Opinion
Docket No. 000066-2007
10-22-2013
Whirlpool Properties, Inc. v. Director, Division of Taxation
JUDGE
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF
THE TAX COURT COMMITTEE ON OPINIONS
Via Regular Mail:
Mitchell A. Newmark, Esq.
Morrison & Foerster LLP
1290 Avenue of the Americas
New York, NY 10104
Marlene G. Brown, Esq.
Senior Deputy Attorney General
R.J. Hughes Justice Complex
25 Market Street
P.O. Box 106
Trenton, New Jersey 08625
Dear Counsel:
This letter opinion constitutes the court's decision with respect to three motions/cross-motions filed by the parties in the above captioned case. In particular, (1) plaintiff, Whirlpool Properties, Inc. ("Whirlpool"), filed a Motion for Partial Summary Judgment seeking to define the appropriate application of the "Throw Out Rule" of the New Jersey Corporate Business Tax ("CBT"), N.J.S.A. 54:10A-6(B)(6) (2002); (2) defendant, the Director of the Division of Taxation ("Director") filed a cross-motion for partial summary judgment to compel Whirlpool to file CBT returns for the tax years at issue, 1996-2003; and (3) Whirlpool filed a cross-motion for partial summary judgment on the basis that New Jersey was unable to tax Whirlpool under the limits set forth by the United States Constitution. For the reasons set forth below, the court denies all motions.
The Throw Out has been subsequently appealed.
Facts and Procedural History
Based on the submissions of the parties, and for the purpose of summary judgment, the following facts are not materially in dispute. Whirlpool is a Michigan corporation with its principal place of business in St. Joseph, Michigan and employs a full-time staff of intellectual property attorneys, administrators, and support staff. Whirlpool Corporation is a Delaware corporation with its principal place of business in Benton Harbor, Michigan. Whirlpool Corporation and its subsidiaries manufacture, market, and distribute major home appliances and related products in all fifty states. Whirlpool is the owner of various brand names, including "Whirlpool" and "KitchenAid", (collectively "the Marks"), and licenses the Marks to Whirlpool Corporation, other affiliates, and other unrelated third parties. In exchange for the right to use the Marks, Whirlpool Corporation pays a percentage (which varies depending on the Mark) of the production costs as royalties to Whirlpool. The royalties accrue when goods bearing the Marks are produced. These royalties are payable quarterly. None of the goods bearing the Marks are produced in plants located in New Jersey.
For the tax years at issue, 1996-2003, Whirlpool did not file tax returns in New Jersey, nor did it pay the CBT. On October 19, 2006, the Director issued a Notice of Assessment Related to Final Audit Determination ("Assessment") for the years at issue resulting in a balance due, including tax, penalties, and interest, of $24,883,399.24. More than 90% of this amount was attributable to the 2002 and 2003 tax years by application of the Throw Out Rule.
Whirlpool timely filed a complaint on January 11, 2007 challenging the Assessment. On September 21, 2007, Whirlpool filed a Motion for Partial Summary Judgment, arguing that the Throw Out Rule, N.J.S.A. 54:10A(6)(B), was facially unconstitutional. After working its way through the court system, the Supreme Court of New Jersey held, in 2011, that the Throw Out Rule was facially constitutional but narrowed its applicability, providing that "for corporate taxpayers having a substantial nexus to New Jersey, the [Throw Out] Rule may apply constitutionally only to untaxed receipts from those states that lack jurisdiction to tax the corporation." Whirlpool Properties, Inc. v. Director, Div. of Taxation, 208 N.J. 141, 177 (2011).
Subsequently, Whirlpool filed a motion for partial summary judgment seeking to define the application of the Throw Out Rule to its case, as now articulated by the Supreme Court. The Director replied and filed his own cross-motion for summary judgment, asserting that Whirlpool was required to file CBT returns before application of the Throw Out Rule could be determined. In response, Whirlpool filed a cross-motion for summary judgment asserting insufficient connection under the United States Constitution to support taxation by New Jersey. Oral argument was heard on all motions.
