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International Business Machines Corp. v. State

Decided: April 23, 1976.


Lynch, Larner and Horn. The opinion of the court was delivered by Larner, J.A.D.


This case is one of first impression involving the construction and application of the Retail Gross Receipts Tax Act of 1966. N.J.S.A. 54:11C-1 et seq.

Plaintiff International Business Machines Corporation (IBM) filed a tax return for the year 1967 pursuant to said act and paid to the State of New Jersey a tax of $20,219.80. Thereafter it filed a claim for refund, contending that its business operations in New Jersey were not encompassed by the gross receipts tax. Upon denial of the refund by the Director of the Division of Taxation, IBM appealed to the Division of Tax Appeals.

After a plenary hearing the judge of the Division rendered an opinion determining that IBM was not subject to the tax. This opinion was approved by the Division of Tax Appeals and an appropriate judgment entered directing the Division of Taxation of the State Department of the Treasury to refund the tax. The State appeals from that judgment.

The retail gross receipts tax is an excise tax imposed upon the owner of a "retail store" computed at the rate of 1/20 of 1% of annual gross receipts from "retail store sales" in excess of $150,000.*fn1 The focus of this litigation is whether the modus operandi of the IBM business activities in the State of New Jersey is such as to fall within the statutory definition of a retail store. N.J.S.A. 54:11C-2. It is therefore essential to examine the factual background of IBM's sales methods as developed by the relatively undisputed evidence in the record below.

IBM manufactures all the products and equipment which it sells. It merchandises the sale and distribution of its products through three divisions. The Data Processing Division manufactures and markets various types of information handling systems, related equipment and services; the Information Records Division manufactures and markets processing cards, business forms, magnetic tapes and other products used in information and data processing systems; and the Office Products Division manufactures and markets typewriters, dictation equipment, copying equipment and related supplies.

The company maintains 12 branch offices in the State of New Jersey, all of which generally function in the same manner. Each office is used as a center of administration and as a home base for a group of sales personnel assigned to the territory encompassed by that branch office. The sales representatives have desks therein where they perform the necessary paper work to carry out their functions. The company employs a large number of trained sales and engineering personnel who develop sales primarily by contacting and servicing customers and potential customers at their respective business locations. These contacts are supplemented by telephone calls or mail emanating from the branch offices.

In addition to serving as a base for outside salesmen, the branch office also serves other uses in the marketing function. New sophisticated systems are on display for demonstration to interested prospects and their employees, who are invited by the sales personnel to inspect the same and determine whether they are appropriate for their needs. From time to time these branch offices are also used for meetings and seminars to educate prospective customers on new concepts and equipment in information processing.

In order to maintain good will, as an accommodation for customers, the branch offices keep on hand a supply of small sales products such as business forms, typewriter ribbons, magnetic tapes, typewriter elements and similar items

which are sold and picked up at the branch offices by salesmen or customers. These sales constitute only 3/10 of 1% of the total sales in the State. Other than these minor supplies there is no inventory of equipment or products maintained at the branch offices. Nor is there a regular pattern of sales over the counter to persons who come off the street. In fact, there is no cash register or sales counter in any of the offices, nor a clerk assigned to handle such sales.

The sales made by the salesmen are usually consummated at the purchaser's place of business, although some transactions are closed at the branch offices. Billing is done exclusively from division headquarters. The equipment or supplies are then shipped from one of the manufacturing ...

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