Opinion
Docket No. 006203-2007
07-02-2013
Re: Becker's Tree Service, Inc. v. Director, Division of Taxation
Joseph Meehan, Esq. Richard D. Del Monaco Deputy Attorney General Division of Law R.J. Hughes Justice Complex
NOT FOR PUBLICATION WITHOUT APPROVAL OF
THE TAX COURT COMMITTEE ON OPINIONS
Patrick DeAlmeida
Presiding Judge
Joseph Meehan, Esq. Richard D. Del Monaco
Deputy Attorney General
Division of Law
R.J. Hughes Justice Complex
Dear Counsel:
This letter constitutes the court's opinion after trial in the above-referenced matter. At issue is the January 18, 2007 final determination of the Director, Division of Taxation assessing sales and use tax, penalties and interest against plaintiff for a number of purchases related to the operation of a recycling business. For the reasons stated more fully below, the Director's final determination is affirmed in part and reversed in part. *
I. Findings of Fact
The court makes the following findings of fact based on the testimony and documentary evidence produced at trial.
Plaintiff Becker's Tree Service, Inc. is an S corporation which operates a tree removal, tree trimming, land clearing and recycling business in Monmouth County. Of particular moment to the present matter is plaintiff's tree recycling operation on a 10-acre plot in Colts Neck.
In 2004, employees of the Director, Division of Taxation undertook an audit of plaintiff's business records. The audit covered a 48-month period. Calendar year 2003 was selected as a representative period for audit purposes. Two purchases by plaintiff during that period on which sales tax was not paid came to the attention of audit personnel. The transactions concerned the purchase of equipment plaintiff contends fall within the sales tax exemption for receipts from the sale of "any equipment which is used exclusively to sort and prepare solid waste for recycling or in the recycling of solid waste." N.J.S.A. 54:32B-8.36a. This exemption "does not include conventional motor vehicles, or any equipment used in a process after the first marketable product is produced . . . ." Ibid.
In 2003, Becker purchased a Kobelco SK3301C Hydraulic Excavator for $147,260. Plaintiff did not pay sales tax on the purchase. The 77,800-pound excavator is over 36 feet long and 11 feet wide and has a 13-foot boom with a bucket that can dig, level, scatter, or compact material. The excavator lifts approximately 4,000 pounds of material at a time. The equipment is mobile. It moves on large treads at speeds of up to 3.6 miles per hour.
Shortly after the purchase plaintiff placed its hydraulic excavator at it Colts Neck location in close proximity to a 13-foot high tub grinder. The tub grinder grinds trees, logs, stumps and woodchips into mulch. The material produced by the tub grinder is a marketable product composed of recycled trees and tree parts. The Director considers the tub grinder to fall within the exemption for equipment used in the recycling process. According to the credible testimony of plaintiff's owner, trees, tree stumps, wood chips and other materials are brought to the Colts Neck facility by truck and are dumped in the area around the tub grinder. The excavator remains in close proximity to the tub grinder and is used only to scoop trees, tree stumps, wood chips and other materials from large piles near the tub grinder and to feed those materials into the tub grinder to be transformed into mulch. Photographs admitted into evidence corroborate this testimony.
Although the excavator is capable of being driven on public roadways, plaintiff's owner credibly testified that the excavator has never left the Colts Necks facility. Uncontroverted testimony established that in order for the excavator to travel it would be necessary to dismantle the machine because it is too large to travel on public roadways fully intact. The 13-foot boom and bucket have to be removed to allow roadway travel. In addition, transportation of the excavator on public roadways requires two permits from State transportation officials. The Director produced no evidence indicating that plaintiff had ever secured those permits or transported the excavator from the Colts Neck site.
Also in 2003, plaintiff purchased a skid loader at $10,000. No sales tax was paid on the purchase. The skid loader, a small machine with a conveyer-belt, is positioned at the mouth of the tub grinder and moves the mulch from the tub grinder to piles for storage and transfer to customers. In the absence of the skid grinder, mulch would rapidly accumulate at mouth of the tub grinder and quickly render the machine ineffective, as there would be no room for the tub grinder's product.
The auditor determined that the receipts from the two transactions are subject to sales tax, determining that the equipment did not sort or prepare solid waste for recycling and were not exclusively used in the recycling process. According to the auditor, the items are general construction equipment capable of being used for many purposes. In addition, the auditor relied on the fact that both pieces of equipment are capable of being moved to other locations.
