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L & L Oil Service, Inc. v. Director

June 26, 2001


On appeal from the Tax Court of New Jersey, whose opinion is reported at 18 N.J. Tax 514 (Tax Ct. 2000), 6341-1997.

Before Judges Petrella, Newman and Wells.

The opinion of the court was delivered by: Petrella, P.J.A.D.


Argued April 30, 2001

L & L Oil Service, Inc. (L & L), a New Jersey corporation, appeals from the entry of judgment in the Tax Court upholding a sales tax assessment by the Division of Taxation (Division) on its business operations of collecting waste oil. The Tax Court opinion is reported at 18 N.J. Tax 514 (Tax 2000).

In the Tax Court L & L's complaint challenged the final determination of the Director of the Division (Director) assessing L & L sales tax and interest during an audit period from 1990 through 1992. L & L contends that the services it provides in the collection and transportation of waste oil in what it calls an "integrated transaction" are exempt from the imposition of sales tax. It sought abatement of the assessed taxes and interest as well as seeking attorney's fees.

On appeal, L & L asserts that the Tax Court Judge erred in holding that the service it provides constitutes the "maintaining, servicing or repairing" of personal property under N.J.S.A. 54:32B-3(b)(2) or of real property under subsection (4). In addition, L & L argues that a portion of its charges are exempt from the tax under N.J.S.A. 54:32B-3(b) as sales for resale and under N.J.S.A. 54:32B-8.11 as transportation charges. Moreover, L & L argues that the Tax Court Judge erred in declining to read the Sales and Use Tax Act in pari materia with the Department of Environmental Protection (DEP) statutes requiring certification to perform services on underground storage tanks. In addition, L & L asserts that the judge erred in refusing to grant a waiver under N.J.S.A. 54:49-11b of interest on the assessment. L & L also asserts error in the Tax Court's quashing its subpoena of a Division employee and permitting the Director to rely on N.J.S.A. 54:32B-3(b)(2) as a basis for the assessment. On October 8, 1998, the parties signed a pretrial order in which the Director acknowledged that the sales tax was imposed under N.J.S.A. 54:32B-3(b)(4), which provides for sales tax on "[m]aintaining, servicing or repairing real property." Whether the tanks (generally ranging in size from 275 to 1,000 gallons) from which L & L collects materials constitute real property under the statute was listed in the pretrial order as an issue for trial.

In its trial brief, L & L apparently argued that it should be assessed no tax for those tanks too small to be deemed "real property" under N.J.S.A. 54:32B-3(b)(4). The Director replied that even if certain tanks were considered personal property because they were too small to constitute real property, L & L was subject to sales tax under N.J.S.A. 54:32B-3(b)(2) for "maintaining, servicing, [or] repairing tangible personal property."

L & L moved before trial to preclude the Director from relying on N.J.S.A. 54:32B-3(b)(2) as a partial basis for the assessment. In an April 5, 1999 letter opinion the Tax Court Judge concluded that L & L would suffer no prejudice by permitting the Director to rely on N.J.S.A. 54:32B-3(b)(2) and denied the motion. However, he permitted L & L to request additional discovery and an adjournment, if necessary, for further preparation.

On April 12, 1999, L & L requested the opportunity to depose four Division employees and requested an adjournment of the trial date. The Director opposed deposition of the Division employees, and L & L withdrew its motion to extend discovery for the depositions. L & L also sought an order allowing it to use an expert witness, and was allowed to submit the report of one expert witness.

On August 9, 1999, L & L subpoenaed a Division employee, Tax Services Specialist Denise Lambert, to appear at trial and produce any documentation prepared by any employee of the "Tax Counselor's Office" regarding removal and transportation of hazardous waste from oil tanks. Lambert was the "Tax Counselor" who, in a July 1, 1993 advisory letter, responded to L & L's inquiry regarding sales tax on hazardous waste removal. Also, on August 11, 1999, the Director was subpoenaed to produce Lambert and the requested documentation. The judge quashed the subpoena on the grounds that Lambert's testimony and the documentation would not be relevant and would unduly delay the proceedings. The judge also concluded that the internal documents and testimony as to conversations with others in the Tax Counselor's Office regarding the preparation of such documents was privileged, and thus inadmissible.

