GE Solid State, Inc. v. Director, Div. of Taxation

• Decision Date: 17 March 1992
• Parties: GE SOLID STATE, INC., a Delaware Corporation (formerly the Solid State Division of RCA Corporation), Plaintiff-Appellant, v. DIRECTOR, DIVISION OF TAXATION, Defendant-Respondent.
• Court: New Jersey Superior Court — Appellate Division

Page 653

254 N.J.Super. 653

604 A.2d 189

GE SOLID STATE, INC., a Delaware Corporation (formerly the

Solid State Division of RCA Corporation), Plaintiff-Appellant, v. DIRECTOR, DIVISION OF TAXATION, Defendant-Respondent.

Superior Court of New Jersey,

Appellate Division.

Argued Jan. 27, 1992.

Decided March 17, 1992.

Charles M. Costenbader, for plaintiff-appellant (Stryker, Tams & Dill, attorneys; Charles M. Costenbader of counsel; Ellen S. Delo on the brief).

Mary R. Hamill, Deputy Atty. Gen., for defendant-respondent (Robert J. Del Tufo, Atty. Gen. of New Jersey, attorney; Michael R. Clancy, Asst. Atty. Gen., of counsel; Mary R. Hamill on the brief).

Before Judges J.H. COLEMAN, STERN and KEEFE.

The opinion of the court was delivered by

COLEMAN, J.H., P.J.A.D.

Plaintiff, GE Solid State, Inc. (GE), appeals from a decision of the Tax Court which affirmed that portion of a determination of the Director of the Division of Taxation assessing a use tax deficiency of $61,599 for the taxation audit period of July 1, 1981 through June 30, 1984. GE paid the use tax assessment under protest, $40,026 of the sum paid is attributable to a use tax imposed on GE's predecessor, the Solid State Division of RCA, purchase of machinery and equipment used to make photomasks. The remaining $21,573 is attributable to a use tax imposed on plaintiff's predecessor's purchase of photoplates used by plaintiff as reticles and printmasters in its photomask operation to make other photomasks. This machinery and equipment were used by plaintiff's predecessor in its high technology manufacturing of integrated circuits or "chips." The process is as complicated as it sounds and it has been thoroughly outlined below. GE Solid State v. Director, Div. of Tax., 11 N.J.Tax 320, 323-329 (1990).

This appeal involves an interpretation of certain provisions of the Sales and Use Tax Act (Act), N.J.S.A. 54:32B-1 et seq. Under the Act, a sales tax is imposed on receipts from the sale of tangible personal property, except as provided otherwise under the Act. N.J.S.A. 54:32B-3(a). No sales tax issue is involved in this appeal. The Act also imposes a use tax on the use of any tangible personal property purchased at retail unless an exemption applies. N.J.S.A. 54:32B-6.

GE contended below and again on this appeal that the machinery and equipment in question are exempt from a use tax pursuant to N.J.S.A. 54:32B-8.13a, the so called manufacturing exemption. GE argues that when the Solid State Division of RCA purchased the photomask machinery and accessories, those purchases did not constitute taxable events because they represented "[s]ales of machinery, apparatus or equipment for use or consumption directly and primarily in the production of tangible personal property by manufacturing...." N.J.S.A. 54:32B-8.13a. GE further contends that subsection 8.13a similarly exempts the reticles and printmaster "because they are used either directly in the production of integrated circuits by manufacturing or directly in the production of photomasks by manufacturing."

The Tax Court rejected GE's arguments and concluded that in light of the legislative history of the manufacturing exemption and the long standing administrative regulations, the Director's interpretation of the exemption was correct. Both the Director and the Tax Court concluded that subsection 8.13a exemption applies only to machinery used directly in the production or manufacturing of personal property that was for sale to an ultimate consumer, at which point a sales tax would be collected.

They relied in part upon N.J.A.C. 18:24-4.2 which defined "machinery, apparatus or equipment" and "manufacturing or processing" as follows 'Machinery, apparatus or equipment' means any complex, mechanical, electrical or electronic device, mechanism or instrument which is adapted to the accomplishment of a production process, and which is designed to be used, and is used, in manufacturing, converting, processing, fabricating, assembling, or refining tangible personal property for sale.

'Manufacturing or processing' means the performance of an operation or series of operations, the object of which is to place items of tangible personal property in a form, composition, or character different from that in which they were acquired. The change in form, composition, or character must be a substantial change, and it must result in a transformation of property into a different or substantially more usable product. [Ibid. emphasis added].