The Director also asserted that Whirlpool's initial Motion for Partial Summary Judgment was procedurally deficient. Upon a careful review, the court finds this contention wholly without merit and addresses it no further.
Issues
A. Standing
As an initial matter, the Director questions whether Whirlpool has standing to bring its complaint. Standing is a threshold issue and may be raised at any time during litigation. See In re Adoption of Baby T, 160 N.J. 332, 339 (1999). New Jersey has adopted a very broad view of standing. See, e.g., Al Walker, Inc. v. Stanhope, 23 N.J. 657, 661-662 (1957) (giving several examples of cases where parties had standing). The New Jersey Supreme Court defined the boundaries of our standing doctrine in Crescent Park Tenants Ass'n v. Realty Equities Corp., 58 N.J. 98 (1971):
Unlike the Federal Constitution, there is no express language in New Jersey's Constitution which confines the exercise of our judicial power to actual cases and controversies. Nevertheless we will not render advisory opinions or function in the abstract nor will we entertain proceedings by plaintiffs who are "mere intermeddlers", or are merely interlopers or strangers to the dispute. Without ever becoming enmeshed in the federal complexities and technicalities, we have appropriately confined litigation to those situations where the litigant's concern with the subject matter evidenced a sufficient stake and real adverseness. In the overall we have given due weight to the interests of individual justice, along with the public interest, always bearing in mind that throughout our law we have been sweepingly rejecting procedural frustrations in favor of "just and expeditious determinations on the ultimate merits."
[Id. at 107-108 (internal citations omitted).]
The Director conflates the notions of standing and nexus. He argues that if Whirlpool were "found not to have nexus [in New Jersey]," then that "would similarly leave [Whirlpool] without any standing...." He further contends that Whirlpool cannot simultaneously argue that it has standing while asking the court to find there is insufficient nexus to require the filing of CBT returns.
The court can make no sense of this argument. Assume arguendo a New York corporation manufactures and sells widgets, with all activities taking place solely within the State of New York. Because the widgets are quite popular, many New Jersey residents purchase them during trips to New York City and bring them back home. Upon seeing widgets within New Jersey, and without any further investigation, the Director asserts that the corporation has substantial nexus with New Jersey for tax purposes, and issues a Notice of Assessment. The Director further requires the corporation to file a CBT return so that he may determine the appropriate amount of New Jersey tax. Pursuant to the Director's rationale set forth in his briefs, the only way the corporation could demonstrate a lack of nexus would be to file a CBT return and then petition the court. If the corporation failed to challenge the assessment, the Director could attempt to collect the assessed tax, thus exposing the corporation to a potential New Jersey tax liability.
Here, the Director's Assessment indicated that Whirlpool may owe New Jersey tax. At that point, Whirlpool could not be considered a "mere interloper"; its "sufficient stake and real adverseness" in the subject matter was a potential tax liability of nearly $25,000,000. See Crescent Park, supra, at 107. The court finds that the Director himself has conferred standing on Whirlpool.
B. Taxation of Whirlpool by New Jersey
The parties have put the cart before the horse with respect to their motions. The court cannot properly analyze the Assessment of the Director, and therefore look at his application of the Throw Out Rule, until an audit takes places. In order to complete the audit, the Director must have some basic starting point, typically the filing of a CBT return. However, a taxpayer is only required to file a CBT return if they are subject to taxation by New Jersey. Therefore, the court will deal with the parties latest motions first.
The parties dispute whether or not an audit took place. This does not affect the court's opinion.
"Courts should . avoid reaching constitutional questions unless required to do so." Garden State Quality v. Dow, Docket No. A-21-13, slip op. at 19 (N.J. Oct. 18, 2013) (internal quotation marks omitted). However, this does not mean that a threshold constitutional question can be ignored simply to avoid an issue. A state may only tax a foreign corporation if permitted by the Due Process Clause and the Commerce Clause of the United States Constitution. Therefore, we must address the threshold constitutional question before entertaining any others.
