AIRWORK SER. DIV., ETC. v. Director, Div. of Taxation

478 A.2d 729, 97 N.J. 290, 1984 N.J. LEXIS 2693

• Court: Supreme Court of New Jersey
• Decided: July 23, 1984
• Status: Published

Opinions

The opinion of the Court was delivered by

HANDLER, J.

Plaintiff, Airwork Service Division (Airwork or taxpayer) is in the business of repairing airplane engines. All repairs are made at Airwork’s facilities in New Jersey, and the repaired engines are then returned to customers, generally out of state. Defendant, Director, Division of Taxation (Director) notified Airwork in September 1973 of its intention to assess it for sales tax on services rendered between July 1, 1970 and June 30, 1973, under the New Jersey Sales and Use Tax Act, N.J.S.A. 54:32B-1 to -29 (Act). Airwork filed an appeal of the assessment with the Division of Tax Appeals in 1975, which was later heard by the Tax Court on cross-motions for summary judgment. The Tax Court held the assessment valid, granting the Director partial summary judgment. 2 N.J.Tax 329 (1981). Airwork appealed and the Appellate Division affirmed. We granted the taxpayer’s petition for certification. 93 N.J. 246 (1983).

I

The question that we first address is whether the underlying transactions are subject to the sales tax under the terms of the Act.

N.J.S.A. 54:32B-3 imposes a sales tax on the sale of tangible personal property and on the performance of certain services. N.J.S.A. 54:32B-2(f). The repair of airplane engines is a service covered by the Act. N.J.S.A. 54:32B-8.35. The taxpayer stresses, however, that while the repair services on these airplanes are rendered in New Jersey, the engines are later returned to out-of-state customers. It is contended that because the sale occurs at the place of delivery, the services should be deemed to have been sold or completed at the site to which the returned property is delivered. The taxpayer points to provisions of the Act that treat the sale of goods and services equivalently, e.g., N.J.S.A. 54:32B-2(i) (defining “vendor”). Because the Act intends to tax only sales made within New Jersey, the argument continues, the Legislature cannot have intended to tax services performed on goods to be delivered to customers in other states.

This argument is not persuasive. It assuredly does not attain constitutional dimensions. In Evco v. Jones, 409 U.S. 91, 93, 93 S.Ct. 349, 350, 34 L.Ed.2d 325, 328 (1972), the Court distinguished between a “tax * * * validly imposed on the service performed in the taxing State,” and “a tax levied on the gross receipts from the sales of tangible personal property in another State,” holding only the latter unconstitutional. Notwithstanding that the Legislature may have treated goods and services similarly for most purposes, it is entirely possible that it recognized the difference between the place where the finished product is delivered and where services upon it are rendered, in terms of subjecting services to taxation in a case such as this. See Fisher-Stevens, Inc. v. Director, Div. of Taxation, 121 N.J.Super. 513 (App.Div.1972), certif. den., 62 N.J. 575 (1973).

The critical issue is whether the Legislature intended to tax services such as those performed by Airwork. In looking first to the statutory language as such, we are struck by the fact that the services performed in New Jersey on goods delivered out of state are not specifically exempted from the application of the Act. N.J.S.A. 54:32B-3(b)(2). We have recently acknowledged, in a somewhat variant context, that such exemptions, if they are present, must be narrowly and strictly construed and, if not clearly applicable, the underlying transaction must be amenable to the tax. See Metpath v. Director, Div. of Taxation, 96 N.J. 147 (1984) (provision of Act exempting from tax all catalysts “that do not become a component part of finished product” is limited to chemicals used to produce tangible personal property); Tuscan Dairy Farms, Inc. v. Director, Div. of Taxation, 4 N.J.Tax 92 (1982).

