New Jersey Tax Court Rules that the Division Cannot Offset a Taxpayer’s Refund against a Liability from a Closed Tax Year
On January 19, 2022, the New Jersey Tax Court issued a decision denying the Division of Taxation’s attempt to take away a refund due to a taxpayer and apply it against a purported liability from a tax period for which the four-year statute of limitations had lapsed, calling the Division’s attempted application of the refund to the closed tax period “tantamount to a[n unlawful] reopening and audit of closed years.” Solvay Specialty Polymers, LLC v. Dir., Div. of Tax’n, No. 009365-2019, 22 (N.J. Tax Jan. 19, 2022). This case is a good reminder to taxpayers that statute of limitations protections can apply in situations other than when a state taxing authority issues a formal assessment and taxpayers should not be afraid to challenge state taxing authorities whenever they purport to take action with respect to tax years outside the typical statute of limitations period.
Facts: The company was engaged in the business of manufacturing and distributing specialty chemicals used in the semiconductor, automotive, and chemical process industries. In July 2015, the company filed sales and use tax refund claims in connection with returns filed between August 2011 and January 2014 claiming that its purchases of manufacturing equipment, repair parts, and supplies used in the production of the chemicals were tax exempt. In 2019, the Division issued its final determination, finding that the company was due a portion of its refund claims, but offset the refunds due against amounts that the Division claimed were owed for the tax periods August 2011 through January 2014.
The amounts that the Division claimed were owed related to credits that the company had taken during that period against its sales and use tax liability, though the credits were unrelated to the company’s refund claims. The Division argued that the offset did not constitute a time-barred assessment, but rather the Division was simply reducing the company’s refund due by the amount of the credits that the Division had determined the company was not permitted to use.
The Decision: The Tax Court rejected the Division’s argument, finding that the Division had four years from when the company filed its sales and use tax returns “to assess and reassess all aspects of the return including the use tax credits” and “[i]f the Division failed to rectify incorrectly applied credits during the statutory period, it cannot do so in the context of [the company’s] refund claim.” Id. The Division also tried to argue that the statute of limitations period began to run when the company filed its refund claim, but the Tax Court quickly dismissed this argument out of hand inasmuch as the applicable statute expressly stated that the limitations period began on the “date of filing of a return.” Id. Finally, the Tax Court observed that “[a]s a matter of public policy, any other determination would dissuade taxpayers from requesting a refund.” Id.
This article is one in a series of articles written for the February 2022 edition of The BR State + Local Tax Spotlight.