FERRELLGAS PARTNERS, LP VS. DIRECTOR, DIVISION OF TAXATION (TAX COURT OF NEW JERSEY) ( 2021 )

NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
This opinion shall not "constitute precedent or be binding upon any court ." Although it is posted on the
internet, this opinion is binding only on the parties in the case and its use in other cases is limited. R. 1:36-3.
SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
DOCKET NO. A-3904-18T1
FERRELLGAS PARTNERS, LP,
Plaintiff-Appellant,
v.
DIRECTOR, DIVISION OF
TAXATION,
Defendant-Respondent.
_____________________________
Argued December 16, 2020 – Decided January 13, 2021
Before Judges Sumners and Geiger.
On appeal from the Tax Court of New Jersey, Docket
No. 7051-2014.
Kyle O. Sollie argued the cause for appellant (Reed
Smith LLP and Jonathan E. Maddison (Reed Smith
LLP) of the Pennsylvania bar, admitted pro hac vice,
attorneys; Jonathan E. Maddison and Kyle O. Sollie, on
the briefs).
Michael J. Duffy, Deputy Attorney General, argued the
cause for respondent (Gurbir S. Grewal, Attorney
General, attorney; Melissa H. Raksa, Assistant
Attorney General, of counsel; Michael J. Duffy, on the
briefs).
Vinson & Elkins, LLP, and Clifford Thau, Marisa
Antos-Fallon, and Bryan Hogg, (Vinson & Elkins,
LLP) of the New York bar, admitted pro hac vice,
attorneys for amicus curiae Energy Infrastructure
Council (George C. Hopkins, Clifford Thau, Marisa
Antos-Fallon, and Bryan Hogg on the brief).
PER CURIAM
Plaintiff Ferrellgas Partners, L.P. appeals from December 7, 2018 and
April 1, 2019 Tax Court orders granting partial summary judgment to defendant
Director of the Division of Taxation (Division), upholding the denial of a refund
of the partnership filing fees (PFF) that plaintiff paid for tax years 2009 through
2011. We affirm.
N.J.S.A. 54A:8-6(b)(2)(A) requires "[e]ach entity classified as a
partnership for federal income tax purposes," that has more than two owners,
"having any income derived from New Jersey sources," to pay "a filing fee of
$150 for each owner with an interest in the entity, up to a maximum of at
$250,000," when filing its informational tax return. Because it had more than
67,000 owners, plaintiff paid the maximum $250,000 PFF for tax years 2009
through 2011.
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Plaintiff challenges the constitutionality of the PFF, arguing it violates the
Dormant Commerce Clause (DCC) of the United States Constitution because it
is not fairly apportioned and discriminates against interstate commerce, and is
not internally consistent.1 It further contends that the PFF is a tax, not a uniform
regulatory fee, imposed on interstate commerce, that does not satisfy the internal
consistency standard. Plaintiff argues that this court should remand to the Tax
Court to cure these constitutional defects through three-factor apportionment.
The Statutory and Regulatory Framework
An entity "classified as a partnership for federal income tax purposes" is
required to file an informational tax return setting forth all items of income and
loss if the entity has "a resident owner" or "any income derived from New Jersey
sources." N.J.S.A. 54A:8-6(b)(1). The return must identify the "name and
address of each partner, member, or other owner of an interest in the entity
however designated." Ibid.
1
The Commerce Clause provides: "Congress shall have Power To . . . regulate
Commerce with foreign Nations, and among the several States, and with Indian
tribes." U.S. Const. art. I, § 8, cl. 3. "Although the Constitution does not in
terms limit the power of States to regulate commerce, we have long interpreted
the Commerce Clause as an implicit restraint on state authority, even in the
absence of a conflicting federal statute." United Haulers Ass'n v. Oneida-
Herkimer Solid Waste Mgmt. Auth., 550 U.S. 330, 338 (2007). This implied
restraint on state authority to regulate interstate commerce is commonly known
as the Dormant Commerce Clause.