The auditor also examined the records of plaintiff's expenses. She determined that a portion of the transactions on which sales tax was not paid are subject to the tax. From this determination, the auditor developed an error rate for tax year 2003. The error rate was applied to plaintiff's expenses for the remaining years of the audit. Application of the error rate resulted in an assessment of use tax, penalties and interest against plaintiff.
On January 14, 2005, the Division issued a Notice of Assessment related to final audit determination. The notice assessed $50,398.36 in sales and use tax, penalties and interest. Plaintiff thereafter filed a notice of protest with the Director, requesting an administrative hearing.
On January 18, 2007, after the administrative hearing, the Director issued a final determination assessing against plaintiff a total of $45,818.63 in sales and use tax, penalties and interest. The Director made several adjustments in favor of plaintiff based on arguments raised during the administrative conference.
On April 18, 2007, plaintiff filed a Complaint in this court challenging the Director's final determination.
After the exchange of discovery and motion practice the matter was tried. Plaintiff relied primarily on the testimony of its owner contesting the assessment of sales tax on the equipment purchases. In addition, plaintiff conceded that sales tax should have been paid on several of the expense transactions. It, however, challenged the taxation of other expense transactions, which will be discussed in greater detail below.
II. Conclusions of Law
The court's analysis begins with the familiar principle that the Director's interpretation of tax statutes is entitled to a presumption of validity. "Courts have recognized the Director's expertise in the highly specialized and technical area of taxation." Aetna Burglar & Fire Alarm Co. v. Director, Div. of Taxation, 16 N.J. Tax 584, 589 (Tax 1997)(citing Metromedia, Inc v. Director, Div. of Taxation, 97 N.J. 313, 327 (1984)). The scope of judicial review of the Director's decision with respect to the imposition of a tax "is limited." Quest Diagnostics, Inc. v. Director, Div. of Taxation, 387 N.J. Super. 104, 109 (App. Div.), certif. denied, 188 NT 577 (2006). The Supreme Court has directed the courts to accord "great respect" to the Director's application of tax statutes, "so long as it is not plainly unreasonable." Metromedia, supra, 97 N.J. at 327. See also GE Solid State, Inc. v. Director, Div. of Taxation, 132 NL 298, 306 (1993)("Generally, courts accord substantial deference to the interpretation an agency gives to a statute that the agency is charged with enforcing.").
"When an administrative agency interprets and applies a statute it is charged with administering in a manner that is reasonable, not arbitrary or capricious, and not contrary to the evident purpose of the statute, that interpretation should be upheld, irrespective of how the forum court would interpret the same statute in the absence of regulatory history." Blecker v. State, 323 N.J. Super. 434, 442 (App. Div. 1999). "[C]ourts are not free to substitute their judgment as to the wisdom of a particular administrative action for that of the agency so long as that action is statutorily authorized and not otherwise defective because arbitrary or unreasonable." Sutton Warehousing, Inc. v. Director, Div. of Taxation, 290 N.J. Super. 686, 697 (App. Div. 1996)(quotations omitted). "However, despite that deference, an administrative agency's interpretation will not be followed when the agency extends a statute 'to give it a greater effect than its language permits.'" Oberhand v. Director, Div. of Taxation, 193 N.J. 558, 568 (2008)(quoting GE Solid State, supra, 132 N.J. at 306).
Additionally, the Sales and Use Tax Act was enacted as a revenue raising measure and is intended to be broadly read. Adamar of New Jersey v. Director, Div. of Taxation, 17 N.J. Tax 80, 85-86 (Tax 1997), aff'd, 18 N.J. Tax 70 (App. Div. 1999). Exemptions from tax are narrowly construed and the taxpayer has the burden of establishing the exemption. See Princeton Univ. Press v. Borough of Princeton, 35 N.J. 209, 214 (1961); Black Whale, Inc. v. Director, Div. of Taxation, 15 N.J. Tax 338, 349 (Tax 1995). It is against this backdrop of precedents that the court must evaluate the Director's final determination. A. The Excavator.
During the period at issue a 6% sales and use tax was imposed on receipts from the retail sales of certain tangible personal property, unless exempt under law. N.J.S.A. 54:32B-3. The Legislature exempted from the sales tax certain equipment used for recycling. The relevant exemption statute provides:
Effective July 15, 2006, the tax was increased to 7%. L. 2006, c. 44, §2.
Receipts from the sales of recycling equipment are exempt from the tax imposed under the "Sales and Use Tax Act." For purposes of this subsection "recycling equipment" means any equipment which is used exclusively to sort and prepare solid waste for recycling or in the recycling of solid waste. "Recycling equipment" does not include conventional motor vehicles, or any equipment used in a process after the first marketable product is produced . . . .
