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Comptroller of Treasury v. Jason Pharmaceuticals, Inc.

Court of Special Appeals of Maryland

March 1, 2018

COMPTROLLER OF THE TREASURY,
v.
JASON PHARMACEUTICALS, INC.

         Circuit Court for Anne Arundel County Case No. C-02-CV-16-000895

          Nazarian, Arthur, Zarnoch, Robert A. (Senior Judge, Specially Assigned), JJ.

          OPINION

          ZARNOCH, J.

         This appeal arises from a decision of the Tax Court requiring the Comptroller to pay interest on two refunds of sales taxes for which the taxpayer was exempt under Maryland law. The Comptroller petitioned the Circuit Court for Anne Arundel County for review of the Tax Court's decision, and the circuit court upheld the Tax Court. The issue before us is whether there was substantial evidence in the record before the tax court to support its conclusion that the taxpayer's error in paying the tax was "attributable to the State, " and therefore, that the Comptroller was required to pay interest on the refund claim.

         BACKGROUND AND PROCEDURAL HISTORY

         Jason Pharmaceuticals, Inc. ("JPI") is a Maryland corporation, with its headquarters in Owings Mills, in Baltimore County. It is a subsidiary of Medifast, which is a weight-loss and weight-management program. JPI sells and distributes weight-management and other health-related products, and it prints paper materials and sells them to customers at Medifast's weight-loss centers. JPI operates a printing shop on Maryland's Eastern Shore, where it leases four large printing machines from Xerox Corporation ("Xerox"). JPI paid sales tax with each lease payment to Xerox from November 2007 through January 2013.

         In August 2011, JPI and Medifast hired Gabriel Massuda ("Massuda") as its Tax Director. Massuda observed the printers at the Eastern Shore printing facility soon after, and he began looking into whether the printers could meet the criteria for a sales tax exemption on personal property used in manufacturing.

         On May 10, 2012, after Massuda determined that JPI's printing activities might meet the exemption, he filed a refund claim with the Comptroller's Office, seeking a refund of $332, 365 in sales tax overpayments for the preceding four years -- from 2008 to April 10, 2012. Even after JPI filed its first refund claim, however, it continued to pay sales tax to Xerox, because Massuda had not been able to confirm whether JPI's production activities met the threshold set by the statute to qualify for an exemption. Thereafter, on September 4, 2012, JPI filed another refund claim seeking $22, 863 for the period of March 10, 2012 through August 1, 2012. Again, JPI continued paying sales tax to Xerox after filing its claim while Massuda continued to evaluate JPI's records.

         An auditor in the Comptroller's Business Tax Audits Section was assigned both refund claims. Between July 2012 and May 2013, the auditor reviewed JPI's tax returns, general ledger, invoices, and samples of materials printed on the printers, and visited the Eastern Shore printing facility. In January 2013, after Massuda became confident that JPI had the records to back up its claim that the printing machines met the criteria for the exemption, but prior to the auditor concluding his field audit, JPI finally stopped paying sales tax to Xerox on the printers.

         The auditor concluded his audit and the Refund Supervisor at the Comptroller's Office issued a denial letter for both refund claims on May 15, 2013. The letter stated the following:

The . . . application for a refund of sales and use tax has been denied due to the fact that the use of the . . . equipment and materials does not satisfy the State's determination of "used directly and predominantly in a production activity" because most of the materials being produced are not for resale.

         The letter further informed JPI of its right to request an informal hearing with the Comptroller.

         On May 23, 2013, JPI requested an informal hearing with the Comptroller, which was held before a hearing officer. The hearing officer reversed the auditor's decision on both refund claims, finding that JPI's use of the printers met the criteria for the exemption and that JPI was entitled to a refund of the sales tax. On September 17, 2013 JPI received a check for the first refund claim in the amount of $314, 655.83 for the first four years of sales tax, and on October 11, 2013, a check for the second claim in the amount of $22, 863 for the period of March 2012 to August 2012. No interest was paid on the sales tax refunds. Later, the hearing officer issued two Notices of Final Determination which concluded that, although the Comptroller had approved the refund claims, JPI was not entitled to recover interest from the State.

         Soon after, JPI appealed the Comptroller's final determination on the issue of interest to the Maryland Tax Court ("Tax Court"), and on August 19, 2015 the court held a hearing. The Tax Court issued its final determination and memorandum opinion on February 18, 2016, requiring the Comptroller to pay interest on the refunds, which we review in detail below. The Comptroller filed a petition for judicial review with the Circuit Court for Anne Arundel County. Following arguments from both parties on November 14, 2016, the circuit court affirmed the Tax Court's decision. The Comptroller appealed to this Court.

