On appeal from the Superior Court, Appellate Division, whose opinion is reported at 293 N.J. Super. 99, (1996).
The opinion of the Court was delivered by O'hern, J. Justices Pollock, Garibaldi, Stein and Coleman join in Justice O'HERN's opinion. Justice Handler has filed a separate Concurring opinion. Chief Justice Poritz did not participate. Handler, J., Concurring.
The opinion of the court was delivered by: O'hern
(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).
General Motors Corporation v. City of Linden (A-106), 150 N.J. 522, 696 A.2d 683.
Argued February 19, 1997 -- Decided July 21, 1997
O'Hern, J., writing for a majority of the Court.
This appeal presents a facial challenge to the constitutionality of the Business Retention Act of 1992 (BRA). L. 1992, c. 24, §§ 1 to 7). The claim is that the BRA creates an unconstitutional exemption of real property from taxation that would favor business or industry.
The case concerns assessments of the General Motors' automobile assembly plants made by the City of Linden for the years 1983, 1984, and 1985 tax years. GM appealed the assessments. The Appellate Divisionremanded the case in light of the opinion of Ford Motor Company v. Edison, 127 N.J. 290, 604 A.2d 580 (1992), and for consideration whether the BRA applied to the case. GM's remaining tax appeals through the 1992 tax year were consolidated on remand.
In an unreported opinion, the Tax Court held the BRA to be unconstitutional. The Appellate Division reversed the Tax Court and concluded that the BRA was constitutional. 239 N.J. Super. 89, 570 A.2d 1032 (App. Div. 1996). The court reasoned that the Legislature can classify personal property and concluded that its goal through the BRA to accord the definition of fixtures the most restrictive scope consistent with the fundamental distinction between real and personal property did not violate the State Constitution. The Court granted Linden's motion for leave to appeal.
HELD: The BRA is facially constitutional because it may reasonably be interpreted in a manner that does not create an unconstitutional exemption for real property from taxation that would favor business or industry.
1. The Uniformity Clause of the New Jersey Constitution places limits on the Legislature's ability to classify real property for purposes of taxation. In 1966, the Legislature passed the Business Personal Property Tax Act, which excluded from taxation at the local level business personal property and substituted a system of taxation at the State level. In applying this Act, courts used common-law definitions of real and personal property, sometimes arriving at inconsistent results. The Legislature responded by amending the Act to define the real property subject to local taxation. L. 1986, c. 117. This amendment defined taxable real property to include personal property "affixed" to the real property, subject to certain exceptions. The legislative history indicates that Chapter 117 was a reaction to case law that the Governor and Legislature believed threatened municipalities with the loss of tax ratables. There followed a shift toward including business personal property as taxable real property in court decisions. The Legislature responded with the BRA, which clarified that machinery and equipment that was not a structure and that did not have as a primary purpose enabling a structure to shelter persons or property (the "b" test), was not real property subject to local taxation. (pp. 4-13)
2. As with all legislation, the BRA is presumed to be constitutional. A taxing statute is not facially unconstitutional if it operates constitutionally in some instances. The Legislature, however, cannot avoid the constitutional restriction by simply defining as personal property that which is real property. Despite several evolutions in its attempt to draw the lines between realty and personalty, the Court is satisfied that the Legislature intended the BRA to be faithful to the common-law recognition that there are certain forms of personal property so affixed to real property as to be considered a part thereof. The Court interprets the BRA such that the refinement excluding machinery and equipment from local taxation under the "b" test was not intended to override the separate, more traditional "a" test when the "a" test would result in property being taxed as real property. (pp. 13-23)
3. The decision does not foreclose future as applied challenges to the BRA. Cases may arise in which the constitutional distinction attempted to be drawn by the BRA may be crossed. (p. 23)
JUSTICE HANDLER, Concurring, emphasizes that the constitutional understanding of real property remains informed by the traditional law of fixtures, and that the Legislature cannot impermissibly alter the law of fixtures in order to bypass the Uniformity Clause.
JUSTICES POLLOCK, GARIBALDI, STEIN and COLEMAN join in JUSTICE O'HERN's opinion. JUSTICE HANDLER has filed a separate Concurring opinion. CHIEF JUSTICE PORITZ did not participate.
