The opinion of the court was delivered by: Coleman, J.
ON CERTIFICATION TO Appellate Division, Superior Court
Chief Justice Poritz PRESIDING
Judgment of the Appellate Division is AFFIRMED.
JUSTICE STEIN filed a separate concurring opinion in which he addressed the contention of amici curiae that the Court's interpretations of the scope of the receipts portion of the apportionment formula for the New Jersey Corporation Business Tax Act will impose an undue burden on New Jersey manufacturers.
CHIEF JUSTICE PORITZ and JUSTICES LONG and ZAZZALI join in JUSTICE COLEMAN's opinion. JUSTICE STEIN filed a separate concurring opinion. JUSTICES VERNIERO and LaVECCHIA did not participate.
On appeal from and on certification to the Superior Court, Appellate Division.
This appeal requires us to decide whether a New Jersey manufacturer that ships its products to out-of-state locations at the behest of its wholly-owned subsidiary, a New Jersey corporation, must include the sales in its allocation factor under N.J.S.A. 54:10A-6(B) of the New Jersey Corporation Business Tax Act (CBTA). In a "drop-shipment" transaction, a manufacturer sells merchandise to a dealer but ships the merchandise directly to the customer of the dealer. The Appellate Division held that the receipts earned by Michigan-based Stryker Corp., a manufacturer of hip and knee replacements, from its wholly-owned subsidiary, a New Jersey corporation, in a drop-shipment context are includible in the numerator of Stryker's receipts fraction under N.J.S.A. 54:10A-6(B)(6) of the CBTA because the receipts were earned within New Jersey. We agree with that determination and now affirm.
The facts of this case were stipulated by the parties. Stryker is a Michigan corporation. It has manufacturing facilities in several states, including one in Allendale, New Jersey. The Allendale facility is the only place where Stryker manufactures orthopedic hips and knees. It sells those products domestically through a wholly-owned subsidiary, Osteonics Corporation, a New Jersey corporation. There is no dispute, however, that Stryker and Osteonics operate independently and are treated as separate corporate entities for purposes of the CBTA.
Osteonics operates out of the same Allendale facility, which it subleases to Stryker. Stryker pays for the costs of the Allendale facility up front and then adds Osteonics's share of those costs to the price it charges Osteonics for its products. Osteonics markets and sells Stryker's products and then transmits its customers' orders to Stryker's computers. Stryker then packs and ships the products from the New Jersey facility "F.O.B. Allendale" via common carrier directly to Osteonics's customers. Osteonics has customers both in New Jersey and out of state. Osteonics subsequently bills the customers at a price that allows a gross profit margin of about 20% for its services. The balance of those receipts is forwarded to Stryker. Stryker sells its products to Osteonics at a price that includes, in addition to reimbursement for expenses incurred at the Allendale facility, manufacturing expenses and a profit margin for Stryker. That operating procedure is known as a "drop-shipment" transaction in which the retailer, here Osteonics, sells but does not take possession of the manufacturer's products because the manufacturer, here Stryker, directly delivers its products to the retailer's customers.
In June 1994, the Director of the Division of Taxation (Division), after auditing Stryker, issued a notice of assessment informing Stryker that it owed $1.326 million plus interest in unpaid corporate business taxes for the audit years of 1988 through 1992 based on the receipts Stryker generated from sales to Osteonics. During those years, Stryker prepared its New Jersey tax returns by including in the numerator of the receipts fraction of the CBTA only those sales to Osteonics in which the orthopedic products were shipped to a New Jersey customer. The Division sought to require Stryker to include receipts, not just from sales to Osteonics shipped to New Jersey customers, but receipts from all of Stryker's sales to Osteonics regardless of where the products were shipped.
Stryker filed an administrative protest of the assessment in September 1994. In February 1996, the Division sent Stryker a final determination letter setting forth a CBTA assessment of $2,115,807 for the audit years, which included accrued interest. Stryker subsequently filed a five-count complaint in the Tax Court appealing the final determination of the Division. R. 8:2(a).
