On certification to the Superior Court, Appellate Division.
For reversal -- Chief Justice Wilentz and Justices Clifford, Handler, Pollock, O'Hern, Garibaldi, and Stein. Opposed -- None. The opinion of the Court was delivered by Garibaldi, J.
[109 NJ Page 563] The issue in this appeal is whether fragrance samples manufactured, stored, and packaged by plaintiff in New Jersey and distributed to plaintiff's customers outside New Jersey are subject to the compensating use tax under the Sales and Use Tax Act, N.J.S.A. 54:32B-1 to -29 (the Act). The Appellate Division, in a per curiam opinion, 9 N.J. Tax. 89, affirmed the
Tax Court's decision, 8 N.J. Tax. 9, imposing a use tax on the samples. We granted certification, 107 N.J. 626 (1987), limited solely to the issue of whether plaintiff's samples are excepted from use tax under the "mere storage, keeping, retention or withdrawal from storage" exemption in N.J.S.A. 54:32B-6. We now reverse.
The following facts are stipulated. Plaintiff, Cosmair, Inc. (Cosmair), is a manufacturer of cosmetic and fragrance products. Cosmair is a Delaware corporation but manufactures all of its products within the State of New Jersey. All finished products are stored in warehouses in New Jersey. Cosmair purchases, in transactions both within and without the State of New Jersey, certain raw materials that are the ingredients of its products. No sales or use tax is paid on those raw materials.
In cooperation with its department store customers, Cosmair conducts marketing programs that involve the distribution to consumers of free samples of its Guy LaRoche and Cacharel fragrances. These samples are the same size as those used by Cosmair in its "purchase-with-purchase" sales promotions. In such promotions, retail customers purchase certain Cosmair products together with another item, such as a canvas bag or umbrella bearing the name of one of Cosmair's product lines.
Cosmair and its department store clients jointly decide the number of samples to be distributed in the clients' stores. Cosmair's New York marketing office or field sales forces then convey this information to Cosmair personnel at the New Jersey warehouses where the inventory is stored. The requisite number of samples for each store is taken from inventory and physically moved to the shipping area of the warehouse. Cosmair employees package the samples for transit together with the other products to be sent to the stores.
Cosmair packages the manufactured samples in the same way that it packages its other products. In the packaging process, Cosmair's employees place all items, including the samples to be sent to each of the department stores, in cartons and other shipping containers together with packaging materials so that such items are not damaged in transit. Cosmair's employees also prepare shipping labels and affix them to the packages. They prepare appropriate documents indicating the number of samples enclosed and insert those documents into the packages. When packaging is completed, a common carrier picks up the cartons at Cosmair's New Jersey warehouse for delivery to the out-of-state department stores.
Cosmair does not charge its department store customers for the samples. The number of samples distributed to a store is not proportionate to the amount of products purchased by the store. Eventually, the department stores distribute the samples without charge to retail customers.
The parties agree that (1) samples distributed to Cosmair's customers located in New Jersey are subject to the use tax, (2) sales of Cosmair's products to out-of-state customers whether shipped by common carrier or in company-owned or -operated vehicles are not subject to sales tax in New Jersey, and (3) samples shipped in company-owned or -operated vehicles to company offices outside New Jersey are not subject to the use tax.
The Director of the Division of Taxation (Director), however, asserts that a use tax is due on samples shipped by common carrier to Cosmair's out-of-state customers. The Tax Court affirmed the Director's use tax assessment and held that Cosmair "used" the samples within the meaning of the Act and that Cosmair's use of the samples in New Jersey was in excess of the "mere storage, keeping, retention or withdrawal from storage" exemption provided in N.J.S.A. 54:32B-6. Cosmair, Inc. v. Director, Div. of Taxation, 8 N.J. Tax. 9, 13, 15 (1985).
The Appellate Division in an unreported opinion affirmed the judgment of the Tax Court essentially for the reasons stated in the Tax Court opinion.
The Legislature adopted the New Jersey Sales and Use Tax Act on April 27, 1966. The Act applies "to sales and services of tangible personal property and the use, storage or consumption of such property. . . ." L. 1966, c. 30, § 31. Under the Act, the State imposes a compensating use tax on the use within this state of any tangible personal property purchased at retail for which no New Jersey sales tax has been or will be paid. N.J.S.A. 54:32B-6; Diamondhead Corp. v. Director, Div. of Taxation, 4 N.J. Tax. 255, 257 (1982); Hoffman-LaRoche v. Director, Div. of Taxation, 5 N.J. Tax. 154, 159, aff'd in part, rev'd in part, 192 N.J. Super. 552 (App.Div.1983). The tax imposed on a ...