Bamboozled: The truth about fee: It’s a tax

BB brandingWith the holiday hubbub dying down, you may be getting ready to spend some of the gift cards you received from family and friends.

If you’re looking to spend less — and who isn’t? — you may be thinking about a visit to Jersey Gardens in Elizabeth, where there’s a lower sales tax.

That’s because Jersey Gardens is in an Urban Enterprise Zone, or UEZ, which means the state’s 7 percent sales tax is reduced to 3.5 percent on most purchases. There is no sales tax on clothing anywhere in New Jersey, but the tax on other items is reduced in a UEZ.

Sounds great.

But in practice, the tax savings are something of a fantasy.

Jersey Gardens merchants must pay a “franchise fee,” essentially a 3 percent tax on sales, to the City of Elizabeth. Clothing sales are excluded from the franchise fee, but for other items, most merchants pass the cost on to the consumer. Shoppers pay a total of 6.5 percent — only half a percent less than you’d pay elsewhere in the state.

Not much of a selling point.

And if you get hungry while you’re shopping, brace yourself. The lower sales tax rate doesn’t apply to restaurant food, and eateries may add that 3 percent franchise fee on top of everything, giving you a 10 percent tax on the bill.

123112John Rahyo of South Plainfield learned about the franchise fee the hard way.

On Dec. 9, he and his wife Cindy had their virgin excursion to Jersey Gardens.

The two made some purchases at Bed, Bath & Beyond, then at the Clarks Bostonian shoe outlet. They then had some sodas and cheese steaks at a joint in the food court.

The next day, Rahyo, 58, reviewed the receipt from Bed, Bath & Beyond.

“I noticed something odd,” he said. “Our receipt had the sales tax of 3.5 percent, which amounted to $1.43, but an additional charge of Elizabeth fee of 3 percent, which amounted to $1.13.”

Rahyo called the store to ask about the charge. He said the rep told him it was the “Elizabeth sales tax of 3 percent.”

He spent several more hours on the phone with the City of Elizabeth and Jersey Gardens’ management.

“It was explained to me that this is a franchise fee of 3 percent to be collected on all taxable sales — the same items that sales tax would be charged on — by all of the various stores at Jersey Gardens,” he said. “It is then to be remitted back to the City of Elizabeth to reimburse the city for the cost of cleaning up the property where Jersey Gardens was built.”

He said he was told each store decides whether to charge the customer directly on the purchase, or to absorb the fee as a cost of doing business.

“I found this to be totally confusing as a consumer. Jersey Gardens takes great delight in its marketing to tout the fact that it is in an economic development zone which enables all of the stores in the mall to only charge 3.5 percent sales tax instead of the normal 7 percent,” he said. “If the stores also charge the additional Elizabeth franchise fee of 3 percent, then the saving is a minuscule .5 percent — hardly worth the effort to drive all the way to Jersey Gardens for the supposed sales tax savings.”


Rahyo’s research was right on.

Jersey Gardens, once the site of a landfill, opened in 1999. It’s one of 32 Urban Enterprise Zones in the state.

“Elizabeth is the State of New Jersey’s largest Urban Enterprise Zone (UEZ), a very important fact to shoppers,” the city’s web site says. “Participating stores are eligible to charge a sales tax rate that is half the normal sales tax throughout the rest of New Jersey.”

The lower sales tax has been a marketing tool for the mall, which tries to lure shoppers from all over New Jersey but also New York, which has a higher sales tax.

“Jersey Gardens takes great delight in its marketing to tout the fact that it is in an economic development zone …”

Looks like it’s working. The city’s web site says more than 20 million people visited Jersey Gardens last year, while a Jersey Gardens spokeswoman put the number at 18 million.

It’s a big cash cow for the city, with $4.5 million collected in franchise fees during the last fiscal year, said Tony Zengaro, Elizabeth’s chief financial officer.

The money goes into the city’s general fund, he said, to make up for the “payment in lieu of taxes” paid by Jersey Gardens. Rather than a collection of property taxes, that payment goes directly to the state to pay off the bonds that financed the $140 million project, he said.

The Division of Community Affairs said Elizabeth is the only UEZ that collects such a fee.

Zengaro said all UEZ businesses in Elizabeth must pay the fee, but whether they list it on a receipt, price it into the cost of products or absorb it as a cost of doing business, well, that’s up to the individual merchants.

“Most tenants charge the customers one way or another,” Zengaro said.

That’s all well and good, but how are consumers to know about the fee? How are consumers to know that when added to the sales tax, the fee means shoppers buying anything but clothing barely save money by shopping there?

“We don’t have any edict that they post it,” Zengaro said. “Through the legislation, they didn’t require anything to be posted.”

Crystal Stell, marketing director for Jersey Gardens, said some stores do post about the fee, “but it is up to the individual stores.”


We checked out some print ads, and while Jersey Gardens touted the discounted sales tax, it did not mention the franchise fee.

Consumer law attorney Ronald LeVine said not disclosing the fee is “clearly disinformation and clearly misleading” if the merchant is passing the cost to the consumer.

“First, they’re calling it a franchise fee and not a tax because they want to hide from people that it’s a tax,” he said. “Then, they’re advertising something which fails to disclose all the tax charges.”

He said that while the franchise fee is “tax chargeable to and collectable from the vendor,” it should not be chargeable to the consumer.

He called the practice both morally and legally wrong, and said vendors cannot add the fee when ringing up the sale — as it showed on Rahyo’s receipt from Bed, Bath and Beyond — because it causes the posted prices to be understated, “thereby constituting an ‘unconscionable commercial practice’ in violation of the NJ Consumer Fraud Act.”

The Division of Consumer Affairs declined to comment.

As things stand, the franchise fee is set to stick around for a long time.

“In 2030, the bonds will be paid off to the state and the franchise fee should cease at that time,” Zengaro said. “Unless there are other infrastructure improvements needed at that time.”

So the fee may never go away.

Rahyo says he doesn’t plan to return to Jersey Gardens.

“Not if we are being charged 3.5 percent sales tax and a 3 percent franchise fee,” he said. “It is way out of the way for us. We have Menlo Park, Bridgewater Commons and Woodbridge Center all within a 15 minute drive from our house in South Plainfield.”