On Certification to the Superior Court, Appellate Division, whose opinion is reported at 187 N.J. Super. 562 (1983).
For reversal -- Justices Clifford, Schreiber, Handler and Garibaldi. For affirmance -- Chief Justice Wilentz and Justices Pollock and O'Hern. The opinion of the Court was delivered by Handler, J. Wilentz, Chief Justice, and Pollock and O'Hern, Justices, dissenting.
[97 NJ Page 319] This case involves the validity of a tax deficiency assessment made by the defendant, Director, Division of Taxation (Director), against plaintiff, Metromedia, Inc., under the New Jersey Corporation Business Tax Act, N.J.S.A. 54:10A-1 to -40 (Act). Metromedia, Inc. (Metromedia or taxpayer) is a Delaware corporation engaged in the ownership and operation of television and radio stations. In determining the net business receipts of the taxpayer attributable to its operation in the state pursuant to the Act, the Director used a calculation referred to
as an "audience share." This calculation is designed to measure receipts attributable to New Jersey by relating the taxpayer's revenues to its listening and viewing audiences in the state. However, this method for determining the New Jersey receipts of a multi-state television or radio enterprise had not been used by the Director before its application to Metromedia in this case. The major issue, therefore, is whether the decision to use this factor in effect constitutes administrative rule-making, within the meaning of the Administrative Procedure Act, N.J.S.A. 52:14B-1 to -15 (APA), necessitating compliance with the statutory requirements of the APA governing the adoption of agency rules. We must also examine the issue of whether the Act itself, in the absence of an implementing regulation, authorizes the allocation of receipts by the use of the "audience-share" factor.
Metromedia has filed corporate business tax returns since 1957, but disputes the deficiencies assessed against it only for the years 1972-1975. During those years, Metromedia owned and operated several television and radio stations, including stations WNEW-TV, WNEW-AM, and WNEW-FM, located in New York City*fn1 and serving the New York metropolitan area, and WIP-AM and WMMR-FM, located in Philadelphia*fn2 and
serving the Philadelphia metropolitan area. Metromedia earns revenue from the sale of network air-time to national and local advertisers represented by advertising agencies. Most of these agencies are located in New York City, and, for present purposes, none is situated in New Jersey. Rates charged for advertising are based primarily on the size of the listening or viewing audience in the area served by the station.
No activity in connection with advertising sales or receipts occurred in New Jersey. Consequently, for the years in question the taxpayer reported no advertising revenues from these stations as attributable to the state. The Director, however, during its 1978 audit, allocated some of Metromedia's business receipts to New Jersey by applying a factor called "audience share." This calculation purported to reflect New Jersey earnings that the Director claimed were generated by virtue of the stations' signals reaching audiences in the state. For each station reaching New Jersey, the Director multiplied Metromedia's total receipts by a fraction or percentage that consisted of a ratio of the station's New Jersey audience to its total audience. The sum of these results for each of the five stations reaching New Jersey audiences was then incorporated into the statutory formula used to determine the taxpayer's New Jersey franchise tax base, consisting of both net worth and net income.
The taxpayer sought review of this determination in the Tax Court, challenging the Director's authority to set and apply the allocation factor. The Tax Court ruled that the "audience share" concept in effect constituted a "rule," within the meaning of the APA, and therefore its adoption by application in this case was invalid because it failed to comply with the requirements applicable to the promulgation of agency rules. 3 N.J. Tax. 397 (1981). Because of its disposition on this ground, the Tax Court did not address contentions that the Act was unconstitutionally vague and therefore violative of the Due Process Clause. 3 N.J. Tax. at 405-06. The court concluded, however, that the statute "[does not] support the use of an
audience factor in the absence of an administrative rule, properly adopted * * *." Id. at 412-13.
The Director appealed and the Appellate Division reversed, finding that the Director's actions were authorized by the Act. 187 N.J. Super. 562, 564 (1983). We granted Metromedia's petition for certification to consider whether the Director's action was invalid for failure to comply with the APA, and whether the Director's use of an audience factor exceeded his discretionary authority under the Act. 97 N.J. 290 (1983).
