On September 1, the Superior Court of New Jersey, Appellate Division, issued its opinion in Praxair Technology, Inc. v. Dir., Div. of Taxation, Case No. A-6262-06T3 (N.J. Super. Ct. App. Div. 2010), which upheld the Director’s imposition of a penalty on Praxair for failing to file a tax return for the 1994, 1995, and 1996 tax years. Praxair took the position that it was not subject to tax under New Jersey tax law because it did not have physical presence in New Jersey. Although the statute remained unchanged, the New Jersey Division of Taxation made a regulatory change in 1996 to add an example that explained that it was the Division’s position that Praxair was subject to the corporate business tax. In addition, the Appellate Division upheld a post-amnesty penalty against Praxair because it failed to take advantage of the 2002 tax amnesty, even though the New Jersey Supreme Court, in 2006, held that economic presence was put into effect in 1996 with the regulatory change. Lanco, Inc. v. Dir., Div. of Taxation, 908 A.2d 176 (N.J. 2006).
The Appellate Division rejected Praxair’s argument that the Director abused its discretion by failing to waive the penalty in light of the legal uncertainty at the time. The ruling is surprising given that the New Jersey Tax Court found the Director’s refusal to waive a penalty to be “manifestly unreasonable” in United Parcel Services General Services Co. v. Div. of Taxation, 25 N.J. Tax 1 (N.J. Tax Ct. 2009). In UPS, the Tax Court found that “genuine questions of . . . law existed.” But in Praxair, despite recognizing the “unsettled state of the law,” the Appellate Division rejected Praxair’s position, stating that it did not show enough “respect” for the Director’s position and had enough state tax guidance to read the tea leaves on whether it would have tax liabilities.
In addition, the Appellate Division held that the post-amnesty penalty was constitutional despite Praxair’s claim that the penalty violated its due process rights. In UPS, the Tax Court found that a taxpayer cannot be expected to satisfy a tax liability during an amnesty period when the taxpayer “did not know and, by reasonable inquiry, could not have known that additional taxes were due.” The Appellate Division, however, again took the contrary position, holding that Praxair had notice of the amnesty period and the post-amnesty penalty, of which Praxair failed to take advantage. Moreover, Praxair did not suffer a deprivation of property, according to the Appellate Division, because it did not yet pay the penalty and was currently litigating the issue.
Praxair has 45 days to appeal the Appellate Division’s determination to the New Jersey Supreme Court. Will the New Jersey Supreme Court recognize that it is unreasonable to impose penalties before published guidance is provided to taxpayers? Stay tuned.