Court Opinion

ID: 9697389
Source: CourtListenerOpinion
Date Created: 2023-08-25 19:15:27.608145+00
Date Added: 2024-06-11T12:27:19.890380
License: Public Domain

HANDLER, J.,
dissenting.
The Court flatly rejects the longstanding interpretation and application by the Legislature and the Division of Taxation of N.J.S.A. 54:32B-8.13a (“section 8.13a”), the “manufacturing” exemption of the Sales and Use Tax Act, N.J.S.A. 54:32B-1 to - 29. The Court now holds that the “manufacturing” exemption can apply to items of property that are used in the course of the manufacturing process even though their function in that process does not itself result in the finished product. I disagree with that determination.
In my opinion, the “for sale” requirement as reflected in the implementing administrative regulations appropriately serves to define what items of manufacture are used “primarily and directly” in the manufacturing process and are eligible for the statutory exemption, and that understanding of the scope and application of the exemption comports with the intention of the Legislature. The reasons for that conclusion are fully expressed in the Tax Court opinion of Judge Andrew, 11 N.J.Tax 320 (1990), and by the opinion of the Appellate Division, 254 N.J.Super. 653, 604 A.2d 189 (1992), affirming the Tax Court judgment.
This is a classic case of statutory construction. The Court first applies the canon relating to statutory plain language. That canon requires a statute to be interpreted only according to the plain meaning of its clear and unambiguous language without resort to any extrinsic aid. E.g., State v. Butler, 89 N.J. 220, 226, 445 A.2d 399 (1982). In applying that canon the Court accepts plaintiffs argument and its conclusion that “the plain and unambiguous language of the manufacturing exemption imposes no ‘for sale’ requirement on the ‘tangible personal property’ produced.” Majority at 308, 625 A.2d at 473.
*317The fact of the matter is the language of the exemption section is not “plain and unambiguous.” Section 8.13a exempts from the Act receipts from
[s]ales of machinery, apparatus or equipment for use or consumption directly and primarily in the production of tangible persona] property by manufacturing, processing, assembling or refining.
It is just not possible to ascertain from the face of that provision alone whether a “for sale” condition or any other similar qualifying condition relating to marketability was intentionally omitted by the Legislature. Not only is the language unclear on whether the omission of a qualifying term, such as “for sale,” was intentional or not, but the terms actually included in the section — “used primarily and directly in the production, etc.” — are hardly self-defining and do not have a “plain meaning.” Indeed, those terms strongly suggest that it would be important to identify where on the continuum of the manufacturing process the item of property is actually used in order to ascertain whether that use can reasonably be characterized as “primary and direct” in relation to the finished product. The term thus implies that some kind of a condition concerning whether the manufactured product is a finished or completed item may be important and helpful in determining whether other tangible personal property — i.e., “machinery, apparatus, or equipment” that is used to produce that end-product — is eligible for the exemption. What thus seems clear is that the language of the exemption is unclear. Hence, the meaning of the statutory exemption cannot be resolved by claiming that its language is plain and unambiguous.
The ambiguity of the language of the section is evidenced by the Court’s own analysis. While professing to derive its interpretation from the literal terms of its language, the Court actually looks beyond the face of the statute to external sources. It refers to another exemption of the statute, N.J.S.A. 54:32B-8.13b, to shed light on the meaning of section 8.13a.
Statutory provisions in pari materia should be read together and reconciled if possible in order to determine the underlying *318legislative intent. E.g., Nero v. Hyland, 76 N.J. 213, 221, 386 A.2d 846 (1978). Section 8.13b specifically provides an exemption for the sale of machinery, apparatus or equipment for use “directly and primarily in the production ... of gas [and other utilities] for sale” (emphasis added). “The express use of the words in section 8.13b,” according to the Court, “indicates that the omission of the words ‘for sale’ in section 8.13a was intentional. Had the Legislature intended to restrict the exemption only to machinery producing tangible personal property that is ‘for sale,’ it would have drafted the statute accordingly.” Majority at 308, 625 A.2d at 473. The short rebuttal of that position is furnished by Judge Andrew:
Plaintiff argues that the express use of the words “for sale” in subpart b. of the exemption provision at § 8.13 demonstrates that the Legislature intentionally omitted the words “for sale” in subpart a. of § 8.13. The argument is not convincing. In § 8.13 the Legislature expressed a desire to exempt machinery used in the production of electricity, etc., “for sale” or in the operation of sewerage systems. The use of the words “for sale” was required to permit an expansion of the machinery exemption to the production of electricity, etc. other than “for sale.” In § 8.13a. the expression, "for sale,” was unnecessary.