In a published opinion, the Tax Court affirmed the assessment, albeit on a different ground. Stryker Corp. v. Director, Div. of Taxation, 18 N.J. Tax 270, 291 (Tax 1999). The Tax Court held, contrary to the Division, that the sales were not within N.J.S.A. 54:10A-6(B)(1) because Stryker made no "shipment" of products to Osteonics as required by that subparagraph. Id. at 284. The court noted that Osteonics received neither physical possession nor physical control over the merchandise. Ibid. Nevertheless, in sustaining the assessment, the Tax Court held that the income that Stryker derived from its sales to Osteonics fell within N.J.S.A. 54:10A-6(B)(6), namely, "all other business receipts . . . earned within the State," because Stryker was located in New Jersey and sold merchandise located in New Jersey to a dealer also located in New Jersey. Id. at 287. The Tax Court therefore entered judgment against Stryker for unpaid corporation business taxes of $1,326,204 for the years 1988 through 1992 with interest of $789,603 through February 1996. Id. at 291.
In a published opinion, the Appellate Division affirmed the judgment of the Tax Court. Stryker Corp. v. Director, Div. of Taxation, 333 N.J. Super. 413, 417 (2000). The panel expanded the Tax Court's reasoning to answer Stryker's argument that the reference in subparagraph (6) to "other" business receipts does not apply to it because its receipts were not "other" business receipts but, rather, were like the receipts referred to in paragraphs (1) and (2). Ibid. The Appellate Division rejected that assertion, finding that that claim was "only a variation on the constant theme" of Stryker's argument. Id. at 417. The theme was that the Director "should treat as one transaction what Stryker has chosen to treat as two", i.e., the sale to Osteonics and Osteonics's sale to its own customer. Ibid.
The court further observed that paragraphs (1) and (2) of N.J.S.A. 54:10A-6(B) concern receipts from sales in which the seller consummates the sale by shipping the product to the buyer. Id. at 417-18. In those circumstances, the statute makes the destination of the shipment determinative. Id. at 418. Therefore, income from Stryker's shipments to its own out-of-state customers would not be included. Ibid. However, the Appellate Division pointed out that the disputed receipts are in a different category because they are from sales in which the products are shipped to someone other than Stryker's direct customers. Ibid.
The Appellate Division concluded that the disputed receipts should be treated as New Jersey receipts under the CBTA for the purpose of calculating the receipts fraction of the allocation formula. Id. at 419. The panel reasoned that "Stryker chose its mode of operation and, insofar as New Jersey is concerned, it is free to alter it." Ibid. We granted Stryker's petition for certification, 165 N.J. 605 (2000), and now affirm.
Corporations have been taxed in this State since 1884 when the Legislature adopted "[a]n act to provide for the imposition of State taxes upon certain corporations and for the collection thereof." L. 1884, c. 159; Robert J. Martin, Calling in Heavy Artillery to Assault Politics as Usual: Past and Prospective Deployment of Constitutional Conventions in New Jersey, 29 Rutgers L.J. 963, 1002 n.155 (1998) ("Corporate taxes date back to 1884, when a franchise tax was imposed upon all domestic corporations."). That act, later compiled under Chapter 13 of Title 54 of the Revised Statutes, subjected certain corporations to an annual fee or franchise tax. N.J.S.A. 54:13-11 to -15. The Legislature ultimately became dissatisfied with that corporate tax scheme because, under a separate statute, L. 1851, p. 271, a corporation's intangible personal property, such as stocks, bonds and notes, was valued for municipal tax purposes by the local assessors and at local rates. Fedders Fin. Corp. v. Director, Div. of Taxation, 96 N.J. 376, 390 (1984); New Jersey Commission on Taxation of Intangible Personal Property, Report 9-21 (1945) (Commission Report). That resulted in so-called "tax lightning" in which corporations became subject to sudden increases in assessments on their intangibles, especially in New Jersey's larger cities. United States Steel Corp. v. Director, Div. of Taxation, 38 N.J. 533, 539 (1962); Statement to Assembly Bill No. 395 of 1945 (L. 1945, c. 162).