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The Business Tax Reform Act (BTRA), L. 2002, c. 40, was enacted to
address large and multi-national corporations that earn billions in New Jersey
source income but pay minimal taxes. Sponsor's Statement to A. 2501 51-52
(June 6, 2002). This was accomplished, in part, by "establish[ing] a revenue
stream that captures enforcement and processing costs that New Jersey incurs
from processing the vast network of limited liability companies and
partnerships." Id. at 52. The BTRA was also intended to "affect[] the tracking
of the income of business organizations, like partnerships, that do not
themselves pay taxes but that distribute income to their owners, the eventual
taxpayers." Assembly Budget Comm. Statement to A. 2501 1 (June 27, 2002).
To that end, the Legislature considered imposing a filing fee of $150 per
owner on partnerships and entities classified as partnerships for federal income
tax purposes, up to a maximum of $250,000 per tax year. A. 2501 (June 6,
2002). The bill was subsequently amended to "[c]larify that the [PFFs] only
apply only to partnerships that derive income from New Jersey." Assembly
Budget Comm. Statement to A. 2501 13; see also A. 2501 (June 28, 2002). "For
pass-through entities that have income from New Jersey sources and more than
two members, the bill establishes an annual $150 per owner filing fee, capped
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at $250,000 per entity annually." Assembly Budget Comm. Statement to A.
2501 7.
The Office of Legislative Services estimated that PFF would increase
General Fund revenues by $40-$60 million in fiscal year 2003 and $28-$40
million in fiscal years 2004 and 2005. Legislative Fiscal Estimate to A. 2501 2
(Sept. 13, 2002).
N.J.S.A. 54A:8-6 was amended to include subsection (b)(2)(A), which
imposes the PFF. It provides:
Each entity classified as a partnership for federal
income tax purposes, other than an investment club,
having any income derived from New Jersey sources,
including but not limited to a partnership, a limited
liability partnership, or a limited liability company, that
has more than two owners shall at the prescribed time
for making the return required under this subsection
make a payment of a filing fee of $150 for each owner
of an interest in the entity, up to a maximum of
$250,000.
[N.J.S.A. 54A:8-6(b)(2)(A).]
The regulations initially proposed by the Division to implement the PFF
included "an apportionment methodology for partnerships . . . liable for the
[PFF] . . . that have partners . . . that never enter New Jersey." 35 N.J.R. 1573(a)
(Apr. 7, 2003). The Division later explained that "only partners or professionals
without nexus would be subject to apportionment." 35 N.J.R. 4310(a) (Sept. 15,
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2003). Accordingly, the regulations provide that the PFF will be apportioned if
a partnership has an office outside New Jersey and nonresident partners with no
nexus to this State. N.J.A.C. 18:35-11.2(b). When applicable, apportionment
is computed in accordance with N.J.A.C. 18:35-11.2(c), which provides:
The total apportioned partnership fee is equal to the
sum of:
1. The number of resident partners multiplied by
$150.00; plus
2. The number of nonresident partners with physical
nexus to New Jersey multiplied by $150.00; plus
3. The number of nonresident partners without physical
nexus to New Jersey multiplied by $150.00 and the
resulting product multiplied by the corporate allocation
factor of the partnership.
The Tax Court provided the following examples:
If a partnership had all resident partners, the fee is $150
times the number of partners. N.J.A.C. 18:35-11.6, Ex.
1. If a Connecticut partnership, which had an office in
Connecticut and New Jersey, and New Jersey source
income, had 4 partners with no physical nexus to New
Jersey, and the partnership’s allocation factor was 0.4,
the fee would apportioned by multiplying 4 x $150 x
0.4 or $240. Id., Ex. 2. If a limited partner of a New
Jersey partnership was a California limited partnership
which stored property in the New Jersey partnership’s
office, had an allocation factor of 10%, and received $1
million in distribution from the New Jersey partnership,
then the California limited partner would also be liable,
as a partnership, for the fee because it has New Jersey
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source income. Id., Ex. 3. Assuming all 15 partners of
the California limited partnership had no physical
nexus to New Jersey, the fee would be 15 x $150 x 0.1
or $225.
In a Technical Bulletin issued in 2005, the Division explained the amount
of the PFF is "generally determined by the number of K-1s filed by . . . the
partnership, including when a . . . tiered partnership or pass-through entity is
involved." TB-55 (Apr. 6, 2005). As to non-resident partners, "[i]f the
partnership has income earned outside New Jersey, the filing fee for non-
resident partners that do not have physical nexus with New Jersey may be
apportioned based on New Jersey source income," determined by applying the
corporate allocation factor. Id. at 2. The PFF would not apply to partnerships
that had "all . . . operations and facilities . . . located outside New Jersey." Ibid.
