Opinion
DOCKET NO. 009529-2011
03-02-2015
LINDA M. HARRINGTON, PETER D. HARRINGTON, JOANNE ROTH, OSCAR OVIEDO, MARTHA ORTIZ, GERARD SOLAS, MELANIE JACOB, ERIC K. JACOB, ROBERT K. SPACE, NANCY M. SPACE, ALAN MOONEY, and MARY MOONEY, Plaintiffs, v. DIRECTOR, DIVISION OF TAXATION, and STATE OF NEW JERSEY, DEPARTMENT OF THE TREASURY, DIVISION OF STATE LOTTERY, Defendants.
William D. Grand, Esq., for plaintiffs (Greenbaum, Rowe, Smith & Davis, LLP, attorneys, Martin L. Lepelstat, Esq., and Steven B. Gladis, Esq., on the briefs) Thu N. Lam, Deputy Attorney General, for defendant Division of State Lottery (John J. Hoffman, Acting Attorney General of New Jersey, attorney) Ramanjit K. Chawla, Deputy Attorney General, for defendant Director, Division of Taxation (John J. Hoffman, Acting Attorney General of New Jersey, attorney)
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE TAX COURT COMMITTEE ON OPINIONS
OPINION William D. Grand, Esq., for plaintiffs (Greenbaum, Rowe, Smith & Davis, LLP, attorneys, Martin L. Lepelstat, Esq., and Steven B. Gladis, Esq., on the briefs) Thu N. Lam, Deputy Attorney General, for defendant Division of State Lottery (John J. Hoffman, Acting Attorney General of New Jersey, attorney) Ramanjit K. Chawla, Deputy Attorney General, for defendant Director, Division of Taxation (John J. Hoffman, Acting Attorney General of New Jersey, attorney) DeALMEIDA, P.J.T.C.
This opinion addresses two motions. First, plaintiffs, seven people who jointly held the winning ticket for the $216 million prize in the March 3, 2009 drawing of the New Jersey Lottery and their spouses, move for a declaration that they satisfied the notice requirements of the Contractual Liability Act, N.J.S.A. 59:13-1, et seq., or in the alternative, for leave to file a late Notice of Contract Claim with respect to their claim that two State agencies, the Division of Taxation and the Division of State Lottery, breached a contract to pay plaintiffs their lottery winnings free from New Jersey gross income tax. Second, the two State agencies cross-move to dismiss plaintiffs' breach of contract claims for failure to file a timely Notice of Contract Claim and to dismiss the Complaint against the Division of State Lottery pursuant to R. 4:6-2(e) for failure to state a claim upon which relief can be granted.
For the reasons explained more fully below, plaintiffs' motion for a declaration that they filed a timely Notice of Contract Claim is granted. The court concludes that plaintiffs' breach of contract claim accrued when the Director, Division of Taxation issued his February 7, 2011 Final Determinations denying plaintiffs' requests for a refund of gross income tax. Plaintiffs' Notice of Contract Claims was filed within 90 days of February 7, 2011, as required by statute. In light of this holding, defendants' cross-motion to bar plaintiff's breach of contract claims for failure to file a timely Notice of Contract Claim is denied. In addition, the court concludes that plaintiffs set forth sufficient allegations in their Complaint against the Division of State Lottery to state a viable claim for breach of contract. Defendant's cross-motion to dismiss the Complaint against the Division of State Lottery is, therefore, denied.
I. Allegations of Complaint and Procedural History
It is well established that when deciding a motion to dismiss pursuant to R. 4:6-2(e) for failure to state a claim upon which relief can be granted the court is to consider the allegations of the Complaint to be true, Nostrame v. Santiago, 213 N.J. 109, 113 (2013), and is "not concerned with the ability of the plaintiffs to prove the allegation[s]." Printing Mart-Morristown v. Sharp Electronics Corp., 116 N.J. 739, 746 (1989). The court, therefore, recites the facts as alleged by plaintiffs but in doing so does not adopt those facts as findings of fact.
Seven of the plaintiffs are residents of New Jersey who, as co-workers, purchased the winning ticket for the March 3, 2009 drawing of the New Jersey Lottery Mega Millions entitling them to a prize of $216 million. As lottery winners, plaintiffs could elect to receive their winnings either as a lump sum payment or as multi-year annuity payments. Plaintiffs opted to receive a lump sum payment of $140 million. Each plaintiff received approximately $14 million.
An additional five plaintiffs are the spouses of the lottery winners, with whom they filed joint New Jersey gross income tax returns for tax year 2009. The twelve plaintiffs are referred to collectively as "plaintiffs" in this opinion. Three other co-workers shared in the lottery prize but are not named as plaintiffs in this action.
