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Holzheid v. Comptroller of Treasury of Maryland

Court of Special Appeals of Maryland

March 28, 2019


          Circuit Court for Baltimore City Case No.: 24-C-15-005700

          Nazarian, Arthur, Battaglia, Lynne, A. (Senior Judge, Specially Assigned), JJ. [*]


          Battaglia, J.

         When a Maryland resident earns income from sources outside of the State, the income is taxed as though earned in the State. Comptroller v. Wynne, 431 Md. 147, 156- 57 (2013), aff'd, 135 S.Ct. 1787 (2015). Maryland, though, provides a credit against an individual's State tax liability for income taxes paid to other states levied on income earned in the other states.[1] Maryland Code (1988, 2010 Repl. Vol.), Section 10-703 of the Tax-General Article.[2] Prior to 2013, however, a credit to offset income taxes collected on behalf of Baltimore City and each of the counties, oftentimes referred to as a "piggy back" tax, Coerper v. Comptroller, 265 Md. 3, 5 (1972), was not available for a Maryland resident who earned out-of-state income, thereby, resulting in a "double taxation" on the local level.[3] Wynne, 431 Md. at 155. A change to this scheme was occasioned by a suit filed by Brian and Karen Wynne who challenged the double taxation by the counties and Baltimore City on income earned in other states.

         The Wynnes have been Maryland residents living in Howard County for a number of years. 431 Md. at 148. In 2006, Mr. Wynne owned stock in Maxim Healthcare Services, Inc. ("Maxim"), a Subchapter S corporation.[4] 135 S.Ct. at 1793. That year, Maxim earned income in states other than Maryland, as it filed state income tax returns in 39 states. Id. As "pass-through" income earners of Maxim, the Wynnes reported a portion of the corporation's income on their joint federal and Maryland income tax returns. Id. On their 2006 Maryland income tax return, they claimed an income tax credit for income taxes they paid to other states pursuant to Section 10-703(c) of the Tax-General Article against not only their state tax, but also the "piggy back" tax. Id.; 431 Md. at 159.

         The Comptroller, however, assessed a tax deficiency against the Wynnes and allowed them a credit against their Maryland "state" income tax but not against their "county" income tax. 135 S.Ct. at 1793. On appeal from the county disallowance, the Hearings and Appeals Section of the Comptroller's office slightly modified the assessment, but otherwise affirmed the Comptroller's decision, and the Maryland Tax Court affirmed. Id.

         The Circuit Court for Howard County, on judicial review, however, reversed the decision on the basis that the tax system benefitting the counties and Baltimore City violated the Commerce Clause.[5] Id. The court remanded the case back to the Tax Court. The Court of Appeals, however, granted certiorari before the remand and before this Court heard the case. 431 Md. at 159.

         The Court of Appeals affirmed the Circuit Court. In doing so, the Court evaluated the tax scheme under the four-part test set forth in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 97 S.Ct. 1076 (1977), by which a tax is assessed under the Commerce Clause to see whether it "applies to an activity with a substantial nexus with the taxing state," "is fairly apportioned," "is not discriminatory towards interstate or foreign commerce," and "is fairly related to the services provided by the State." 431 Md. at 147 (citing Complete Auto Transit, Inc., 430 U.S. at 279, 97 S.Ct. 1076)). In Wynne, the Court held that the tax scheme failed both the fair apportionment and nondiscrimination parts of the Complete Auto Commerce Clause test. 431 Md. at 165-72; 173-76. With respect to the fair apportionment prong, the Court initially held that the tax failed the "internal consistency" test, for if every State adopted Maryland's tax scheme, the fruits of interstate commerce would be taxed at a higher rate than intrastate commerce. Id. at 166-71. The Court further held that the tax scheme failed the "external consistency" test because it created the risk of multiple taxation on the same income. Id. at 171-72.

         In terms of nondiscrimination, the Court noted that because the tax scheme denied residents a credit on income taxes paid to other states and so taxed income earned interstate at a rate higher than income earned intrastate, that the tax discriminated against interstate commerce. Id. at 173-76. The Court, however, noted that a "state may avoid discrimination against interstate commerce by providing a tax credit, or some other method of apportionment, to avoid discriminating against interstate commerce in violation of the dormant Commerce Clause." Id. at 189.