The Technical Bulletin also stated that "[i]ncome cannot be allocated outside
New Jersey (all income is New Jersey source income) if the partnership has no
place of business outside New Jersey." Ibid.
The Tax Court's Findings of Fact
Plaintiff is a publicly traded limited partnership incorporated in Delaware
that is headquartered and commercially domiciled in Kansas. Partnership
interests in plaintiff were regularly traded on the New York Stock Exchange.
Plaintiff's "general partner is Ferrellgas Inc., a wholly owned subsidiary of
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Ferrell Companies, Inc." According to its New Jersey partnership returns (N.J.-
1065), plaintiff's "limited partners are (1) the public 'shareholders,' (2) Ferrell
Companies, Inc., (3) Ferrell Companies, Inc., dba Ferrell Propane, Inc., and (4)
Jef Capital Management, Inc."
In tax year 2009, plaintiff had 67,019 partners, of whom 2542 were
residents or partners with nexus to New Jersey. In tax year 2010, plaintiff had
66,835 partners, of whom 2423 were residents or partners with nexus to New
Jersey. In tax year 2011, plaintiff had 82,047 partners, of whom 2927 were
residents or partners with nexus to New Jersey.
Plaintiff is the 99% sole limited partner in an affiliated Delaware limited
partnership, Ferrellgas, LP (the Operating Partnership). In turn, Ferrellgas Inc.
is the Operating Partnership's 1% general partner. Plaintiff facilitates
investments by the investing public in the Operating Partnership. The Operating
Partnership distributes propane tanks nationwide under the label "Blue Rhino."
Plaintiff has a storage facility in New Jersey. Three other locations handle
service and delivery calls.
For tax years 2009 through 2011, plaintiff reported the following as
allocable to New Jersey:
(1) property (real and intangible) valued at
$11,499,191; receipts of $20,380,367; payroll of
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$3,434,904, and a total apportionment of 1.1680% for
tax year 2009; (2) property (real and intangible) valued
at $11,418,129; receipts of $19,077,148; payroll of
$3,229,104; and a total apportionment of 1.0550% for
tax year 2010; and, (3) property (real and intangible)
valued at $11,510,505; receipts of $21,519,209; payroll
of $2,887,867; and a total apportionment of 1.0161%
for tax year 2011.
This was the same allocation factor used by the Operating Partnership. Plaintiff
also reported New Jersey sourced net partnership income of $942,513 in tax year
2009; $597,413 in 2010; and $190,966 in 2011.
The distributive share of New Jersey source partnership income from the
Operating Partnership was $1,208,149; $898,503; and $477,459, respectively,
for tax years 2009 to 2011. These were offset with plaintiff's ordinary losses
from trade or business for each tax year. The court noted that the reported
distributive share of New Jersey source partnership income differed from that
reported on the K-1 forms issued to plaintiff by the Operating Partnership in tax
years 2009 to 2011.
Plaintiff paid the maximum $250,000 PFF in tax years 2009 to 2011. It
then sought a full refund of the PFF it had paid in those years, claiming its
distributive share of partnership income from the Operating partnership was not
reportable income. Plaintiff filed amended NJ-1065s that eliminated the New
Jersey source income it had previously reported.
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The Division denied plaintiff's refund claims, determining that "pursuant
to N.J.A.C. 18:35-1.3(d)(6), a tiered partnership must 'take into account its
distributive share of partnership income' and cannot thereafter 'reallocate' it."
Because the Operating Partnership had allocated income to New Jersey, plaintiff
could not reallocate it.
Plaintiff filed a complaint against the Director and moved for partial
summary judgment, contending the PFF is a tax that violated the DCC under
three of the four criteria enumerated in Complete Auto Transit, Inc. v. Brady,
430 U.S. 274 (1977), because the PFF: (1) discriminated against interstate
commerce; (2) was not fairly apportioned; and (3) was not fairly related to the
services provided by the Division. In support of its claims, plaintiff provided
the following data obtained from the New Jersey Department of Treasury:
(1) The New Jersey source income reported by all
partnerships for tax years 2009-2011 was
$26,400,624,146; $42,211,064,190; and
$11,679,724,687 respectively.
