Magazine article The CPA Journal

N.J. Supreme Court Affirms Drop Shipment Apportionment

Magazine article The CPA Journal

N.J. Supreme Court Affirms Drop Shipment Apportionment

Article excerpt

The New Jersey Supreme Court affirmed two lower courts by holding that a New Jersey manufacturer must include the income from sales to its wholly owned distributor in its apportionment factor, regardless of where the product is shipped. The decision will likely have consequences for companies with affiliated companies that sell their product (Stryker Corp. v. Dir., NJ Sup. Ct., Dkt. No. A-27-00, 6-14-2001).

The facts of this case were fully explored at the tax court level [Stryker Corp. v. Dir., (1999) 18 NJ Tax 270]. Stryker Corporation, a manufacturer of orthopedic hips and knees, shares a building with its wholly owned subsidiary, Osteonics, which sells Stryker products. When Osteonics takes an order for Stryker, it is entered by computer and relayed to Stryker's computer system. Stryker fills the order and ships it directly to Osteonic's customers. When Stryker prepared its corporate tax returns for the years 1988-1992, it included in the numerator of the receipts factor only those sales that were physically shipped to locations in New Jersey. The director of taxation included in the apportionment factor all the sales to Osteonics, regardless of where they were shipped, under the reasoning that the sales to Osteonics were earned in New Jersey even though not physically shipped there.

The tax court ruled that the out-of-state shipments should not be included in the receipts factor under NJSA 54:106(B)(1)(2), which includes them when the "receipt or appropriation of the orders are shipped to points within the state." It reasoned that this part of the statute only applies when there is a physical shipment of goods in New Jersey. It also ruled, however, that the receipts should be included under NJSA 54:10-6(B)(6) as "all other business receipts" earned within the state.

Decision and Impact

The supreme court held that the lower court decisions should be upheld not only on state grounds but also on constitutional grounds, and even under the rules of statutory construction. On state grounds, it held that the destination sales rules of NJSA 54:10A-(B)(1)(2) were not the exclusive method for the apportionment of receipts from the sales of tangible personal property and that the director was not precluded from utilizing NJSA 54:10-6(B)(6) to reflect the taxpayer's activity within the state. The internal consistency clause of the commerce clause of the U.S. Constitution was not violated through application of the statute. …

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