At the time of the March 3, 2009 drawing, and when plaintiffs subsequently claimed their prize, N.J.S.A. 54A:6-11 provided that New Jersey lottery winnings were not subject to New Jersey gross income tax. The statute provided that gross income subject to tax "shall not include lottery winnings from the New Jersey lottery." N.J.S.A. 54A:6-11.
Plaintiffs allege that at the time that they purchased their winning lottery ticket, the Division of State Lottery included on its website the following statement:
Tax Requirements for Lottery PrizesThe reasonable inference from this allegation, to which plaintiffs are entitled at this stage of the proceedings, Stubaus v. Whitman, 339 N.J. Super. 38, 52 (App. Div. 2001), certif. denied, 171 N.J. 442 (2002), is that the Division of State Lottery publicized this information as an inducement to the public to purchase a ticket for a New Jersey Lottery drawing.
* * *
New Jersey residents who win a New Jersey Lottery prize are not required to pay any New Jersey state income tax on their winnings.
In June 2009, after plaintiffs claimed their prize, a bill was introduced in the Legislature to amend N.J.S.A. 54A:6-11 to provide that all New Jersey Lottery winnings in an amount exceeding $10,000 shall be included in taxable income subject to New Jersey gross income tax. The amendment was enacted on June 29, 2009, less than four months after plaintiffs won and claimed their Lottery prize. L. 2009, c. 69. The amendment was made retroactive to January 1, 2009, L. 2009, c. 69, §5, which had the effect of subjecting plaintiffs' Lottery winnings in excess of $10,000 to New Jersey gross income tax.
On or about April 15, 2010, plaintiffs timely filed 2009 New Jersey gross income tax returns, reporting their New Jersey Lottery winnings in excess of $10,000 as taxable income. Although plaintiffs disputed application of the retroactive amendment to N.J.S.A. 54A:6-11 to their New Jersey Lottery winnings, they paid the gross income tax reflected on their returns. Attached to plaintiffs' income tax returns was the following passage titled "RESERVATION OF RIGHTS":
Taxpayer files this return and pays the New Jersey gross income tax imposed on the taxpayer's New Jersey Lottery winnings under protest and without prejudice to the taxpayer's right to seek a refund of the New Jersey gross income tax paid on the taxpayer's lottery winnings. The taxpayer disagrees with and disputes the propriety of retroactive application of the June 29, 2009, amendment to N.J.S.A. § 54A:6-11 to the taxation of the taxpayer's New Jersey lottery winnings. The taxpayer reserves all rights to commence any appropriate judicial or administrative proceedings to obtain a refund of the New Jersey gross income tax herewith paid on such lottery winnings.
On or about May 20, 2010, plaintiffs filed amended 2009 New Jersey gross income tax returns. The amended returns excluded plaintiffs' New Jersey Lottery winnings from taxable income. Each unmarried plaintiff and plaintiff couple sought a refund of approximately $1.49 million dollars in gross income tax paid on their original returns. The amended tax returns contained the following passage:
New Jersey income tax was paid on the taxpayers' New Jersey lottery winnings. The taxpayers disagree with and dispute the propriety of the retroactive application of the June 29, 2009 amendment to N.J.S.A. 54A:6-11 to the taxation of taxpayers' New Jersey lottery winnings. The taxpayers reserved their rights and are requesting a refund based on their New Jersey lottery winnings are not subject to the New Jersey gross income tax.
By letters dated July 9, 2010 and August 2, 2010, the Director, Division of Taxation, denied plaintiffs' refund requests.
On August 10, 2010, plaintiffs timely sought an administrative appeal of the Director's denials through the filing of written protests with the Division of Taxation's Conference and Appeals Branch. The protests included plaintiffs' names, the nature of their claims, including that plaintiffs believed they had suffered a breach of contract, the date on which they allege the claim arose, the specific amount of the gross income tax refunds they sought and the following passage:
Taxpayers challenge the retroactive taxation of their New Jersey Lottery winnings on the grounds that (1) retroactive application of the amended statute is unconstitutional, (2) retroactive application of the amended statute results in manifest injustice, and (3) retroactive application of the amended statute is a breach of a contract between the taxpayers, as lottery participants/winners, and the State of New Jersey.
The administrative conference was held on December 7, 2010. After the conference, on the same day, plaintiffs' counsel reiterated plaintiffs' legal positions in an e-mail communication with the Division of Taxation conferee.
On February 7, 2011, the Director rejected plaintiffs' administrative appeal and issued Final Determinations upholding the denial of their refund requests.