(2) The partnership filing fees received from all entities
in tax years 2009-2011 totaled $44,703,658;
$47,109,396; and $47,461,768 respectively.
(3) The salaries paid to all employees of the Division of
Revenue who worked on processing [Gross Income
Tax] returns for [fiscal years] 2009-2011 totaled
$22,933,753; $18,373,397; and $20,101,294.
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(4) In each tax year 2009-2011, Taxation processed the
following number of NJ-1065s: 168,628; 175,517; and
182,745. For each of those tax years, the total returns
filed (for all types of income taxes) were about 4.7 to
4.9 million.
(5) All amounts collected as the filing fee were
deposited into the General Fund, as part of the
[Corporate Business Tax], a category in the General
Fund.
While plaintiff did not challenge the validity of the regulations, it claimed
they did not cure the partnership levy through apportionment. Plaintiff asserted
the Division could cure the DCC violation by apportioning the $250,000
maximum fee. The Tax Court concluded "[t]here was no fee apportionment for
[plaintiff] because the number of its domestic or in-[s]tate partners caused the
fee to reach the $250,000 cap."
The Division cross-moved for partial summary judgment, arguing the PFF
"is a regulatory fee intended to defray administrative costs" associated with
"processing, examining, and auditing" plaintiff's partner and partnership returns,
and thereby valid under Am. Trucking Ass'ns v. Mich. Pub. Serv. Comm'n, 545
U.S. 429 (2005) (ATA-Michigan). The Division asserted "the court need only
examine whether the amount [of the PFF] is excessive when the benefits to a
taxpayer are compared to the State's interests under Pike v. Bruce Church, Inc.,
397 U.S. 137 (1970)." The Division maintained the PFF was not excessive since
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the fee equates to less than $4 per partner. Alternatively, the Division argued
that "even if the PFF is deemed a tax, it still does not violate the DCC because
it is": (1) "fairly apportioned under its regulations"; (2) non-discriminatory
since it applies to any partnership; and (3) co-relative to the services provided
by the State (since plaintiff maintained storage facilities in New Jersey and was
able to do business here). The Division noted that applying the apportionment
sought by plaintiff would reduce the fee to less than $1 per partner, an
unreasonable result.
The Tax Court employed the following test for determining the
constitutionality of a state-imposed levy under the DCC:
(1) If a statute discriminates facially or in practical
effect, it is invalid. The challenger has the burden to
prove discrimination either way. If discrimination is
proven, the State must then justify the statute vis-à-vis
the local benefits, and lack of nondiscriminatory
alternatives. This is the "less stringent" test, albeit still
a heightened scrutiny.
(2) Generally, a tax is subject to a stricter test, i.e., it
must also be internally consistent, and thus, must be
fairly apportioned. The challenger has the burden to
prove the lack of apportionment. The State must then
justify the statute as being nondiscriminatory, or that it
cannot achieve a more "accurately apportioned fee." A
State need not provide both a credit for, and an
apportionment of, the challenged tax.
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(3) If a statute or regulation is not discriminatory
facially or in practical effect, then the statute may need
to be examined under the burden-benefit balancing test
if the excessiveness of the fee burdens interstate
commerce. It would appear that the same initial burden
of proof is on the challenger to prove discrimination,
and then the excessiveness of the burden on interstate
commerce when compared to the governmental benefit,
after which the burden will shift to the State in proving
the opposite.
(4) The label of the levy is irrelevant to decide
whether State law or regulation discriminates against
interstate commerce.
(5) The DCC protection applies to residents and non-
residents.
(6) For purposes of the DCC analysis, flat fees are
sometimes treated as taxes, thus subject to the four-part
test of Complete Auto, but sometimes not, especially if
the levy is found to be non-discriminatory and applies
only to intrastate transactions.
The court first addressed whether interstate commerce was burdened by
the PFF. Recognizing that the Operating Partnership was the entity engaged in
nation-wide propane sales, and had not joined in challenging the PFF, the Tax
Court found:
[Plaintiff]'s activity . . . is its investment in its affiliate
directly or indirectly, which in turn facilitates (in part
or otherwise) the earning of income by the Operating
Partnership. Stated differently, the "commerce" being
impacted is [plaintiff]'s provision of capital, and its
facilitation of the provision of capital by residents and
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nonresidents, to the Operating Partnership, directly or
indirectly, which investment enables [plaintiff] to earn
income from the Operating Partnership, thus, to earn
New Jersey source income. Such commerce could be
interstate because [plaintiff] is a foreign partnership as
are some of its partners, thus, capital contributions from
such partners, when infused into the Operating
Partnership, and used in the latter’s activities which are
both in and out-of-State, can implicate interstate
commerce.