         The State, though, filed a petition for certiorari to the Supreme Court, which was granted. 572 U.S. 1134, 134 S.Ct. 2660 (May 27, 2014). The Supreme Court affirmed and held that because Maryland failed to provide a credit against the county portion of income taxes, the Maryland tax scheme as applied to the Wynnes necessarily violated the dormant Commerce Clause, for reasons similar to those postulated by the Court of Appeals. 135 S.Ct. at 1792.

         As a result, Wynne and others similarly affected by having had paid county income taxes as well as taxes to other states for income earned therein became entitled to refunds of a portion of their Maryland "piggy back" taxes. Many of the individuals affected by Wynne then filed amended tax returns with the Comptroller, claiming a refund on the portion of tax paid to the counties to which no credit for out-of-state taxes had been provided.

         At the time of the Wynne litigation, the interest rate on unpaid income tax refunds was 13% without regard to the source of the income. Maryland Code (1988, 2010 Repl. Vol.), Section 13-604 of the Tax-General Article.[6] While Wynne was pending before the Supreme Court, though, the General Assembly enacted Section 16 of the Budget Reconciliation and Financing Act of 2014 ("Section 16"), [7] which reduced the interest rate on refunds under Wynne to approximately 3%.[8] 2014 Maryland Laws, Chapter 464, Section 16.[9]

         In the present case, Michael J. Holzheid, Bruce Feinerman, and Jeffrey and Arielle Grill, individuals affected by Wynne, also filed amended Maryland income tax returns claiming an additional credit against the "piggy back" portion of their Maryland personal income tax. They also claimed refunds of Maryland taxes that they had, under Wynne, overpaid in prior years, along with applicable interest, and ultimately, they received refunds, but with interest calculated, not at 13%, but, pursuant to Section 16.

         Contending that they were entitled to 13% interest on their refunds, the litigants filed a complaint on behalf of themselves and putative class members in the Circuit Court for Baltimore City to challenge the legality of Section 16.[10] In Count One of their complaint, they facially challenged Section 16's reduced interest rate on the basis that it violated the Fourteenth Amendment of the United States Constitution.[11] In Count Two, they claimed that the reduced interest rate violated the Commerce Clause of the United States Constitution. In Count Three, they questioned the reduction of the interest rate on the ground that it served as an unconstitutional taking without due process or just compensation, thereby, violating the Fifth Amendment, [12] as incorporated to the states by the Fourteenth Amendment of the United States Constitution. And in Count Four, they alleged that the Comptroller was liable to them and all other putative class members, in his personal capacity, for the aforementioned alleged constitutional violations, pursuant to Section 1983 of Title 42, United States Code.

         The State moved to dismiss the complaint on the ground that the group had failed to exhaust their administrative remedies for the resolution of tax disputes by failing to pursue their action in the Maryland Tax Court. Initially, the Circuit Court denied the motion to dismiss, and subsequently, denied the State's motion for reconsideration. Thereafter, the litigants filed a motion for class certification, which the State opposed, and both sides filed cross-motions for summary judgment.

         At a hearing on the motions, Judge Yvette Bryant of the Circuit Court for Baltimore City revisited the State's motion to dismiss, and subsequently, dismissed the suit on the ground that the Circuit Court lacked jurisdiction, because the litigants failed to exhaust their administrative remedies. In so finding, Judge Bryant reasoned that "the process for resolution of issues related to tax refunds, including the proper rate of interest, rests exclusively with the Tax Court."

