Spencer Gifts, Inc. challenges a deficiency assessment under the New Jersey Sales and Use Tax Act, N.J.S.A. 54:32B-1 et seq., of $199,960.79 plus interest for the years 1974 through 1976, and the denial of refund claims in the amounts of $19,648.61, $29,116.90 and $24,019.53 for sales taxes paid for the years 1976, 1977 and 1978, respectively.
The challenge is based on the taxpayer's position that its purchase of certain printed materials is exempt from taxation as "wrapping paper," "wrapping supplies," "nonreturnable containers" or "labels" under the provisions of N.J.S.A. 54:32B-8(o), and that the rental of computer mailing lists by the taxpayer is exempt from taxation as the rental of intangible property or the purchase of a nontaxable service.
Plaintiff is a Delaware corporation with its principal place of business in New Jersey. For all periods related to this proceeding, plaintiff engaged in the business of selling merchandise by mail order to customers throughout the United States.
By his notice of assessment dated December 28, 1977, defendant notified plaintiff that he had made a deficiency assessment for the period of January 1, 1974 to December 31, 1976 of $399,045.92 as follows:
Sales/Use Tax $275,123.86
On March 10, 1978 a memorandum brief in support of plaintiff's protest against the notice of assessment and in support of the refund claim was filed with defendant. On March 22, 1978 plaintiff's representatives protested the conclusions reached in the notice of assessment at a hearing before a representative of defendant pursuant to N.J.S.A. 54:32B-19, and defendant issued his determination in the form of a letter to petitioner dated April 13, 1978. On April 20, 1978 plaintiff paid, by certified check in the amount of $335,021.47, the tax called for by the determination: $275,123.86, plus interest computed to April 20, 1978, $59,897.61. Plaintiff's representatives had been informed that, upon receipt of such payment, one-half of the interest and all of the penalty set forth in the determination would be waived by defendant. The letter accompanying payment filed on plaintiff's behalf stated that plaintiff's payment was being made under protest and that the present action would be brought.
Plaintiff's petition of appeal was filed with the Division of Tax Appeals on June 7, 1978. The matter was subsequently transferred to the Tax Court. N.J.S.A. 2A:3A-26. The plaintiff appealed defendant's determination dated April 13, 1978 with regard to the assessments for 1974, 1975 and 1976, and also appealed defendant's denial of its refund claims for 1976 and 1977. The petition claimed that the determination (a) erroneously holds plaintiff subject to use tax with respect to the purchase of mailing wrappers, and (b) erroneously holds plaintiff subject to use tax with respect to the rental of computer mailing lists.
On or about December 27, 1979 plaintiff filed a claim for a refund for 1978 in the amount of $24,019.53. The claim was denied by defendant's letter dated June 16, 1980. On July 8, 1980 plaintiff amended its petition of appeal, treated as a complaint in the Tax Court, to include an additional claim for refund of sales and use tax for 1978.
It is stipulated that plaintiff should recover $157,522.03 with respect to the advertising wrapper issue if it prevails on that issue. It is further stipulated that plaintiff should recover $158,715.27 with respect to the mailing list issue if it prevails on that issue.
The matter is before the court for disposition without trial on an agreed stipulation of facts, agreed exhibits and briefs submitted by each party in accordance with the pretrial order and R. 8:8-1(b).
With regard to the wrappers or mailing labels, the parties stipulated, in pertinent part, as follows:
1. During the calender years 1974 through 1976 plaintiff purchased certain printed paper for use as wrappers and mailing labels for its merchandise catalogs and to serve advertising and promotional purposes. The printed paper was referred to in the stipulation submitted to the court as "advertising wrappers" without any concession by defendant that the objects are wrapping paper, labels or nonreturnable containers under N.J.S.A. 54:32B-8(o), and without any concession by plaintiff that the objects are not wrapping paper, labels or nonreturnable containers under that section of the statute.
