Court Opinion

ID: 9752805
Source: CourtListenerOpinion
Date Created: 2023-08-28 18:35:43.94042+00
Date Added: 2024-06-11T09:46:43.716532
License: Public Domain

GARIBALDI, J.,
dissenting.
It is the part of a good shepherd to shear the flock, not flay it. [Tiberius Caesar, A.D. 25.]
Justice Frankfurter once noted that “[e]ven tax administration does not as a matter of principle preclude considerations of fairness.” Angelus Milling Co. v. Comm’r of Internal Revenue, 325 U.S. 293, 297, 65 S.Ct. 1162, 1165, 89 L.Ed. 1619, 1623 (1945). Today’s decision loses sight of the need for fairness. It *303allows the Division of Taxation (Division), long after the transactions in question were closed, to extract from Airwork Service Division (Airwork) sales taxes that the Division itself informed Airwork it should refrain from collecting from its out-of-state customers. The Division has been able to accomplish this apparently draconian result by successfully arguing that Airwork should never have relied on its information in the first place.
Given the prior published position of the Division, Airwork’s understandable reliance on that announced position, the nature of the sales tax, and Airwork’s current inability to collect the sales taxes, the retroactive imposition of the sales tax produces such a harsh result that it offends fundamental concepts of fairness relating to agency conduct. I believe that an agency may not reverse itself retroactively when doing so will cause extraordinary detriment to those who have relied in good faith on the agency’s prior position. Further, as the imposition of sales tax here allows the state to revise its earlier publicized position without first providing a taxpayer with notice of the change, it violates the Administrative Procedure Act (APA), N.J.S.A. 52:14B-1 to -15, governing the promulgation of administrative rules. Hence, I disagree with the majority, and would hold the sales-tax assessment invalid.
I
Administrative agencies need flexibility to exercise their executive role through rulemaking and adjudication so that they may effectuate public policy. See In re Kallen, 92 N.J. 14, 24-25 (1983). As a result, they have great discretion in selecting the form of proceeding best suited to achieving their aims. See In re Uniform Admin. Procedure Rules, 90 N.J. 85, 92 (1982); Texter v. Department of Human Servs., 88 N.J. 376, 383-84 (1982); Bally Mfg. Corp. v. New Jersey Casino Control Comm’n, 85 N.J. 325, 338 (1981) (Handler, J., concurring).
*304This discretion is not unlimited, however. This Court has not hesitated to apply principles of fundamental fairness, beyond those required by the Constitution, to administrative agency actions. See In re Arndt, 67 N.J. 432 (1975); Monks v. New Jersey State Parole Bd., 58 N.J. 238 (1971); cf. State v. Tropea, 78 N.J. 309, 315-16 (1978) (although retrial of charge of speeding was not barred by Constitution, “considerations of fundamental fairness” militated against retrial when it would merely afford the State another opportunity to produce evidence of the applicable speed limit that the State had failed to produce originally); Rodriguez v. Rosenblatt, 58 N.J. 281, 294-95 (1971) (“considerations of fairness” dictated that counsel be provided to indigents charged in municipal courts with disorderly persons or other petty offenses). “When specific parties are particularly affected by a proposed rule, fair play and administrative due process dictate that an agency must conscientiously concern itself with and make reasonable efforts to accommodate the rights and interests of the affected individual and genuinely account for the individualized effect of its proposed action.” Bally Mfg. Corp. v. N.J. Casino Control Comm’n, supra, 85 N.J. at 345 (Handler, J., concurring).
“[TJhere are no simple answers as to what constitutes fundamental fairness” and “[e]ach case must be considered and evaluated on its own merits.” In re Kallen, supra, 92 N.J. at 27. The determination of whether agencies have observed principles of basic fairness therefore requires “an examination of the facts in each case, giving weight to the effect of the decision on the agency’s public policy.” Id. at 26. My review of this case clearly establishes that the retroactive imposition of the sales tax on Airwork would be harsh and unfair.