The Tax Court here determined that the Act’s failure to include an exemption from the sales tax of services to property delivered out of state was purposeful. 2 N.J.Tax at 345. Such an exemption was expressly contained in the New York Sales and Compensating Use Tax Laws, § 1101 et seq. (McKinney 1979), which served as a model to the New Jersey Act. “Where the Legislature adopts a new law, using as a source a statute theretofore enacted in another jurisdiction, but omits a provision of the source statute, the omission is construed as being deliberate.” 2 N.J.Tax at 346. Clearly, the rendition of services in conjunction with the delivery of products out of state is not uncommon. E.g., Fisher-Stevens, Inc., supra, 121 N.J.Super. 513. Accordingly, we adopt the Tax Court’s conclusion that the Legislature purposefully chose not to exempt these services. See Evco v. Jones, supra, 409 US. 91, 93 S.Ct. 349, 34 L.Ed. 2d 325; see also Bank of America v. Webster, 439 F.2d 691 (9th Cir.1971).

The taxpayer, however, points to historical circumstance to support its contention. The Act was passed in 1966 to be effective July 1 of that year. On June 28, 1966 the Sales and Use Tax Bureau of the Division of Taxation issued a press release, containing questions and answers about the Act, that was published on July 11, 1966, in a commercial tax news service—Report 162 of the Commerce Clearing House New Jersey Tax Reports. The press release included the following statement:

Charges for repairs where the articles upon which the work is performed are delivered, upon completion, pursuant to contract, to a purchaser outside the State for use outside the State are exempt from the sales tax.

Airwork claims that this published statement is equated with an official policy adopted by the Division of Taxation. Nevertheless, the issue of the taxability of services performed for out-of-state customers was being actively litigated. It was — or should have been — well known to similarly situated taxpayers that the Division of Taxation was vigorously taking the position that such services were taxable. The issue was finally resolved in 1972 by the decision of the Appellate Division in Fisher-Stevens, Inc., supra, 121 N.J.Super. 513, affirming the 1971 determination of the Division of Tax Appeals, Docket S.T. 109, which held that a company providing direct mailing services in New Jersey with materials sent chiefly to addresses in other states on behalf of out-of-state customers was subject to the sales tax for the services performed in New Jersey.

The taxpayer further notes that following the enactment of the statute, the Legislature failed to object to the Division’s “position,” ostensibly appearing in the 1966 press release. Air-work draws the conclusion that the Division’s policy therefore met with legislative approval and conformed to the Legislature’s intent. In general, the legislative attitude towards enacted legislation is a marginal tool of interpretation, even under the most propitious circumstances. 2A Sutherland, Statutory Construction § 48.06 (4th ed. 1972). The generally limited usefulness of coupling administrative practice with legislative inaction to extrapolate legislative intent is further reduced when the agency attitude itself is unofficial and equivocal. As the Division points out, the earlier press release was never officially approved or even authenticated as an official pronouncement. Further, to the extent there were any officially endorsed statements on this subject matter, these were set forth in the general instructions accompanying the official tax returns. The instructions did not authorize or permit the exclusion of services performed on goods delivered outside New Jersey. Moreover, following its successful litigation of the issue in 1972, the Division affirmatively sought to dispel the possible confusion generated by the earlier press release by specifically stating, in two separate issues of State Tax News, a bi-monthly newsletter published by the Division itself, that the sales tax did apply to repair services performed in New Jersey, regardless of where the repaired property was to be delivered.

We note that courts have acknowledged that “the practical administrative construction of a statute over a period of years without interference by the Legislature is evidence of its conformity with the legislative intent and should be given great weight by the courts.” Automatic Merchandising Council v. Glaser, 127 N.J.Super. 413, 420 (App.Div.1974) (interpreting Sales and Use Tax Act); see Malone v. Fender, 80 N.J. 129 (1979). Nevertheless, the court will consider this factor only when it is not satisfied that the Legislature’s intent cannot otherwise be determined by a critical examination of the purposes, policies, and language of the enactment. When such circumstances point strongly to the imputation of a particular legislative intent, they may not be outweighed or overcome simply by a countervailing administrative practice. See Fedders Corp. v. Director, Div. of Taxation, 96 N.J. 376 (1984) (language, purpose, and policy of “indebtedness” clause in New Jersey Corporation Business Tax Act evidenced legislative intent to exclude bona fide debt owed to affiliated corporation, notwithstanding contrary administrative interpretation that was itself confirmed by administrative rule and longstanding, uniform agency practice); Mobay Corp. v. Director, Div. of Taxation, 96 N.J. 407 (1984) (same).

