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Praxair Technology, Inc. v. Director

December 15, 2009

PRAXAIR TECHNOLOGY, INC., A DELAWARE CORPORATION, PLAINTIFF-RESPONDENT AND CROSS-APPELLANT,
v.
DIRECTOR, DIVISION OF TAXATION, DEFENDANT-APPELLANT AND CROSS-RESPONDENT.



On certification to the Superior Court, Appellate Division, whose opinion is reported at 404 N.J. Super. 287 (2008).

SYLLABUS BY THE COURT

(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).

RIVERA-SOTO, J., writing for a unanimous Court.

The issue in this appeal is whether the New Jersey business activities of an out-of-state taxpayer were subject to New Jersey's Corporation Business Tax Act of 1945, N.J.S.A. 54:10A-1 to -41, for the years 1994-1996, prior to the 1996 addition of an example to an applicable regulation, N.J.A.C. 18:7-1.9.

Plaintiff Praxair Technology, Inc. (Praxair) is a Delaware corporation that maintains a principal place of business in Connecticut. Praxair owns patents, trade secrets and technology relating to the equipment to manufacture and the manufacture of industrial gases. Praxair exists only to own and license the use of those patents to its corporate affiliates. Praxair's corporate parent manufactures and sells industrial gases throughout the United States, including New Jersey. From 1994 through 1999, Praxair's corporate parent used Praxair's intellectual property in its manufacturing facilities in New Jersey, and it paid licensing fees to Praxair for that use. During that period, Praxair never filed New Jersey corporate business tax returns or paid any New Jersey corporate business taxes.

The Director of the Division of Taxation issued a notice of assessment to Praxair. In 2005, following the completion of the administrative review process, the Director issued a final determination finding Praxair liable for corporate business taxes for 1994-1999, together with interest and late filing penalties, for an aggregate assessment of $2,950,187.59.

One of the issues litigated before the Tax Court was the assessment of a corporate business tax for the years 1994-1996 under N.J.S.A. 54:10A-1, in light of the 1996 addition of an example to N.J.A.C. 18:7-1.9. The Tax Court noted that during the relevant time period, N.J.S.A. 54:10A-2 required every foreign corporation to pay an annual franchise tax "for the privilege of doing business" in New Jersey; and N.J.A.C. 18:7-1.9 is a regulation that interprets the meaning of "doing business" under the statute. In 1996, an example was added to the regulation, stating that a foreign corporation that receives fees for licensing trademarks to New Jersey companies for use in New Jersey is subject to the corporation business tax. The court concluded that the statute applied to Praxair, rejected Praxair's claim that the adoption of the regulatory example expanded the Director's taxing powers, and found Praxair liable for the corporation business tax.

Praxair appealed. The Appellate Division reversed. Praxair Tech., Inc. v. Dir., Div. of Taxation, 404 N.J. Super. 287 (App. Div. 2008). The panel found that sufficient doubt about whether Praxair's business activities were subject to the corporate business tax had resulted in a perceived need for the explanatory example in the regulation. It thus held that the Tax Court erred in deciding Praxair's pre-1996 tax liability because it had given insufficient regard for the impact of the 1996 changes to the regulation.

The Supreme Court granted the Director's petition for certification and Praxair's cross-petition for certification. 199 N.J. 130 (2009).

HELD: Praxair's business arrangement with its corporate parent gave rise to liability under the Corporation Business Tax Act, N.J.S.A. 54:10A-2, for the years 1994-1996, before an example was added to the relevant regulation, N.J.A.C. 18:7-1.9.

1. The Court's role in statutory interpretation is to determine the Legislature's intent. The Court looks first to the plain language of the statute. The words chosen by the Legislature are read in accordance with their ordinary meaning, unless the Legislature has used technical terms, or terms of art, which are construed in accordance with those meanings. (pp. 11-12)

2. At all relevant times, N.J.S.A. 54:10A-2 provided that foreign corporations shall pay an annual tax for the privilege of "doing business" or "employing or owning capital or property" in New Jersey. Even before the example was added to the regulation, Praxair's business arrangement with its corporate parent gives rise to liability under that statute. Under their business arrangement, Praxair would possess intellectual property, and the parent would license that property from Praxair for a price. From a plain language standpoint, the Tax Court reached the sensible conclusion: the use of intangible property for income-producing purposes in New Jersey renders that property's owner subject to taxation either as one who is "doing business" or "employing or owning capital or property" in New Jersey. (pp. 12-14)

3. The same result obtained if N.J.A.C. 18:7-1.9 is examined even before the 1996 example was added. That regulation broadly defined "doing business" as "all activities which occupy the time or labor of men for profit." The regulation further defined considerations in determining whether an activity constituted "doing business," as well as those activities that would not constitute "doing business." Applying those non-exclusive factors leads to the conclusion that Praxair was "doing business" in New Jersey sufficient to render its activities liable for New Jersey's corporation business tax. Praxair's intellectual property was brought to and put into continuous income-producing use in Jersey. (pp. 14-16)

4. The Court rejects the argument that Praxair's business arrangement with its corporate parent became subject to the corporate business tax only after the Director adopted a regulatory example that clearly mirrored Praxair's arrangement. That argument is premised on an incorrect assumption that tax liability can somehow flow from a regulatory change. Although the Legislature may delegate its exclusive taxing power, the proposition that the taxing power can be expanded by the Executive Branch via the adoption of regulations is erroneous. The Director's exercise of his regulatory powers is circumscribed by the taxing authority conferred by the Legislature. (pp. 17-18)

The judgment of the Appellate Division is REVERSED; the judgment of the Tax Court imposing liability on plaintiff under Section 2 of the Corporation Business Tax Act, N.J.S.A. 54:10A-2, for the years 1994 to and including 1996 is REINSTATED; and the matter is REMANDED to the Appellate Division for plenary consideration of plaintiff's challenges to the imposition of the late filing penalty and the post-tax amnesty penalties under N.J.S.A. 54:49-4 and N.J.S.A. 54:53-18(b), respectively.

The opinion of the court was delivered by: ...


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