NFF Construction Inc. v. Director, Division of Taxation, No. 011330-2009; Tax Court; opinion by Menyuk, J.T.C.; decided and approved for publication December 26, 2012. DDS No. 35-5-8589 [18 pp.]

This action contests the director of the Division of Taxation’s denial of plaintiff’s claim for a refund of sales and use tax. At issue is whether plaintiff was entitled to collect sales tax at the reduced rate authorized by the Urban Enterprise Zone Act (UEZ Act), on its sales of building materials that were used in the construction of the Borgata Hotel and Casino in Atlantic City.

The director contends that plaintiff NFF Construction Inc. (NFF) should have collected tax at the then-full rate of 6 percent, because NFF did not regularly operate a place of business for the purpose of making retail sales within the urban enterprise zone, and was therefore not eligible to be certified as a business authorized to collect tax at the reduced rate of 3 percent; that NFF did not regularly exhibit and offer for sale the goods at issue here at its location in the urban enterprise zone; and that the transactions in issue did not qualify as retail sales under the UEZ Act. The director maintains that NFF is liable for the uncollected remaining 3 percent sales tax due under the Sales and Use Tax Act (S&U Tax Act).

NFF asserts that it adequately demonstrated that it maintained a place of business for the purpose of making retail sales in the urban enterprise zone, that the transactions in issue were retail sales, and that it was authorized by the director to collect tax at the reduced rate, thereby entitling it to rely on the director’s authorization. It accordingly asserts that it is not liable for the tax deficiency.

Held: Because there was no credible evidence that the transactions at issue had taken place entirely within the urban enterprise zone as required by the regulations, the director’s final determination denying plaintiff’s refund claim is affirmed.

In furtherance of the purpose of stimulating economic activity in the authorized zones, the UEZ Act offers certain incentives, including reduced sales tax on sales made from a zone. N.J.S.A. 54:27H-80 provides that, except for certain retail sales not relevant here, receipts from retail sales made by a certified vendor from a place of business owned or leased and regularly operated by the vendor for the purpose of making retail sales, and located in a designated zone, are exempt to the extent of 50 percent of the tax imposed under the S&U Tax Act.

The director is charged with determining whether a vendor owns or rents a place of business located within a zone that is regularly operated by the vendor for the purpose of making retail sales; that the vendor regularly exhibits and offers items for retail sale at that location; and that the business is not used primarily for the purpose of catalogue or mail order sales. The director is also charged by the UEZ Act with promulgating regulations pertaining to the special tax provisions.

This action arises from an audit of NFF by the New Jersey Division of Taxation. The auditor’s report included the observation that plaintiff’s home office did not have a retail sales display area and that there were no materials inventoried for sale. The auditor concluded in his report that plaintiff’s business was not regularly operated for the purpose of making retail sales and that the certification issued by the director pursuant to N.J.S.A. 52:27H-80, authorizing the plaintiff to collect sales tax at the reduced rate, had been issued in error.

NFF’s only witness at trial was Frank Lundy, currently NFF’s president and sole owner. During the audit period, Lundy was a minority (49 percent) owner and vice president of the company. NFF maintains that it demonstrated through Lundy’s testimony that it was authorized to collect tax at the reduced rate.

The director maintains that NFF has failed to meet its burden of proof to show that the assessment is erroneous. Specifically, the director asserts that NFF failed to demonstrate that it regularly operated a place of business for the purpose of making retail sales, that it failed to establish that it sold items that were regularly exhibited and offered for sale at its location in the zone, and that it failed to show that the transactions with KHS&S constituted qualified retail sales within the meaning of the UEZ Act and the director’s regulations promulgated under the act.

The court concludes that the transactions were not completed in the zone but were, instead, completed in Atlantic City, contrary to the provision of N.J.A.C. 18:24-31.4(e), that only receipts from sales originated and completed by a purchaser in person at the seller’s place of business in the zone qualify for the reduced rate of sales tax. Because the sales transactions between NFF and KHS&S were not originated and completed within the zone, the sales do not qualify for the reduced rate of tax. Accordingly, NFF is not entitled to a refund of sales taxes that were properly assessed against it.

The court also concludes that there was no reasonable reliance on the certificate of authority issued by the director to NFF where the certificate specifically referred to N.J.A.C. 18:24-31.4 and NFF failed to comply with the director’s regulations.

NFF failed to carry its burden of establishing that the director’s assessment of tax was incorrect. The director’s denial of NFF’s refund claim is affirmed and the complaint is dismissed with prejudice.

For plaintiff — William J. Hughes Jr. and Mark A. Fiore (Cooper, Levenson, April, Niedelman & Wagenheim). For defendant Director, Division of Taxation — David B. Bender, Deputy Attorney General (Jeffrey S. Chiesa, Attorney General).