[N.J.S.A. 54:32B-8.36a.]
Statutory construction begins with the statute's plain language. Merin v. Maglaki, 126 N.J. 430, 434 (1992). "A statute should be interpreted in accordance with its plain meaning if it is clear and unambiguous on its face and admits of only one interpretation." Board of Educ. v. Neptune Twp. Educ. Ass'n, 144 N.J. 16, 25 (1996)(quotations omitted). "[T]he best approach to the meaning of a tax statute is to give to the words used by the Legislature their generally accepted meaning, unless another or different meaning is expressly indicated." Public Serv. Elec. & Gas Co. v. Township of Woodbridge, 73 N.J. 474, 478 (1977)(quotations omitted). "'The duty of the Director, and this court, is to give meaning to the wording of the statute and, where the words used are unambiguous, apply its plain meaning in the absence of a legislative intent to the contrary.'" Vassilidze v. Director, Div. of Taxation, 24 N.J. Tax 278, 291 (Tax 2008)(quoting Sutkowski v. Director, Div. of Taxation, 312 N.J. Super. 465, 475 (App. Div. 1998)).
In addition, when determining the meaning of statutes,
words and phrases shall be read and construed with their context, and shall, unless inconsistent with the manifest intent of the legislature or unless another or different meaning is expressly indicated, be given their generally accepted meaning, according to the approved usage of the language.The court concludes that the excavator is "equipment . . . used exclusively to sort and prepare solid waste for recycling or in the recycling of solid waste." There is no dispute that plaintiff recycles solid waste into a marketable product through use of the tub grinder. Trees and tree byproducts are recycled into mulch, which is sold to customers by plaintiff. The record contains credible evidence from plaintiff's owner that the excavator is integral to the use of the tub grinder. The excavator moves the trees and tree byproducts from large piles into the tub grinder for processing. Given the height of the tub grinder and the bulkiness and weight of the material processed by the tub grinder, the excavator is necessary for the recycling process to take place.
[N.J.S.A. 1:1-1.]
In addition, according to the undisputed evidence in the record, the excavator is exclusively used by plaintiff for the recycling of trees and tree byproducts. While the excavator can be used for general construction purposes, the taxpayer established that it has exclusively been used for recycling since its purchase by plaintiff. The mere fact that the equipment is able to be used for other purposes is insufficient to overcome the exemption. The statute applies to "any equipment which is used exclusively . . . in the recycling of solid waste." N.J.S.A. 54:32B-8.36a. The statute does not limit the exemption to equipment capable only of being used for recycling purpose. The Director's interpretation of the statute to apply only to equipment that does not have the potential to be used for non-recycling purposes exceeds that unequivocal statutory language and is not, therefore, entitled to judicial deference. According to the Legislature's express terms, it is the exclusive use of the equipment that determines whether the exemption applies, not the potential use of the equipment.
Nor is the court convinced that the excavator falls within the statutory exception to the exemption for a "conventional motor vehicle." Ibid. While the excavator is capable of being driven on public roadways, it must be partially dismantled for that purpose. In addition, permits are needed to travel on roadways with the excavator, which goes no more than 3.5 miles per hour. It is not a conventional motor vehicle and its potential mobility, as noted above, is insufficient to overcome the undisputed evidence of its fixed location at the Colts Neck facility.
The record contains undisputed evidence that the Director's employees declined an invitation to view the Colts Neck facility and the operation of the excavator and skid loader. Personal observations of the equipment may have assisted the Director's staff in making a determination regarding their exclusive use in the recycling process.
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The court concludes, therefore, that plaintiff produced a preponderance of credible evidence establishing that the Director's final determination incorrectly assessed sales and use tax on receipts from the purchase of the excavator. B. The Skid Loader.
The court reaches the same conclusion with respect to the skid loader. The record contains credible evidence, similar to that with respect to the excavator, that the skid loader is used by plaintiff exclusively in the recycling of solid waste. Without the skid loader, the tub grinder's operations would have to be halted frequently to clear away mulch. The skid loader performs the essential function of removing the mulch from the production site for storage and sale to customers. In addition, while this piece of equipment is capable of being used for general construction purposes and is mobile, nothing in the record suggests that it has been moved from the mouth of the tub grinder since the time of its purchase.