[(citations omitted).]
The court found that "simply because [plaintiff] may be . . . involved in interstate
commerce does not mean that the DCC is automatically implicated, and without
more, render a levy, regardless of whether it is labeled a fee or a tax,"
unconstitutional.
The court then focused on whether the PFF "discriminates against
[plaintiff]'s investment activity by improperly favoring investment activity . . .
in a local business, operation, or activity, to the disadvantage of that same
investment activity in an out-of-State business, operation or activity." It
concluded that the Legislature "wanted to track New Jersey sourced income
earned or derived by partnerships engaged in business (as opposed to small
investment clubs), since partnerships are not themselves taxed, and instead pass-
through the income earned/derived to partners, who/which are taxed."
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The court determined "that the activity or transaction for which the fee is
imposed is based on the governmental activity of processing/reviewing returns,"
thereby "regulating partnerships by tracking their New Jersey source income."
This "regulation or governmental activity [was] a purely intrastate activity and
is not commerce, let alone interstate commerce."
The court noted that "the Legislature's primary concern was to ensure that
the pass-through New Jersey-derived income by large pass-through entities be
captured," creating an "urgent need" to track "such income, which then required
a review of these entities' informational returns and its members' tax returns."
Hence, "the Legislature used the filing fee as a mechanism to pay such costs."
The court reiterated that "the fee is imposed only if the partnership derives New
Jersey source income." Considering these circumstances, the court held that the
PFF "does not implicate the DCC under ATA-Michigan even if it is imposed on
an interstate commerce participant, such as [plaintiff]," and granted partial
summary judgment to the Division.
The court next addressed whether the PFF facially discriminated against
plaintiff or its activity. It found N.J.S.A. 54A:8-6(b)(2)(A) "provides no 'home'
based advantage, that is, one which favors local over foreign partnerships." The
court explained that "the PFF is not imposed based on the location of the
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partnership, or the nature/scope of its particular business activity." Instead, "the
PFF is imposed if the partnership has New Jersey source income to be reported
on an NJ-1065." Thus, "New Jersey is not exercising any economic
protectionism by unduly favoring in-State activities or transactions over those
same activities or transactions conducted interstate." The court found that "[t]he
PFF does not bar any pass-through entity from earning income/loss outside New
Jersey, nor does it incentivize or promote local business over out-of-State
business. To the contrary, domestic partnerships pay the same PFF, and are
subject to the same $250,000 cap as non-domestic partnerships." Therefore,
N.J.S.A. 54A:8-6(b)(2)(A) "is facially neutral and regulates even-handedly."
The court also considered whether the PFF had a disparate impact on
investment activity, resulting in an impermissible burden on interstate
commerce by making out-of-state entities or businesses "pay more than their fair
share of a State-imposed levy or by making it so expensive, disproportionately
for them," to engage in business in New Jersey. The court found it did not,
concluding that "[o]ut-of-[s]tate partnerships earning New Jersey source
income/loss are not paying any more than an in-[s]tate partnership" with the
same income level "since each will pay the same PFF and the same cap amount
(if each had more than 1,667 partners)."
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The court explained that the "DCC 'does not seek to relieve those engaged
in interstate commerce from their just share of state tax burden even though it
increases the cost of doing business.'" (Quoting ATA-Michigan, 545 U.S. at
438.) It noted that the PFF paid by plaintiff is "extremely low (if the $250,000
cap is divided by the number of partners), as compared to a smaller partnership."
Thus, "the effect on interstate commerce would be minimal or only incidental."
The court further found plaintiff did not provide "any proof that its
interstate commerce is unduly burdened." It rejected plaintiff's "resort to the
mechanical application of the hypothetical math under the internal consistency
component of Complete Auto, [as] a substitute for its burden of proving, at least
prima facie, that the PFF results in a disparate impact on its interstate investment
activity."
The court distinguished both Am. Trucking Ass'ns v. Scheiner, 483 U.S.