[11 N.J.Tax at 336 n. 5.]
Thus, apart from the Court’s implicit acknowledgment that the language of section 8.13a is not plain and unambiguous, the conclusion it reaches based on its comparison between sections 8.13a and 8.13b is flawed.
The Court also invokes the extrinsic aid of legislative history. It recounts accurately and completely the historical chronology of the current exemption. Nevertheless, it is off the mark in concluding that the history forecloses an interpretation that manufacturing machines are exempt even though their function in the manufacturing process does not result in the finished product.
An exemption for property used in manufacturing production was originally enacted in 1969. The Director of the Division of Taxation adopted regulations interpreting that first exemption. The original exemption was then repealed and the current exemption was enacted in 1977. In the interim the statutory *319exemption and the tax policy considerations surrounding such an exemption were the subject of a study of the Tax Policy Committee. The specific recommendation of the Committee was to restore the production-machinery exemption.
The current exemption was reenacted by the Legislature in 1977 based on the Committee’s recommendation. The exemption was phrased in language identical to the original statutory exemption. Further, shortly after its passage, the Director, in September 1977, promulgated the current regulations, which interpret the manufacturing exemption in language almost identical to the Director’s regulations interpreting the original exemption. “Both sets of regulations,” as pointed out by Judge Andrew, “interpret the machinery exemption as being applicable only when the finished product is tangible personal property ‘for sale’ to the ‘ultimate consumer.’ ” 11 N.J.Tax at 332-33. Thus, not only is the current statute identical to the previous enactment, but the current regulations are virtually identical to the regulations adopted by the Director after the machinery exemption provision at section 8.13a was reenacted by the Legislature.
I am mystified that the Court can state that the Legislature was not aware of the Director’s official interpretation of the exemption statute when it reenacted that exemption in 1977. The Legislature specifically acted on the Committee’s recommendation — a recommendation itself predicated on a long study of the earlier exemption, which obviously and necessarily included the Director’s implementing regulations defining that exemption.
In discounting the fact that the legislative action was based on that understanding, the Court adopts the position taken by the concurring judge in the Appellate Division: “[T]he record here contains no direct proof that the Legislature was aware of, or actually intended to adopt, the regulations promulgated by the Director under the statute before its repeal.” 254 N.J.Super. at 659, 604 A.2d 189. The Court echoes that position, viz: it finds no “direct proof that the Legislature was aware of, or *320actually intended to adopt, the regulations promulgated by the Director in 1969 when it reenacted the exemption in 1977.” Majority at 312, 625 A.2d at 475.
I am perplexed that the Court imposes a burden of proof in this context — and not just a burden of proof, but one that requires “direct proof.” The inquiry after all entails the search for legislative intent, not a search for legislators’ actual intent. Cf. Riggs v. Long Beach Township, 109 N.J. 601, 613, 538 A.2d 808 (1988) (allowing proof of improper ulterior motives of municipal officials in passage of local zoning ordinance to vindicate claim of property owner that ordinance was invalid). Legislative intent is extrapolated from relevant circumstances surrounding the passage of legislation, and that determination is rarely governed or settled by formal rules imposing a burden of proof. The judicial determination of legislative intent encompasses extrinsic evidence relating to the meaning of legislation, including legislative history, and ultimately is informed by our conventional and ordinary understanding of government operations and the normal presumptions that are invoked to make sense out of the past, particularly when every legislative event is not and cannot be and need not be chronicled. The approach to that kind of determination is exemplified by Judge Andrew’s explanation and use of the relevant legislative history:
[T]he tax policy committee specifically recommended a restoration of the machinery exemption and that exemption provision had been interpreted by the Director through the regulations issued in August 1969. The committee had to have been acutely aware of the Director’s interpretive regulations at the time that it made its specific recommendation, yet, it did not suggest any changes in statutory language.
When 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. [Citation omitted.]
[11 N.J.Tax at 333-34.]
His conclusion, I submit, is right on target.