The opinion of the Court was delivered by
In this case, we review again the ebb and flow of legislative and judicial efforts to distinguish between real and personal property for purposes of taxation. We last reviewed that distinction in R.C. Maxwell Company v. Galloway Township, 145 N.J. 547, 679 A.2d 141 (1996). This appeal presents a facial challenge to the constitutionality of the Business Retention Act of 1992 (BRA). L. 1992, c. 24, §§ 1 to 7. We find that the statute is facially constitutional because it may reasonably be interpreted as not to create an unconstitutional exemption for real property from taxation that would favor business or industry. It is, rather, as the BRA's sponsors stated, an effort to "provide refinements in the definitions of real and personal property" for purposes of determining whether certain forms of property are subject to taxation. Sponsor's Statement to S. 332 (205th N.J. Leg., lst Sess. 1992).
FACTS AND PROCEDURAL HISTORY
The case concerns assessments of General Motors' automobile assembly plants made by the City of Linden for the 1983, 1984, and 1985 tax years. General Motors (GM) appealed the assessments on the basis that the Tax Court had incorrectly assessed the property as special purpose property rather than general purpose property. The Appellate Division remanded the case to the Tax Court for consideration in light of our opinion in Ford Motor Company v. Edison, 127 N.J. 290, 604 A.2d 580 (1992), and for consideration of whether the BRA applied to the case. 13 N.J. Tax 324 (1993). GM's remaining tax appeals, through the 1992 tax year, were consolidated on remand.
In an unreported opinion, the Tax Court held the BRA to be unconstitutional. Linden appealed to the Appellate Division, which reversed the Tax Court and concluded that the BRA was constitutional. 293 N.J. Super. 99, 679 A.2d 718 (App. Div. 1996). The court held that "because the subject of [the BRA] is not real property, as to which the Uniformity Clause applies, but rather personal property," the proper test was whether the BRA's classifications were reasonable. Id. at 104. The court reasoned that the Legislature can classify personal property and concluded that its goal through the BRA "to accord the definition of fixtures the most restrictive scope consistent with . . . the fundamental distinction between real and personal property" did not violate the State Constitution. Id. at 107. Linden sought leave to appeal.
The Senate and General Assembly passed concurrent resolutions requesting the Court to expedite its consideration of the constitutionality of the appeal. Senate Committee Substitute for State Concurrent Resolution No. 57 (March 7, 1996). We granted leave to appeal. We permitted the State, the City of Newark, the New Jersey Chamber of Commerce, and NBCP Urban Renewal to intervene and to file briefs as amici curiae.
BACKGROUND TO THE CONTROVERSY
There are two benchmarks for our decision. One is that the Legislature has broad discretion "in the classification of personal property for exemption or preferential treatment." Switz v. Kingsley, 37 N.J. 566, 586, 182 A.2d 841 (1962). The Legislature is free to tax personal property in any way so long as the classifications are reasonable and the property is assessed under general laws and by uniform rules. The other is that the Uniformity Clause of the New Jersey Constitution places limits on the Legislature's ability to classify real property for purposes of taxation. The Uniformity Clause requires that all real property be "assessed and taxed . . . according to the same standard of value . . . [and] at the general tax rate of the taxing district in which the property is situated." N.J. Const., art. VIII, § 1, P 1(a). The clause has been described as a compromise that barred discriminatory burdens on real property taxation, in order to protect the tax revenues of municipalities. New Jersey State League of Municipalities v. Kimmelman, 105 N.J. 422, 433, 522 A.2d 430 (1987).
Historically, both real and personal property were subject to local taxation. In 1966, however, the Legislature passed the Business Personal Property Tax Act. N.J.S.A. 54:11A-1 to -21 (repealed). That Act excluded from taxation at the local level business personal property and substituted a system of taxation at the state level. The Act defined business personal property as "tangible goods and chattels used or held for use in any business" but did not include "goods and chattels so affixed to real property as to become part thereof and not to be severable or removable without material injury thereto." N.J.S.A. 54:11A-2(b)(2) (repealed). Such business personal property, except when "so affixed," was excluded from local taxation. Items so affixed, or "fixtures," were subject to local taxation as real property. *fn1
In Bayonne City v. Port Jersey Corporation, 79 N.J. 367, 399 A.2d 649 (1979), this Court interpreted N.J.S.A. 54:11A-2(b)(2) in the context of three extremely large, movable cranes. The Bayonne Court adopted a "material injury" test to determine whether the items were business personal property. The Court interpreted the exclusion from the definition of business personal property in N.J.S.A. 54:11A-2(b)(2) to refer to "only those chattels the removal of which will do irreparable or serious physical injury or damage" to the property. Bayonne, (supra) , 79 N.J. at 378. Bayonne rejected the so-called "institutional doctrine," which focused on whether the removal of a fixture would prevent the realty from being used for its original intended purpose. *fn2 Id. at 376. See also H.J. Bradley, Inc. v. Tax Div., 4 N.J. Tax 213, 219-20 (1982) (discussing institutional doctrine and its rejection).