On March 3, 2011, plaintiffs filed a complete Notice of Contract Claim with both the Division of Taxation and the Division of State Lottery. This Notice informed the State of plaintiffs' intention to file suit claiming, among other things, a breach of contract against the Division of Taxation and the Division of State Lottery.
On March 31, 2011, an investigator employed by the Attorney General responded to plaintiffs' Notice of Contract Claim. The response asserted that plaintiffs' notice was filed more than a year after accrual of their claims and was therefore time barred under the Tort Claims Act. That statute is not applicable to plaintiffs' claims. It appears that the investigator meant to refer to the time limit for filing a notice of claim under the Contractual Liability Act.
On April 1, 2011, plaintiffs filed a Complaint in the Superior Court, Law Division, Ocean County. Plaintiffs named as defendants the Director, Division of Taxation and the Division of State Lottery. Both divisions are within the Department of the Treasury.
In the First Count of the Complaint, plaintiffs allege that retroactive application of the amendment to N.J.S.A. 54A:6-11 to plaintiffs' March 3, 2009 lottery winnings violates the manifest injustice doctrine. In the Second Count of the Complaint, plaintiffs allege that retroactive application of the amendment to N.J.S.A. 54A:6-11 to plaintiffs' March 3, 2009 lottery winnings violates the due process, equal protection and other clauses of the United States and New Jersey Constitutions. The Third Count of the Complaint alleges a breach of contract claim against both defendants.
On April 8, 2011, plaintiffs also filed Complaints in the Tax Court challenging the Director's denial of their refund claims. The counts in plaintiffs' Tax Court Complaints mirror those in their Superior Court Complaints. All of the matters are assigned to the same Judge and are proceeding in tandem.
On June 24, 2011, the Hon. Craig L. Wellerson, J.S.C., granted defendants' motion to transfer the Complaint to this court. See N.J.S.A. 2B:13-2(b)("The Tax Court shall have jurisdiction over actions cognizable in the Superior Court which raise issues as to which expertise in matters involving taxation is desirable, and which have been transferred to the Tax Court pursuant to the Rules of the Supreme Court.").
On September 13, 2011, this court denied plaintiffs' motion to recuse the undersigned and have this matter assigned to another Judge of the Tax Court.
Judge Wellerson also transferred to this court plaintiffs' motion for a declaration that plaintiffs satisfied the notice requirements of the Contractual Liability Act, or in the alternative, for leave to file a late Notice of Contract Claim. In addition, the Superior Court transferred to this court defendants' cross-motion to dismiss the Third Count of the Complaint against all defendants for failure to file a timely Notice of Contract Claim and to dismiss the Complaint against the Division of State Lottery pursuant to R. 4:6-2(e) for failure to state a claim upon which relief can be granted.
The court heard oral argument from counsel on the motions.
II. Conclusions of Law
A. Plaintiffs' Notice of Contract Claim.
The Contractual Liability Act was enacted in response to a Supreme Court decision abrogating sovereign immunity for contract claims. See P, T & L Constr. Co. v. Department of Transp., 55 N.J. 341 (1970). The Act allows for a limited waiver of sovereign immunity for suits based on "an express contract or a contract implied in fact," N.J.S.A. 59:13-3, and requires compliance with specific statutory provisions as a prerequisite for commencing litigation against the State. N.J.S.A. 59:13-5. A Notice of Contract Claim must be served with the offending agency by the potential claimant prior to the filing of suit. N.J.S.A. 59:13-5 provides:
[i]t shall be the responsibility of parties contracting with the State to promptly notify the State in writing of any situation or
occurrence which may potentially result in the submission of a claim against the State.
A Notice of Contract claim need not take a prescribed form. The Notice must, however, convey four pieces of information: (1) "the name of the claimant;" (2) "the nature of the claim;" (3) "specific reasons for making the claim;" and (4) "the total dollar amount of the claim if known." N.J.S.A. 59:13-5. "As noted by various courts, the purposes of the notice provisions of the Act are to give state agencies, which are often faced with large amounts of litigation, 'an opportunity to determine the merits of claims for the possibility of a settlement, as well as to investigate the claims for the purpose of preparing for trial.'" County of Morris v. Fauver, 153 N.J. 80, 107 (1998)(quoting Frapaul Construction Co. v. State, 175 N.J. Super. 84, 92 (App. Div. 1980)); accord Housing Auth. v. Sagner, 142 N.J. Super. 332, 343 (App. Div. 1976). There is "little doubt" that compliance with the notice requirement is mandatory given the legislative directive that notice "shall" be served prior to initiation of suit. County of Hudson v. State, 208 N.J. 1, 20 (2011)(citing Aponte-Correa v. Allstate Ins. Co., 162 N.J. 318, 325 (2000)). In addition, because the Contractual Liability Act derogates sovereign immunity it must be interpreted strictly in favor of the State. Allen v. Fauver, 167 N.J. 69, 75 (2001).