         DISCUSSION

         The issue before us on appeal is whether there was substantial evidence in the record before the Tax Court to support its conclusion that JPI is entitled to interest on its refund of sales tax. Whether JPI's use of the printers met the criteria for exemption involved measuring what proportion of its printed materials were for sale or resale[1] based on sample materials and JPI's own records. There is no dispute that JPI's use of the printers met the exemption and that it was entitled to a refund of the sales tax it paid during the relevant time periods. The paramount question at stake is whether JPI's error in paying the tax was "attributable to the State." For the reasons discussed below, we hold that no substantial evidence in the record before the Tax Court supported its conclusion that JPI's error in paying the tax was attributable to the State, and therefore, we reverse.

         We review decisions of administrative agencies directly, looking "through" the circuit court's decision. Kor-Ko Ltd. v. Md. Dep't of the Env't, 451 Md. 401, 409 (2017) (quoting People's Counsel for Baltimore Cnty. v. Surina, 400 Md. 662, 681 (2007); see also Comptroller of Treasury v. Sci. Apps. Int'l Corp., 405 Md. 185, 192 (2008) (Citation omitted) [hereinafter SAIC]. Because the Tax Court is "an adjudicatory administrative agency, " "decisions of the Tax Court receive the same judicial review as other administrative agencies. Gore Ent. Holdings, 437 Md. at 503 (citing Frey, 422 Md. at 136)). "When the Tax Court interprets Maryland tax law, we accord that agency a degree of deference as the agency that administers and interprets those statutes." Comptroller of the Treasury v. Wynne, 431 Md. 147, 160 (2013) (citing Comptroller v. Blanton, 390 Md. at 533-35 (2006)).

         The Court of Appeals in Kor-Ko Ltd. provided three areas of inquiry for appellate courts in reviewing administrative agency decisions: (1) whether "the findings of fact made by the agency are supported by substantial evidence in the record made before the agency;" (2) whether the agency "commit[ed] any substantial error of . . . substantive law in . . . formulating its decision;" and (3) whether the agency act[ed] arbitrarily or capriciously in applying the law to the facts."[2] Kor-Ko Ltd., 451 Md. at 411-12 (quoting Md. Bd. of Pub. Works v. K. Hovnanian's Four Seasons at Kent Island, LLC, 425 Md. 482, 514 n. 15 (2012)). We treat an administrative agency's decision as "prima facie correct" and "review the evidence in the light most favorable to the agency." SAIC, 405 Md. at 192-93 (Citation omitted). Additionally, the Court in SAIC reiterated the standard that "[w]hen we review an agency decision that is a mixed question of law and fact, we apply 'the substantial evidence test, that is, the same standard of review it would apply to an agency factual finding.'" 405 Md. at 193 (quoting Longshore v. State, 399 Md. 486, 522 n. 8 (2007)) (Internal quotation marks omitted).

         II. The Sales Tax Exemption and Exception to the Comptroller's Duty to Pay Interest

         Pursuant to § 11-102(a)(1)-(2) of the Tax-General Article ("TGA"), Md. Code (Repl. Vol. 2016), "[e]xcept as otherwise provided in [Title 11], a tax is imposed on . . . a retail sale in the State; and . . . a use, in the State, of tangible personal property or a taxable service." One exception to the requirement to pay sales tax is in § 11-210(b):

The sales and use tax does not apply to a sale of: (1) tangible personal property used directly and predominantly in a production activity at any stage of operation on the production activity site from the handling of raw material or components to the movement of the finished product, if the tangible personal property is not installed so that it becomes real property . . . .

TGA § 11-210(b) (Emphasis added). The Code of Maryland Regulations ("COMAR") defines "production activity" as -- "[a]ssembling, manufacturing, processing, or refining tangible personal property for sale or resale."[3] COMAR 03.06.01.32-2(B)(1)(a)(i). Personal property items are "used directly and predominantly in a production activity" if:

(a)[the] [u]se of the property is integral and essential to the production activity, occurs where the production activity is carried on, and occurs during the production activity; and
(b) [p]roperty used both in production activities and administrative, managerial, sales, or any other operational or nonoperational activities is used more than 50 percent of the time directly in production activities.

COMAR 09.06.01.32-2(B)(2) (Emphasis added). Accordingly, under the circumstances of the present case, JPI could meet the criteria for the exemption if JPI used the printers "more than 50 percent of the time" to manufacture printed materials that were "for sale or resale." See TGA § 11-210(b); COMAR 03.06.01.32-2(B)(1)(a)(i) and (2).

         When a taxpayer "erroneously pays to the State a greater amount of tax, fee, charge, interest, or penalty than is properly and legally payable, " the taxpayer may file a claim for refund "with the tax collector who collects the tax." TGA § 13-901(a)(1). Further, the taxpayer may be entitled to interest on the amount of the refund under certain circumstances, as provided in § 13-603(a):

Except as otherwise provided in this section, if a claim for refund under ยง 13-901(a)(1) or (2) or (d)(1)(i) or (2) of this title is approved, the tax collector shall pay interest on the refund from the 45th day after the claim is filed in the manner required in ...

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