Continuing to build on its reputation as a rational and fair adjudicative body, the New Jersey Tax Court recently refused to uphold a regulation whose language and effect contradicted and overstepped the bounds of its enabling legislation. Kishan Corp., t/a Dunkin Donuts v. Dir., Div. of Tax’n, Dkt. No. 014341-2014 (N.J. Tax Ct. June 16, 2026). The decision serves as an important reminder both that most people do not eat their donuts with a fork and a knife and that an administrative body is not vested with “unbridled power” to rewrite the law.

The Facts: Kishan Corp. (“Kishan”) operates a Dunkin’ Donuts franchise in New Jersey where it offers a classic mix of Dunkin’ products including donuts, bagels, coffee, breakfast sandwiches, and thermos items. The Director of the Division of Taxation (“Director”) audited Kishan for the tax periods October 1, 2005 through September 30, 2009. The Director found that Kishan underreported its taxable sales because, under the Director’s regulation, all of Kishan’s food sales were taxable as sales of prepared food. Kishan appealed the Director’s assessment to the Conference and Appeals Branch and, unsuccessful at that level, continued its challenge to the Tax Court.

The Statute: In New Jersey, sales tax applies to receipts from the sale of prepared food. NJSA 54:32B-3(c)(1). Prepared food is defined to include: (a) food sold in a heated state; (b) two or more food ingredients combined by the seller for sale as a single item; or (c) food sold with eating utensils provided by the seller, including plates, knives, forks, spoons, cups and napkins. Id. at (c)(3)(i) (emphasis added). Prepared food does not include bakery items, including bagels, donuts, and muffins, which are sold without eating utensils. Id. at (c)(3)(ii).

The Regulation: Administrative Code 18:24-12:2A (the “Regulation”) provides, in relevant part, that “[w]hether eating utensils are deemed to be provided by the seller depends on whether the seller’s annual sales of certain types of prepared food make up more than [75-percent] of its total sales of food and food ingredients.”[1] If a seller’s sales percentage is below the 75-percent threshold, utensils are considered to be provided with the food item and the food item is taxable prepared food, if the seller’s practice is to physically hand the utensils to the purchaser. If a seller’s sales percentage exceeds the 75-percent threshold, utensils are considered to be provided to the purchaser and the food is taxable prepared food, if the utensils are merely made available (including at a kiosk or common area).

Finding that Kishan’s sales exceeded the 75-percent threshold and that utensils were made available to purchasers at a kiosk, the Director determined that all of Kishan’s sales were taxable.

The Holding: Despite enjoying a rebuttable presumption of validity, the Court found no basis in the plain language of the law or in the legislative history to uphold the Regulation. However, the Court’s criticism of the Regulation did not stop there.

The Court rejected the Director’s argument that the Regulation was a “clarification” of the law, instead finding that the Regulation “complicate[d] enforcement” by creating “additional classifications and calculations.” The Court also found that application of the Regulation could result in different outcomes than under the statute. For example, the sale of a cookie without utensils is excluded from taxation under the law. However, application of the Regulation could result in the cookie sale being taxable if the seller has crossed the 75 percent threshold and merely makes utensils available at a kiosk. The Director’s “nullification of statutory language [could not] be tolerated.”

Next, the Court found that the “core consideration” to determine whether a food item is taxable is the item’s characteristics—not the seller’s gross sales. By ignoring this core consideration, the Court found the Regulation was “in essence… a new tax.”

Finally, the Court rejected the Director’s argument that the Regulation was consistent with the legislature’s purpose of bringing New Jersey into compliance with the Streamlined Sales and Use Tax Agreement (“SSUTA”), of which the State is a member. Finding that the 75 percent threshold test was established through an SSUTA interpretive opinion in 2006, the Court concluded that the legislature did not contemplate the test when it adopted the law at issue in 2005.

With no basis upon which to uphold the Regulation, the Court concluded it was ultra vires and invalid.

The Takeaway: The Court’s analysis makes clear that successfully proving regulatory overreach involves proving that the regulation contradicts the plain language of the enabling legislation and that the legislative history provides no basis for the regulation.

Although some courts stretch the idea of regulatory “clarification” to uphold rules that conflict with the statutes they purport to interpret, a regulation that disregards or effectively rewrites the statute cannot stand.

Taxpayers must be prepared to challenge application of a regulation that flies in the face of the statute!

[1]The Regulation was adopted in 2008 while the tax periods at issue went back to 2005. The Court noted that retroactive application of the Regulation posed a potential issue but, because the Court ultimately declared the Regulation invalid, it did not substantively address the retroactivity issue.