On certification to the Superior Court, Appellate Division.
For affirmance -- Chief Justice Wilentz and Justices Clifford, Schreiber, Handler, Pollock, O'Hern and Garibaldi. For reversal -- None. The opinion of the Court was delivered by Schreiber, J.
[96 NJ Page 149] Plaintiff, Metpath, Inc., commenced this action in the Tax Court against the Director, Division of Taxation, contesting deficiency assessments of $279,188 plus interest of $176,314 imposed under section 54:32B-3 of the Sales and Use Tax Act, N.J.S.A. 54:32B-1 to -29, for chemicals purchased by the plaintiff between April 1, 1970 and September 30, 1979. The Director moved for summary judgment and the plaintiff, claiming an exemption under N.J.S.A. 54:32B-8.20, filed a cross-motion for summary judgment. The Tax Court granted only the Director's motion. 4 N.J. Tax. 277 (1982). The Appellate Division affirmed substantially for the reasons expressed by Judge Lasser in his opinion for the Tax Court. 5 N.J. Tax. 477 (App.Div.1983).
We granted plaintiff's petition for certification, 94 N.J. 604 (1983), and affirm.
Plaintiff operates a laboratory in which it performs more than 800 laboratory testing service procedures on blood and other body fluids and substances primarily for hospitals, physicians and government agencies. The laboratory tests frequently involve processing operations requiring the use of certain chemicals. When testing has been completed, plaintiff submits a computer-generated laboratory report of the test results to its customers. The chemicals used in these procedures do not become a component part of the report. The issue is whether plaintiff's purchase of these chemicals is exempt from the Sales and Use Tax.
Plaintiff claims it is exempt by virtue of N.J.S.A. 54:32B-8.20 (previously designated -8(t), L. 1966, c. 53) (the catalyst exemption), which reads as follows:
Receipts from sales of materials, such as chemicals and catalysts, used to induce or cause a refining or chemical process, where such materials are an integral or essential part of the processing operation, but do not become a component part of the finished product are exempt from the tax imposed under the Sales and Use Tax Act.
The plaintiff contends that it has met all the essential elements of the catalyst exemption provision: (1) a sale of materials such as chemicals; (2) use of chemicals to induce or cause chemical processes; (3) use of chemicals that are an "integral or essential part of the processing operation"; and (4) use of chemicals that are not a component part of the finished product. The defendant agrees that the first three prerequisites have been satisfied. The parties' dispute concerns only the fourth requirement.
Insofar as the fourth element is concerned, plaintiff argues first that there is no finished product and that none is required under the statute. Alternatively, it contends that if the catalyst exemption is read to require a resultant product, the reports submitted to the customers satisfy that element. The Director, on the other hand, claims that the statute requires
that there be a finished product (tangible personal property) and that the written report furnished to the customer does not satisfy this requirement because the chemicals were not physically used to produce the report.
The Sales and Use Tax Act was enacted in 1966. L. 1966, c. 30. The legislative scheme calls for a tax on the receipts from every retail sale of tangible personal property except as otherwise provided in the Act. N.J.S.A. 54:32B-3(a). A retail sale is defined to exclude a resale either (1) in the same form or as converted into or as a component part of a product produced for sale by the buyer, or (2) for use by the buyer in performing services subject to the use tax where the property becomes a physical component part of the property upon which the services are performed or the property is transferred to the purchaser of the service in conjunction with the performance of the service. N.J.S.A. 54:32B-2(e)(1).
Thus it can be seen that the general legislative intent was to impose the tax on sales of tangible personal property unless that property was to be resold by the purchaser. The contemplation was that the tax in such a situation would be incurred on resale. The theoretical justification for the resale exemption was "the desire to avoid pyramiding taxes as goods move along the channels of distribution toward the marketplace." Redlich, "Sales Taxes and the Resale Exemption in the Manufacture and/or Distribution of Personal Property," 9 Tax L.Rev. 435, 436 (1954). In furtherance of the policy against double taxation of a single product, the Act has long exempted from the tax on sales not only the sale of personal property that is resold but also the sale of personal property that becomes a component part of a finished product that is then ...