New Jersey Sales Tax Regulation: When the Rule Itself Is Illegal

State taxing agencies do two things: they enforce the law, and they write the rules that determine how they enforce it. Most business owners only worry about the first part, and over the course of my career defending businesses against state sales tax assessments, I have watched that narrow focus cost people money they did not have to pay.

A regulation is not the same as a statute. The legislature passes statutes. The Division of Taxation writes regulations that explain how the agency intends to implement those statutes. Every now and then, a regulation goes further than the statute permits. When that happens, the regulation is ultra vires, beyond the agency's legal authority, and a court can strike it down.

On June 16, 2026, the New Jersey Tax Court confirmed it in print.

The Regulation That Went Too Far

What the New Jersey Tax Court Actually Decided

The case is Kishan Corp. t/a Dunkin' Donuts v. Director, Division of Taxation, Docket No. 014341-2014, decided by Judge Bedrin Murray, J.T.C. The opinion is published, which means it carries precedential weight in New Jersey Tax Court proceedings going forward.

Here is what was at issue. New Jersey's sales and use tax statutes impose tax on “prepared food,” and the statute includes food sold “with eating utensils provided by the seller” — language that came directly from the Streamlined Sales Tax Agreement. The Division of Taxation implemented this through N.J.A.C. 18:24-12.2A, which created a numerical threshold: if a seller's prepared food sales exceeded 75% of total gross food and food ingredient sales, and utensils were available at a kiosk or similar location, then all food sales would be treated as taxable prepared food.

The court held that N.J.A.C. 18:24-12.2A extends beyond the bounds of the statute and is therefore ultra vires, granting partial summary judgment for the taxpayer and denying the Division's cross-motion for summary judgment on the utensils issue. The statute required that utensils be “provided by the seller” — a qualitative standard. The Division's regulation converted that into a revenue percentage threshold. The court found no statutory authority for that conversion.

Why This Is Not Just a Dunkin' Donuts Story

Dunkin' is a convenient headline. The real lesson has nothing to do with coffee or donuts. The Division of Taxation enforced that regulation for years, businesses were assessed under it, some paid without question, and most never asked whether the regulation itself was valid. That is the norm in state tax enforcement.

That is the administrative law principle every business owner in every state needs to understand: the agency writes the rules, but the legislature draws the lines. When the rules cross those lines, the rules lose. The question is whether anyone is looking for that argument.

The Regulation Trap

What Ultra Vires Actually Means for Your Audit

“Ultra vires” is Latin for “beyond the powers.” In an administrative law context, it means a government agency acted outside the authority the legislature granted it. Further, as agencies can only do what the legislature authorizes, a regulation that goes further than the statute is not just wrong — it is invalid. A court can strike it down entirely.

In the Kishan Corp. case, the Division's regulation converted a qualitative statutory test — “eating utensils provided by the seller” — into a numerical threshold test where crossing a revenue percentage triggered tax on all food sales. The statute said nothing about a 75% threshold. The Division invented it. And the court held that invention was not within the Division's authority to make.

Here is what I want you to understand about your own audit: the assessment notice you received cites authority. It cites a statute. It cites a regulation. Those citations are meant to look final, and most businesses treat them that way. But a regulation is only valid if the agency stayed within what the legislature authorized. If it did not, the regulation cannot support the assessment, and the assessment built on it may not hold.

What It Looks Like When a Regulation Overreaches

The Kishan Corp. pattern is not unusual. Across the state tax systems I have worked in, regulations routinely do one of two things that courts will not tolerate: they expand the statutory definition to capture more transactions than the legislature authorized, or they add a numerical test that has no basis in the statutory language.

I have seen versions of this in Illinois, in New York, in Nevada. The framing is always the same: the agency writes a rule that makes auditing easier for itself, at the cost of broadening the taxpayer's exposure beyond what the law actually requires. Most of those regulations are never challenged, not because they are valid, but because the business that received the assessment paid it without asking whether the rule was sound.

What This Means If You Are in a New Jersey Audit Right Now

The Prepared Food Assessment That May Be Overstated

If you are a New Jersey food service operator and you received an assessment under the 75% threshold regulation, whether in the current audit or in prior years, the Kishan Corp. decision is directly relevant to your matter. The court has now confirmed in a published opinion that the regulation the Division used to calculate your liability was beyond its authority. That is not a grey area argument. That is a court holding.

New Jersey has a limited window to contest audit determinations, and I am not going to state a specific number of years here because the statute of limitations analysis turns on facts that vary from case to case. What I will say is this: if you have a prior assessment under this regulation and you have not yet sought review, you should find out whether your window is still open. Waiting costs options.

The Broader Audit Regardless of Industry

Even if your business is not a restaurant or food service operator, the Kishan Corp. ruling matters to you. It confirms that courts will look past the Division's enforcement history and invalidate a regulation that exceeded statutory authority. That principle is not limited to the prepared food context. It applies wherever a New Jersey regulation purports to impose a burden that the underlying statute does not authorize.

The question to ask in any New Jersey audit is not only whether the transactions are taxable under the statute. It is also whether the regulation the Division is using to reach that conclusion is itself a valid exercise of regulatory authority. Most businesses never ask the second question. Kishan Corp. is proof that the second question can win the case.

What I Know That Changes the Defense

I do not just know the tax law. I know whether the rule enforcing it is valid.

The Division of Taxation works with its own regulations every day, and they know where those regulations are aggressive. They do not volunteer that information to the businesses they audit. The state sends the assessment. The business pays it or fights it. Most businesses pay because they do not know what to look for and because the Division's notice does not invite scrutiny of the regulation itself.

If you have received a New Jersey sales tax assessment, for prepared food or any other issue, contact Sales Tax Legal before you respond. The first consultation is free. The regulation they cited may not be the last word — and in the case of N.J.A.C. 18:24-12.2A, a court has now confirmed it was not.

The Bigger Picture

State tax agencies are not infallible. They make errors in applying the law, in calculating assessments, and sometimes in writing the regulations they use to calculate those assessments, and most businesses never discover that because they pay the bill without scrutinizing it.

Kishan Corp. puts that principle on paper in a published New Jersey Tax Court opinion. The next business that receives a NJ prepared food assessment has a legal argument that did not exist in print before June 16, 2026. Every business in every state that is sitting under a regulation-heavy assessment should be asking whether the regulation is valid — because Kishan Corp. confirms that the answer is not always yes.

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