On certification to the Superior Court, Appellate Division, whose opinion is reported at 193 N.J. Super. 503 (1984).
For affirmance -- Chief Justice Wilentz, and Justices Handler, Pollock and O'Hern. For reversal -- Justice Clifford. The opinion of the Court was delivered by O'Hern, J. Clifford, J., dissenting.
This appeal presents issues similar to those resolved in Silent Hoist & Crane Co. v. Director, Div. of Taxation, 100 N.J. 1 (1985), also decided today.
In this case, a Pennsylvania financial services company, linked through its national parent with New Jersey affiliated offices, protests the payment to New Jersey of a corporate income tax upon an apportioned share of the interest and service income it received from New Jersey borrowers. The amounts at stake are modest -- $1308 for 1974 and $2123 for 1975, in comparison to the $150,000 in revenues derived from doing business in New Jersey during each of those years -- but the issues are important. We agree with the Director of the Division of Taxation and the Appellate Division that the taxpayer had the "minimal connection" with New Jersey sufficient to sustain a tax that bears a "rational relationship between the
income attributed to the State and the intrastate values of the enterprise." Silent Hoist & Crane, supra, 100 N.J. at 8 (quoting Mobil Oil Corp. v. Commissioner of Taxes, 445 U.S. 425, 436-37, 100 S. Ct. 1223, 1231-32, 63 L. Ed. 2d 510, 520 (1980)).
The differing considerations in this case are that (1) we do not deal with a contention by the Division that the taxpayer's income can be reached as part of a "unitary business," and (2) the tax involved is a corporate income tax rather than a corporate franchise tax. As we have seen, since Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 97 S. Ct. 1076, 51 L. Ed. 2d 326 (1977), the constitutional analysis of state taxation of interstate commerce depends not on the label given the tax but on the economic effects of the tax. There being no charge that the tax discriminates against interstate commerce, analysis will focus again on the nexus or minimal connection of the activity taxed to the State, and the rational relationship of the fairly apportioned tax to the services provided by the State.
The Corporation Income Tax Act (N.J.S.A. 54:10E-1 to -24), commonly referred to as a second tier tax (L. 1973, c. 170), imposes a direct corporate income tax (CIT) on corporations deriving income from sources within this state that are not subject to the tax imposed under the Corporation Business Tax Act (N.J.S.A. 54:10A-1 to -40). The new levy, approved June 7, 1973, is applicable to calendar and fiscal years ending after December 31, 1973. The current rate of tax is 7 1/4% of entire net income or such portion as is allocable to New Jersey. N.J.S.A. 54:10E-5.
To understand the tax, we must recall the history of state taxation of interstate commerce. Prior to 1973, New Jersey had only a franchise tax although one of its components of
value was measured by income. See Silent Hoist, supra, 100 N.J. at 11-12. Until Complete Auto Transit, it was thought that a direct tax on an exclusively interstate business, phrased solely in terms of a levy on the privilege of doing business in the state, was constitutionally forbidden. To meet this constitutional objection and to reach broader sources of revenue, the Report of the New Jersey Tax Policy Committee, Part V, "Non-Property Taxes in a Fair and Equitable Tax System," (February 23, 1972) (Cahill Commission) recommended that New Jersey do as many other states had done, "by adding to their corporate franchise taxes, or by substituting for them, an income tax levied, not on the privilege, or the doing of business in the State, but on income derived from sources within the State." Id. at 20.
The Committee recommended that New Jersey retain the corporate business franchise tax (CBT) for corporations to which it can be applied, and adopt this "second-tier net income tax" in recognition of the fact that "there is a good deal of room for broadening the scope" of the State's tax base. Id. at 22. The Committee recognized the recent restraints that Congress had placed on state taxing powers under Pub.L. No. 86-272, but, relying on Clairol v. Kingsley, 57 N.J. 199 (1970), decided that there was still a considerable range of exclusively interstate business within the reach of a direct income tax. Cahill Commission, supra, at 22. The Committee concluded: "[E]quity demands business carrying on activities in the State and exploiting the New Jersey market make some contribution to the costs of maintaining governmental operations and the services provided by the State * * *." Id.
Like the CBT, the CIT is a tax on the corporation's "entire net income," measured in the first instance by its federal taxable income. See N.J.S.A. 54:10E-4. That "entire net income" is apportioned to New Jersey by the application of the three-part formula based on receipts, property and payroll within and without the State. N.J.S.A. 54:10E-6. To this
allocated income is applied the tax rate of 7 1/4%. N.J.S.A. 54:10E-5.