Recovery is "forever barred" if a claimant "fails to notify the appropriate contracting agency within 90 days of accrual of his claim . . ." N.J.S.A. 59:13-5(a). This court, however, may grant leave to file a late notice of claim within one year of the date of accrual based on "sufficient reason" and in the absence of substantial prejudice to the State. N.J.S.A. 59:13-6.
To determine whether plaintiffs served a timely Notice of Contract Claim the court must first determine the date of accrual of plaintiffs' claim. "'Accrual of claim' shall mean the date on which the claim arose and shall not be affected by the notice provisions contained herein." N.J.S.A. 59:13-2. "[C]ourt have generally stated that a claim accrues, for statute of limitations purposes, on 'the date on which the right to institute and maintain a suit first arose.'" County of Morris, supra, 153 N.J. at 107 (citing Rosenau v. City of New Brunswick, 51 N.J. 130, 137 (1968)(internal quotations omitted); Deluxe Sales and Serv., Inc. v. Hyundai Eng'g & Constr. Co., 254 N.J. Super. 370, 374 (App. Div. 1992)). As a general rule, "[t]o establish a breach of contract claim, a plaintiff has the burden to show that the parties entered into a valid contract, that the defendant failed to perform his obligations under the contract and that the plaintiff sustained damages as a result." Murphy v. Implicito, 392 N.J. Super. 245, 265 (App. Div. 2007) (internal quotations omitted).
Here, plaintiffs' claims are based on what they characterize as a contractual agreement with the State to award to plaintiffs the full amount of their Lottery winning from the March 3, 2009 drawing free from gross income tax liability. There is limited precedent in New Jersey regarding the nature of the relationship between the purchaser of a lottery ticket and the State and its agencies. In 1993, a trial court judge recognized precedents from other jurisdictions holding that "the relationship arising out of the lottery system is primarily contractual in nature." Driscoll v. State, 265 N.J. Super. 503, 510 (Law Div. 1993)(citing Valante v. Rhode Island Lottery Comm'n, 544 A.2d 586, 589 (R.I. 1988); Hair v. State, 2 Cal. App. 4th (1991); Aguimatang v. California State Lottery, 234 Cal. App. 3d 769 (1991); Brown v. California State Lottery Comm'n, 232 Cal. App. 3d 1335 (1991); Thao v. Control Data Corp., 790 P.2d 1239 (Wash. App. 1990)). "A ticket holder is said to have accepted an offer upon purchasing the lottery tickets at the licensed agency." Id. at 510. "From a contractual perspective, the terms of the contract are subject to the lottery law, and the rules and regulations promulgated pursuant to that authority." Ibid. (citing Karafa v. New Jersey State Lottery Comm'n, 129 N.J. Super. 499, 502 (Chan. Div. 1974)(denying claim to lottery prize by person who misplaced winning ticket and could not satisfy regulation requiring presentation of ticket to claim prize)). "The rights and obligations of the contracting parties arising out of a lottery ticket purchase cannot, therefore, contravene the rules and regulations of the" Division of State Lottery. Id. at 510.
Article IV, Section VII, paragraph 2 of the 1947 Constitution prohibited gambling of any kind without approval from the voters. In 1969, that clause was amended to permit the Legislature to authorize a State lottery. The Legislature implemented this provision by enactment of L. 1970, c. 13, § 1, et seq., effective February 16, 1970. Karafa, supra, 129 N.J. Super. at 502.
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The court concludes that plaintiffs' breach of contract claim accrued on February 7, 2011 when the Director, Division of Taxation issued his Final Determinations denying plaintiffs' requests for a refund of gross income tax. Until that time, plaintiffs' were not certain that the State would, in fact, reject each of plaintiffs' arguments that application of the amendment to N.J.S.A. 54A:6-11 to the winnings from the March 3, 2009 drawing was unlawful.
Plaintiffs' breach of contract claim surely did not accrue upon the enactment of the amendment to N.J.S.A. 54A:6-11. Although the amendment purported to extend the gross income tax to plaintiffs' winnings, the tax was not due until April 15, 2010, the date on which they were statutorily required to file a 2009 gross income tax return. N.J.S.A. 54A:8-1(a)("a return . . . shall be filed . . . on or before April 15 following the close of such calendar year . . . ."). In fact, in early February 2010, a bill was introduced in the General Assembly that would have deleted the retroactive effect of the amendment to N.J.S.A. 54A:6-11. See A-2069, 214th Leg. (N.J. 2010). It was still possible prior to April 15, 2010 that the State would not impose gross income tax on plaintiffs' winnings from the March 3, 2009 drawing. Nor could plaintiffs have known the precise measure of their damages prior to filing of their 2009 gross income tax return. Gambling winnings are subject to gross income tax on a net basis. N.J.S.A. 54A:5-1(g); N.J.S.A. 54A:5-2. Plaintiffs could not know the amount gambling winning that would be subject to gross income tax for tax year 2009, until the tax year concluded and they could tally gambling losses, if any, that would offset their winnings from the March 3, 2009 lottery drawing.
