jersey transactions. Therefore, the receipts were earned in New Jersey. The Court recognized that the manufacturing company could have established its sales company as a division and not as a separate subsidiary corporation. In such an event, the Division of Taxation acknowledged that receipts from sales made by the manufacturing company (through its sales division) and shipped to out-of-state customers would not have been includable in the numerator of the manufacturing company’s receipts fraction. But, having elected the existing corporate structure, the manufacturing company could not avoid its tax consequences. In reaching this conclusion, the Tax Court cited the New Jersey Supreme Court: “We are not told why [the taxpayer] employed subsidiaries. A probable motivation was tax advantage somewhere. The question is whether a state must adjust its tax laws to avoid a disadvantage a taxpayer may experience because of its decision to incorporate a part of its operation. As a general proposition, the answer must be that it is for the taxpayer to make its business decisions in the light of tax statutes, rather than the other way around.”

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