As the Court noted in Quill Corp., "the Due Process Clause and the Commerce Clause are analytically distinct." I d. at 305.
"Due process" and "commerce clause" conceptions are not always sharply separable in dealing with these problems . . . . To some extent they overlap. If there is a want of due process to sustain the tax, by that fact alone any burden the tax imposes on the commerce among the states becomes "undue." But, though overlapping, the two conceptions are not identical. There may be more than sufficient factual connections, with economic and legal effects, between the transaction and the taxing state to sustain the tax as against due process objections. Yet it may fall because of its burdening effect upon the commerce. And, although the two notions cannot always be separated, clarity of consideration and of decision would be promoted if the two issues are approached, where they are presented, at least tentatively as if they were separate and distinct, not intermingled ones."
[Id. at 305-306 (quoting Int'l Harvester Co. v. Dep't of Treasury, 322 U.S. 340, 353 (1944) (Rutledge, J., concurring in part and dissenting in part)).]
Within the United States Constitution, the Due Process Clause, U.S. Const. amend. XIV, § 1, and the Commerce Clause, U.S. Const. art. I, § 8, cl. 3, define the limits by which a state may tax a foreign corporation. Under the Due Process Clause, "the relevant inquiry [is] whether a [foreign corporation] had minimum contacts with the jurisdiction such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice." Quill Corp. v. North Dakota, 504 US. 298, 307 (1992) (quoting International Shoe Co. v. Washington, 326 U.S. 310 (1945)) (internal quotation marks omitted). A foreign corporation may be subject to tax if it "purposefully avails itself of the benefits of an economic market in the forum State...." Ibid.
The parties have not discussed the applicability of the New Jersey Constitution in their motions.
Under the Commerce Clause, a foreign corporation may be subject to tax if the "tax (1) is applied to an activity with a substantial nexus with the taxing State, (2) is fairly apportioned, (3) does not discriminate against interstate commerce, and (4) is fairly related to the services provided by the State." Id. at 311 (quoting Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977)). "A state may tax such part of the income of a non-resident as is fairly attributable either to property located in the state or to events or transactions which, occurring there, are subject to state regulation and which are within the protection of the state and entitled to the numerous other benefits which it confers." Int'l Harvester Co. v. Wis. Dep't of Taxation, 322 U.S. 435, 441-442 (1944). Notably, "a [foreign] corporation may have the 'minimum contacts' with a taxing State as required by the Due Process Clause, and yet lack the 'substantial nexus' with that State as required by the Commerce Clause." Quill Corp., supra, 504 U.S. at 313.
C. Substantial Nexus under the Commerce Clause
Because the requirements under both the Due Process Clause and the Commerce Clause must be satisfied, and because the parties focused on the Commerce Clause analysis, the court will begin there. This case specifically involves the taxation of income derived from intangible intellectual property, a subject which New Jersey courts previously addressed in Lanco, Inc. v. Dir., Div. of Taxation, 379 N.J. Super. 562 (App. Div. 2005):
Lanco, Inc., ("Lanco") [was] a Delaware corporation that own[ed] certain intangible property (trademarks, trade names and service marks). The parties ... stipulated that Lanco ha[d] no offices, employees, or real or tangible property in New Jersey. Lanco license[d] Lane Bryant, Inc., ("Lane Bryant") to utilize the intangible property in the conduct of Lane Bryant's retail operations, including those in New Jersey, and in return receive[d] royalty payments from Lane Bryant.The fees Lanco received were related to the sales of goods containing licensed intangibles. See Lanco, supra, 21 N.J. Tax at 215-216. In Lanco, "the critical issue [was] whether the taxpayer must have a physical presence in the state in order to constitute the required 'substantial nexus' necessary to satisfy the Commerce Clause" under Quill Corp, supra, "which applied that test and held physical presence was necessary in the context of a sales and use tax." Lanco, supra, 379 N.J. Super. at 564. The court ultimately decided that "the physical presence requirement applicable to use and sales taxes [was] not applicable to income tax and that the New Jersey Business Corporation Tax may be constitutionally applied to income derived by plaintiff from licensing fees attributable to New Jersey." Id. at 573. This view was consistent with several other jurisdictions. See, e.g., Geoffrey, Inc. v. S.C. Tax Comm'n, 437 S.E.2d 13 (S.C. 1993) (upholding a tax on royalty payments based on net sales made in South Carolina of licensed products); A&F Trademark, Inc. v. Tolson, 605 S.E.2d 187 (N.C. App. 2004) (upholding a tax on royalty payments based on retail operating gross sales for the use of a trademark in North Carolina); Sec'y, Dep't of Revenue v. Gap (Apparel), Inc., 886 So. 2d 459 (La. App 2004) (upholding a tax on royalty payments based on net sales made in Georgia of licensed products).