The New Jersey Corporation Business Tax Act imposes a franchise tax on all nonexempt foreign and domestic corporations that exercise a corporate franchise, do business, employ or own capital or property, or maintain an office in New Jersey. N.J.S.A. 54:10A-2. The tax is computed by reference to the taxpayer's net worth tax base and net income base. N.J.S.A. 54:10A-5; see Fedders Corp. v. Director, Div. of Taxation, 96 N.J. 376 (1984). The receipts or revenues of the taxpayer that are considered in the net income tax base for tax purposes are those that arise from (1) sales of tangible personal property from within this state, (2) services performed within the state, (3) rentals from property and royalties from the use of patents or copyrights within the state, and (4) all other business receipts that are earned within the state. N.J.S.A. 54:10A-6(B)(6).
For corporations that maintain a regular place of business outside of New Jersey, the Act recognizes that only a percentage of the taxpayer's net worth and net income may be the result of its activities in the state. Consequently, an "allocation" formula is applied to both the net worth and net income tax bases so that only those portions of net worth and net income, respectively, that are fairly attributable to the corporation's activities in New Jersey are used in the measure of the tax. N.J.S.A. 54:10A-6. The allocation formula consists of
three factors, namely, property, payroll and receipts. Each of the three factors in the so-called three-ply formula is expressed as a fraction, the numerator of which is, respectively, the taxpayer's New Jersey property, receipts, and payroll, and the denominator of which is the taxpayer's total property, receipts, and payroll generated by the operations of the entire enterprise. N.J.S.A. 54:10A-6(B). These fractions are averaged, and the combined fraction is then applied to the taxpayer's total net worth and net income in order to determine the percentage or portion of net worth and income properly attributable, and thus taxable, to New Jersey. Id.
It is the implicit premise of the Act that the statutory three-ply formula can only approximate the taxpayer's true net worth and income generated by its New Jersey activities. Hence, the Act gives the Director broad authority to adjust the allocation factor in order to reflect more accurately and fairly the activity, business, receipts, capital, entire net worth, or entire net income of a taxpayer reasonably referable to the state. N.J.S.A. 54:10A-8 authorizes the Director to make the following particular adjustments: (1) to adhere to those factors already set forth in the statutory formula, namely, property, receipts, and payrolls; (2) to include in the formula one or more other acceptable recognized factors, such as expenses, purchases, or existing contracts; and (3) to exclude one or more assets from the formula or from the entire net worth tax base. In addition to this specific authority, the Director is given broad general discretion to "apply * * * any other similar or different method calculated to effect a fair and proper allocation of the entire net income and the entire net worth reasonably attributable to the State." Id.
As noted, the Director used the "audience share" as a modification of the "receipts factor" of the three-ply formula in order to adjust the percentage of the taxpayer's total receipts allocable to New Jersey. Metromedia contends that the Director's determination was not authorized by any provisions of the Act
and exceeded the Director's statutory discretion.*fn3 The argument is that the use of the "audience factor" is ultra vires. We disagree.
Clearly, the language of the statute vests broad authority in the Director to determine what income-producing activity of the taxpayer is reasonably referable to its business in New Jersey, so that this income can appropriately be used in the measure of the franchise tax. The statutory scheme recognizes that this is a highly specialized decision that entails considerable discretion. See Fedders, supra, 96 N.J. 376. The Director's discretion is bound by standards of "sound accounting principles." N.J.S.A. 54:10A-8(e); R.H. Macy & Co., Inc. v. Director, Div. of Taxation, 77 N.J. Super. 155 (App.Div.1962), aff'd o.b., 41 N.J. 3 (1963). It is nonetheless as broad as necessary to enable the Director to determine the fair value of the taxpayer's net worth, Hawthorne Fabrics v. Kingsley, 41 N.J. 521 (1964), as well as the percentage of net worth and net income that can be attributed to New Jersey, F.W. Woolworth v. Director, Div. of Taxation, 45 N.J. 466 (1965); see Household Fin. Corp. v. Director, Div. of Taxation, 36 N.J. 353 (1962).
The broad question of statutory interpretation can be narrowed to whether the use of an audience-share factor to determine the taxpayer's "receipts earned within the State" would constitute any "other similar or different method" of allocation that is made available to the Director under N.J.S.A. 54:10A-8(e) to fashion an accurate allocation factor. A "similar method" would presumably be one comparable to the allocation methods specified ...