We conclude, therefore, that the Act authorizes the imposition of a sales tax on the performance of services rendered in the state on goods to be delivered to customers outside the State.

II

The Division made no attempt to collect taxes on taxpayer’s repair work during the early years of the sales tax, despite its having audited plaintiff’s books during the summer of 1967. Because the taxpayer assertedly relied on the Division’s previous position, it argues that the tax assessment against it is improper.

This argument is analogous to one based on principles of equitable estoppel. In New Jersey Turnpike Auth. v. Washington Tp., 137 N.J.Super. 543, 552 (App.Div.1975), aff’d o.b., 73 N.J. 180 (1977), the court remarked that “the application of principles of estoppel [is] particularly inappropriate where the collection of taxes by a public body is involved, except in unusual circumstances.” See also Bayonne v. Murphy & Perrett Co., 7 N.J. 298 (1951) (taxing authority is not bound or estopped by unauthorized acts of its officers). In Skulski v. Nolan, 68 N.J. 179, 198 (1975), this Court recognized that “the concept of estoppel is not applied as readily against the public as against private persons.” Id.; see Zigmont v. Bd. of Trustees, Teachers’ Pension & Annuity Fund, 91 N.J. 580 (1983). The issue thus becomes whether the circumstances of this case warrant the unusual remedy of estopping the government from collecting taxes because the taxpayer has assertedly relied on earlier statements by the taxing authority.

A number of cases in other jurisdictions have refused to allow an estoppel against a taxing authority. E.g., Crane Co. v. Arizona State Tax Comm’n, 63 Ariz. 426, 163 P.2d 656 (1945), overruled on other grounds sub nom. Duhame v. State Tax Comm’n, 65 Ariz. 268, 179 P.2d 252 (1947); Market Street Ry. Co. v. California State Bd. of Equalization, 137 Cal.App.2d 87, 290 P.2d 20 (Dist.Ct.App.1955); La Societe Francaise v. California Employment Comm., 56 Cal.App.2d 534, 133 P.2d 47 (Dist.Ct.App.1943). The application of this equitable doctrine is extremely fact-sensitive. The Division stresses that Airwork has not demonstrated actual or reasonable reliance on any definitive official conduct on the part of the Division. As noted, no express exemption is provided by the Act itself. The press release, published in a private, commercial tax news service, was not shown to be an official statement or pronouncement. In addition, according to the Division, that release contained inaccuracies and outdated information, suggesting a lack of reliability. See Iowa Movers & Warehousemen’s Ass’n v. Briggs, 237 N.W.2d 759 (Iowa 1976) (taxing authority not estopped from imposing tax contrary to past enforcement-policy when taxpayer failed to prove actual reliance); see also Dixon v. United States, 381 U.S. 68, 72-73, 85 S.Ct. 1301, 1304-1305, 14 L.Ed.2d 223, 227 (1965) (Commissioner may retroactively correct mistakes of law in application of tax laws to particular transactions, even where taxpayer may have relied to his detriment on past practice). Also, the Division, in active litigation, asserted the taxability of such transactions. Fisher-Stevens, Inc., supra, 121 N.J.Super. 513. Moreover, the official instructions accompanying the sales tax returns did not mention or recognize any exemption for services provided out-of-state customers.

