On appeal from final judgment of the Tax Court of New Jersey reported at 4 N.J. Tax 349 (Tax Ct. 1982).
Michels, King and Dreier. The opinion of the court was delivered by Dreier, J.A.D.
The Director of the Division of Taxation has appealed from an adverse determination by the Tax Court, reported at 4 N.J. Tax. 349 (1982), thwarting the defendant's efforts to tax the income received by plaintiff from loans made through its Pennsylvania offices to New Jersey residents. This case requires an analysis of the Corporate Income Tax Act, N.J.S.A. 54:10E-1 et seq., and of the Commerce Clause, U.S. Const. Art. 1, § 8 and the Due Process Clause, U.S. Const. Amend. XIV, § 1. The Tax Court judge held that the imposition of the tax based upon the New Jersey income received by plaintiff violated both Federal constitutional provisions. The amounts in controversy are small, $1,308.99 for plaintiff's fiscal year ending November 30, 1974, and $2,123.46 for plaintiff's 1975 fiscal year, but the legal principles are of broad application.
The facts, which have been stipulated pursuant to R. 8:8-1(b), are adequately set forth in the Tax Court opinion, 4 N.J. Tax. at 352-355, and will not be repeated here, except where necessary to explain our disagreement with the Tax Court.
The Tax Court judge in his comprehensive and well written opinion properly focused on the nexus between the activities of plaintiff in New Jersey and the disputed income received by plaintiff to determine whether the contact was substantial enough for taxing purposes. Just after the filing of the Tax Court opinion the United States Supreme Court decided ASARCO, Inc. v. Idaho State Comm'n, 458 U.S. 307, 102 S. Ct. 3103,
73 L. Ed. 2d 787 (1982), completing a trilogy of cases; see also Mobil Oil Corp. v. Comm'r of Taxes of Vermont, 445 U.S. 425, 100 S. Ct. 1223, 63 L. Ed. 2d 510 (1980) and Exxon Corp. v. Wisconsin Dept. of Revenue, 447 U.S. 207, 100 S. Ct. 2109, 65 L. Ed. 2d 66 (1980). These latter cases were distinguished by the trial court, 4 N.J. Tax at 360, and dealt in the main with the allocation of unearned income to various taxing states where earned income was generated, applying the "unitary-business principle." In discussing the application of state income tax, the U.S. Supreme Court in ASARCO, Inc. noted that it adhered to its previous statements of principles quoted in Mobil Oil Corp.:
The court there cited the income tax formula case of Moorman Mfg. Co. v. Bair, 437 U.S. 267, 98 S. Ct. 2340, 57 L. Ed. 2d 197 (1978), reh'g den. 439 U.S. 885, 99 S. Ct. 233, 58 L. Ed. 2d 201 (1978), the sales and use tax cases of National Bellas Hess, Inc. v. Dept. of Revenue State of Illinois, 386 U.S. 753, 87 S. Ct. 1389, 18 L. Ed. 2d 505 (1967), and Norfolk & Western R. Co. v. Missouri Tax Comm'n, 390 U.S. 317, 88 S. Ct. 995, 19 L. Ed. 2d 1201 (1968), reh'g den. 390 U.S. 1046, 88 S. Ct. 1633, 20 L. Ed. 2d 311 (1968) (noting that a state may attribute income for tax purposes only where it is rationally related to "values connected with the taxing State," 390 U.S. at 325, 88 S. Ct. at 1001. The trial judge here, although utilizing the standards set forth in these cases, failed to appreciate the minimum showing that a taxing district such as New Jersey would have to make as to the activities that would provide a basis for income taxation.
Before we examine each of plaintiff's specific activities within New Jersey, however, we must note that New Jersey does not employ the single-factor formula upheld in Moorman
Mfg. Co., but rather the more equitable three-factor formula which analyzes the activities of the taxpayer from the standpoints of its property, payroll and sales within the taxing state, rather than by sales or income alone. Thus, since New Jersey applies the more lenient of the two recognized methods of taxation, there is no inordinate effect on plaintiff of evaluating its New Jersey income where it has neither personnel nor property in the state.
Were there the "minimal connections" between the interstate activities of AVCO and New Jersey upon which the taxing power over the disputed income could rest? As the U.S. Supreme Court noted in National Bellas Hess, Inc. v. Dept. of Revenue State of Illinois, supra, 386 U.S. at 756, 87 S. Ct. at 1391. "[I]n determining whether a state tax falls within the confines of the Due Process Clause, the Court has said that the 'simple but controlling question is whether the state has given anything for which it can ask return.' Wisconsin v. J.C. Penney Co., 311 U.S. 435, 444, 61 S. Ct. 246, 249, 85 L. Ed. 267 . . ." The Court there stated that the test under the Commerce Clause and Due Process Clause is the same. We are attempting to find "'some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax.' Miller Bros. Co. v. Maryland, 347 U.S. 340, 344-345, 74 S. Ct. 535, 538-539, 98 L. Ed. 744 ; Scripto, Inc. v. Carson, 362 U.S. 207, 210-211 [80 S. Ct. 619, 621-622, 4 L. Ed. 2d 660] . . ." [386 U.S. at 756-757, 87 S. Ct. at 1391-1392].
Although the trial judge reached this correct issue, he did so only after an analysis of the situs of the receivables and a finding that "the income sought to be taxed was not earned in New Jersey in the constitutional sense." 4 N.J. Tax. at 359. He reasoned that the loans were physically made in Pennsylvania to the New Jersey residents, and the situs of the indebtedness "is the domicile of the ...