J&J Snack Foods Hit with Bill Regarding Sales & Use Tax

J&J Snack Foods and Sales & Use Tax

In a recent decision, the New Jersey Appellate Division affirmed a Tax Court decision that since a company had assembling operations in the state, this qualified as taxable use. According to a Bloomberg BNA report, the Superior Court of New Jersey upheld the tax court’s decision that J&J Snack Foods, the largest manufacturer of soft pretzels in the country as well as the famous maker of Slush Puppies, was subject to a use tax assessment that totaled $250,000.

The decision held that J&J Snack Foods received machine parts in New Jersey and assembled the parts into pretzel-warming machines for use by customers located in and out-of-state. This was classified as a taxable use of the parts in New Jersey, a provision broadly written to define use as the exercise of the right or power over tangible personal property by the purchaser.

The background of the J&J Snack Foods case

The case originally involved a use tax audit by the state of New Jersey on J&J Snack Foods in 1992, which resulted in the company being told that it was required to pay the tax assessment – regardless of whether or not it sold or loaned any machines to customers within New Jersey borders. However, the company argued that it paid the necessary amount of taxes, and that sales and use taxes were not applicable.

Although in J&J Snack Foods Sales Corp. v. Director, Div. of Taxation, N.J., the Tax Court agreed with the state by asserting that the company was required to pay the use tax on all the machine parts used to assemble warmers, even if the machines themselves were used out of state.

In opposition, the company challenged the application of the tax code by asserting that the Tax Court was mistaken in that the purchase of machine parts for the warmers were retail sales. J&J Snack Foods then alleged that these warmer parts were bought for re-sale, and not as a part of the product to be sold by the company. The company’s argument then was that it was not subject to use taxes because the warmers were not loaned or sold for profit. The company also argued that the State acquiesced in its treatment in the audit from the 1990s and was stopped from raising the issue many years later.

The Appellate Division upholds the Tax Court’s decision

The Tax Court initially ruled that the company’s purchase of the parts and subsequent re-sale, along with the assembling and distribution of the warmers, qualified within the sales and use tax act’s ambit. Therefore, according to a report by the Altus Group, the company owed the use tax, regardless of whether customers used the machine within the state or outside of its borders. In turn, in upholding the Tax Court’s decision, the Superior Court of New Jersey found that J&J Snack Foods owed $258,226.99 in use taxes.

What the decisions means for taxpayers

Sales and use tax imposition can be difficult as it varies state by state. Therefore, as states do not often clarify their positions on the use tax laws, and often oppose each other, it is difficult for taxpayers to understand their tax burdens. For instance, had J&J Snack Foods been incorporated in Wyoming, the company would have not been subject to the sales and use tax because the items produced were prepared for use in a different state.

The significance of the decision from a broader perspective

One of the issues presented by the Superior Court’s upholding of the Tax Court’s decision is that it gives J&J Snack Foods, which has been headquartered in New Jersey for its entire existence, incentive to relocate its operations outside of the state, or outsource the assembling of the warmer machines rather than have them built in New Jersey.

Further, this decision is significant because from a broader perspective, taxpayers should be aware that any operations, regardless of whether these are essential operations of the company, may be subject to the use tax depending on the state law and regulation. Taxpayers can be certain that the absence of symmetry between state statutes can produce unexpected results between states. Taxpayers can also be certain that, as long as state budget deficits persist, they will face aggressive readings of law and regulation by tax collectors.