Airwork had no reason to believe it was not conforming to the Division’s policy. In 1966, after the passage of the New Jersey Sales and Use Tax Act, L.1966, c. 30, § 1 (Act), the Sales Tax Bureau of the Division issued an “Official News Release” (Release), New Jersey Tax Rptr. (CCH), No. 162, (July 11, 1966), stating inter alia:
*305Charges for repairs where the articles upon which the work is performed are delivered upon completion, pursuant to contract, to a purchaser outside the state for use outside the state are exempt from the sales tax.
The Division never adopted formal regulations governing this specific issue. Thus the Release, continuously printed, was the only statement on the topic for seven years.
In reliance on the Release, Airwork, which is principally engaged in the business of repairing aircraft engines, did not collect sales tax from its out-of-state customers. It did collect sales tax from its New Jersey customers. From Airwork’s point of view, a 1967 tax audit confirmed the viability of this position. During its 1967 audit of Airwork, the Division concluded that Airwork’s policy of not collecting sales tax from its out-of-state customers was correct. Although neither the Release nor the audit bars the Division from changing its policy, they do raise questions about the fundamental fairness of changing a policy without at least giving a taxpayer notice of that change.
On August 12, 1971, the Division of Tax Appeals promulgated its decision in Fisher-Stevens Inc. v. Director, Div. of Taxation, Docket S.T. 109, aff’d, 121 N.J.Super. 513 (App.Div.1972), certif. den., 62 N.J. 575 (1973). Two years after the Division of Tax Appeals decision in Fisher-Stevens, and only after the Appellate Division’s decision in Fisher-Stevens, the Division first published a document contradicting the Release. In its August-September 1973 edition of State Tax News, a bi-monthly newsletter of tax items of interest, the Division announced a complete reversal of its prior position and announced that sales of service performed on goods delivered to customers outside the State were subject to the sales tax. The next issue of State Tax News, the October-November 1973 issue, contained the following:
Service Performed in New Jersey — The charges for taxable services performed in New Jersey upon tangible personal property are subject to the sales tax whether the property serviced is delivered within New Jersey or out-of-state
*306Although the APA, N.J.S.A. 52:14B-1 to -15, was in effect as of September 1, 1969, see A. 1968, c. 410, § 1, none of the rule-making procedures was followed in connection with the Division’s publications in the August-September 1973 and October-November 1973 editions of the State Tax News. Once alerted by these announcements, Airwork commenced collecting sales tax from its out-of-state customers until the,Legislature specifically exempted those customers from the sales tax in 1977. See A. 1977, c. 54.
After publication of these announcements, the Division notified Airwork of its intention to assess sales and use tax for the period from July 1, 1970 to June 30, 1973. Because of the Release, however, the Division later took the position that the assessment period began August 12, 1971, the date of the Division of Tax Appeals’ decision in Fisher-Stevens, Inc. v. Director, Division of Taxation, supra, Docket S.T. 109. The assessment was for $628,255.31.
II
The Division cannot seriously maintain that it never changed its interpretation of the Act. The Division’s lack of claim for sales tax for the period prior to the decision of the Division of Tax Appeals in Fisher-Stevens is itself acknowledgment that a change has occurred, as are its subsequent releases in 1973. Moreover, various statements by the Legislature concerning amendments to the Act recognize that a change in interpretation occurred.
In 1974, the Legislature passed a bill, later vetoed by the Governor for revenue reasons, that would have exempted the transactions at issue from the sales tax. The Assembly Committee on Taxation Statement to this bill provided, in relevant part:
The committee has acted favorably on Assembly Bill No. 1628 in that it believes the bill serves to remove an inequitable situation, and further, it is in keeping *307with the original interpretation of the Sales Tax Act which subsequently was changed.
As noted during the first 6 or 7 years of the life of the act there would have been no sales tax, but several years ago, the interpretation was changed and the tax imposed. In effect, this bill will return the situation to its original status.
[Emphasis added.]
Those “first 6 or 7 years” were the years from 1966 to 1972 or 1973. Thus, not only did the Legislature perceive a change but, like Airwork, it perceived that change as occurring in 1973.