Nor does the skid loader fall within the exception to the exemption for equipment "used in a process after the first marketable product is produced . . . ." Ibid. It is true that the skid loader is used after the production of mulch, a marketable product. It is not, however, used in a "process" after production of the mulch. A "process" is a "series of operations performed in the making or treatment of a product." The American Heritage Dictionary, 4th Ed. 2000. The function of the skid loader is to move the mulch away from the tub grinder for storage and sale to customers. Movement of the marketable mulch away from the tub grinder for storage and sale is not part of a series of operations intended to make or treat a product. It is, instead, the final step in the process of recycling trees and tree by-products into marketable mulch. C. Plaintiff Expenses.
Plaintiff concedes that a majority of the expense transactions identified by the auditor and used to formulate an error rate for 2003 are subject to sales tax. Plaintiff argues, however, that a portion of the transactions identified by the auditor are exempt from sales tax and should be removed for the calculation of the error rate for 2003. If plaintiff is correct, an error rate more favorable to plaintiff would be developed for 2003 and, when applied to the 48-month audit period, would reduce the Director's overall assessment of sales tax, penalties and interest. The disputed transactions are discussed in turn.
Plaintiff contends that $35,265 of its purchases from Ott's Diesel Service ("Ott's") are exempt from sales tax pursuant to N.J.S.A. 54:32B-8.43. That statute provides
Receipts from: (a) sales, renting or leasing of commercial trucks, truck tractors, tractors, semitrailers, and vehicles used in combination therewith, as defined in R.S. 39:1-1, which are registered in New Jersey and (1) have a gross vehicle weight rating in excess of 26,000 pounds, (2) are operated actively and exclusively for the carriage of interstate freight pursuant to a certificate or permit issued by the Interstate Commerce Commission, or (3) are registered pursuant to R.S. 39:3-24 or R.S. 39:3-25 and have a gross vehicle weight rating in excess of 18,000 pounds; and (b) repair and replacement parts for such vehicles, are exempt from the tax imposed under the "Sales and Use Tax Act." "Gross vehicle weight rating" means the value specified by the manufacturer as the loaded weight of the single or combination vehicle and, if the manufacturer has not specified a value for a towed vehicle, means the value specified for the towing vehicle plus the loaded weight of the towed vehicle.According to the testimony of plaintiff's owner, all of the Ott's transactions were for the purchase of repair and replacement parts for trucks with a gross vehicle rating in excess of 26,000 pounds and for labor for installing those parts. The record contains no evidence corroborating the owner's testimony regarding the gross vehicle ratings of the trucks repaired by Ott' s. Nor is there any evidence with respect to the registration of those trucks in New Jersey, their active and exclusive use for the carriage of interstate freight, permitting or certificates from the Interstate Commerce Commission or registration pursuant to N.J.S.A. 39:3-24 or 3-25. The record is bereft of evident establishing necessary elements of the exemption claimed by plaintiff.
[N.J.S.A. 54:32B-8.43.]
In addition, even if plaintiff had established that the parts it purchased from Ott's fell within the exemption in N.J.S.A. 54:32B-8.43, the record contain insufficient evidence from which to determine the portion of Ott's charges that are exempt. The Ott's receipts do not separately state charges for repair and replacement parts, which plaintiff argues fall within the exemption and charges for labor, which plaintiff concedes are not exempt. Plaintiff's owner testified that Ott's had a practice of separately stating the parts and labor charges but ceased doing so prior to 2003. The witness estimated that 50% of the charges should be allotted to exempt parts charges and 50% allotted to non-exempt labor charges.
As a vendor of services subject to sales tax, Ott's is required to collect the tax when collecting the price of the services sold. N.J.S.A. 54:32B-12(a). "If the customer is given any sales slip, invoice, receipt or other statement or memorandum of the . . . service charge . . . the tax shall be stated, charged and shown separately on the first of such documents given to him." Ibid. As noted above, Ott's failed to satisfy this statutory requirement. In these circumstances, it is entirely reasonable for the Director to conclude that plaintiff is liable for sales tax on the entire amount charged by Ott's. See Tozour Energy Sys., Inc. v. Director, Div. of Taxation, 23 N.J. Tax 341, 355 (Tax 2007). The estimate of plaintiff's owner that 50% of the Ott's receipts should be considered exempt is insufficiently precise and unreliable. He did not testify in any detail about the Ott's transactions and offered no corroborating evidence establishing that a 50% allocation for each transaction is warranted.