266 (1987) and Am. Trucking Ass'ns v. State, 180 N.J. 377 (2004) (ATA-NJ),
where the plaintiffs presented proof of disparate impact. It noted that in ATA-
Michigan, the Supreme Court upheld a "flat $100 fee imposed only upon
intrastate transactions," finding it non-discriminatory since it taxed "only purely
local activity" and not transactions that took place outside the State. 545 U.S.
at 434, 437. The Court reached this conclusion even if all States charged similar
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fees, resulting in the trucker paying much higher aggregate fees , since those
higher fees were imposed "only because it engages in local business in all those
States." Id. at 438.
The Tax Court rejected the assertion "that any levy payable by an
interstate commerce participant is automatically suspect unless apportioned."
Rather, the focus "is whether a levy discriminates facially or practically." To
that end, the internal consistency test "was formulated to insure that 100% of
income earned by a taxpayer in a business operating in multi-states is divided
among the [s]tates in which the income is earned, so that the total tax paid by
the multi-state business is equal to the tax on 100% of income." Accordingly,
multi-state income tax is not implicated by the PFF.
The court was "not persuaded that simply because the PFF is deposited
into the general funds, it is a flat tax that must be apportioned pursuant to
Complete Auto. Both fees and taxes raise revenues, just as they both impose a
cost on a business."
The court recognized that if Scheiner applies, "an unapportioned levy
must be internally consistent," citing ATA-NJ, 180 N.J. at 397. Here, N.J.S.A.
54A:8-6(b)(2) "imposes the PFF for a purely intrastate reason." "Therefore,
Scheiner would not automatically apply."
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The court further explained that since the statute "is neutral facially, and
there is no proof of any disparate impact or undue burden on [plaintiff's]
investment activity due to the PFF," the court is neither required to apply the
internal or external consistency tests, nor determine "whether the PFF amount
is fairly related to the services provided by the State."
Based on these findings, the court denied plaintiff's motion for partial
summary judgment. Therefore, "it [did] not address the validity of [the
Division's] regulations which permit an apportionment of the PFF."
The court also concluded that it did not need to a determine if Pike applied.
Even if Pike did apply, plaintiff had not established that the PFF imposes an
excessive burden on interstate commerce. 2
On the other hand, the Division did not provide any independent
information to show that the fee of $150 per partner or $250,000 cap is not
excessive. While it contended that salary totals did not reflect the cost of
employee benefits, the Division provided no supporting data. "Since neither
2
Plaintiff provided data showing that the revenues raised by the PFF were
roughly double the $19 million in salaries paid by the Division. The court noted
this equated to a modest $4 per-partner fee ($19 million in salaries ÷ 4.7 million
returns = $4 per return), which did not prove that the PFF was an excessive
burden on plaintiff's investment activity. Moreover, government costs were not
clearly limited to salaries.
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[plaintiff] nor [the Division] provided any data, evidence or other proof on why
the PFF fails or passes the Pike balancing [test], should that test even apply
here," the court found it would be inappropriate to grant summary judgment to
either party on this issue.
Based on these findings, the court determined that "N.J.S.A. 54A:8-
6(b)(2) does not implicate or violate the DCC because it imposes the PFF to
defray the costs of a purely intrastate governmental activity, which is to review
partnership and partner returns, in order to track whether New Jersey sourced
income/loss was reported to New Jersey." "[B]ecause the PFF does not
implicate the DCC," the court granted partial summary judgment to the Division.
Following the Tax Court's decision, plaintiff withdrew any remaining
claims and requested that final judgment be entered. On April 1, 2019, the court
issued an order entering final judgement upholding the denial of the PFF refund.
This appeal followed.
Plaintiff raises the following points for our consideration:
POINT I
THE LEVY VIOLATES THE COMMERCE CLAUSE
OF THE UNITED STATES CONSTITUTION.
A. The Levy Is Not Fairly Apportioned—In Fact, It Is
Not Apportioned At All.
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B. The Levy Discriminates Against Interstate
Commerce. This Is Proved By The Fact That The Levy
Is Not "Internally Consistent"—A Standard Developed
By The United States Supreme Court To Test For
Discrimination.
POINT II
THE NEW JERSEY TAX COURT AVOIDED THESE
CONSTITUTIONAL TESTS BY CONCLUDING
THAT THE PARTNERSHIP LEVY IS A WHOLLY
IN-STATE REGULATORY FEE THAT DOES NOT
"IMPLICATE" INTERSTATE COMMERCE. THE
TAX COURT ERRED.