Consequently, the Legislature adopted the Corporation Business Tax Act (CBTA), L. 1945, c. 162, replacing the prior corporate tax scheme with a uniform statewide tax on corporations. N.J.S.A. 54:10A-1 to -40; United States Steel, supra, 38 N.J. at 539 ("The Corporation Business Tax Act (1945) was adopted because of dissatisfaction with prior law under which intangible property was taxable Ad valorem at the substantial rates applicable to realty and tangible personalty."). The CBTA imposes a tax on every foreign or domestic corporation, not otherwise exempt, "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." L. 1945, c. 162, § 2 (N.J.S.A. 54:10A-2). In direct response to the prior corporate tax system, the CBTA provides that "such franchise tax shall be in lieu of all other State, county or local taxation . . . measured by intangible personal property." Ibid.
In the case of a corporation that "maintains a regular place of business outside this State other than a statutory office," Section 6 of the CBTA provides that such a corporation is to be taxed only on that portion of its income and worth that approximates 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-4(b); N.J.S.A. 54:10A-6. Thus, the statute, "particularly § 6 thereof, reflects the recognition that the business activity of a multi-state enterprise within one particular state is inadequately measured by the worth of its assets or income in that state alone, but is enhanced by the activity of the entire enterprise." American Tel. & Tel. v. Director, Div. of Taxation, 4 N.J. Tax 638, 648 (Tax Ct. 1982), aff'd, 194 N.J. Super. 168 (App. Div.), certif. den. 97 N.J. 627 (1984). The CBTA is intended "to permit the tax to reflect the extent to which each corporation engages in business activities within New Jersey." Commission Report, supra, at 63.
To that end, the CBTA establishes a three-factor formula for apportioning the income of out-of-state corporations to New Jersey. N.J.S.A. 54:10A-6.*fn1 During the audit years 1988 to 1992, the formula required that, in determining Stryker's CBTA liability, the corporation's entire net worth and entire net income should be multiplied by the average of three fractions specified in N.J.S.A. 54:10A-6 (A), (B) and (C). The denominators of those fractions represent the corporation's total (real and tangible) property, business receipts, and payroll, respectively——the numerators represent the corporation's New Jersey property, receipts, and payroll, respectively. Ibid.*fn2 See also Hon. David E. Crabtree, 43 New Jersey Practice State and Local Taxation § 22.7 (1999) (discussing at length determination of tax base under CBTA).
The only dispute in this case involves the amount Stryker is required to include in the numerator of the "receipts fraction" under N.J.S.A. 54:10A-6(B). Although seemingly uncomplicated, the Taxation Commission envisioned that "[t]he principal problem in connection with the allocation of gross receipts occurs in the specification of sales to be attributable to the taxing State." Commission Report, supra, at 78. N.J.S.A. 54:10A-6(B) defines the kinds of income in the numerator of the receipts fraction to include:
[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,
(6) all other business receipts . . . earned within the State . . . .
The phrase "where shipments are made to points within this State" presently included in both (B)(1) and (B)(2) was not added to the CBTA until adoption of L. 1949, c. 236. That amendment appears to have been in response to concerns expressed in the Second Report of the Commission on State Policy (1947) at 92: "It has been suggested that the sales element of the gross receipts factor . . . be modified to give more weight to the location of customers." That report stated that New Jersey's business community was concerned that the apportionment formula under Section 6 discriminated against companies that largely conducted their manufacturing activity in New Jersey but sold their products outside the State. Id. at 93. The 1949 amendment therefore addressed those concerns by establishing a destination sales formula under (B)(1) and (B)(2) in which receipts from the sales of tangible goods are apportioned based on the location of the customer rather than the place where the costs of performing the service are incurred.
At the same time, L. 1949, c. 236, added a new subparagraph under N.J.S.A. 54:10A-6(B) that required corporations to ...