Similarly, the Assembly Committee on Taxation Statement to A.1787 (1977), a bill which also exempted these transactions from sales tax, stated in relevant part:
The bill proposes to exempt from the sales tax services provided by New Jersey companies on tangible personal property delivered out of state. Because New Jersey is the only State, with the possible exception of New Mexico, that imposes a sales tax on such transactions, it places New Jersey businesses at a considerable disadvantage in maintaining such operations.
The imposition of the tax is one which did not occur in the beginning years of the sales tax, but was imposed by interpretation later. Such taxes, when assessed against New Jersey businesses, in many instances incur a loss because they are unable to collect from customers after the fact.
[Emphasis added.]
This bill became law. in 1977. L.1977, c. 54. Since 1977, the services in question have been exempt from the sales tax.
Ill
The Division relies on the decision of the Division of Tax Appeals in Fisher-Stevens as notice of its new revised policy that sales tax is due on sales of services when delivery of the tangible personal property is out-of-state. It is difficult to see' how an agency decision that is not on point and was never officially reported can constitute notice of a change in policy.
Fisher-Stevens cannot by any stretch of the imagination be said to address the application of sales tax to the services at issue in this case. In Fisher-Stevens the court held that services performed and delivered in New Jersey were taxable. There was nothing novel in this approach. From the transcript *308of the Fisher-Stevens trial, it is evident that the Division’s policy was not to tax the services if the finished items rather than being mailed from New Jersey were instead shipped out of the state for mailing by the customer. This policy of course reflects the exemption Airwork claims existed. To contend that Airwork somehow should have read Fisher-Stevens and, having digested it, should have determined that the court’s language, in which it held that the “use” of direct mail services occurred entirely within this state, actually meant that the rebuilding of nonresidents’ aircraft engines for use outside the state was no longer exempt from the state sales tax is beyond belief. Moreover, this expectation is even less realistic when, as here, published, official statements were made by the Division that clearly stated that the sales tax should not be collected for repair charges on articles that were to be delivered and used out of state.
Further, Fisher-Stevens, was not even an opinion of a court. The decision of the Division of Tax Appeals was a decision of an administrative agency. Thus, many of the opinions of the Division of Tax Appeals were never published. Those opinions that were published were not published in official reporters such as the present New Jersey Tax Court Reports. Unless the Division of Tax Appeals specifically granted a taxpayer’s request to receive all copies of its opinions, a taxpayer could not possibly become familiar with all its opinions. Even if a taxpayer made such a request, of course, it is not clear it would be granted.
New Jersey courts have recognized these problems even with respect to reported court opinions. In Glaser v. Downes, 120 N.J.Super. 476, 491-92 (Ch.Div.1972), rev’d in part, 126 N.J.Super. 10 (App.Div.1973), certif. den., 64 N.J. 513 (1974), the trial court ruled that the gasoline service-station practice of giving free gifts for merely coming into a station was illegal. The court recognized, however, that it would be unfair to enforce its decision without first giving effective notice to service stations *309that had been acting in reliance on the Division of Taxation’s prior practice of not treating such gifts as illegal and held that:
[T]he Director must give gasoline retailers throughout the State ample written notice of the illegality of each of these competitive devices. I leave to his discretion whether he takes this action by the adoption of appropriate regulations or the giving in some fashion of adequate written notice to all of the gasoline retailers operating in this State of the conclusions reached in this opinion. [Id. 120 N.J.Super. at 492 (emphasis added).]
The Appellate Division in Glaser v. Downes, supra, 126 N.J.Super. at 18-19, went even further, holding that merely mailing notices to all licensed retail motor fuel dealers was inadequate. If the Director was going to change his prior position and treat the giveaways as illegal, he had to adopt regulations to that effect, and do so in the manner prescribed by the APA, especially policy previously followed by the Division of not treating such giveaways as illegal. Id. at 18. After ruling that the Director had to comply with the APA, the court concluded that “[w]hat he did denied due process of law to the three companies * * * involved.” Id. at 19.