In addition, plaintiffs' breach of contract claim did not accrue upon the filing of their 2009 gross income tax returns, given that plaintiffs had available to them various avenues to challenge application of the amendment to their winnings. On or about May 20, 2010, plaintiffs filed amended 2009 gross income tax returns seeking a refund of the tax they paid as a result of the retroactive application of the amendment to N.J.S.A. 54A:6-11 to their winnings. The Director could well have granted the refunds requested in the amended returns.
In July 2010, the Director, Division of Taxation informed plaintiffs that he rejected the refunds requested in their amended 2009 gross income tax returns. Plaintiffs' breach of contract claims did not accrue at that time. Plaintiffs had available to them the option of filing a Notice of Protest and Request for an Administrative Hearing at the Division of Taxation.
In August 2010, plaintiffs exercised that option, requesting in writing that the Division reconsider the denial of plaintiffs' gross income tax refund requests. Plaintiffs' Notice of Protest and Request for an Administrative Hearing set forth in detail the various legal arguments on which plaintiffs relied in support of the refund requests. The Director was authorized to consider those arguments. If he had adopted any one of plaintiffs' assertions, the gross income tax refund requests would have been granted and plaintiffs' breach of contract claim would never have matured.
It was not until February 7, 2011, when the Director, Division of Taxation issued his Final Determinations rejecting plaintiffs' gross income tax refund requests that their breach of contract claim arose. It was only then that plaintiffs had exhausted Executive Branch remedies with respect to their challenge to the retroactive application of the amendment to N.J.S.A. 54A:6- 11 to the winnings from the March 3, 2009 drawing. Once the Director made a final decision that plaintiffs' winnings would be subject to gross income tax, plaintiffs had suffered an alleged breach of contract and could quantity their damages.
Plaintiffs filed a complete Notice of Contract Claim well within the 90-day period following February 7, 2011. Defendants do not dispute the sufficiency of the March 3, 2011 Notice of Contract Claim. The State was, therefore, given notice of all of the statutorily required information necessary to satisfy N.J.S.A. 59:13-5 within 90 days of the accrual of plaintiffs' breach of contract claim. B. Defendants' Cross-Motion to Dismiss.
When reviewing a motion to dismiss, the court's inquiry is limited to the "legal sufficiency of the facts alleged on the face of the complaint." Green v. Morgan Props., 215 N.J. 431, 451 (2013)(quoting Printing Mart, supra, 116 N.J. at 746 (internal quotations omitted). The question is whether the alleged facts "suggest" a cause of action. Id. at 451. A court searches "the complaint in depth and with liberality to ascertain whether the fundament of a cause of action may be gleaned even from an obscure statement of claim, opportunity being given to amend if necessary." Id. at 452. The question is not whether plaintiffs can prove a claim; rather, plaintiffs are to be given every "reasonable inference of fact" with respect to their allegations. Ibid. (internal citations and quotations omitted). As the Supreme Court explained:
At this preliminary stage of the litigation [a] [c]ourt [should not be] concerned with the ability of plaintiffs to prove the allegation contained in the complaint . . . . [P]laintiffs are entitled to every reasonably inference of fact. The examination of a complaint's allegations of fact required by the aforestated principles should be one that is at once painstaking and undertaken with a generous and hospitable approach.
[Banco Popular No. Amer. v. Gandi, 184 N.J. 161, 165 (2005) (citing Printing Mart, supra, 116 N.J. at 746 (alterations in original).]Because of this liberal and searching inquiry, dismissal under Rule 4:6-2(e) should be granted "'in only the rarest of instances.'" NCP Litigation Trust v. KPMG, LLP, 187 N.J. 353, 365 (2006)(quoting Printing Mart, supra, 116 N.J. at 772).
