March 18, 2008
DAVIDOFF OF GENEVA (CT), INC., PLAINTIFF-RESPONDENT,
DIRECTOR, DIVISION OF TAXATION, DEFENDANT-APPELLANT.
On appeal from the Tax Court of New Jersey, Docket No. 5278-2005.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued February 4, 2008
Before Judges Sabatino and Alvarez.
The Director of the Division of Taxation ("the Director") appeals the Tax Court's order of November 3, 2006, granting summary judgment to respondent, Davidoff of Geneva (CT), Inc. ("Davidoff"). The order dismissed the Director's claim that Davidoff, a Connecticut-based wholesale dealer of cigars and tobacco products, was subject to the New Jersey Tobacco Products Wholesale Sales and Use Tax Act, N.J.S.A. 54:40B-1 to -14, (the "TPT"), during calendar years 1995 through 2000. The Tax Court also denied the Director's request to reopen discovery. We affirm.
Davidoff is a nationwide wholesale dealer of cigars and other tobacco products. The company is based in Stamford, Connecticut. At the relevant times, Davidoff employed six sales representatives covering the entire United States.
Davidoff owns no property in New Jersey and has no offices in this State. The parties agree, however, that Davidoff products are regularly sold by third-party retailers and consumed in, among other places, New Jersey. In May 1994, Davidoff registered to do business in this State, defining its business as the "wholesale distribution of tobacco products." That same year, Davidoff applied for a license to operate in New Jersey as a cigarette distributor or wholesale dealer. The company renewed this license annually through April 2002. Davidoff began conducting wholesale cigarette sales in New Jersey in 1997, and filed Non-Resident Cigarette Dealer Sales Returns on a monthly basis for the next five years.*fn1
During the six-year taxable period that is at issue here, Davidoff collected the following receipts from its cigars and other tobacco products as the result of purchases by customers from New Jersey: $499,452 in 1995, $1,104,263 in 1996, $1,223,587 in 1997, $1,228,326 in 1998, $754,808 in 1999, and $639,627 in 2000. For that entire taxable period, Davidoff filed returns under the New Jersey Corporation Business Tax Act ("CBT"), N.J.S.A. 54:10A-1 to -41, and paid the CBT taxes that it owed to the State for those years.*fn2
Davidoff applied for and was granted a Certificate of Authority in 1994 to collect our State's sales and use tax, N.J.S.A. 54:32B-1 to -55. Davidoff has never collected that tax, presumably because it has not yet engaged in sales activities in this State that would be subject to that particular tax.*fn3
In April 2000, Davidoff obtained a Certificate of Authority to collect the TPT. Despite having that authorization, Davidoff did not collect or pay the TPT tax, again because it believed that the nature of its operations did not trigger any liability under the TPT.
In 2000, the Director undertook an audit of Davidoff, as part of a broader effort to investigate general compliance with the TPT. The audit was performed by Matthew Goff, a Division of Taxation ("Division") auditor located in Des Plaines, Illinois. Goff completed his audit report of Davidoff on July 28, 2003, about three years after he was assigned the matter.
At multiple times during the course his audit, Goff requested that Davidoff provide him, among other things, with New Jersey customer lists and New Jersey sales data. Goff contends that he never received this information, despite several oral and written requests.*fn4 Consequently, Goff asserted in his report that Davidoff "refused to cooperate and provide any type of customer list, run, or sales detail."
Based on Goff's limited interactions with Davidoff officials, the audit report summarized his understanding of Davidoff's position that it did not owe New Jersey taxes under the TPT:
[Davidoff] feels that they are neither a distributor nor wholesaler under the New Jersey [TPT] and are therefore not responsible for collecting the tax. They maintain that the sales transactions to customers are completed outside the state of New Jersey and therefore not subject to imposition of the tax. As is the "industry practice" of cigar distributors, they feel that their customers should assume responsibility and pay taxes on their purchases . . . . [Emphasis added.]
Goff disagreed with Davidoff's characterization of its business. He acknowledged that Davidoff "purchases it[s] cigars from foreign manufacturers and has no physical location in New Jersey." Even so, Goff found that:
They [Davidoff] do have New Jersey independent contractors who visit customers within the state, which is why they are registered for CBT. From the comments made by [Davidoff's] tax department, it was determined that [Davidoff] sells to both other wholesalers and retailers, so they were deemed to be subject to the TPT . . . . [Emphasis added.]
In another section of his report, Goff noted that an unidentified Davidoff representative had stated to him that the company "sold cigars into the state, solicited by independent contractors."