Plaintiff's claimed exemption for $3,564 in purchases from Jasper Engines, and $265 in purchases from Dueco also fails. Plaintiff argues that these purchases fall within the exemption in N.J.S.A. 54:32B-8.43, because they relate to parts for trucks registered at gross vehicle weights of over 26,000 pounds. As noted above, plaintiff produced insufficient evidence to establish several of the elements of N.J.S.A. 54:32B-8.43.
Plaintiff also contests application of the sales tax to an $822 purchase from Fabco for drums, brooms, and speedy dry needed to remediate an oil spill. Plaintiff provided no statutory citation in support of this claimed exemption. Nor did plaintiff provide any corroborating evidence concerning the circumstances of the purchase, the service provider or the use of the equipment. This exemption claim is not proven by a preponderance of the evidence.
Plaintiff claims an exemption for its purchases from Steve's Truck Equipment ("Steve's"). Several of the purchases relate, according to plaintiff, to equipment for trucks with gross vehicle weights exceeding 26,000 pounds. As is the case with the other exemptions claimed for large trucks, and as explained more fully above, plaintiff failed to produce evidence establishing necessary elements of the exemption.
In addition, other transactions with Steve's concern charges for painting the tub grinder. Plaintiff's owner testified that regular painting is necessary to keep the tub grinder in working order. N.J.S.A. 54:32B-8.36a exempts from the sales tax receipts from the sale of equipment used exclusively in the recycling process, not receipts from repairs and maintenance services related to the recycling equipment. Thus, even if the court were to accept as true plaintiff's contention that frequent painting of the tub grinder is necessary to keep it in working order, a contention not supported by corroborating evidence, such painting would be a maintenance or repair service and would not fall within the N.J.S.A. 54:32B-8.36a exemption.
Plaintiff contends that all of its 2003 purchases from Deacon Equipment Company, Inc. ("Deacon") are exempt from sales tax pursuant to N.J.S.A. 54:32B-8.36a. plaintiff's owner testified that Deacon manufactures the tub grinder and that all purchases from Deacon were for parts for the tub grinder and wood chippers. He stated that all of the Deacon invoices did not include labor charges because plaintiff's own personnel maintained the tub grinder. Plaintiff has not met its burden with respect to the claimed exemption for its purchases from Deacon. At trial, plaintiff's owner did not individually address the Deacon invoices to provide specific testimony regarding each purchase. He did not identify the tub grinder parts (as opposed to the wood chipper parts), nor did he provide any testimony with respect to the use of the wood chippers. The testimony was insufficient to establish by a preponderance of the evidence that all of the Deacon purchases were embraced by the N.J.S.A. 32B-8.36a exemption.
Plaintiff also has not established that its purchases from Lyons Sawmill and Shore Hydraulics for parts for the tub grinder and other recycling equipment are exempt from sales tax. The testimony of plaintiff's owner was imprecise with respect to these transactions. He did not identify the parts with any specificity, did not explain what he meant by "other recycling equipment" and did not establish that the charges did not include labor costs. Although he testified that the purchases were for equipment only, he did so from memory and produced no evidence to corroborate his testimony. The court is not convinced that plaintiff produced a preponderance of evidence establishing the exemption for these purchases.
Plaintiff failed to prove its claimed exemption for a $3,200 purchase of a root rake from H&R Construction. According to the testimony of plaintiff's owner, the root rake attaches to the front of a bulldozer and is used to remove tree roots from the ground. He testified that the roots are ultimately dumped into the tub grinder for recycling and that the root rake is used for no other purpose. It is clear to the court that the root rake is used at the sites on which plaintiff performs tree remove and other services. The roots, once removed from the ground, are transported by truck to the Colts Neck facility for processing. The use of the root rake is too far removed from the recycling process, which takes place when the roots are dumped into the tub grinder, for the court to conclude that the Director's treatment of the purchase as taxable is unreasonable. Reasonable minds could differ on whether the root rake purchase falls within the exemption as equipment used exclusively in the recycling process. In those circumstances, the Director's interpretation must prevail.
Finally, the same conclusion is true with respect to plaintiff's $1,160 purchase of a saw from Bailey's Inc. Plaintiff's owner testified that the saw was used in the recycling process. He provided no further details with respect to the use of the saw. There is insufficient evidence in the record upon which this court could conclude that the Director's decision to apply the sales tax to the saw purchase was unreasonable.
In light of the court's conclusions, it will enter a Judgment affirming in part and reversing in part the Director's January 18, 2007 final determination.
Very truly yours,
Patrick DeAlmeida, P.J.T.C.