Clairol, Inc. v. Kingsley

Citations: 262 A.2d 213; 109 N.J. Super. 22

Court: New Jersey Superior Court Appellate Division; February 16, 1970; New Jersey; State Appellate Court

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Clairol, Incorporated, a Delaware corporation unqualified to do business in New Jersey, appealed the denial of its tax refund claims for the years 1959 to 1963, totaling $12,579.56, after the Director of the Division of Taxation determined that Clairol's activities in New Jersey created a taxable status under the New Jersey Corporation Business Tax Act. The Division of Tax Appeals upheld this determination, but Clairol also sought to challenge taxes for 1964 to 1966, which the Director ruled was outside the Division's jurisdiction due to Clairol not filing timely petitions of appeal for those years. The court confirmed the Division's lack of jurisdiction regarding the later years and found Clairol's activities in New Jersey substantial enough to justify the corporate business tax. The court concluded that Clairol's operations, including owning property and maintaining offices in New Jersey, warranted taxation as they benefit from state protections and services.

The tax levied on Clairol is constitutionally valid, as its activities in New Jersey, while less extensive than those of other taxpayers like Roadway Express, still provide a sufficient basis for subjecting Clairol to the Corporation Business Tax Act. Clairol has not claimed that the tax is discriminatory or unfairly apportioned, thus affirming its validity as a fair means for Clairol to contribute to state government costs. Clairol argues that Public Law 86-272 invalidates the net income portion of the tax and may also affect the net worth portion. The tax imposed is calculated based on both allocated net worth and net income, with specific tax amounts detailed for the years 1959 to 1963. Public Law 86-272 restricts states from imposing a net income tax on income derived from interstate commerce if a person's only in-state activities involve order solicitation that is sent outside the state for fulfillment. The law also clarifies that independent contractors soliciting orders do not constitute business activities for tax purposes. Definitions for terms such as "independent contractor" and "net income tax" are provided within the law.

The federal act was enacted following the Supreme Court's decision in Northwestern States Portland Cement Co. v. Minnesota, which upheld Minnesota's right to impose a direct income tax on a foreign corporation engaged in interstate commerce. In response, Congress passed P.L. 86-272, which restricts states from taxing net income derived from interstate commerce when the only in-state activities involve soliciting orders that are sent outside the state for fulfillment. This limitation does not apply to the case at hand, as it does not preclude states from exercising broader taxing powers on interstate commerce.

Clairol's argument that the federal act invalidates the net worth portion of its tax lacks merit, as the act specifically addresses taxes measured by net income. Whether the act affects the allocated net income tax hinges on whether Clairol's activities in New Jersey are confined to order solicitation. The findings indicate that Clairol's representatives engage in activities beyond mere solicitation; they actively promote products, visit retail druggists regularly, and perform tasks such as arranging product displays and conducting inventory checks with the store's permission. These activities suggest that Clairol's business operations in New Jersey exceed the scope defined by P.L. 86-272, leading to the conclusion that the federal statute does not apply in this instance.

The inventory is presented to the buyer, who can either place an order through their wholesaler or have the representative send it directly. Clairol employs representatives to visit beauty salons that buy their products from wholesalers. These representatives, possessing technical backgrounds, primarily educate salon staff on product usage and address any product issues, rather than taking orders. In contrast, representatives for drugstores lack technical expertise. Importantly, these representatives are not Clairol employees; they work for technical centers as technicians. Clairol's business in New Jersey includes more than just order solicitation, as increased consumer favor leads to higher orders from retailers and wholesalers. This activity does not qualify for the protections of the federal act concerning mere order solicitation. Clairol's reliance on out-of-state cases to broaden the interpretation of "solicitation of orders" is unconvincing, as the relevant case law has evolved to narrow such interpretations. The decisions in Smith Kline and other cited cases do not support Clairol's position. Consequently, the dismissal of Clairol's appeals for the years 1959 to 1963 is upheld.