Village Super Market of PA Inc. v. Director, Division of Taxation, No. 021002-2010; Tax Court; opinion by Brennan, J.T.C.; decided and approved for publication October 23, 2013. DDS No. 34-4-1782 [25 pp.]

After World War II, Nicholas and Perry Sumas joined a food cooperative, now known as Wakefern Corporation whose members began to trade under the name ShopRite. In1954 the Sumas formed Village Super Market Inc. (INC), a New Jersey corporation whose principal place of business is now Springfield.

INC’s later decision to reorganize led to the creation of Village Super Market of PA Inc. (PA) and Village Super Market of NJ, LP (LP). INC formed PA as a wholly owned subsidiary incorporated in Pennsylvania. It owns and operates a ShopRite supermarket in Pennsylvania. As PA’s sole shareholder, INC appoints the PA board of directors, which, with the exception of the store manager, is comprised of INC officers or employees. PA filed a business registration form with the New Jersey Division of Revenue indicating that it was doing business in New Jersey effective Jan. 1, 2000.

INC and PA formed LP, a New Jersey limited partnership whose primary place of business is Springfield. It operates 25 ShopRites in New Jersey. INC holds a 17 percent general partnership interest in LP; PA holds a limited partnership interest of 83 percent. INC appoints LP’s board of directors, which is comprised of INC employees, officers and shareholders.

PA and LP adopted a joint cash management agreement (CMA) with INC pursuant to which INC can loan funds to them as a “parent loan” and they can make subsidiary loans to INC and all of PA and LP’s cash is held by INC through a subsidiary loan. INC pays all of PA and LP’s bills and records these transfers as repayments against the subsidiary loan.

INC’s chief executive officer is vice chairman of Wakefern and a member of the Wakefern board of directors.

After a division audit of LP revealed that INC had filed a New Jersey CBT return reporting a distributive share of partnership income but PA had not, the division determined that PA is subject to the New Jersey Corporate Business Tax, N.J.S.A. 54:10A-1 to -41. The division’s conference and appeals branch upheld that determination.

PA then filed this action in the Tax Court.

Held: PA and LP are not discreet and independent entities because they are in the same line of business, are both parties to the same New Jersey-governed CMA, have common agents, managers, officers, and directors on whom they are dependent to operate as ShopRite stores, and share a principal place of business in Springfield. Therefore, PA has nexus with New Jersey and is subject to the CBT.

For a state to tax an out-of-state entity there must be a “minimal connection” or “nexus” between the interstate activities and the taxing state, and a rational relationship between the income attributed to the state and the intrastate values of the enterprise. Nexus can be established through a transaction-based analysis (tax on an activity) or a presence-based analysis. In a transactional analysis, there must be a connection between the entity to be taxed and the activity being conducted in the taxing state. A passive investor in an unrelated business enterprise would not have transactional nexus.

For a presence nexus, a corporation must have minimum contacts with the taxing state, sufficient to reasonably anticipate being haled into court. Physical presence is not required—only that the entity purposely directs its activity into a jurisdiction. The test is whether the taxing power exerted by the state bears fiscal relation to protection, opportunities, and benefits given by it.

The application of CBT also must be in accordance with the Commerce Clause. Thus, a tax on interstate economic activity must be applied to an activity with a substantial nexus with the taxing state, be fairly apportioned, not discriminate against interstate commerce, and be fairly related to the services provided by the state.

The CBT imposes a tax on a corporation for the privilege of having or exercising its corporate franchise in New Jersey or for the privilege of doing business, employing or owning capital or property, or maintaining an office, in New Jersey. A case-by-case analysis determines whether an out-of-state corporation is subject to the act.

Citing BIS LP Inc. v. Director, Div. of Taxation, 25 N.J. Tax 88 (2009), aff’d, 26 N.J. Tax 489 (App. Div. 2011), certif. granted, 27 N.J. Tax 58 (2012), PA argues its limited partnership interest in LP is not enough to subject it to CBT because it is strictly a passive investor. The court distinguishes BIS and concludes that PA’s interactions with LP and INC establish sufficient minimum contacts to meet the requirement of presence-based nexus with New Jersey.

Looking at PA’s physical presence in Springfield, contractual presence through the CMA, and correlating business interests, the court notes that its business records are kept at INC’s business offices in Springfield, its tax returns and bank statements identify Springfield as its address, its New Jersey registration form indicates that there are persons working in New Jersey on its behalf, and all but one of its officers and directors work out of the Springfield office. The net result of the CMA, which is governed by New Jersey law, is that all of PA’s cash assets are held in New Jersey as a subsidiary loan to INC.

The court says the notion that PA is a separate, distinct and independent business from LP or INC is neither credible nor supported by the facts. Due to Wakefern’s structure and INC’s shareholder status, all of the entities are involved in the supermarket business, are interrelated, and are interdependent.

As to whether there is a rational relationship between the income attributed to New Jersey and the values of the enterprise, the court notes PA’s business receipts are limited to Pennsylvania and are consequently irrelevant. However, the investment income from PA’s limited partnership in LP bears a rational relationship to New Jersey by virtue of the overlap of officers and directors, the commonality of the business enterprises and their unification in INC’s western district, and the execution of a joint CMA with LP and INC. PA’s interest income on subsidiary loans to INC flows from the CMA, which is governed by New Jersey law and permits INC to hold and control all of PA’s cash assets. PA’s patronage dividends are also generated in New Jersey and are derived from INC’s shareholder status.

Thus, the court concludes that PA has a presence-based nexus with New Jersey.

For plaintiff — Michael A. Guariglia (McCarter & English). For defendant — Michael J. Duffy (John J. Hoffman, Acting Attorney General).