In connection with the Corporation Income Tax Act, the Legislature passed the Corporation Business Activities Reporting Act, N.J.S.A. 14A:13-14 to -23. That act's purpose
is to enable the Division of Taxation to obtain pertinent data from any foreign corporation which carries on an activity or owns or maintains property in this State but which has not obtained a certificate of authority to do business in New Jersey, to the end that a proper determination may be made as to whether such corporation is subject to any State tax.
See also American Bank & Trust Co. of Pennsylvania v. Lott, 99 N.J. 32 (1985) (N.J.S.A. 14A:13-20, requiring all foreign corporations to file a Notice of Business Activities Report, was not intended to apply to foreign banks).
N.J.S.A. 14A:13-15 requires a foreign corporation that, among other things, receives payments from persons residing in this state, or businesses located in this state, aggregating more than $25,000 (as plaintiff did here), to file a Notice of Business Activities Report. The Legislature viewed the receipt of such payments as at least a preliminary indication that a foreign corporation derived income from sources within New Jersey and was subject to the corporation income tax. By filing its report, Avco became subject to the Division's scrutiny.
The Taxpayer and its Activities
The taxpayer, Avco Financial Services Consumer Discount Company One, Inc. (Avco Pa.), is one of many subsidiaries of Avco Financial Services, Inc. (Avco) linked through Avco Financial Services Management Company (the Management Company) with over 900 branch offices nationwide. Avco Pa. is a Pennsylvania corporation. Among its branch offices are several on the New Jersey border, including Philadelphia, Levittown, Morrisville, and Easton. New Jersey residents have taken out
consumer loans or purchased credit life, accident and health and credit property insurance through the Pennsylvania offices. Avco Pa. also purchased installment contracts from a New Jersey retailer. Avco, through its affiliates, also operates and maintains similar branch offices in New Jersey. The record does not disclose whether the borrower would have any conscious understanding that the Pennsylvania and New Jersey branch offices were of different subsidiaries since Avco has a policy that permits payments to be made on the loans made by the Pennsylvania branches at the New Jersey branches. The loan agreement is between a New Jersey borrower and Avco Pa. "and/or its Parent, Affiliates or Subsidiaries." A sample promissory note in the stipulated exhibits was made payable to Avco Financial Services, Inc. [the parent], "and/or * * * its affiliates or subsidiaries." Mailings from the parent or the management company to existing New Jersey customers invited the customer to refinance or extend existing credit lines. The mailings are warm and encourage the reader to resolve gift, tax and vacation problems, referring in generic terms to "Avco Financial Services," the lender that "believes in you." In addition, the Management Company also provides general radio advertising in New Jersey for the benefit of the parent and its affiliates.
Avco Pa. sends its own personnel into New Jersey to service accounts. Some customers were afforded "once or twice monthly visits" to remind borrowers of their obligations. Avco Pa. estimates that its branch managers spend "three to five percent" of their working hours in New Jersey. When loans are in default, Avco Pa. uses the New Jersey court system to enforce collections (about $3,000 per year), including wage garnishment and repossession of a few New Jersey automobiles. As a result of these activities, Avco Pa. estimates that its interest and other income for each of the years 1974 and 1975 was approximately $150,000.
Pursuant to N.J.S.A. 14A:13-15, Avco Pa. filed a Notice of Business Activities Report with the defendant, Director, Division
of Taxation ("Director"), for the taxable year beginning December 1, 1973 and ending November 30, 1974.*fn1 Avco Pa. reported that it received payments during the period from "persons residing in or business located in New Jersey" in excess of $25,000. Avco Pa. indicated that such payments were received in respect of notes held by its out-of-state offices. Avco Pa. disclaimed liability under the CIT in its report.
The Director asserted that Avco Pa. was liable for corporate income taxes with respect to Avco Pa.'s receipt of income from "sources within this state." Eventually, Avco Pa. filed tax returns pursuant to the CIT for the taxable years ending November 30, 1974 and November 30, 1975. Each of these returns indicated that Avco Pa. derived no income from sources within New Jersey. Avco Pa. thereafter submitted an estimate to the Director that Avco Pa. received $150,000 in interest income from New Jersey resident borrowers for each of the taxable years in controversy.
The Director issued a final tax deficiency assessment against Avco Pa. with respect to each of the taxable years in question. Based upon Avco Pa.'s estimates regarding receipts from New Jersey residents, the Director assessed taxes of $1308.99 plus interest for 1974 and $2,123.46 plus interest for 1975.
On Avco Pa.'s appeal, the Tax Court ruled that the Director's imposition of the Income Tax Act in this matter violates both the Due Process Clause and the Commerce Clause of the United States Constitution, and granted Avco Pa.'s refund claim. 4 N.J. Tax. 349 (1982). ...