The facts are essentially gleaned from the joint stipulation submitted by the parties, the testimony of L & L's trial witnesses and the Tax Court Judge's opinion. L & L presented three witnesses at trial: its expert witness, its vice-president and its accountant. The Director presented no witnesses.

L & L is a refiner and also engages in pumping oil, sludge and antifreeze (collectively "waste materials") from the storage tanks of gasoline service stations, industrial properties and occasionally, residential properties. During the years in question its customers paid L & L a fee to remove the waste materials and sometimes clean empty tanks. The tanks varied in size, generally between 275 to 1,000 gallons.

The waste materials are pumped into an L & L tanker truck and transported to its facility, where the materials are refined or processed for sale.*fn1 The purification process requires the separation of water and oil from the sludge. L & L disposes of the waste water and sludge and sells the separated oil at a profit. L & L's vice-president testified that waste materials that did not meet their recycling specifications could be returned to the generator of the waste but were normally disposed of off-site, sometimes for an additional fee. L & L's vice- president further testified that in his fifteen years with the company, it returned waste materials to the generator perhaps ten to thirty times. The Tax Court Judge found this testimony incredible, suggesting it "was molded to suit a theory of non- taxability developed by L & L for purposes of trial." Id. at 529.

During the audit period, L & L normally charged a lump sum for removal of waste materials. However, some invoices included a separate transportation charge. L & L's accountant testified that payments it received for the removal of waste materials were not treated as income, but as a reduction in the cost of the processed material it later sold.

Generally, L & L did not charge customers sales tax for the removal of waste materials, but some invoices did indicate such a charge. L & L attributed this inconsistency to confusion over whether the sales tax applied. Ultimately, it determined not to charge the sales tax based upon advisory letters from the Tax Counselor's branch of the Division, and an article in New Jersey State Tax News.*fn2

The Division issued an assessment for sales tax due for the audit period of $305,032, plus interest to July 24, 1994, of $100,173, for a total of $405,205. Based on exemption certificates subsequently provided by L & L, the Division modified the assessment and fixed L & L's sales tax liability at $97,773.33, plus interest to August 20, 1997 of $36,678.88, for a total of $134,452.21. On June 1, 1996, L & L made a partial payment under an Amnesty Program of $45,000, thus the balance of sales tax due became $52,773.33, plus interest.

The judge held that the services provided by L & L, i.e., the removal of wastes from storage tanks, "permitted the continued use of the tanks for their intended purpose ... and, therefore, such removal constituted 'maintenance' or 'servicing' of the tanks under N.J.S.A. 54:32B-3(b)(2) and (4)." 18 N.J. Tax 514, 527-528.


L & L contends the Tax Court erroneously permitted an amendment to the pretrial order "on the eve of trial" by allowing the Director to rely at trial upon N.J.S.A. 54:32B-3(b)(2) in addition to N.J.S.A. 54:32B-3(b)(4). It argues that this shifted the focus from whether the tanks constituted real property to whether L & L's business constituted maintaining, servicing or repairing the tanks.

Despite L & L's unsupported assertions to the contrary, oral amendments to the pretrial order, although not encouraged, are permissible in the sound discretion of the trial judge. See R. 4:25-1 and R. 4:9-2; Wilkins v. Hudson County Jail, 217 N.J. Super. 39, 44 (App. Div.), certif. denied, 109 N.J. 520 (1987). The court rules afford flexibility in amending pretrial orders "where necessary to subserve the presentation of the merits of the action, provided the adverse party will not be prejudiced ...

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