Nowhere in his report did Goff document that Davidoff had made actual sales in New Jersey. Instead, Goff found that Davidoff qualified as a "wholesaler" under the TPT. Under Goff's reading of the TPT statute, as it existed at the time, he reasoned that Davidoff did not have to maintain an established place of business physically in New Jersey in order to be considered a wholesaler subject to the TPT. Moreover, Goff rejected Davidoff's contention that all of its sales had taken place in Connecticut and that the company had not sold products in New Jersey. Goff wrote that he "[found] it difficult if not impossible [for Davidoff] to service existing customers as well as expanding business in New Jersey without having sales people making regular visits to New Jersey locations, which again is the industry practice for cigar distributors."
Pursuant to Goff's audit, the Director issued an assessment against Davidoff on September 9, 2003. The assessment found Davidoff liable for a total of $4,189,845.33 in unpaid taxes, interest and late filing penalties. The total included a TPT assessment of $1,889,478.00, a separate modest assessment of $2,894.83 under the former Litter Control Tax Act, N.J.S.A. 13:1E-92 to -95 (repealed 2002), and over $2 million in interest and late fees. The assessment was for the years 1995 through 2000.
Davidoff sought administrative review of the assessment with the Division's Conference and Appeals Branch. On March 30, 2005, the Branch affirmed the Notice of Assessment, and recalculated the interest and fees due, bringing the total assessment to $4,681,824.27. In a written report that ultimately formed the basis of its final determination, the Branch concluded that Davidoff "acts not only as a manufacturer, but also as a distributor and a wholesaler," and that the company "definitely falls within the confines of the statutory definition of [a] distributor."*fn5 The Branch also faulted Davidoff for not fully complying with requests for information.
Davidoff then filed a complaint in the Tax Court in June 2005. The complaint took issue with the Director's determination that Davidoff was a "distributor" in New Jersey, within the meaning of the terms of the TPT in force from 1995 through 2000. In particular, Davidoff opposed the Director's characterization of its business presence in New Jersey, denying that it ever utilized independent contractors to market its products in this State. Servidio, in a sworn affidavit, denied ever telling Goff that Davidoff used independent contractors in New Jersey, or that such alleged independent contractors were connected to Davidoff's filing of CBT returns in New Jersey. To the contrary, Servidio certified that "Davidoff does not use independent sales representatives. Therefore, Davidoff had no independent sales representatives in New Jersey during the [t]axable [p]eriod."
Davidoff also presented to the Tax Court a certified statement from Diane Kalambokas, its Director of Finance. Kalambokas was "responsible for all aspects of Davidoff's financial and tax management, reporting and compliance, and [was] knowledgeable about all aspects of Davidoff's operations during the [t]axable [p]eriod."
With respect to the key issues raised under the TPT, Kalambokas attested that "[d]uring the [t]axable [p]eriod, Davidoff had no employees, agents, independent contractors, sub-contractors, or other persons or entities performing services or activities on its behalf in New Jersey." Rather, Kalambokas certified that Davidoff sold all of its products from its headquarters in Connecticut, and shipped them "'free-on-board' Stamford" ("F.O.B.") to its buyers via common carrier. Under the terms of that F.O.B. policy, "title and risk of loss passed upon delivery of the tobacco products by Davidoff to the common carrier in Stamford." The purchaser was responsible for insuring the merchandise during shipment, and Davidoff relinquished all rights to its merchandise upon delivery to the common carrier in Stamford.
The Director nonetheless countered that Davidoff had a substantial presence in New Jersey. It based that claim upon (1) Davidoff's alleged use of independent contractors in New Jersey, (2) the company's registration for and payment of other state business taxes, and (3) the attendance of some Davidoff employees at a New Jersey computer software training seminar in 1996. Regarding this last allegation, Davidoff admits that in January 1996, several of its employees, including Kalambokas, attended a computer software training seminar given by a third-party vendor in Mount Laurel. However, Kalambokas asserted that the software "related to . . . inventory management and control, sales order processing[,] and all aspects of financial record keeping and management reporting," operations which all took place at the Connecticut offices. She further certified that the software "related to the general purposes of our business, having nothing specifically related to do with the sales effort in New Jersey."
After discovery was exchanged, Davidoff moved for summary judgment in the Tax Court on August 18, 2006. The Director opposed the application and cross-moved for summary judgment. At oral argument before Judge Gail Menyuk on October 20, 2006, the parties both asserted that the only disputed material fact was whether or not Davidoff had a sufficient physical presence in New Jersey to make it subject to the TPT. The Director maintained that Davidoff's various contacts with New Jersey subjected the company to this State's jurisdiction for taxation purposes. In opposition, Davidoff's counsel argued that neither the company's registration for the CBT, nor the attendance of some of its employees at the Mount Laurel computer seminar in 1996, created a substantial transactional nexus with New Jersey. He also flatly denied that Davidoff used independent contractors in this State to make sales. He did admit that, if the company did, in fact, utilize independent contractors in New Jersey, then it would have been subject to the TPT.