As discussed at greater length above, the relationship between the purchaser of a lottery ticket and the State and its agencies "is primarily contractual in nature." Driscoll, supra, 265 N.J. Super. at 510. Here, plaintiffs' claims against the Division of State Lottery are based on what they characterize as a contractual agreement to award to them the full amount of winnings from the March 3, 2009 drawing free from New Jersey gross income tax. This claim is based, in part, on plaintiffs' allegations that at the time they purchased their winning ticket, the Division of State Lottery advertised publically that New Jersey lottery winnings are not subject to New Jersey gross income tax. An inference can be drawn from plaintiffs' allegations that the advertisement was an inducement to play the lottery and a material component of the Division of State Lottery's offer to purchase a ticket for a chance to win the March 3, 2009 drawing. Plaintiffs allege, in effect, that they accepted that offer when they purchased the winning ticket for the March 3, 2009 drawing and that the Division of State Lottery breached the resulting contract when plaintiffs were paid less than the contractually agreed upon winnings amount.
The Division of State Lottery argues that, even if taken as true, plaintiffs' allegations establish that the Division of State Lottery satisfied any contractual obligation that it has to plaintiffs. According to the Division of State Lottery, it was contractually obligated only to pay plaintiffs the amount of winnings from the March 3, 2009 drawing, which the Division argues it has done. The subsequent taxation of plaintiffs' winnings is, according to the Division of State Lottery, carried out by the Division of Taxation, a separate government entity that does not have a contractual obligation to plaintiffs. Thus, the Division of State Lottery argues, any claims that plaintiffs may have with respect to the taxation of their lottery winnings must be asserted against the Director, Division of Taxation, who is a defendant in this action, and do not sound in contract against the Division of State Lottery. See Kawa v. Wakefern Food Corp., 24 N.J. Tax 444 (App. Div. 2009), certif. denied, 200 N.J. 369 (2009).
In addition, the Division of State Lottery argues that it is not possible for the parties to have entered into an agreement precluding the Legislature from amending the Gross Income Tax Act to include lottery winnings over a certain amount in taxable income. According to the Division of State Lottery, such a contractual provision would be unenforceable. Finally, the Division of State Lottery argues that any advertisements indicating that lottery winnings are not subject to gross income tax were not a contractual promise, but a statement of fact accurately stating the tax status of lottery winning at the time of the March 3, 2009 drawing. See Schlichtman v. New Jersey Highway Auth., 243 N.J. Super. 464, 469 (Law. Div. 1990)(advertisements are mere notices and solicitations for offers which create no power of acceptance in the recipient).
In light of the liberal standard which this court must employ on a motion to dismiss pursuant to R. 4:6-2(e), the court rejects the Division of State Lottery's arguments. The Complaint without question suggests a contract claim against the Division of State Lottery. This suggestion is based on legal precedents recognizing a contractual relationship between the bearers of a winning lottery ticket for the March 3, 2009 drawing and the Division of State Lottery. The Complaint also alleges that the contract included the Division of State Lottery's agreement to pay a sum certain to plaintiffs. That sum certain, according to the allegations, was calculated based on the advertised prize amount without a reduction for New Jersey gross income tax. According to the Complaint, plaintiffs received less than that amount. These allegations are sufficient to withstand a motion to dismiss for failure to state a claim.
The Division of State Lottery draws too fine a line at this stage in the proceedings with its argument that the contract created by plaintiffs' purchase of the winning ticket was between plaintiffs and the Division of State Lottery only and that the Division cannot be contractually liable for the actions of a separate state agency, the Division of Taxation, which collected the tax from plaintiffs for 2009. N.J.A.C. 17:20-7.5, a regulation adopted by the Division of State Lottery, suggests that the contract created by the purchase of a winning ticket is between the ticket holders and the State, including all of its subdivisions. The regulation provides:
(a) The State of New Jersey, its subdivisions, agents, officers, and employees, the State Lottery Commission, the Director, Division of the State Lottery, its agents, officers, and employees shall be discharged of all liability upon award of a prize.The Division of State Lottery acknowledges that this regulation is incorporated in the contract that exists between plaintiffs and the Division of State Lottery. If, as the Division of State Lottery suggests, the relevant contract is between plaintiffs and the Division of State Lottery only, N.J.A.C. 17:20-7.5 would not need to contain a sweeping protection from liability encompassing all State subdivisions, agents, officers, and employees. To view the contract in the manner suggested by the Division of State Lottery would render most of N.J.A.C. 17:20-7.5 superfluous, an outcome which should be avoided. The concept is well recognized in the arena of statutory construction. See Gabin v. Skyline Cabana Club, 54 N.J. 550, 555 (1969)("It is a cardinal rule of statutory construction that full effect should be given, if possible, to every word of a statute. We cannot assume that the Legislature used meaningless language."). Regulations are subject to the same rules of construction as are applicable to statutes. Krupp v. Board of Educ., 278 N.J. Super. 31, 38 (App. Div. 1994), certif. denied, 140 N.J. 277 (1995); Department of Health v. Tegnazian, 205 N.J. Super. 160, 175 (App. Div. 1985); Beljakovic v. Director, Div. of Taxation, 26 N.J. Tax 455 (Tax 2012).
