Crown Packaging Tech., Inc. v. Director, Dkt. No. 003249-2012
| Decision Date | 26 February 2019 |
| Docket Number | Dkt. No. 003249-2012 |
| Parties | Re: Crown Packaging Technology, Inc. v. Director, Division of Taxation |
| Court | New Jersey Tax Court |
Richard C. Kariss, Esq.
Zachary T. Gladney. Esq.
Steven L. Penaro, Esq.
Alston & Bird, L.L.P.
New York, New York 10016
Michael J. Duffy, Esq.
Deputy Attorney General
Trenton, New Jersey 08625
Dear Counsel:
This is the court's opinion as to plaintiff's motion for partial summary judgment. Plaintiff seeks an Order voiding defendant's notices asking that plaintiff file corporation business tax ("CBT") returns for 1996-2010 since it received royalty income from its affiliate that does business in New Jersey. Plaintiff argues that the two royalty-generating licensing agreements between plaintiff and its affiliate, allowing the affiliate the right to use plaintiff's intellectual property ("IP") nation-wide, cannot be the basis for New Jersey's jurisdiction over plaintiff, and to allow this would violate the Due Process Clause ("DPC") or the substantial nexus factor of the Dormant Commerce Clause ("DCC").
Defendant ("Taxation") opposes the motion, claiming the matter is not ripe for summary judgment. Alternatively, it contends that summary judgment should be granted in its favor because plaintiff is deemed to be doing business in New Jersey by receiving New Jersey-sourced royalty income under Lanco, Inc. v. Dir. Div. of Taxation, 21 N.J. Tax 200 (Tax 2003), rev'd, 379 N.J. Super. 562 (App. Div. 2005), aff'd, 188 N.J. 380 (2006), cert. denied, 551 U.S. 1131 (2007) ().
For the reasons stated below, the court denies, without prejudice, plaintiff's partial summary judgment motion. The court agrees with plaintiff that there appear to be material facts here that are distinct from those in Lanco, and therefore, the ruling therein as to either the DPC or DCC may not automatically control or apply. However, those facts were not properly adduced, being neither certified to, nor included as materially undisputed facts, nor provided to Taxation during discovery, which discovery is still pending. Therefore, and since the court cannot rule as a matter of law that Taxation's notices asking plaintiff to file CBT returns are constitutionally impermissible, the court denies plaintiff's motion, but without prejudice.
The facts are taken from the pleadings of the parties and supporting certified attachments. Plaintiff, f/k/a Crown Cork & Seal Technologies Corporation, is a Delaware corporation with its offices located in Illinois. Plaintiff is holding company, and a member of the Crown Holdings, Inc. ("Crown Group"). The latter apparently sells packaging products (packages, cans, containers and the like) world-wide. Plaintiff asserts that it is an active research and development company with extensive research facilities in Illinois and England, and owns/develops IP such as patents, know-how, technology, and trademarks, for use of the Crown group on a nation- and world-wide basis.
Crown Cork & Seal USA ("USA"), a Delaware corporation, is plaintiff's affiliate. USA is apparently in the "business of developing, manufacturing, marketing, and selling containers and related products and providing services related to such products."
On December 31, 1996, plaintiff entered into a Patent & Technology License Agreement (the "Patent Agreement") granting USA the rights to plaintiff's IP by:
a perpetual, world-wide, non-exclusive right to develop, manufacture, have manufactured, use and sell any products employing . . . [plaintiff's IP] . . . (the "Licensed Products"), provide services related to the Licensed Products, and otherwise commercially exploit the [IP] . . . throughout the world, including the right to grant sublicenses.
In return, USA had to pay a royalty of 3% of the net sales of the Licensed Products. "Net sales" means the gross sales of the Licensed Products less discounts, taxes, shipping and insurance costs, if those are included in the "gross sales price." However, if USA paid royalty under the separate 1996 Trademark Agreement (see below), then it did not have to pay the 3% under the Patent Agreement. A 2005 amendment included certain specific IP, to which plaintiff gave USA the same rights as above, except that this was an exclusive license. USA had to pay plaintiff a royalty of 2.8% but as to any IP sublicenses, USA had to pay plaintiff 50% of the royalties USA received.