Thus, the Legislature reenacted a statutory provision that had in fact been given a practical interpretation by the adminis*321trative agency most familiar with the enactment and charged with its implementation, and whose interpretation was obvious to those who studied the underlying tax policy and examined the statute to resolve that policy. In addition, when the statutory exemption was reenacted, that administrative agency, the Division of Taxation, which was charged with its implementation and application, immediately adopted regulations that interpreted the exemption, thus strongly confirming the underlying legislative understanding of the scope of the exemption. The canon of construction based on those circumstances is expressed in Ford Motor Co. v. New Jersey Department of Labor & Industry, 7 N.J.Super. 30, 38, 71 A.2d 727 (App.Div.1950), quoted by Judge Andrew: “Where a statute has received a ... practical interpretation, and the statute as interpreted is reenacted, the practical interpretation is accorded greater weight than it ordinarily receives, and is regarded as presumptively the correct interpretation of the law.” 11 N.J. Tax at 334.
More important, the statutory exemption as interpreted and applied by the Director has endured for a long time. That circumstance should invoke the well-settled canon that a practical and uniform administrative construction of a statute with which the Legislature has not interfered over an extended period of time is strong evidence that the administrative interpretation conforms with legislative intent, and thus is accorded great weight. Body-Rite Repair Co. v. Director, Div. of Taxation, 89 N.J. 540, 545-46, 446 A.2d 515 (1982). The majority, however, also misapplies that canon. It initially says: “[T]he Legislature’s long-standing acceptance of the Director’s regulations is not persuasive evidence that the regulations conform to legislative intent.” Majority at 312-13, 625 A.2d at 475. Why is it not “persuasive evidence”? Because, by some alchemy, the Court turns “long-standing acceptance” into “inaction,” and because “inaction” is a “weak reed” on which to base the interpretation of a statute, the long period over which the Director has interpreted and applied the statute cannot, accord*322ing to the Court, support a legislative acceptance of the administrative agency’s regulations. Ibid.
Even the concurring judge below, who was not impressed by the interpretive significance of the legislative reenactment in 1977 of the identical original exemption as defined by the Director, was convinced that its subsequent history evidenced not “inaction,” but rather “long acceptance” by the Legislature of the administrative understanding of the exemption. That administrative interpretation, therefore, should be viewed as consistent with and expressive of the underlying legislative intent. He pointed out:
[W]e review this case almost fifteen fiscal years after the relevant regulations were adopted and during which the Legislature relied upon projections from Sales and Use Tax receipts and on Sales and Use Tax Revenues, as reported by the Department of the Treasury, in considering the adopting State budgets. See N.J.S.A. 52:27B-20 et seq., -46. See also N.J.S.A. 52:18A-4, -6, -6.2, -32, - 46. Those projections and receipts were premised on the regulations of the Director of the Division of Taxation in the Department of the Treasury. See N.J.S.A. 52:18A-3, -24, -25, -48.
[254 N.J.Super, at 660, 604 A.2d 189.]
The Court observes that “that long-continued error does not make valid what is clearly invalid.” Majority at 313, 625 A.2d at 475-76. An administrative construction may, indeed, be rejected if it is “just plain wrong.” International Flavors & Fragrance, Inc. v. Director, Div. of Tax., 102 N.J. 210, 221, 507 A.2d 700 (1986) (Clifford, J., concurring). However, unless one can show convincingly that the Director’s interpretation is “error,” let alone “long-continued error” — that it is “just plain wrong” — the legislative acquiescence in that interpretation cannot be explained away by characterizing it as simply “inaction.” The focus should not be on whether the agency interpretation is indisputably correct, but on whether it is not plainly unreasonable. The sound approach is not to reject agency interpretation because it has not been proved to be correct, but to recognize that “the agency’s interpretation of the operative law is entitled to prevail, so long as it is not plainly unreasonable.” *323Metromedia v. Director, Div. of Taxation, 97 N.J. 313, 326, 478 A.2d 742 (1984). The Legislature presumptively adopted the Director’s interpretation when it reenacted the machinery exemption, and thereafter for many years actually used and applied the exemption in accordance with that understanding. See In re Boyan, 127 N.J. 266, 268, 604 A.2d 98 (1992) (adopting specific provisions in appropriations acts can influence meaning of related statute). That legislative conduct should be regarded as its “acceptance” and confirmation of the Director’s interpretation, and ought not be rejected or discounted unless that interpretation is otherwise “plainly unreasonable.”