[Id. at 564 (quoting Lanco, Inc. v. Dir., Div. of Taxation, 21 N.J. Tax 200, 203 (Tax 2003)).]
The Director asserts that Whirlpool has a substantial nexus with New Jersey and relies on two major points in support of this claim. First, the Director asserts that Whirlpool previously conceded nexus. At the beginning of a March 28, 2008 hearing before the Tax Court, Judge Kuskin, the parties and the court engaged in the following discussion:
THE COURT: The first issue, as I said, I would like to address is whether I should hear from Whirlpool and Federated. As part of the Director's brief in response to the Whirlpool and Federated motions, the Director has argued that, unless those two entities acknowledge that they're subject to taxation in New Jersey, that their motion with respect to facial constitutionality should not be heard. I'm not sure whether that would be phrased in terms of lack of standing or ripeness. My own view is that it's a question of ripeness because, if it turns out that neither Whirlpool nor Federated is subject to tax, then the issue of the facial constitutionality of the [Throw Out] Rule, an issue which under our jurisprudence I should address last and not first, becomes not as to those two plaintiffs. So, Ms. Brown, I'll hear from you first on that issue.
MS. BROWN: Thank you, Your Honor. Just very briefly, in the Director's papers, we noted that the plaintiffs, Federated and Whirlpool, did weave throughout their statement of the facts an intangibles contact argument with New Jersey and suggested that they were not, in fact, in New Jersey, or doing business in New Jersey, such that they would be subject to CBT Corporation Business Tax. We thus raised the point that if they are not within the context of the taxing statute, that they should not be heard with respect to the facial constitutionality. And, frankly, that's the sum and substance of the Director's argument on that point.
THE COURT: I guess the question I have for you is, since we're all here, why not hear from them and be done with it?
MS. BROWN: If we -- the Court is not -- respectfully, should not be issuing a declaratory judgment on this when we have two other taxpayers that are ripe or have standing in this matter. We say that that would clutter the record. Judge Hayser has the Federated matter. He can certainly deal with that. And, Your Honor, we can continue on with discovery and continue on in the normal course and deal with the Whirlpool case with Your Honor at a later date. It is not a question of using the resources of the Court at this juncture in the cases.
THE COURT: All right. Thank you. Mr. Frankel?
MR. FRANKEL: We are all here. And Your Honor, these complaints were filed before cert was denied to Lanco. So at that time, the Lanco issue was still alive. And now, for better or worse, Lanco is the law in New Jersey. So Federated, which is a trademark protection company like Lanco was, it's based in New Hampshire but it does get a royalty from an affiliated company, notwithstanding the fact that the royalties weren't deducted during the [Throw Out] years. It is not, I would say, constitutionally different from Lanco so I imagine it is ripe.
THE COURT: Well, are you conceding that or you're just --
MR. FRANKEL: Well, I would sure like to reserve a --
THE COURT: -- suggesting maybe?
MR. FRANKEL: Because I think the day is going to come, Your Honor I don't know if it will be now or in ten years from now but the U.S. Supreme Court is going to take this issue. And when they take it -- when they take it, I would just sort of like to have my rights reserved when that happens.