As a practical matter, allowing unreported decisions of administrative agencies to provide sufficient notice of an agency’s changed position imposes an intolerable burden on the taxpayer. In addition to regularly checking regulations and Division releases, businessmen would have to meticulously check an agency’s decisions, many of which are unreported, for cases that might possibly affect them. Requiring businesses to check for these decisions is a useless waste of time, energy, and money. It would be much simpler, more logical, and more efficient for the Division to simply amend an existing release or promulgate a new regulation when a case causes it to change its policy. This would adequately serve notice to taxpayers of changes in policy and comport with due process.
I recognize that the Division, with the best of intentions, issues releases informally to aid taxpayers in complying with the new tax after the enactment of a new tax statute. Nevertheless, once such a release on a specific topic is set forth, I believe that it is only fair that a change of position similarly be *310set forth in a notice. The Division can easily and inexpensively satisfy fairness concerns by merely issuing a new release as it later did in State Tax News. Such a release would have provided adequate notice to Airwork to collect sales tax from its out-of-state customers. The cost to the state of such a notice would have been minimal. Thus, to the extent that administrative costs or effects on the efficient operation of government may be legitimate concerns in assessing what process is due in any ease, see Mathews v. Eldridge, 424 U.S. 319, 335, 96 S.Ct. 893, 903, 47 L.Ed.2d 18, 33 (1976), such concern is easily satisfied here.
I would hold, therefore, that Airwork first received sufficient notice of the Division’s change of policy in 1973 when the change was announced in issues of State Tax News.
IV
If Airwork did not receive sufficient notice of change in policy until 1973, then the Division’s assessment of sales tax prior to that date is retroactive. This Court has recognized that constitutional due process imposes certain limits on the retroactive application of taxing statutes. See Klebanow v. Glaser, 80 N.J. 367 (1979). As stated by the Supreme Court in Welch v. Henry, 305 U.S. 134, 147, 59 S.Ct. 121, 125, 83 L.Ed. 87, 93 (1938), and quoted with approval by this Court in Klebanow, supra, 80 N.J. at 376:
In each case it is necessary to consider the nature of the tax and the circumstances in which it is laid before it can be said that its retroactive application is so harsh and oppressive as to transgress the constitutional limitation.
Or, stated another way:
The need of the government for revenue has hitherto been deemed a sufficient justification for making a tax measure retroactive whenever the imposition seemed consonant with justice and the conditions were not such as would ordinarily involve hardship. [Id. at 375 (quoting with approval Untermyer v. Anderson, 276 U.S. 440, 450, 48 S.Ct 353, 356, 72 L.Ed. 645, 649 (1928)) (Brandeis, J., dissenting).]
The hardship that exacerbates the unfairness of retroactive application of the agency rule here is that the reversal of the *311rule has transformed a statutory agent for the collection of tax into a delinquent taxpayer. Cf Central Ill. Pub. Serv. Co. v. United States, 435 U.S. 21, 33 n. 12, 98 S.Ct. 917, 923 n. 12, 55 L.Ed. 2d 82, 91 n. 12 (1978) (expressing concern that retroactive assessment of tax on an employer who had failed in good faith to withhold taxes for employee wages in the form of lunch reimbursement would be “almost punitive in light of the facts”). Although personally liable for the taxes required to be collected under the Sales and Use Tax, N.J.S.A. 54:32B-14, Airwork’s role in the statutory scheme is as tax collector on behalf of the State of New Jersey. See N.J.S.A. 54:32B-12. It was in this capacity that Airwork, and others similarly situated, were advised by the Division not to collect the sales tax on services performed for out-of-state customers. The effect of retroactive application is to allow the consumer to escape the tax, while imposing it instead on the vendor. As such, retroactive application changes the very nature of the tax from a sales tax to be paid by the customer to a business tax to be paid by the vendor for the privilege of selling retail goods and services. The vendor can no longer collect the tax from the customer after the transaction has been completed, yet retroactive application first imposes the tax after the transaction has occurred.