[N .J.A.C. 17:20-7.5.]
Nor is the court convinced that dismissal of the Complaint against the Division of State Lottery is mandated by the holding in Kawa, supra, because plaintiffs' exclusive remedy to secure a refund of gross income tax is through a challenge in Tax Court to a final determination of the Director, Division of Taxation. Kawa arose as a class action suit in which the plaintiff alleged that she made several purchases at various supermarkets and was overcharged sales tax on items which had reduced prices or were free through use of the store coupons and customer loyalty cards. Id. at 446. According to the plaintiffs, the supermarkets used the wrong base price of the items to calculate the sales tax. It was undisputed that the supermarkets had remitted all sales tax collected from plaintiff and the class to the Director, Division of Taxation, as required by law. Id. at 446-447.
Plaintiffs did not seek a refund of the overpaid sales tax from the Director, Division of Taxation. They instead filed claims in the Superior Court against the supermarkets under the Consumer Fraud Act, N.J.S.A. 56:8-1 to -20, and under common law fraud, negligent taxation and an alleged breach of fiduciary duty. Id. at 447. The matter was transferred to the Tax Court, see N.J.S.A. 2B:13-2(b), and defendants moved to dismiss the Complaint, alleging that the allegations in the Complaint amounted to a claim for a refund of overpaid sales tax that could exclusively be heard by the Director, Division of Taxation. Id. at 447. Defendants also argued that "there was a direct and unavoidable conflict between the design of the tax statutes . . . for a refund of overpaid sales tax . . . and the purpose and remedies under the" Consumer Fraud Act. Id. at 447-448.
Judge Menyuk agreed with defendants' argument and dismissed the Complaint. She first examined the statutory provisions creating the right of a consumer to seek a refund of overpaid sales tax from the Director, Division of Taxation and the establishing the procedures for doing so. Kawa v. Wakefern Food Corp., 24 N.J. Tax 39, 46-48 (Tax 2008). She then examined the Consumer Fraud Act, with "'its remedial purpose, namely, to root out consumer fraud,'" id. at 49 (quoting Lemelledo v. Beneficial Mgmt. Corp., 150 N.J. 255, 264 (1997)), and its provisions allowing for treble damages and the award of reasonable attorney's fees. Id. at 48. Finding these statutory schemes to be in conflict, Judge Menyuk explained
I conclude that the Division of Taxation has exclusive jurisdiction in the first instance to determine whether a transaction is taxable or not taxable, to determine the price on which the tax is calculated, to determine the correct amount of the tax, and if tax has been overpaid and remitted to the Director, to refund the tax pursuant to N.J.S.A. 54:32B-20(a). Under the facts of this case, there is therefore a direct and unavoidable conflict between the provisions of the Sales and Use Tax Act and application of the Consumer Fraud Act.
[Id. at 51.]
She detailed the unavoidable conflict by observing that the Sales and Use Tax Act, together with Division of Taxation regulations, provided a detailed mechanism for vendors to seek a refund of sales taxes collected from customers in excess of those actually due. The regulations do not include a penalty provision for vendors who collect excess sales taxes and, in fact, require the vendor to remit to the Director all sales tax collected, even if in excess of the amount due. On the other hand, the Consumer Fraud Act, as the Kawa plaintiffs intended to use it, authorizes damages, including treble damages and attorney's fees, against vendors who collect and remit to the Director excess sales taxes. This contravenes "'a legislative intent not to subject parties to multiple regulations that, as applied, will work at cross purposes.'" Id. at 52 (quoting Lemelledo, supra, 150 N.J. at 270). Notably, Judge Menyuk also held that
there is nothing in the Sales and Use Tax Act that creates a fiduciary duty on the part of the vendor for the benefit of the customer. The vendor is a trustee, but only for and on account of the State. N.J.S.A. 54:32B-12(a).The Kawa plaintiffs, however, alleged breach of fiduciary duty against the vendors. The Appellate Division affirmed Judge Menyuk substantially for the reasons set forth in her written opinion. 24 N.J. Tax at 446.
[Id. at 59.]
