NJ: Tax Court Rules in Favor of Division in Sales Tax Sourcing Dispute

A recent, unpublished New Jersey Tax Court opinion illustrates the importance of keeping good records. The case involved two retailers with home offices in New Jersey. Both retailers had locations throughout the U.S. and Canada. The retailers purchased printed advertising materials from a New Jersey-based printer. The invoices issued by the printer showed a New Jersey address as the “ship to” address, and New Jersey sales tax was paid on the materials. Later, the retailers requested sales tax refunds from the Division on the basis that the printed materials were shipped to store locations all over the U.S. and Canada and therefore New Jersey sales tax should not have been charged on the full amount. After the Division of Taxation denied the refunds, the matter made its way to the New Jersey Tax Court.

The key issue before the court was lack of evidence to establish that the printed materials were shipped by a common carrier or shipping company to the various store locations. An executive from the printing company testified that the materials were packaged individually at the printer’s location, that work orders were provided by the retailers directing each separate shipment, and that the packages were picked up at the printer’s location by a “trucker.” However, it was unclear from the testimony and the records provided to the court whether the trucker was an employee of the retailers or a common carrier/ shipping company. This determination was central to the outcome, as the goods would be subject to New Jersey sales and use tax in the first instance and would not be in the second instance.  In the court’s view, the retailers did not present sufficient evidence for the court to rule on the matter as a motion for summary judgment. The retailers presented a spreadsheet purportedly downloaded from a common carrier as support for their position, but the court noted it only covered a six month period (the refund was for a five year period) and was not made in the regular course of the reatilers’ business because it was downloaded. As such, the court ruled the spreadsheet could not be used as support for the refund. The taxpayers also argued that the court should apply the principles of the SSUTA’s sourcing provisions for direct mail. Under the SSUTA rule, the retailers could present “any reasonable, but consistent and uniform, method of allocation that fairly represents the state and local jurisdictions where delivery or distribution was made to recipients.”  The court rejected this argument because the printed materials were not “direct mail,” and there was no indication that New Jersey had adopted the elective direct mail sourcing provisions.  Because the matter was going to trial, the court declined to address the Division’s concerns that the retailers had delayed their refunds claims until the statute of limitations had expired in the other states in which use tax would have been due. Please contact Mike Kenny at 212-872-3414 with questions on this decision.