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This post was originally published on Forbes Oct 14, 2015

If you ever bought one of those big soft pretzels at a mall or a stadium, you probably didn’t worry about where the “pretzel warmer” that held it at the proper temperature for your enjoyment came from.  I’m going to tell you anyway.  J&J Snack Food Sales Corp makes soft pretzels under a variety of brands including Suprerpretzel, Mr. Pretzel and Seriously Twisted.

According to its 10-K , soft pretzels accounted for 22% of the company’s over $900 million in sales and it believes that it is the only national distributor of soft pretzels.  You can buy a pretzel warmer, which also serves as a kind of display case, from J&J, but if you are a good enough customer, the company will loan you one.   The warmers are assembled and tested on an as-needed basis in Bellmawr, NJ. It is possible that the Bellmawr location is strategic as it is about an hour and a half drive from New York City, where many soft pretzels are consumed, and a similar distance from  Lancaster PA.  Lancaster County considers itself the pretzel capital of America.
I hope that Bellmawr’s critical role in the pretzel world has not been jeopardized by the recent decision Superior Court of New Jersey upholding a decision of the New Jersey Tax Court that found J&J liable for $258,226.99 in use tax on the parts to assemble the pretzel warmers. J&J had been audited on this issue in 1992 and was told that it needed to pay use tax on warmers which were sold or loaned to New Jersey customers.  In the audit that gave rise to the litigation, it was noted that the appropriate amount was being paid on said warmers although it was incorrectly reported as sales tax.  So no harm, no foul, no change?  Not so fast.
On this audit the state took the position that J&J needed to pay use tax on all the parts used to assemble warmers regardless of where they are sent.  New Jersey was thus demanding use tax on pieces of metal, plastic and glass that were in the state for a couple of days being assembled into a warmer that went to another state.  In the end the courts agreed with the state’s position knocking out several seemingly solid arguments that J&J raised:

(1) mere storage and withdrawal from storage of the Warmers plaintiff manufactures in New Jersey exempts the Warmers from use tax; (2) the Warmers are use tax exempt because plaintiff uses the Warmers as part of the manufacturing and processing of pretzels; (3) the Division should be equitably estopped from its assessment because of its 1992 Final Determination; (4) the Division should not be permitted to assess plaintiff use tax on the Warmers based on the equitable principle of laches;

Actually I had no idea as to what the “equitable principle of laches” is, but it sounded good.  There were a couple of other arguments I didn’t get at all.
Maybe They Might Do Better Next Time Around

The Tax Court determined plaintiff’s purchase, assembly and distribution of the Warmer parts in New Jersey fell within the Act’s broad ambit and were therefore subject to a use tax, regardless of whether they were shipped to in-state or out-of-state customers. We agree.

Plaintiff first challenges the application of N.J.S.A. 54:32B-6(A) by arguing the Tax Court erred in presuming its purchase of Warmer parts was a “retail sale.” N.J.S.A. 54:32B-2(e) defines “retail sale” as “any sale, lease, or rental for any purpose, other than for resale, sublease, or subrent.” (emphasis added). Plaintiff alleges the Warmer parts are purchased for resale, “as a component part of a product produced for sale by the purchaser,” whether the Warmers are loaned or sold and, therefore, no use tax applies.

However, plaintiff did not present this argument to the Tax Court, notwithstanding that the opportunity to do so was available. We note that plaintiff consistently argued two separate theories, in the alternative, for the Warmers’ exemption from the use tax, each denied by the Tax Court. We will decline consideration of an issue not properly raised before the trial court, unless the jurisdiction of the court is implicated or the matter concerns an issue of great public importance. Zaman v. Felton, 219 N.J. 199, 226-27 (2014) (citing Nieder v. Royal Indem. Ins. Co., 62 N.J. 229, 234 (1973) ). Neither situation exists here and, therefore, we decline to consider plaintiff’s contention on this point.

The Real Lawyerly Stuff Didn’t Work Either

The equitable estoppel and laches arguments go back to the 1992 audit. Laches is an equitable remedy “’invoked to deny a party enforcement of a known right when the party engages in an inexcusable and unexplained delay in exercising that right to the prejudice of the other party.”.  It seemed pretty solid to me.  J&J was audited for 1992 and adjusted their practices and then they are told something different.  The Court, however, did not find any “inexcusable delay”.

 
SALT Is Hard
 
The quarter million dollar assessment is not going to break J&J which earned nearly $72 million in the year ended September 27, 2014 and is debt-free.  Still New Jersey has just given the company an incentive to outsource the warmer assembly and have them direct shipped to wherever they are being used. The case also illustrates how tricky sales and use tax issues are.
Other Coverage
 
Altus Group had a brief write-up.  Ernest Hunter of BNA noted that the case might have gone differently in Wyoming

Had the case arisen in Wyoming, a Wyoming court might have found differently on this issue. A recent Wyoming ruling dealt with broadband equipment brought into the state to be prepared for out-of-state use. The Wyoming Department of Revenue held that temporarily storing and sorting broadband equipment in the state was not a taxable use, because the owner would ultimately use the equipment for its intended purpose out-of-state. If the New Jersey court had adopted this reasoning, things might have ended more favorably for J&J.

I don’t know.  Wyoming seems awful far from the heart of pretzeldom in Lancaster, so that is not a lot of help.