Judge Menyuk initially reserved judgment on the motions. The judge observed that she considered the sole material issue to be whether or not Davidoff had independent contractors in New Jersey. She also expressed doubts about whether the mere presence of Davidoff employees at the 1996 computer seminar in New Jersey was jurisdictionally significant.
Six days after the motion arguments, the Deputy Attorney General representing the Director wrote a letter to Judge Menyuk. The letter requested the judge to continue to reserve judgment on the pending motions for forty-five days, and to allow the Director in the interim to conduct further discovery on the independent contractors issue. Specifically, the Director sought, for the first time, to depose Servidio, as well as another Davidoff employee, Jeffrey Lee.
Judge Menyuk issued her oral determination on these matters in a telephonic conference with counsel on November 3, 2006. The judge granted Davidoff's motion for summary judgment and denied the Director's cross-motion. The judge also denied the Director's post-argument request to extend the time to conduct discovery.
As a central basis of her substantive ruling, Judge Menyuk concluded that "Davidoff was not a distributor as defined by N.J.S.A. 54:40[B]-2 [the TPT] during the period in issue here." Characterizing as "meager" any evidence that Davidoff had engaged independent contractors in New Jersey, the judge stated:
What I am unable to conclude is that Davidoff received, stored, sold, or otherwise disposed of tobacco products after they had reached this state. From all the evidence that has been presented by both parties . . . the only inference that I could possibly make in favor of the
[D]irector is that Davidoff had an independent contractor in New Jersey doing something here on behalf of Davidoff.
What has not been presented is any evidence from which I could infer that anyone connected with Davidoff received, stored, sold, or otherwise disposed of tobacco products once they had reached this state. [A]n independent contractor or even an employee, even when he [or she] actively engaged in soliciting sales, does not make Davidoff a distributor under the act. The most obvious example of that would be a salesperson soliciting orders transmitted to Davidoff in Connecticut for shipment of tobacco products from Connecticut by common carrier to New Jersey.
In light of her statutory finding that Davidoff's activities for the years in question were not covered by the TPT, Judge Menyuk found no need to "reach the issue of whether the [D]irector may constitutionally impose the tobacco products tax on Davidoff on the facts of this case." The judge did not make a ruling on the applicability of the Litter Control Tax to Davidoff, instead inviting the parties to discuss that issue. Following such discussion, the parties consented in February 2007 to a cancellation of the Litter Control Tax assessment, subject to reinstatement if the Division prevailed in its appeal of Judge Menyuk's decision regarding the TPT.
As a general matter, this court recognizes the considerable expertise of the Tax Court in state tax matters. We will not disturb its rulings, unless "the Tax Court came to its decision in an arbitrary fashion[, or] . . . its findings of fact are [not] supported by substantial credible evidence." Little Egg Harbor Twp. v. Bonsangue, 316 N.J. Super. 271, 285 (App. Div. 1998) (citing Glenpointe Assocs. v. Twp. of Teaneck, 241 N.J. Super. 37, 46 (App. Div.), certif. denied, 122 N.J. 391 (1990)).
In this case, we review the Tax Court's entry of an order for summary judgment. It is well-established that summary judgment is appropriate if "the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact challenged and that the moving party is entitled to a judgment or order as a matter of law." R. 4:46-2(c). When deciding a motion for summary judgment, the court must "consider whether the competent evidential materials presented, when viewed in the light most favorable to the non-moving party, are sufficient to permit a rational factfinder to resolve the alleged disputed issue in favor of the non-moving party." Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995). On appeal, this court applies the same standard as the court below. Coastal Eagle Point Oil Co. v. W. Deptford Twp., 19 N.J. Tax 301, 304 (App. Div. 2001).
That being said, we are completely satisfied that Judge Menyuk's decision on the merits here was supported by the record, consistent with the substantive law, and in accord with the standards for summary judgment. We also sustain her discretionary prerogative in not acceding to the Director's belated request to extend discovery after the cross-motions for summary judgment had been argued. Accordingly, we affirm the Tax Court's final judgment, substantially for the reasons cogently expressed by Judge Menyuk in her oral ruling of November 3, 2006. We add only a few comments.
From 1995 through 2000, the definition of a "distributor" under the Tobacco Products Wholesale Sales and Use Tax Act was as follows:
"Distributor" means a person, wherever resident or located, who brings or causes to be brought into this State a tobacco product purchased directly from the manufacturer thereof and receives, stores, sells or otherwise disposes of the same after it reaches this State.*fn6
[Historical and Statutory notes to N.J.S.A. 54:40B-2 (West 2002) (emphasis added).]
By comparison, the definition of a "wholesaler"*fn7 under the Act, both today and during the taxable period, is: a person, wherever resident or located, other than a distributor as defined herein, who:
a. purchases tobacco products from any other person who purchases from the manufacturer and who acquires tobacco products solely for the purpose of bona fide resale to retail dealers or to other persons for the purposes of resale only; or
b. services retail outlets by the maintenance of an established place of business for the purchase of tobacco products including, but not limited to, the maintenance of warehousing facilities for the storage and distribution of tobacco products. [N.J.S.A. 54:40B-2.]