2. The advertising wrappers are tangible personal property with the following physical characteristics:
a. They are generally printed in black and white and in colors on both sides of 50 lb. offset paper.
b. They are printed two to a sheet. Sheets are 17" high and from 12 3/8" to 14 3/16" wide.
c. The advertising wrappers themselves are from 7 1/2" to 7 3/4" high and from 13 3/8" to 14 3/16" wide.
d. The width of the sheets and advertising wrappers depends on whether the wrapper has a flap and, if so, the width of the flap.
e. The sheets are perforated between wrappers and punched with sprocket holes on the right- and left-hand sides. The sprocket holes enable plaintiff to run the sheets through its computer-printer.
3. The advertising wrappers are printed with plaintiff's return address, a bulk rate postage permit imprint and promotional or advertising matter intended to increase the customers' response to plaintiff's catalogs.
4. Plaintiff runs the printed sheets through its computerprinter, which types the recipient's name and address and a "personalized" message on each advertising wrapper. The addressed and personalized advertising wrappers are separated along perforations and sent in bulk to plaintiff's catalog distributor in Illinois where they are wrapped around each catalog.
5. In accordance with Postal Service regulations, the catalogs, bearing the addressed advertising wrapper with a postage permit imprint, are entered as bulk third-class mail by plaintiff's catalog distributor at postoffices outside of New Jersey.
6. The advertising wrappers serve the following purposes:
a. They bear the customer's name and address and a bulk rate postage permit imprint to permit delivery of the catalogs by mail.
b. They are wrapped around and protect the catalogs from damage in transit.
c. They bear promotional or advertising matter intended to increase the customer's response to the catalogs.
7. The catalogs could be mailed without the advertising wrappers provided that an address label and a bulk rate postage permit imprint appeared on the outside of the catalog in accordance with Postal Service regulations.
8. Less than 8% of the advertising wrapper actually contains information necessary for the delivery of the catalogs by mail.
9. During the period 1974 through 1976 plaintiff purchased all of its advertising wrappers from two firms: Scanforms Co. and the Cyril Scott Company.
10. Plaintiff would incur less cost if it used small address labels with no promotional or advertising matter instead of advertising wrappers.
11. Plaintiff's catalogs are distributed free of charge to the recipients.
Submitted with the stipulation were five exhibits relating to the wrapper issue. Three of them are relevant: a typical advertising wrapper before being addressed, a typical advertising wrapper after being addressed, and a catalog with the wrapper attached. The two unattached wrappers are each 15 7/16" wide and 7 15/16" high. The width measurement includes sprocket holes on both edges of the wrapper. In addition to an address one wrapper contains messages directed to the addressee. The wrapper attached to the catalog is 14 1/2" wide and 7 3/4" high and is affixed to the catalog by being stapled to the spine of the catalog in the same manner in which all the pages and the cover of the catalog are stapled together. The sprocket holes had been removed. When attached to the catalog the wrapper is folded in such a way that it is approximately the same size as the catalog cover. The manner of folding results in three sheets, or six pages, two of which pages are at the back of the catalog, two at the front of the catalog, and two on a flap folded over at the front of the catalog. The address is on the back page in a space 5 3/8" wide and 2 15/16" high, which also contains the return address of the taxpayer and the bulk rate postage permit imprint. In addition, three of the six pages contain messages specifically directed to the addressee.
