New Jersey: Tax Court Addresses Scope of P.L. 86-272

The New Jersey Tax Court recently addressed whether a wholesale produce distributor was protected from taxation under P.L. 86-272 for the tax years at issue. The taxpayer sold and delivered produce to customers in New Jersey. At times, customers rejected the produce orders and either requested the product be returned before it was unloaded, or later had the taxpayer return to pick up the rejected goods. For one tax year at issue, the taxpayer sent trucks into New Jersey to pick up produce from a related entity. The taxpayer did not file corporation business tax (CBT) returns because it took the position that its activities were exempt under P.L. 86-272. After the Division of Taxation became aware of the taxpayer’s activities and issued a jeopardy assessment of CBT, the taxpayer filed CBT returns under the state’s amnesty program. The Division assessed additional CBT on the amnesty returns, and the taxpayer protested the assessments.

Before the tax court, the key issue was whether the taxpayer’s acts of accepting rejected produce caused the loss of P.L. 86-272 protection. The taxpayer argued that under a federal law, the Perishable Agricultural Commodities Act of 1930 (PACA), it was required to accept rejected produce within twenty-four hours of delivery, and this activity, therefore, was ancillary to the sale of produce and within the scope of P.L. 86-272 protection.  The court determined PACA required wholesalers of produce to accept returns of produce that were rejected prior to being accepted by the purchaser. To the extent that the produce was returned on the taxpayer’s trucks prior to being accepted by the purchaser, it was the court’s view that the act of returning the rejected produce was ancillary to the sale of the produce and was protected under P.L. 86-272.  However, when the taxpayer later picked up produce after it had been accepted by the buyer, this activity was not required by PACA and was not protected by P.L. 86-272 as it was not an activity ancillary to the sale of produce.  While the taxpayer’s activity of sending trucks to pick up accepted, but later rejected, product was not protected under P.L. 86-272, the vast majority of the produce returned was rejected prior to the orders being accepted by the purchasers and did not need to be picked up. As such, the court concluded this activity was de minimis and therefore fell within the exception in P.L. 86-272 for unprotected activities that are de minimis. Lastly, the court determined that for the 2007 tax year, in addition to taxpayer’s de minimis unprotected activities, the taxpayer had its drivers regularly and systematically pick up tomatoes from a related entity in New Jersey. This activity was not ancillary to the sale of produce and when combined with its de minimis pickup actions, caused the taxpayer to exceed the scope of P.L. 86-272 for that year. The court rejected the Division’s position that the taxpayer’s use of pallets to deliver produce constituted ownership of property in New Jersey that would likewise cause the loss of 86-272 protection. It was demonstrated that ownership of the pallets remained with the pallet company at all times and were constantly being rotated between the taxpayer and others. As such, the taxpayer was subject to CBT for 2007 when it had the additional unprotected activity and was subject to penalties, including the post-amnesty penalty, for that tax year. For more information on Procacci Brothers Sales Corp. please contact James Venere.