Before Judges Baime, Brochin and Eichen.
The opinion of the court was delivered by: Brochin, J.A.D. (retired and temporarily assigned on recall).
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
On appeal from the Tax Court of New Jersey.
Plaintiff Stryker Corporation, a Michigan corporation, has appealed from a judgment entered against it by the Tax Court (Honorable Harold A. Kuskin, J.T.C.), Stryker Corp. v. Director, Division of Taxation, 18 N.J. Tax 270 (Tax 1999), for unpaid Corporation Business Tax in the amount of $1,326,204, with interest of $789,603.04 through February 15, 1996, for the years 1988 through 1992. The facts of the case, which have been stipulated by the parties, are fully described in Judge Kuskin's written opinion issued August 16, 1999. A brief summary will be sufficient for our purpose.
Stryker has manufacturing facilities in New Jersey and in other states. Its New Jersey facility, where the activities take place that are the subject of this appeal, is in Allendale, New Jersey. That facility is the only site at which Stryker manufactures hip and knee replacements. Stryker sells these products to customers located in the United States through its wholly owned subsidiary, Osteonics Corporation, which operates out of the same Allendale facility as Stryker. Osteonics' computers transmit customers' orders to Stryker's computers. Stryker packs and ships the products directly to Osteonics' customers without any intervention by Osteonics beyond submission of the orders. Osteonics never takes possession of the products. Osteonics bills its customers, retains a portion of the receipts, and remits the balance to Stryker. The payments from Osteonics to Stryker include a profit to Stryker.
The operations of the two companies are very closely integrated. Both Stryker and the Director agree, however, that they should be treated as separate entities for purposes of the Corporation Business Tax.
New Jersey imposes a tax on "[e]very domestic or foreign corporation which is not hereinafter exempted . . . for the privilege of having or exercising its corporate franchise in this State, or for the privilege of doing business, employing or owning capital or property, or maintaining an office, in this State." N.J.S.A. 54:10A-2. The intent of the statute is to tax a corporation which, like Stryker, "maintains a regular place of business outside this State other than a statutory office" only upon that portion of its entire net income, from wherever derived, *fn1 which is roughly proportional to the contribution that tangible assets and employees located in New Jersey and receipts earned here have made to the corporation's entire net income. N.J.S.A. 54:10A- 6. To that end, the statute prescribes an allocation formula. N.J.S.A. 54:10A-6. The portion of the corporation's entire net income which is allocated to New Jersey is "determined by multiplying such . . . entire net income . . . by . . . the average of" three defined fractions, the property fraction, the receipts fraction and the payroll fraction. N.J.S.A. 54:10A-6. *fn2 The denominators of these fractions represent all of the property, receipts and payroll of the corporation, wherever situated and from wherever derived. N.J.S.A. 54:10A-6. The numerators are intended to reflect New Jersey's contributions. N.J.S.A. 54:10A-6. Therefore the larger the numerators of these fractions, the larger the percentage of the taxpayer's income which will be allocated to New Jersey and subject to the New Jersey tax. The disputed issue in the present case is, what receipts of Stryker are New Jersey income and should therefore be included in the numerator of the receipts fraction.
N.J.S.A. 54:10A-6(B) describes as follows the kinds of income to be included in the numerator of the receipts fraction:
[R]eceipts of the taxpayer . . . arising . . . from
(1) sales of its tangible personal property located within this State at the time of the receipt of or appropriation to the orders where shipments are made to points within this State,
(2) sales of tangible personal property located without the State at the time of the receipt of or appropriation to the orders where shipment is made to points within the State,
(3) (Deleted by amendment.)
(4) services performed within ...