The Court never demonstrates that the Director’s interpretation is “plainly unreasonable.” Its ultimate basis for characterizing the Director’s interpretation as “error” is the Court’s own view that the exemption should be broader than it is. The Court argues that because the Legislature wanted to enhance the competitive position of New Jersey manufacturers, vis-a-vis those in neighboring states, it necessarily opted to enact a broad exemption, one that would cover more property items used in the manufacturing process than only those used to complete the finished product as contemplated by the original exemption according to the Director.
The Court, while purporting to explain the tax policy that was in fact recommended by the Committee and adopted by the Legislature, actually is expressing its own views, and thus, in effect, is exercising a legislative or administrative discretion relating to State tax policy. The judgment concerning the breadth of the machinery exemption is one involving tax policy, which should be left to other branches of government.
The legislative and administrative history indicates that the central tax policy issue was whether a so-called machinery exemption should be provided. That policy issue was resolved by the judgment to have such an exemption. The history does not demonstrate a discrete determination that the exemption should be restored only in its broadest possible form. Although *324the broad-form exemption, as now urged by the Court, might, indeed, make New Jersey manufacturers more competitive, it will also reduce revenues. Nothing in the circumstances surrounding the reenactment of the exemption suggests that the other branches of government were not satisfied that the exemption as applied by the Division of Taxation makes our manufacturers sufficiently competitive. Nor does anything suggest that the other branches were willing to reduce public revenues by broadening the exemption in order to make manufacturers even more competitive. In short, the record contains no showing that the legislative or executive branches, in adopting and implementing the current machinery exemption, did not, consistent with the administrative understanding, appropriately resolve and balance the conflicting tensions between maintaining the public coffers and enhancing local competition.
Those concerns, I repeat, implicate tax policy and are remitted exclusively to the nonjudicial branches of government. The expansion of a tax exemption is surely not the business of the courts. The point is illustrated by the Director’s reference to the 1988 Final Report of the State and Local Expenditure and Revenue Policy Commission (SLERP). In that report the Commission recommended that the existing statutory language in section 8.13 be “clarified” by “expanding the exemption to include the sales of supplies” and “extending the exemption to machinery which is used to produce production equipment, parts of other features of the production machinery itself.” See Final Report, SLERP (1988), at 118 (emphasis added). The Director reasonably asserts that the recommendation in the SLERP report recognizes the common understanding that the manufacturing exemption does not apply to machinery used to produce something other than a final product for sale. Id. at 334-35. As expressed by the Appellate Division in dealing with the taxpayer’s arguments, which are similar to the Court’s position, any shift from that understanding implicates matters of tax policy.
*325Even 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.
[254 N.J.Super. at 657, 604 A.2d 189.]
Thus, in light of the legislative history of the manufacturing exemption, the Director’s interpretive regulations, the Director’s longstanding practice and consistent implementation of the exemption, the concomitant acceptance by the Legislature of that agency interpretation, the consistent and actual legislative application of the agency’s interpretation of the exemption as a revenue-raising measure, and the common understanding of the exemption provision, I find the Director’s construction manifestly reasonable — it is surely “not plainly unreasonable” — and accordingly, it must prevail. See Metromedia, supra, 97 N.J. at 327, 478 A.2d 742. As expressed by the Appellate Division,
[a]n agency’s interpretation of a statute it is entrusted with enforcing should prevail unless plainly unreasonable, ... or unless that construction is “just plain wrong.” ... Agency regulations are presumptively valid, ... and should not be invalidated unless they violate the enabling Act or its express or implied legislative policies____ 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. [(Citations omitted.)]
[254 N.J.Super. at 657, 604 A.2d 189.]
In sum, the manufacturing exemption applies only to a property item that itself is used to produce a finished or final product — one ready for sale to the consumer in accordance with the Director’s regulations. That understanding of the scope and application of the manufacturing exemption is a reasonable definition and a practical clarification of the broad statutory terms of “used primarily and directly” in production.
. I would affirm the judgment below.
CLIFFORD and POLLOCK, JJ., join in this opinion.
*326For reversal and remandment — Chief Justice WILENTZ, and Justices O’HERN, GARIBALDI and STEIN — 4.
For affirmance — Justices CLIFFORD, HANDLER and POLLOCK — 3.