Court for Anne Arundel County Case No. C-02-CV-16-000895
Nazarian, Arthur, Zarnoch, Robert A. (Senior Judge, Specially
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.
AND PROCEDURAL HISTORY
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.
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.
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.
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.
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
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.
letter further informed JPI of its right to request an
informal hearing with the Comptroller.
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
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.
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 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.
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)).
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." 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).
The Sales Tax Exemption and Exception to the
Comptroller's Duty to Pay Interest
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 §
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." 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
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).
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 § 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 ...