The hardship is particularly worthy of note when the taxpayer could have been expected to refrain from the conduct that created his tax liability had he anticipated the tax. See Welch v. Henry, supra, 305 U.S. at 147, 59 S.Ct. at 125, 83 L.Ed. at 93; Pressed Steel Car Co. v. Lyons, 7 Ill.2d 95, 105-06, 129 N.E.2d 765, 770-71 (1955); Hercules Powder Co. v. State Bd. of Equalization, 66 Wyo. 268, 306, 208 P.2d 1096, 1112, reh’g denied, 66 Wyo. 309, 210 P.2d 824 (1948); cf. In re Kaplan, 178 N.J.Super. 487, 496 (App.Div.1981) (notions of fundamental fairness impaired in action to retroactively enforce Medicaid anti-fraud provision in part because had appellant been able to anticipate the statute “it seems likely that appellant would have altered his conduct”). Here the conduct that created Airwork’s *312liability was its failure to collect and pay to the state the sales tax. That conduct surely would have been avoided by Airwork had it known or anticipated that its repairs on out-of-state property would be taxed. Simply stated, had Airwork known that the state would treat such repairs as taxable, it would have collected the tax from its out-of-state customers. Indeed, once Airwork received notice in 1973 that the state would treat these repairs as taxable, it immediately began collecting the tax from its out-of-state customers.
V
Today in Metromedia, Inc. v. Director, Div. of Taxation, 97 N.J. 313 (1984), we held that the Division’s decision to apply the audience share factor in allocating taxpayer’s receipts to New Jersey was tantamount to an agency rule and consequently had to be promulgated in accordance with the APA. In that opinion, we stated:
Similarly, an agency determination can be regarded as a “rule” when it effects a material change in existing law. See Crema [v. New Jersey Dept. of Environmental Protection], supra, 94 N.J. [286] at 302; K.C. Davis, Administrative Law Treatise § 7:25 at 186 (2d ed. Supp.1982); Ford Motor Co. v. Fed. Trade Comm’n, 673 F.2d 1008, 1009 (9th Cir.1981), cert. den., [459] U.S. [999, 103 S.Ct. 358], 74 L.Ed.2d 394 (1982) (an agency determination that changes existing law and has widespread application must be addressed by rule-making and not adjudication). This feature relates not only to fairness to the individual party actually before the agency but to other persons as well. When an agency’s determination alters the status quo, persons who are intended to be reached by the finding, and those who will be affected by its future application, should have the opportunity to be heard and to participate in the formulation of the ultimate determination. See Bergen County Pines Hosp. [v. Dept. of Human Services], supra, [96] N.J. [456]; Crema, supra, 94 N.J. at 303; Boller Beverages, Inc. [v. Davis], supra, 38 N.J. [138] at 151. [Id. at 330.]
We further held that one of the factors determining whether an agency determination must be considered an administrative rule is whether it “reflects an administrative policy that * * * constitutes a material and significant change from a clear, past agency position on the identical subject matter.” Id. at 331.
I disagree with the majority and believe that based on the totality of circumstances in this case, it is clear that the policy *313announced in 1973 in the State Tax News constituted a material and significant change from the prior policy of the Division as stated in its Release. This conclusion is confirmed by the Division’s audit of Airwork, is reflected in its failure to assess taxes for the entire period, and is affirmed by the Legislature’s statements.
Both the Tax Court and the majority assume that Airwork is contesting the right of the Division initially to make such a ruling under its assessment power. I am not. I am however, claiming that once such a ruling is made, it may not be changed without notice to the affected public. Particularly in a case like this that transforms Airwork from the role of tax collector to that of primary taxpayer, lack of notice produces an extraordinarily harsh and unfair result.
Accordingly, I would hold under the APA that Airwork was entitled to notice of the Division’s changed position set forth in its 1973 Release. Since the Division failed to give notice, it violated the procedures under the APA and I would hold its assessment invalid.
For affirmance — Chief Justice WILENTZ and Justices SCHREIBER, HANDLER and O’HERN — 4.
For reversal — Justices CLIFFORD, POLLOCK and GARIBALDI — 3.