They also relied upon

N.J.A.C. 18:24-4.4(b), which provides that,

Production is limited to those operations commencing with the introduction of raw materials into a systematic series of manufacturing, processing, assembling, or refining operations, and ceases when the product is in the form in which it will be sold to the ultimate consumer .... [Ibid. emphasis added],

and N.J.A.C. 18:24-4.4(c), which provides that,

Machinery, apparatus, or equipment is considered to be directly used in production only when it is used to initiate, sustain or terminate the transformation of raw materials into finished products.... [Ibid.]

The foregoing regulations were adopted by the Division of Taxation in 1969 construing the manufacturing exemption as it existed after the exemption was first enacted in 1966. These regulations were readopted in 1977 with virtually no change following the Legislature's reenactment of the exemption by L. 1977, c. 18.

Based on the application of these regulations, neither the photomasks nor the photoplates used to make reticles and printmasters to make photomasks were used directly in manufacturing because they were not sold directly to consumers. Rather, they were used to manufacture the integrated circuits which were sold to consumers on which sales taxes were collected. The judge concluded that the subsection 8.13a. exemption requires that the machinery be used "directly" and "primarily" in the production process and since it was not used "directly," he need not decide whether it was used "primarily."

We now affirm the judgment of the Tax Court substantially for the reasons stated by Judge Andrew in his reported decision. An agency's interpretation of a statute it is entrusted with enforcing should prevail unless plainly unreasonable, Metromedia, Inc. v. Director, Div. of Tax, 97 N.J. 313, 327, 478 A.2d 742 (1984), or unless that construction is "just plain wrong." International Flavors and Fragrance, Inc. v. Director, Div. of Tax., 102 N.J. 210, 221, 507 A.2d 700 (1986) (Clifford, J., concurring). Agency regulations are presumptively valid, Medical Society of New Jersey v. Dept. of Law & Public Safety, 120 N.J. 18, 25, 575 A.2d 1348 (1990), and should not be invalidated unless they violate the enabling Act or its express or implied legislative policies. Public Service Electric & Gas Co. v. Dept. of Envtl. Protection, 101 N.J. 95, 103, 501 A.2d 125 (1985). Since the Legislature took no action to overturn the agency's regulations that have existed since 1969, the presumption of validity is enhanced. Beyond that, tax exemptions are to be strictly construed. Metpath, Inc. v. Director, Div. of Tax, 96 N.J. 147, 152, 474 A.2d 1065 (1984). See also Service Armament Co. v. Hyland, 70 N.J. 550, 558-559, 362 A.2d 13 (1976). Even though GE's arguments are impressive, we find no basis for interfering with the longstanding interpretation of the claimed exemption. To hold otherwise, would cause a substantial interruption of existing State tax policies. Such an interruption should come only from the Legislature.

Affirmed.

STERN, J.A.D. (concurring).

N.J.S.A. 54:32B-8.13a provides an exemption from taxation pursuant to the Sales and Use Tax Act, N.J.S.A. 54:32B-1 et seq., with respect to

[s]ales of machinery, apparatus or equipment for use or consumption directly and primarily in the production of tangible personal property by manufacturing, processing, assembling or refining.

On its face, this statute provides an exemption from taxation of sales (and purchases) of items "directly and primarily" used in the production of "tangible personal property." It does not include a requirement that the "tangible personal property" be manufactured or produced "for sale."

When the statute was enacted in 1977, the Legislature utilized the precise language of the prior statute which had been repealed in 1970. Regulations had been promulgated by the Director under the prior statute, and regulations are generally entitled to deference in interpreting a statute administered by the agency which promulgates the regulations. See Metromedia, Inc. v. Director, Div. of Taxation, 97 N.J. 313, 327, 478 A.2d 742 (1984). Hence, my colleagues, in agreement with the Tax Court, conclude that

[w]hen the Legislature, in fact, reenacted the exemption provision it employed the identical language of the former exemption provision. Thus, it must be presumed that it agreed with, and adopted, the interpretation of that language by the very agency charged with its administration. [GE Solid State v. Dir., Div. of Tax., 11 N.J.Tax 320, 333 (Tax Ct.1990) ].

The Tax Court determined that

[i]n light of the legislative history of the manufacturing exemption, the Director's interpretive regulations, i.e. those that predated the reenacted exemption and those that followed, the Director's long standing practice with which the Legislature has not interfered and the common understanding of the exemption provision, I find the Director's construction manifestly reasonable, and accordingly, must prevail. Id. at 335-36.

Accordingly, the Tax Court and my colleagues conclude that "[i]n order for the manufacturing exemption to apply, the tangible personal property being produced must be 'for sale.' " Id. at 336.

As developed in the Tax Court opinion, id. at 331-333, N.J.S.A. 54:32B-8.13a was originally adopted as N.J.S.A. 54:32B-8(m)(1), effective April 29, 1966, see L. 1966, c.30, § 8(m)(1), as amended by L. 1966,...