The New Jersey Sales and Use Tax Act, N.J.S.A. 54:32B-1 et seq. (hereinafter the act), imposes a tax upon "the receipts from every retail sale of tangible personal property," N.J.S.A. 54:32B-3(a), unless otherwise provided in the act. A retail sale is defined as "[a] sale of tangible personal property to any person for any purpose, other than... for resale either as such or as converted into or as a component part of a product produced for sale by the purchaser." N.J.S.A. 54:32B-2(e)(1). The tax is also imposed on advertising materials or services. N.J.S.A. 54:32B-3(b)(5). If the tax is not collected by the vendor, the Director may collect it from the purchaser. N.J.S.A. 54:32B-14(b). It is presumed that the sale of tangible personal property is subject to the tax, and the burden of proving an exemption is upon the person required to collect the tax or upon the customer. N.J.S.A. 54:32B-12(b).The fundamental approach of the act is that ordinarily all defined transactions shall bear their just and equal share of the public burden of taxation. As was said in Princeton Univ. Press v. Princeton Borough, 35 N.J. 209, 172 A.2d 420 (1961):
As the existence of government is a necessity, taxes are demanded and received in order for government to function. 51 Am.Jur., Taxation, § 9, p. 42. Statutes granting exemption from taxation represent a departure and consequently they are most strongly construed against those claiming exemption. [Citation omitted] The burden of proving a tax-exempt status is upon the claimant. [at 214]
Plaintiff contends that the item referred to in the stipulated facts as a wrapper or mailing label is not taxable because it is a mailing wrapper exempt from taxation pursuant to N.J.S.A. 54:32B-8(o), now N.J.S.A. 54:32B-8.15, and hereinafter referred to as section (o). This section provides that receipts from certain transactions are exempt from tax under N.J.S.A. 54:32B-3(a) and N.J.S.A. 32B-6 as follows:
(o) Sales or use of wrapping paper, wrapping twine, bags, cartons, tape, rope, labels, nonreturnable containers, reusable milk containers and all other wrapping supplies when use is incidental to the delivery of any personal property.
Plaintiff claims that its wrapper qualifies as "wrapping papers," "labels," "nonreturnable containers" and "wrapping supplies" because it is wrapped around the catalog and serves as a mailing label and that it is of no consequence that only 8% of the wrapper contains mailing information, for the item can qualify as a label whether it consists of a simple name and address or a more elaborate device such as plaintiff's. Plaintiff contends that the wrapper is not taxable as advertising matter under N.J.S.A. 54:32B-3(b)(5) even though it contains promotional material thereon. It claims that the fact that the wrapper serves a dual purpose does not preclude exemption under section (o), for the statute does not require that the wrapper be "exclusively used" or used "solely for" the delivery of personal property. Plaintiff also asserts that the wrapper is not disqualified from exemption by reason of the fact that the catalog is distributed without charge. The exemption provision only requires "delivery" and not a sale of the personal property.
Defendant responds that the printing and advertising services incurred for the production of the mailing wrapper are taxable under N.J.S.A. 54:32B-3(b)(5). Defendant also contends that the principal use of the mailing wrapper is determinative of its character. He asserts that its principal function is of a promotional nature, rather than as a label or a wrapper, and therefore it does not qualify for the exemption under section (o). He concedes that this section does not impose an exclusivity test, but claims that it does require that the item have as its principal function one of the enumerated uses in the section. Defendant further contends that since the catalogs are distributed without charge, the exemption provision does not exempt the wrapper, for it only exempts labels, wrappers and similar items when their use is incidental to the sale of personal property.
In ascertaining the meaning of a statute, the language employed should be given its ordinary and common significance. Lane v. Holderman, 23 N.J. 304 [129 A.2d 8] (1957). It is to be recognized, however, that "words are inexact tools at best, [and] resort may freely be had to the pertinent constitutional and legislative history for aid in ascertaining the true sense and meaning of the language used." Lloyd v. Vermeulen, 22 N.J. 200, 206 [125 A.2d 393] (1956). In brief, the term [being considered] must be understood in its usual significance and in a manner which will sensibly effectuate the salient statutory objective.... [at 536, 537, 246 A.2d 178]
The words "wrapping paper," "labels," "nonreturnable containers" and "wrapping supplies" in the exemption provision of the act must therefore be understood in their usual significance and in a manner which will sensibly effectuate the salient statutory objective of insuring that all ...