Here, plaintiffs' contract claims against the Division of State Lottery are not in direct conflict with the statutes that authorize the Director, Division of Taxation to adjudicate gross income tax refund claims. The plaintiffs in the instant matter, unlike the plaintiffs in Kawa, filed refund claims with the Director, Division of Taxation. After the Taxation Director rejected the claims, plaintiffs, contemporaneous with the filing of their Superior Court Complaint, filed Complaints in the Tax Court challenging the Taxation Director's decision. The two actions, therefore, are proceeding in tandem. Plaintiffs are not circumventing the authority of the Director of Taxation to determine whether retroactive application of the 2009 amendment to N.J.S.A. 54A:6-11 to the winnings from the March 3, 2009 drawing is valid. The Complaint alleges that the measure of contractual damages sought from the Division of State Lottery is equal to the amount claimed as gross income tax refunds from the Director of Taxation. Thus, if plaintiffs prevail in securing a refund of gross income tax from the Director in their direct appeals in the Tax Court, their contract claims against the Division of State Lottery in the Superior Court action will be extinguished. If, and only if, plaintiffs do not prevail in their challenge to the Taxation Director's denial of their refund claims will they proceed with their contract claim against the Division of State Lottery. There is, therefore, no danger of plaintiffs securing more in damages than the amount of overpaid gross income tax they allege to be due to them, a significant difference from the facts in Kawa where the plaintiffs had available to them a Consumer Fraud Act provision allowing for treble damages and attorney's fees in addition to the amount of sales tax they alleged to have overpaid.
In addition, the defendants in Kawa were supermarket vendors who were required by law to collect and remit sales tax to the Director, Division of Taxation. They had no independent fiduciary duty to the plaintiffs with respect to the tax collected and were insulated from liability under the tax laws for an alleged act of collecting more sales tax than was actually due. Here, the defendant seeking dismissal of the Complaint is the Division of State Lottery, an entity which admits that it has a contractual relationship with plaintiffs. Plaintiffs allege that the contractually required prize was not paid to them. While the amount in dispute under the contract claims is equal to the amount of gross income tax plaintiffs paid for tax year 2009, plaintiffs' tax claim and plaintiffs' contract claims are distinct. Plaintiffs allege that if they are unsuccessful with their challenge to the Director, Division of Taxation's Final Determinations, they will be entitled to contractual damages from the Division of State Lottery for failing to pay to plaintiffs the amount of winnings to which they are entitled pursuant to contract.
There is, therefore, no basis to the argument that plaintiffs allege that their contract with the State precludes the Legislature from amending the Gross Income Tax Act so that it applies retroactively to lottery winnings. Plaintiffs do not allege that the enactment of the amendment to N.J.S.A. 54A:6-11 constituted a breach of contract. They allege that application of the amendment to their winnings from the March 3, 2009 drawing violates the federal and State Constitutions, is manifestly unjust, or is otherwise invalid. The also allege, in effect, that if they are not successful with those arguments and they must pay gross income tax, the Division of State Lottery violated its contract with them by not paying them the winnings to which they are entitled by contract.
Nor is the court convinced that plaintiffs have not alleged a claim with respect to the Division of State Lottery's advertisements. In Schlichtman, supra, the New Jersey Highway Authority advertised through various media, including highway billboards, the sale, for a limited period, of Garden State Parkway tokens at a discount. 243 N.J. Super. at 466. Shortly after the sale period commenced it became evident that the agency had underestimated demand for the tokens, the supply of which soon dissipated. As a result, the authority was compelled to turn down prospective purchasers. The plaintiff, having on five occasions attempted to purchase the tokens without success, filed suit in the Special Civil Part of Superior Court, alleging, among other claims, a breach of contract based on the agency's advertisements. Id. at 466-467.
The court rejected the plaintiff's claims, holding that "the advertisements did not constitute offers. Rather, plaintiff made an offer in response to the authority's advertisements, but plaintiff's offers were refused by the authority." Id. at 468-469. The court held that the agency's advertisements "were not offers, but rather were solicitations for offers from potential customers that were subject to acceptance or refusal" by the agency. Id. at 469 (citing Mesaros v. United States, 845 F.2d 1576 (Fed. Cir. 1988)). The allegations made in this case, if taken as true, are substantially different from the facts in Schlichtman. Here, it is alleged that the Division of State Lottery advertised that winnings from the March 3, 2009 drawing would not be subject to gross income tax. Plaintiffs, induced by that advertisement, purchased a ticket for the March 3, 2009 drawing. They won. After they elected to receive a lump sum payment, the amount of their winnings was calculated to a sum certain to be paid to plaintiffs. That sum certain was calculated based on the winnings from the March 3, 2009 drawing not being subject to gross income tax. Unlike in Schlichtman, the advertisements at issue were part and parcel of a completed commercial transaction, resulting in a contractual relationship between plaintiffs and the State, which was reduced to a contractual obligation on the Division of State Lottery's part to pay plaintiffs a sum certain.
The court will enter an Order effectuating this opinion.