It is an elemental principle of statutory construction that "the words and phrases in the statute must be given their generally accepted and ordinary meaning." State v. Malik, 365 N.J. Super. 267, 275 (App. Div. 2003), certif. denied, 180 N.J. 354 (2004). Furthermore, "when interpretation of a taxing provision is in doubt, and there is no legislative history that dispels that doubt, the court should construe the statute in favor of the taxpayer." Fedders Fin. Corp. v. Dir., Div. of Taxation, 96 N.J. 376, 385 (1984).
In this case, the Division's auditor, Branch reviewer, and Director all perceived that Davidoff was a "distributor" under the Act, thus subjecting it to the TPT. All three focused on the first part of the statutory definition of distributor, finding that Davidoff "cause[d]" tobacco "to be brought into" New Jersey. However, the language of the Act is clear that a distributor also must "receive, store, sell or otherwise dispose of" a tobacco product "after it reaches" New Jersey. N.J.S.A. 54:40B-2 (amended 2001). The Director has failed to establish this half of the statutory requirement, which is the key aspect that Judge Menyuk relied on in granting summary judgment to Davidoff. As Judge Menyuk correctly noted, even if the Director could prove that Davidoff relied upon independent contractors to sell its tobacco products in New Jersey, such reliance does not constitute evidence that Davidoff had anything to do with its products after they were physically shipped, F.O.B. Stamford,*fn8 out of Connecticut and into New Jersey.
Further, the Director failed to marshal sufficient evidence in the Tax Court to refute the sworn certifications from Davidoff's management, attesting that any marketing of Davidoff's products after they left Connecticut was undertaken by third-party retailers or third-party wholesalers. The articles that the Director culled from the Internet and presented to the Tax Court, which mention Davidoff products being used at various cigar-smoking events in New Jersey, have no relevance to whether Davidoff itself undertook any of the statutorily-defined actions in this State that would make it a "distributor" for purposes of the Act. Moreover, the Director's contention that the Legislature intended the TPT to be broadly construed is undermined by the clear terms of the statute, as it was worded before its amendment in 2001, defining a "distributor" in a precise and limiting way.
In sum, the Tax Court's substantive decision properly applied the requirements of the statute to the record submitted on the cross-motions. The Director presented no genuine issue of material fact that any employees or agents of Davidoff had sold its tobacco "after it reache[d]" New Jersey, following its F.O.B. shipment from Connecticut. N.J.S.A. 12A:2-319(1). We thus affirm the grant of summary judgment to Davidoff.*fn9
We briefly address the Division's procedural argument that Judge Menyuk committed reversible error in declining to extend discovery after the summary judgment motions had already been argued. We discern no reason to set aside the judge's denial of that eleventh-hour request.
Rule 8:6-1(a)(4) specifies that discovery in State tax cases "shall be completed within 150 days," unless otherwise directed in a case management notice or order of the Tax Court. That 150-day period runs from sixty days after the service of the complaint. Ibid. Although we were advised at oral argument that the Tax Court held several case management conferences in this matter, the Director concedes that the court never issued an order extending the discovery period beyond the time specified by the Rule. We cannot tell from the record supplied to us when Davidoff's complaint was served upon the Director, but we know that the Director filed an answer on August 5, 2005. If, for the sake of argument, we use sixty days from that answer date as the trigger of discovery, the Division should have concluded discovery by April 5, 2006, or, if it still wanted more discovery, filed a timely motion to extend the discovery period. It chose not to do so.
Instead, the Division initially took the position on its cross-motion for summary judgment that the factual record was sufficiently complete for the court to rule on the merits. Notably, the Division did not respond to Davidoff's affirmative summary judgment motion with an assertion under R. 4:46-5 that it was unable to present by affidavit facts essential to justify opposition because discovery was incomplete. It was only after the Division apparently sensed, from oral argument on the motions, that its legal position may have been in jeopardy that it sought to reopen discovery, and to pursue depositions that it could have sought long before that time. We are also mindful that the Division's auditor took three years to examine the company's operations before the assessment was imposed and suit was filed.
Under the circumstances, we do not believe that Judge Menyuk misapplied her discretion in denying the late discovery request. Abtrax Pharm., Inc. v. Elkins-Sinn, Inc., 139 N.J. 499, 517 (1995) (appellate courts reviewing discovery rulings ordinarily should consider only whether the trial court abused its discretion); see also Cavallaro v. Jamco Prop. Mgmt., 334 N.J. Super. 557, 570-72 (App. Div. 2000).
The Tax Court's judgment of November 3, 2006 is affirmed.