Cases following Bayonne questioned the extent of its holding. Some cases gave the "material injury" test sweeping effect, and exempted from taxation many items (such as radiators, toilets, and sinks) previously taxed as real property because they could be removed from the realty without irreparable or serious injury. Other Tax Court decisions, however, applied both the Bayonne "material injury" test and a traditional "fixtures" test, to find certain items to be real property. Several cases interpreted the "without material injury thereto" language of N.J.S.A. 54:11A-2(b)(2) as exempting items from local taxation when their removal would cause material injury neither to the real property nor the personal property itself. See, e.g., Lawrence Assoc. v. Lawrence Township, 5 N.J. Tax 481, 511-12 (1983).
When the differences remained unresolved, the Legislature responded. In 1986, it amended N.J.S.A. 54:11A-2(b)(2) and N.J.S.A. 54:4-1, which defined property subject to taxation. See L. 1986, c. 117. Specifically, Chapter 117 amended N.J.S.A. 54:4-1 and defined taxable real property to include personal property "affixed" to the real property, unless
The personal property so affixed can be removed or severed without material injury to the real property;
The personal property so affixed can be removed or severed without material injury to the personal property itself; and
The personal property so affixed is not ordinarily intended to be affixed permanently to real property;
The personal property so affixed is machinery, apparatus, or equipment which is neither functionally essential to a structure the personal property is within or to which the personal property is affixed nor constitutes a structure itself. *fn3
Chapter 117 further amended N.J.S.A. 54:11A-2 to exclude from the definition of business personal property goods and chattels taxable as real property pursuant to the amended N.J.S.A. 54:4-1. Chapter 117 deleted the former N.J.S.A. 54:11A-2(b)(2). It added N.J.S.A. 54:4-1.12 to define storage tanks of more than 30,000 gallons as real property.
The statements that accompanied Chapter 117 and the Governor's objections and recommendations to the Senate explained that the Legislature was reacting to post-Bayonne case law. Both the Governor and Legislature believed that municipalities were facing an immediate revenue deficit from the loss of tax ratables. Items traditionally thought to be taxed as real property were being exempted from taxation because almost any property affixed to realty could be removed without irreparable or serious injury. The Governor's objections and recommendations for amendment, which related only to aspects of the bill that dealt with taxation of storage tanks, stated in part: "This bill is a response to certain recent court decisions that may result in the exemption from local property taxation of certain industrial property that has long been taxed locally." Governor's Reconsideration and Recommendation Statement to Senate Bill No. 1858 at 1 (Sept. 5, 1986). See, e.g., Stem Bros., Inc. v. Alexandria Township, 6 N.J. Tax 537 (1984) (finding large storage tanks business personal property). The Assembly statement attached to the floor amendment observed:
The statutory test will clarify that personal property, once fixed to real property, becomes taxable as real property if the personal property is of a type or class which ordinarily remains with the real property for the period of its useful life. Thus, items such as toilets, sinks, water fountains and built-in lighting fixtures will be taxed as real property.
However, machinery, apparatus and equipment used in business, even if affixed to real property, will not be subject to local property taxation under the definition because that property is not functionally essential to a structure or is not a type or class of property which is ordinarily intended to be affixed permanently to real property. Basically, such property is ordinarily moved when a business relocates, is frequently bought and sold separate from the real property and would not ordinarily be included in a deed of sale for the real property. The test excludes such property from real property taxation.
[Assembly Appropriations Committee, Statement to Assembly Bill No. 2251 (June 23, 1986).]