A. Contrary To The Tax Court's Conclusion, The
Partnership Levy Was A Revenue-Raising Measure,
Not A Regulatory Fee.
1. The Partnership Levy Was Intended To Raise
Revenue.
2. The Record Shows That The Partnership Levy
Was Not Intended To Function, And Did Not
Actually Function, As A "Regulatory Fee."
(a) The Record Shows That The Partnership Levy
Is Not A Uniform Charge For Return
Processing—Whether Computed "Per Owner" Or
Otherwise.
i. The Evidence Is Clear That The Levy Is Not A
Uniform Charge For Return Processing.
ii. This Lack Of Uniformity Contrasts With
Other Regulatory Fees That Have Been Sustained
Because They Are, In Fact, Uniform Charges For
Government Services.
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(b) The Record Shows That The Partnership
Levy Does Not Correlate In Any Way With
Agency Costs To Process Returns. In Fact, No
Effort Was Ever Made To Do So Because The
Levy Is Simply A Revenue-Raising Measure.
3. Since The Partnership Levy Is A Revenue-
Raising Measure Imposed On Interstate
Commerce, The Tax Court's Reliance On [ATA-
Michigan] Was Misplaced.
4. With Respect To The Internal Consistency
Standard For Discrimination, The Tax Court
Erred In Suggesting That The Taxpayer Must
Show Actual Discrimination.
B. A Taxpayer Has The Initial Burden Of Showing
Discrimination Through Lack Of Internal Consistency.
If That Burden Is Met, The Supreme Court Of New
Jersey Has Held That The State Then Has The Burden
Of Proving That A Levy Is A Uniform Regulatory Fee.
The Tax Court Acknowledged The State Did Not Meet
That Burden In This Case, But Nonetheless Found In
Favor Of The State.
POINT III
THIS COURT SHOULD REMAND TO THE TAX
COURT FOR THAT COURT TO CURE THE
PARTNERSHIP LEVY THROUGH
APPORTIONMENT.
A. The Tax Court Has The Authority To Order
Apportionment To Cure A Constitutional Defect.
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B. There Are Two Reasonable Methods Of
Apportionment To Fix The Problems With The
Partnership Levy.
1. This Court Should Remand To The Tax Court
To Apply Three-Factor Apportionment. Three-
Factor Apportionment Is The Standard Method
Of Apportionment And Is Supported By The
Record In This Case.
2. In The Alternative, This Court Should Remand
To The Tax Court To Apply Apportionment
Based On The Percentage Of Partners With New
Jersey Nexus. This Method Resolves The
Constitutional Issues And Is Consistent With The
Tax Court's Finding Regarding The Nature Of
The Partnership Levy As A Tax On Capital-
Gathering.
C. Apportionment Preserves Most Of The Revenue
From The Partnership Levy.
D. Methods That Do Not Fix The Apportionment
Problems.
1. The Partnership Levy Is Not Saved By Merely
Imposing The Partnership Levy Only With
Respect To Partners With New Jersey Nexus.
2. The Partnership Levy Is Not Saved By
Applying An Apportionment Percentage To The
Per-Partner Tax Rate.
We begin by recognizing several well-established principles. "A taxpayer
challenging the Director's determination bears the burden of proof." UPSCO v.
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Dir., Div. of Taxation, 430 N.J. Super. 1, 8 (App. Div. 2013) (citing Atl. City
Transp. Co. v. Dir., Div. of Taxation, 12 N.J. 130, 146 (1953)).
Statutes are presumed to be constitutional. State v. Lagares, 127 N.J. 20,
31-32 (1992). "This presumption of validity is particularly strong in the realm
of economic legislation 'adjusting the benefits and burdens of economic life.'"
N.J. Ass'n of Health Plans v. Farmer, 342 N.J. Super. 536, 551 (Ch. Div. 2000)
(quoting Usery v. Turner Elkhorn Mining Co., 428 U.S. 1, 15 (1976)). In
addition, we "defer to the interpretation of the agency charged with the statute's
enforcement, and the Director's interpretation will prevail 'as long as it is not
plainly unreasonable.'" Campo Jersey, Inc. v. Dir., Div. of Taxation, 390 N.J.