Both Airwork and amicus Consumer Bureau, Inc., rely on cases from other jurisdictions in which courts have not permitted taxing authorities to change or modify their position. However, many of these cases involve the power to apply new regulations retroactively, see, e.g., Illinois Bell Tel. Co. v. Allphin, 95 Ill.App.3d 115, 50 Ill.Dec. 739, 419 N.E.2d 1188 (1981); Appeal of Denman, 120 N.H. 568, 419 A. 2d 1084 (1980); Department of Revenue v. Family Hosp., Inc., 105 Wis.2d 250, 313 N.W.2d 828 (1982); Hercules Powder Co. v. State Bd. of Equalization, 66 Wyo. 268, 208 P.2d 1096 (1949), reh’g denied, 66 Wyo. 309, 210 P.2d 824 (1948). The instant case appears to involve the converse situation, namely, the application of the controverted tax to cover previous tax years is in accord with the enabling tax statute, consistent state fiscal concerns, and legislative policy.

The Legislature presumably has been long aware of the issues implicated in the taxability of services performed for out-of-state customers. In 1974, the Legislature passed A. 1628, designed to exempt from taxation repair work on tangible property delivered to out-of-state customers. This bill was vetoed by the Governor, whose veto message explained:

I strongly believe that such an amendment would represent a substantial and excellent step forward in reforming the present business tax structure that now plagues the economy of this State. However, I cannot overlook the fact that enactment of such an amendment may result in the loss of approximately $5 million in tax revenue for the State. During this time of fiscal crisis, it would be irresponsible for me to allow such an amendment to become law without having the ability to recoup the loss through another revenue raising device.

A similar bill was finally enacted in 1977. L.1977, c. 54, N.J.S.A. 54:32B-3(b)(5) (as amended). The committee statements accompanying both bills reflect legislative disapproval of a tax on such services, as it would impose hardship on New Jersey businesses, some of which may have relied on the Division’s earlier failure to impose the tax. It is more significant, however, that in enacting L.1977, c. 54, the Legislature itself did not choose to apply the statutory exemption retroactively. Further, the Governor’s veto in 1974 of previous legislation reinforces the policy that a retroactive recognition of the exemption for such services would be contrary to public policy.

Other states have announced a per se rule against estopping the government from collecting taxes. See, e.g., State v. Maddox Tractor & Equip. Co., 260 Ala. 136, 69 No. 2d 426 (1953); Claiborne Sales Co., Inc. v. Collector of Revenue, 233 La. 1061, 99 So. 2d 345 (1957); Henderson v. Gill, 229 N.C. 313, 49 S.E.2d 754 (1948) (in collection of sales tax, error of an administrator should not serve to redistribute tax burden as imposed by the Legislature). We conclude, under the circumstances of this case, that when a sales tax statute specifically provides for the taxation of particular transactions and does not explicitly provide for the tax exemption of such transactions, estoppel should not generally be available to a subject taxpayer. The strong public and governmental interest in the collection of the tax imposed by the Legislature will usually outweigh the asserted reliance by a taxpayer, especially when such reliance is claimed to be based on unofficial statements and equivocal administrative inaction.

In summary, we hold that principles of equitable estoppel or similar considerations do not prevent the collection of the sales taxes against the taxpayer as determined by the Director.

III

Airwork argues that before changing its position, the Division was obliged to follow the procedures of the Administrative Procedure Act (APA) N.J.S.A. 52:14B-1 to -15, governing the promulgation of administrative rules. The Tax Court concluded, however, that the Division’s tax assessment did not constitute rule-making and therefore was not subject to the APA. 2 N.J. Tax at 340-41. While N.J.S.A. 54:32B-24(1) gives the Division the power to make rules, the Director, under N.J.S.A. 54:32B-24(6), has the power “[t]o assess, determine, revise and readjust the taxes imposed by this act.” The Tax Court held that in assessing the tax against Airwork, the Division was acting pursuant to this power. The Appellate Division affirmed the Tax Court. We agree.

N.J.S.A. 52:14B-2(e) defines an administrative agency “rule” as follows:

“Administrative rule” or “rule,” when not otherwise modified, means each agency statement of general applicability and continuing effect that implements or interprets law or policy, or describes the organization, procedure or practice requirements of any agency. The term includes the amendment or repeal of any rule, but does not include: (1) statements concerning the internal management or discipline of any agency; (2) intraagency and interagency statements; and (3) agency decisions and findings in contested cases.