Chapter 117, therefore, established the a and b tests and created a framework for determining when an item of business personal property becomes real property for purposes of taxation. It has been described as establishing a presumption that "personal property affixed" is real property unless excluded under the subsections. Freehold Township v. Javin Partnership, 15 N.J. Tax 88, 94-95 (1995).
However, in interpreting Chapter 117, a number of cases created a distinction between "special purpose" and "general purpose" property. See Texas Eastern Trans. Corp. v. Division of Taxation, 11 N.J. Tax 198 (1990). Special purpose property has unique physical design, special construction materials, or layout that restricts its utility to the use for which it was built. Id. at 209 n.2. In Texas Eastern, the court concluded that regulations of the Division of Taxation, which were meant to clarify the terms "structure," "material injury," and "machinery, apparatus or equipment" in Chapter 117, were not reasonably related to special purpose property. Id. at 209-10. Texas Eastern was viewed as having restored the institutional doctrine because the decision stated that if real estate is special purpose property, "the operation of the structure and the operation of the business conducted therein merge." Id. at 211. The court had reasoned that the Legislature's intent in enacting Chapter 117 was to broaden the meaning of real property and narrow that of personal property. Ibid.
In response to Texas Eastern's understanding of Chapter 117, the pendulum began to shift toward including business personal property as taxable real property. The Legislature expressed concern with three decisions referred to in our opinion in R.C. Maxwell, (supra) , 145 N.J. at 563. See American Hydro Power Partners v. Clifton, 11 N.J. Tax 12 (1990) (holding hydroelectric power machinery real property), aff'd in part, 12 N.J. Tax 264 (App. Div. 1991); Badische Corp. v. Town of Kearny, 11 N.J. Tax 385 at 395 (1990) (holding batch ester plant machinery real property); Texas Eastern, (supra) , 11 N.J. Tax 198 (holding natural gas plant machinery real property).
The BRA was the Legislature's response. The BRA sought more broadly to exclude personal property used or held for use in business from local real property taxes. The BRA amended the subsection b machinery, apparatus, or equipment exemption to its current form. R.C. Maxwell, (supra) , 145 N.J. at 562. The BRA modified the b test of Chapter 117 by defining as real property all business personal property affixed unless the personal property affixed
is machinery, apparatus, or equipment used or held for use in business and is neither a structure nor machinery, apparatus or equipment the primary purpose of which is to enable a structure to support, shelter, contain, enclose or house persons or property. For purposes of this subsection, real property shall include pipe racks, and piping and electrical wiring up to the point of connections with the machinery, apparatus, or equipment of a production process as defined in this section.
The legislative statement explained:
The bill amends subsection b. of R.S. 54:4-1 to specify that items of machinery, apparatus or equipment used in the conduct of a business are defined as personal property regardless of the class or type of real property to which such items may be affixed. Such items are defined as locally taxable real property only if they constitute a structure, as defined in the bill, or are primarily used to enable a structure to support, shelter, contain, enclose or house persons or property.
[Senate Budget and Appropriations Committee, Statement to Senate Bill No. 332 (February 24, 1992).]
In a new section, the Legislature defined "machinery, apparatus or equipment" as "any machine, device, mechanism, instrument, tool, tank or item of tangible personal property used or held for use in business." N.J.S.A. 54:4-1.15.
In R.C. Maxwell, we said that "the broader exclusion from local taxation [in the BRA] was an essential element to the Legislature's goal of reaffirming its policy to exclude 'machinery, apparatus and equipment used or held for use in business from local taxation.'" 145 N.J. at 562. Applying the principle of ejusdem generis, Maxwell construed "[any] item of tangible personal property used or held for use in business" to mean those items similar to "machinery, apparatus, or equipment" used in manufacturing operations. Id. at 565-66.
With the BRA, the Legislature continued to clarify its intent to distinguish between property integrated with the business, and property integrated with the realty upon which the business is located. The Governor's Statement to the Senate concerning the BRA confirms this understanding. The Statement declares that the BRA was intended to restore Chapter 117's distinction between business machinery that participates in the business, and business machinery that accommodates the business. The former was business personal property, the latter taxable as real property. Governor's Reconsideration and Recommendation Statement to Senate Bill No. 332 at 2 (June 1, 1992). ...