THE COURT: One would hope, Mr. Frankel, that these matters will be disposed of before ten years from now.
MR. FRANKEL: Well, who knows, Your Honor. On Whirlpool, it's a little different because the Whirlpool Properties Company, whatever they did, we think it took place in Michigan but I understand that, when you get to the proper interpretation or I would say the broad interpretation, whatever it is, of Lanco, there is a payment from the Whirlpool [Corporation] that's here in New Jersey which winds up with [Whirlpool] in Michigan. So I think that since cert was denied after the complaints were filed, for purposes of today's procedure, we are ripe and we should go forward with facial unconstitutionality. THE COURT: Well, but if you should establish . that you are not subject to taxation in New Jersey, then haven't I, as to [Whirlpool], rendered an advisory opinion?
* * *
MR. FRANKEL: . Whirlpool, although I'm slightly more optimistic, I think the realistic view is that Lanco is going to apply to Whirlpool so I think we should go forward with both cases.
* * *
THE COURT: All right. If the Whirlpool and Federated Matters were the only matters before me, I would think a lot more seriously about deferring hearing your motions, Mr. Frankel. But given the fact that we already have Pfizer and General Engines here, we might as well get the whole thing over with. So I will permit you to proceed.
[Transcript of Oral Argument at 4-9, Pfizer Inc. v. Dir., Div. of Taxation, 24 N.J. Tax 116 (Tax 2008).]
Pfizer, Inc. was the lead plaintiff in the case in which four corporations challenged the facial constitutionality of the Throw Out Rule. The other three corporations were General Engines Company, Inc.; Federated Brands, Inc.; and Whirlpool Properties, Inc.
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Although the court characterized the issue of Whirlpool's ability to proceed without conceding they were subject to tax in New Jersey as one of ripeness, this court finds the characterization was more appropriately one of standing, which is exactly what the Director has argued in the instant case. For the reasons stated above, this court is satisfied that Whirlpool has standing (and had standing in 2008) to challenge the Assessment. With respect to nexus, however, this court cannot find that Whirlpool conceded the point. In fact, Whirlpool appears to explicitly reserve its position that Lanco was inapplicable to the facts of its case. Based on the opinion in Pfizer Inc., supra, the court does not appear to have concluded that Whirlpool conceded nexus: "Plaintiffs Federated Brands, Inc. and Whirlpool Properties, Inc. also contend that they are not subject to taxation in New Jersey." Id. at 120. "Whirlpool Properties do[es] not challenge nexus for purposes of the summary judgment motions." Id. at 128 n.5 (emphasis added). Accordingly, this court finds that Whirlpool has not conceded nexus.
Second, the Director asserts that Lanco requires Whirlpool to pay tax in New Jersey. Lanco simply stands for the proposition that physical presence is not required to tax income received from intangible property. New Jersey may tax intangible income resulting from transactions taking place within New Jersey, such as a percentage of gross sales of trademarked goods, as was the state of affairs in Lanco and other similar cases. Lanco does not stand for the proposition that New Jersey may tax intangible income from transactions occurring outside the state of New Jersey, particularly if there is no constitutional basis to subject an entity to taxation.
Summary Judgment
Pursuant to New Jersey's Court Rule 4:46-2(c), a court shall grant a motion for summary judgment "if the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact challenged, and that the moving party is entitled to a judgment or order as a matter of law." R. 4:46-2(a) outlines the requirements in support of a motion for summary judgment:
The motion for summary judgment shall be served with briefs, statement of material facts and with or without supporting affidavits. The statement of material facts shall set forth in separately numbered paragraphs a concise statement of each material fact to which the movant contends there is no genuine issue together with a citation to the portion of the motion record establishing the fact or demonstrating that it is uncontroverted. The citation shall identify the document and shall specify the pages and paragraphs or lines thereof or the specific portions of exhibits relied on. A motion for summary judgment may be denied without prejudice for failure to file the required statement of material facts.
[Ibid.]