If an agency determination or action constitutes an “administrative rule,” then its validity requires compliance with the specific procedures of the APA that control the promulgation of rules. Metromedia v. Director, Div. of Taxation, 97 N. J. 313 (1984).

We have considered the question of when a determination of the Division of Taxation imposing a tax assessment can appropriately be found to implicate agency rule-making, thereby necessitating conformity with the APA. We stated in Me-tromedia v. Director, Div. of Taxation, decided today:

[A]n an agency determination must be considered an administrative rule when all or most of the relevant features of administrative rules are present and preponderate in favor of the rule-making process. Such a conclusion would be warranted if it appears that the agency determination, in many or most of the following circumstances, (1) is intended to have wide coverage encompassing a large segment of the regulated or general public, rather than an individual or a narrow select group; (2) is intended to be applied generally and uniformly to all similarly situated persons; (3) is designed to operate only in future cases, that is, prospectively; (4) prescribes a legal standard or directive that is not otherwise expressly provided by or clearly and obviously inferable from the enabling statutory authorization; (5) reflects an administrative policy that (i) was not previously expressed in any official and explicit agency determination, adjudication or rule, or (ii) constitutes a material and significant change from a clear past agency position on the identical subject matter; and (6) reflects a decision on administrative regulatory policy in the nature of the interpretation of law or general policy. These relevant factors can, either singly or in combination, determine in a given case whether the essential agency action must be rendered through rule-making or adjudication.

[ 96 N.J. at 331.]

In this ease, applying the Metromedia standards, we are satisfied that the Director’s assessment was not invalid for want of an authorizing rule or regulation. Here, the taxability of these services is sufficiently clearly and directly inferable from the tax statute itself, especially in the absence of a specific exemption. See discussion, supra at 320-323. Further, it has not been demonstrated that the determination represents a material and significant change in administrative policy, even though for several years the taxing authority did not impose the tax. Past policy was itself equivocal, was not officially endorsed, and was not definitively settled. Further, it seems clear that the agency action properly applies retroactively to this particular case and could be applied to similarly situated taxpayers. Finally, the broad fact-finding and informational procedures typical of rule making are not warranted in this case in order to buttress the soundness of the determination or to assure fairness to individual litigants. In terms of the actual assessment, Airwork had every opportunity to challenge with countervailing proofs the application of the tax. Each taxpayer to whom the tax is sought to be imposed will similarly be free to contest the application of the tax to its operations. Accordingly, we conclude that the Director had the authority in this case to proceed by way of adjudication.

IV

We acknowledge that constitutional issues have been asserted at various stages of this litigation, some by the taxpayer and some by amicus. These issues were not determined by the courts below. We note these issues, but in the absence of their consideration by the lower courts, and without a sound and complete record to demonstrate their viability, decline to address them.¹ The taxpayer also argues that the assessment applies only to the cost of labor, not to the cost of parts. This issue, however, was raised for the first time on appeal, and the Appellate Division declined to consider it. We similarly decline to deal with this issue, recognizing that the taxpayer may pursue this as well as its constitutional claims before an appropriate tribunal if it chooses to do so.

In conclusion, we hold that the tax assessment imposed on the taxpayer in this case is in accordance with the terms of the Act; it was permissibly imposed on transactions for the years involved; and it does not in the circumstances presented constitute invalid rule-making.

Accordingly, the judgment below is affirmed.

1 The taxpayer asserts that goods sold and delivered to out-of-state customers are immune from taxation under the federal Commerce Clause. It also makes an equal protection argument along these lines, questioning the rationality of such a distinction. Amicus American Civil Liberties Union of New Jersey argues that the retroactive imposition of the sales tax violates plaintiffs constitutional right to substantive due process under both federal and State constitutions.