Plaintiff Rocappi, Inc., has appealed from a final determination of the Director of the Division of Taxation imposing a tax under the Corporation Business Tax Act of 1945, N.J.S.A. 54:10A-1 et seq.*fn1 Plaintiff argues that the Director improperly denied plaintiff the right to apportion part of its net income to other states, a reporting procedure by which plaintiff would have reduced its tax base allocable to New Jersey by more than 20%.
Plaintiff is a Pennsylvania corporation doing business in New Jersey. Its corporate headquarters are in Pennsauken, New Jersey, where its computer and other equipment are located. It is in the business of silk screen printing and computerized typesetting, and it manufactures multicolored textbook covers. All of plaintiff's commercial printing is done in and shipped from New Jersey where decisions to accept or to reject orders are made. Plaintiff is a subsidiary of the Lehigh Press, Inc. Lehigh Press is also a Pennsylvania corporation and it and its seven subsidiaries are collectively known as the Lehigh Graphics Group. The parent and all subsidiaries specialize in certain aspects of the printing business.
Plaintiff's witness, Louis Muracco, testified that prior to 1973 Rocappi had its own salesmen and that these salesmen sometimes made sales for other subsidiaries of Lehigh Press. When this occurred, the particular subsidiary for which the sale was made paid the salesman a commission. Thus, prior to 1973 Rocappi paid commissions to its own salespeople only when the sale was made for the benefit of Rocappi. In 1973 Lehigh Press put into effect a new sales concept which involved the formation of a corporate sales group. The purpose of this group was to market all of the services offered by Lehigh Press and its subsidiaries. To that end the group operated a sales office in Palo Alto, California, beginning in 1973, and a sales office in Boston, Massachusetts, beginning in 1974. Both sales offices continued to exist through 1975.
In 1973 the sales office in California was staffed by a man named Harold Nesbitt who was the first salesman to operate under the corporate group sales concept. Nesbitt and his successor sold services and products for all of the entities in the Lehigh Press Group. When he sold something on behalf of Rocappi, Rocappi paid a preset "parent company commission" to Lehigh Press. All of the other subsidiaries did the same when something was sold for them. The parent company commission consisted of a percentage of any specific sale and was intended to include not only the remuneration of the salesman but also payment of expenses associated with a particular sale. The expenses paid encompassed rental of office space, purchase of office supplies and payment of certain payroll taxes. Expenses were apportioned among the subsidiaries based upon the volume of sales made for each entity. After parent company commissions had been calculated and paid, a monthly salesman's profit and loss statement was prepared. The amount of the parent company commissions represented the income figure on this statement. From the income figure, all expenses built into the parent company commissions were subtracted, including office, salary, payroll tax and benefits. The result was referred to as disposable income, 20% of which was retained by corporate headquarters to defray any costs of those groups not covering their costs. Of the remaining 80% of the disposable income, 20% went to the manager of the particular sales office and the rest was distributed among the other salesmen in that office. Since the Palo Alto office was staffed with only one person at the time, that person received 80% of the disposable income. Muracco testified that the initial expense for opening the California office was borne by the parent company, Lehigh Press, which had no products or services itself to sell. After initial expenses, all costs were covered by parent company commissions unless disposable income on the profit and loss statement was actually a disposable loss. When a disposable loss occurred the parent company covered the loss by use of disposable income kept from other parent company commissions.
Plaintiff's salesman Nesbitt did not keep regular hours at the California office, although he lived in California. His successor in 1975 did not live in California and spent only about one week each month at the California office. The office had an answering service to take messages when the salesmen were not there. Plaintiff's Boston office was operated in much the same way as the California office, both of which were located in office buildings. However, the Boston office had three salesmen and a full-time secretary. The phone number for both offices was in the name of Lehigh Press. The name Lehigh Press appeared on the floor directories of both the California and Massachusetts office buildings; the name Rocappi did not appear on the building exteriors, the floor directories or the office doors. Nesbitt's employment contract was with Lehigh Press and business cards carried by Nesbitt identified him as a salesman for "The Lehigh Graphics Group," although the name of Rocappi appeared on the back of the card along with the names of the other group members.