Summary judgment is appropriate where "a discriminating search of the merits in the pleadings, depositions and admissions on file, together with the affidavits submitted on the motion clearly shows not to present any genuine issue of material fact requiring disposition at a trial." Judson v. Peoples Bank and Trust Co., 17 N.J. 67, 74 (1954) (citation omitted). "The moving papers and pleadings are to be considered most favorably to the party opposing the motion. All doubts are to be resolved against the movant." Ruvolo v. Am. Cas. Co., 39 N.J. 490, 499 (1963); See also Seltzer v. Isaacson, 147 N.J. Super. 308, 312-313 (App. Div. 1977). "The papers supporting the motions are closely scrutinized and the opposing papers indulgently treated." Judson, supra, 17 N.J. at 75 (citation omitted).
"By its plain language, R. 4:46-2 dictates that a court should deny a summary judgment motion only where the party opposing the motion has come forward with evidence that creates a 'genuine issue as to any material fact challenged.'" Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 529 (1995). "That means a non-moving party cannot defeat a motion for summary judgment merely by pointing to any fact in dispute." Ibid. If the opposing party in a summary judgment motion offers
only facts which are immaterial or of an insubstantial nature, a mere scintilla, fanciful, frivolous, gauzy or merely suspicious, he will not be heard to complain if the court grants summary judgment, taking as true the statement of uncontradicted facts in the papers relied upon by the moving party, such papers themselves not otherwise showing the existence of an issue of material fact.A moving party must meet its burden of proof by a preponderance of the evidence. Brill, supra, 142 N.J. at 532.
[Judson, supra, 17 N.J. at 75 (citations omitted).]
After a careful review of the parties' submissions, the court concludes that neither party is entitled to summary judgment on the issue of nexus because material facts are in dispute. First, whether Whirlpool earned income properly attributable to New Jersey is a material fact. Whirlpool asserts that the royalty income in question was calculated based on an "arm's length ... determin[ation] by an independent appraisal of the Marks...." However, Whirlpool has not provided any information to support this position. In fact, Whirlpool argued that "[s]ales data and the arm's length nature of the license fees are not material to this motion." The court disagrees. Viewed in the light most favorable to the Director, it is possible that a portion of the license fee, which Whirlpool has attributed solely to manufacturing, should have been assigned to sales.
Second, whether Whirlpool had a physical presence in New Jersey or exercised control over Whirlpool Corporation's activities in New Jersey is a material fact. The plain language of Whirlpool's licensing agreement gives Whirlpool the right "to monitor and control the quality of any goods or services in connection with the Marks..."; "to inspect [Whirlpool Corporation's] places of business ... to assure compliance with [Whirlpool's] quality standards"; and "to examine all books and accounts of [Whirlpool Corporation] relating to the permitted use of the Marks.. " Whether Whirlpool exercised these rights, perhaps establishing nexus, is a factual dispute better resolved at trial. Therefore, Whirlpool is not entitled to summary judgment.
For the Director's motion to compel filing of the CBT returns, he must make a minimal showing that Whirlpool had nexus with New Jersey. Aside from a mere assertion, the Director has been unable to point to even a single dollar of income Whirlpool received from New Jersey sources. Additionally, the Director has been unable to demonstrate with any evidence that Whirlpool in fact asserted its contractual rights. Viewed in the light most favorable to Whirlpool, the Director has not demonstrated that Whirlpool has a substantial nexus with New Jersey.
Conclusion
For the reasons set forth herein, the court finds that neither party is entitled to summary judgment on the issue of nexus. Therefore, both Whirlpool's motion on the issue of nexus and the Director's motion to compel filing of CBT returns are denied without prejudice. Since the threshold issue of nexus cannot be decided at this time, the court need not reach Whirlpool's motion to define the application of the Throw Out Rule, which is also denied without prejudice. A copy the court's order reflecting the decision of this letter opinion is enclosed. Very truly yours, Hon. Vito L. Bianco, J.T.C. VLB/WIO:tms Encl.