Super. 366, 380 (App. Div. 2007) (quoting Koch v. Dir., Div. of Taxation, 157
N.J. 1, 8 (1999)). Where the issue is strictly legal, we afford no deference to the
Director's statutory interpretations and review de novo. Amer. Fire & Cas. Co.
v. Dir., Div. of Taxation, 189 N.J. 65, 79 (2006).
In turn, "[o]ur review of a decision by the Tax Court is limited." UPSCO,
430 N.J. Super. at 7 (citing Est. of Taylor v. Dir., Div. of Taxation, 422 N.J.
Super. 336, 341 (App. Div. 2011)). "We recognize the expertise of the Tax Court
in this 'specialized and complex area.'" Advance Hous., Inc. v. Twp. of Teaneck,
215 N.J. 549, 566 (2013) (quoting Metromedia, Inc. v. Dir., Div. of Taxation, 97
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N.J. 313, 327 (1984)). "The Tax Court judge's [factual] findings will not be
disturbed unless we conclude they are arbitrary or lack substantial evidential
support in the record." UPSCO, 430 N.J. Super. at 7-8 (citing Yilmaz, Inc. v.
Dir., Div. of Taxation, 390 N.J. Super. 435, 443 (App. Div. 2007)). "Although
the Tax Court's factual findings 'are entitled to deference because of that court's
expertise in the field,' we need not defer to its interpretation of a statute or legal
principles." Advance Hous., 215 N.J. at 566 (quoting Waksal v. Dir., Div. of
Taxation, 215 N.J. 224, 231 (2013)).
We review the Division's motion for partial summary judgment using the
same standard applied by the Tax Court—"whether, after reviewing 'the
competent evidential materials submitted by the parties' in the light most
favorable to [plaintiff], 'there are genuine issues of material fact and, if not,
whether the moving party is entitled to a judgment or order as a matter of law.'"
Grande v. Saint Clare's Health Sys., 230 N.J. 1, 23-24 (2017) (quoting Bhagat v.
Bhagat, 217 N.J. 22, 38 (2014)). Because we review the Tax Court's grant of
partial summary judgment to the Division, we conduct a de novo review. Waksal,
215 N.J. at 231-32.
Applying those principles, we affirm substantially for the reasons
expressed by Tax Court Judge Mala Sundar in her well-reasoned and
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comprehensive forty-one-page December 7, 2018 opinion. We add the following
comments.
The Tax Court rejected the premise "that any levy, whether a fee or a tax,
is automatically or per se unconstitutional under the DCC solely because it is a
flat amount and the payor of the levy is involved in interstate commerce." We
concur. Rather, the court must determine whether the levy discriminates against
the identified interstate commerce by imposing an impermissibly disparate
impact or excessive burden.
Plaintiff did not present a prima facie case of disparate impact or other
form of discrimination violative of the DCC. On the contrary, the record
demonstrates that the PFF funds the cost of the Division's processing and
reviewing partnership and partner returns filed in New Jersey to track their New
Jersey source income, which is a purely intrastate activity. Consequently,
N.J.S.A. 54A:8-6(b)(2) does not implicate or violate the DCC, even though
plaintiff is involved in interstate commerce.
N.J.S.A. 54A:8-6(b)(2) is facially neutral. Therefore, absent disparate
impact or undue burden on plaintiff's investment activity, the court was not
required to apply the internal or external consistency tests or to determine
whether the PFF amount is fairly related to the services provided by the State.
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Plaintiff failed to present a prima facie case that the statute discriminates
against, or imposes an excessive burden on, interstate commerce. Nor did it
demonstrate that the PFF was not fairly related to the Division's processing and
review of partnership and partner returns.
Our careful review of the record reveals that material facts are not disputed,
and when viewed in the light most favorable to plaintiff, the Division was entitled
to partial summary judgment as a matter of law. See R. 4:46-2(c). Judge Sundar's
findings are fully supported by substantial credible evidence in the record. Her
legal conclusions are sound and consistent with applicable law. Accordingly, we
discern no basis to disturb the partial summary judgment granted to the Division.
To the extent we have not specifically addressed any of defendant's
remaining arguments, we conclude they lack sufficient merit to warrant
discussion in a written opinion. R. 2:11-3(e)(1)(E).
Affirmed.
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