Muracco testified that the salesmen were often out of their offices calling on potential customers, but customers also visited the offices on occasion. Each office was furnished with promotional literature and work samples from all of the subsidiaries and each salesman was trained by each subsidiary so that he was familiar with their various services and products. Although Lehigh Press hired all of the office managers, who in turn hired other personnel for each office, the subsidiaries had some influence on hiring, firing and job performance ratings.
During the years in issue Rocappi paid corporate franchise tax to California based upon apportionment to California of less than 2% of its income. In its California tax returns Rocappi reported no inventory, buildings, machinery, equipment, furniture, fixtures, delivery equipment or other tangible assets as being owned or rented by it in California. It also reported no wages, salaries, commissions or other compensation for employees within California. Rocappi was not qualified to do business in Massachusetts and paid no taxes there. On its New Jersey tax returns for 1973, 1974 and 1975 Rocappi reported that it had one out-of-state place of business.
Plaintiff contends that it maintained regular places of business in California and Massachusetts during the years in question. It argues that pursuant to N.J.S.A. 54:10A-6 it should be able to apportion part of its net income to those states for franchise tax purposes. Plaintiff further contends that if it cannot take advantage of the apportionment provision found in N.J.S.A. 54:10A-6, New Jersey's franchise tax would be imposed on net income susceptible to franchise taxation elsewhere. Plaintiff contends that this multiple taxation, or the possibility of multiple taxation, is prohibited by the Commerce Clause. The issues presented by this litigation, therefore, are whether plaintiff maintained regular places of business outside of New Jersey within the meaning of N.J.S.A. 54:10A-6 during the years at issue and, if not, whether plaintiff's inability to apportion some of its net income to California and Massachusetts for franchise tax purposes is violative of the Commerce Clause.
The corporation business tax applies to domestic and foreign corporations "for the privilege of having or exercising their corporate franchise in this State, or for the privilege of doing business, employing or owning capital or property, or maintaining an office, in this State." N.J.S.A. 54:10A-2. The tax is computed by adding together prescribed percentages of a tax-payer's net worth and net income. N.J.S.A. 54:10A-5.
N.J.S.A. 54:10A-6, the statute at issue in the present case, provides that a taxpayer "which maintains a regular place of business outside this State other than a statutory office" may allocate as much of its net worth and its net income as applies to these regular places of business outside New Jersey. That statute further provides for a method of calculating an "allocation factor" to be used in conjunction with the formula found in N.J.S.A. 54:10A-6. However:
In the case of a taxpayer which does not maintain a regular place of business outside this State other than a statutory office, the allocation factor shall be 100%.
Thus, if plaintiff in the present case did not maintain a regular place of business outside of New Jersey, it must allocate 100% of its net worth and net income to New Jersey for purposes of franchise taxation. The initial issue, therefore, is what constitutes a "regular place of business."
In N.J.A.C. 18:7-7.2(a) the Director of the Division of Taxation has defined "regular place of business" as follows:
A regular place of business is any bona fide office (other than a statutory office), factory, warehouse, or other space of the taxpayer which is regularly maintained, occupied and used by the taxpayer in carrying on its business and in which one or more regular employees are in attendance.
In the present case defendant contends that since plaintiff did not itself "regularly maintain" the offices in California and Massachusetts and since the salesmen in both offices were not regular employees of plaintiff, plaintiff cannot allocate any part of its net worth or net income to California or Massachusetts. Defendant further argues that the operations in California and Massachusetts should not even be considered as "offices" within the meaning of the above rule, since plaintiff failed to establish that they met the definition set forth in the Director's regulation.
In response, plaintiff states that a regulation like a statute must be interpreted with an eye toward effectuating the Legislature's intent. Although plaintiff admits that employees were not always "in attendance" at the California office, it contends that this requirement was merely gloss placed upon the statute by the Director as a result of a policy decision and that the Director's gloss is inconsistent with legislative intent.
In Hoeganaes v. Director of Division of Taxation, 145 N.J. Super. 352, 367 A.2d 1182 (1976), the Appellate Division of the New Jersey Superior Court construed the meaning of the words "maintain a regular place of business outside this State." In that case, a company which maintained its principal office and factory in New Jersey wished to allocate part of its net worth and net income to six states where it had located sales engineers to service customers' complaints, receive orders and assist in the solution of customers' manufacturing problems. These engineers were full-time, regular employees of the ...