USA could sub-license plaintiff's IP without plaintiff's consent under the same conditions of the Agreement, with USA being responsible for the sub-licensee's compliance and obligations. Plaintiff was primarily responsible for all issues pertaining to its IP, including defending their validity. Any litigation involving the IP could be prosecuted/defended by plaintiff, or by plaintiff and USA jointly, and could be compromised or settled by plaintiff (upon notice to USA). If USA was a party in a third-party infringement claim, its out-of-pocket costs would be reimbursed by plaintiff. However, plaintiff disclaimed any obligations towards USA or USA's sub-licensees asto, among others, the use of plaintiff's IP, the quality and performance of products manufactured and sold using the IP, or third-party claims relating to such products, or for "any failure" in the production, design or operation of such products. Plaintiff also disclaimed any liability to USA or a sub-licensee "for indirect, special, incidental or consequential damages." On the other hand, USA would indemnify, defend, and hold plaintiff harmless against any liability arising from, among others, the manufacture, use or sale of the Licensed Products.
USA had to pay a royalty of 3% of the net sales unless it paid royalty under the Patent Agreement. USA could sub-license plaintiff's trademarks without plaintiff's consent, but remained responsible for its and the sub-licensee's compliance and obligations with the terms of the Agreement. Plaintiff was primarily responsible for all issues pertaining to its IP, including defending their validity. Any litigation involving the IP could be prosecuted/defended by plaintiff, or by plaintiff and USA jointly, and could be compromised or settled by plaintiff (upon notice to USA). If USA was a party in a third-party infringement claim, its out-of-pocket costs would be reimbursed by plaintiff. There was no warranty disclaimer/indemnification provision.
In March 2012, Taxation audited USA. Since USA was deducting royalty payments made to plaintiff, Taxation conducted a spin-off audit of plaintiff. At the auditor's request, plaintiffprovided unsigned CBT returns for 1997-2005, excluding tax year 2002, claiming that USA did not pay royalties that year. The returns computed CBT at 9% of the gross receipts. Plaintiff did not provide the IP agreements, but provided royalty study reports prepared by Pricewaterhouse Coopers on accepted royalty rates. Taxation therefore imputed royalty payments for 1996-2010, and apportioned 0% to Illinois since it was a combined reporting jurisdiction. Apparently, the Illinois return showed that royalty income was not included in the numerator of the sales fraction on the apportionment schedule. Taxation allocated the royalty income to New Jersey using USA's allocation factor, and computed CBT (plus interest and penalties) totaling $2,099,619.16 for tax years 1997-2010.
Plaintiff then submitted a settlement offer to Taxation for both itself and USA, which Taxation rejected on May 1, 2012. Taxation further required that plaintiff file tax returns within 30 days of receipt of the correspondence, else it would levy an arbitrary assessment on plaintiff.
Promptly thereafter, plaintiff filed the instant complaint in the Tax Court on May 30, 2012, seeking injunctive and declaratory relief from any proposed arbitrary or other assessment, alleging that requiring it to file CBT returns violated the DPC and DCC because it had no physical or other presence in New Jersey.1 The court denied temporary restraints and injunctive relief.
This partial summary judgment motion followed. Plaintiff's president averred that plaintiff developed IP "for the nation-wide business operations" of the Crown Group; plaintiff had no physical presence in New Jersey in 1996-2010; USA "conducts a packaging products manufacturing business in which it uses" plaintiff's IP; USA is plaintiff's only domestic related-party licensee; and USA did not manufacture packaging products in New Jersey. In its answers to Taxation's interrogatories, plaintiff stated that the "only connection between" plaintiff's IP and New Jersey was (1) on USA's employees' business cards, stationery, or other advertising material given to USA's current or potential New Jersey customers; (2) on USA's shipping materials used to ship USA's products into New Jersey; and (3) on USA's products, but only in "certain instances" and then, those were "small and inconspicuous to the consumer." Plaintiff also stated that other than space rented by USA in New Jersey to store its packaging products during "certain periods" in 1996-2010, neither USA nor any related member owned/used/leased any office, retail outlet, warehouse, or other building in New Jersey.
During oral argument, pl...
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