         Judge Bryant noted, however, that if the Circuit Court had jurisdiction over the matter, she would have denied class certification, ruled that sovereign immunity barred claims against the Comptroller in his individual capacity, but would have ruled also that Section 16 violated the dormant Commerce clause, positing that

[w]hile the court finds its determination that administrative remedies are a condition precedent to this court's consideration of Plaintiffs' cause of action, this court, in the absence of dismissal, would have found that Plaintiffs' claims against the Comptroller in his individual capacity are barred by sovereign immunity but that the remaining claims are not barred by sovereign immunity. Additionally, the court would have found that applying a different rate to any interest owed to Plaintiffs would violate the dormant Commerce Clause.
The court has not provided in-depth written analysis as to what it would have found if ruling upon the parties' motions for summary judgment because of the determination that Plaintiffs must exhaust administrative remedies in this case. However, this court recognizes that the Court of Special Appeals may be called upon to review the court's determination, and, to that end, would like to advise of its view of the case in light of the parties' pleadings, limited exhibits, and arguments.

         A timely Notice of Appeal was filed by the litigants, now the present Appellants, contending, primarily, that the Circuit Court erred in dismissing their action.[13]

         For the reasons that follow, we shall affirm the judgment of the Circuit Court and hold that Appellants were required to exhaust their administrative remedies before the Maryland Tax Court prior to availing themselves of judicial review before the Circuit Court; we will not reach any of the other issues raised.


         Our review of the circuit court's grant of a motion to dismiss is de novo.[14] Reichs Ford Rd. Joint Venture v. State Rds. Comm'n of the State Highway Admin., 388 Md. 500, 509 (2005); Evans v. Cty. Council of Prince George's Sitting as Dist. Council, 185 Md.App. 251, 256 (2009). In the course of that review, "we must determine whether the trial court's decision was legally correct[, ]" Med. Mgmt. & Rehabilitation Servs., Inc. v. Md. Dep't of Health & Mental Hygiene, 225 Md.App. 352, 360 (2015) (citing Napata v. Univ. of Md. Med. Sys. Corp., 417 Md. 724, 732 (2011)), and "accord no special deference to the Circuit Court's legal conclusions." Heavenly Days Crematorium, LLC v. Harris, Smariga & Associates, Inc., 433 Md. 558, 568 (2013). We examine "whether the complaint, assuming all well-pleaded facts and reasonable inferences drawn therefrom in a light most favorable to the pleader, states a legally sufficient cause of action." Reichs Ford Rd. Joint Venture, 388 Md. at 509 (citing Adamson v. Correctional Med. Servs. Inc., 359 Md. 238, 246 (2000)). Dismissal is proper only "if the complaint would fail to provide the plaintiff with a judicial remedy." Id. (citing Bobo v. State, 346 Md. 706, 709 (1997)).

         The rationale underlying the exhaustion requirement stems from the "expertise which the agency can bring to bear in sifting the information presented to it" and the idea that allowing "interruption for purposes of judicial intervention at various stages of the administrative process might well undermine the very efficiency which the Legislature intended to achieve in the first instance." Soley v. Comm'n on Hum. Rel., 277 Md. 521, 526 (1976). Furthermore, administrative agencies "are fully competent to resolve issues of constitutionality and the validity of statutes or ordinances in adjudicatory administrative proceedings which are subject to judicial review." Furnitureland South, Inc. v. Comptroller, 364 Md. 126, 138 (2001) (quoting Montgomery Cnty. v. Broadcast Equities, Inc., 360 Md. 438, 451 n. 8 (2000)). This includes the "constitutionality of an enactment as applied, as well as the constitutionality of enactment as a whole." Prince George's Cnty. v. Ray's Used Cars, 398 Md. 632, 651 (2007) (citation omitted).

         The pivotal issue in the instant case involves whether Appellants needed to exhaust their administrative remedies before the Maryland Tax Court[15] when they challenged the reduction of the interest rate on their Wynne refunds. To resolve this issue, we turn to Zappone v. Liberty Life Insurance Company, 349 Md. 45 (1998), in which the Court of Appeals analyzed the relationship between statutorily provided administrative remedies and coextensive judicial remedies and defined the three possible decision-making alternatives as:

First, the administrative remedy may be exclusive, thus precluding any resort to an alternative remedy. Under this scenario, there simply is no alternative cause of action for matters covered by the statutory administrative remedy.
Second, the administrative remedy may be primary but not exclusive. In this situation, a claimant must invoke and exhaust the administrative remedy, and seek judicial review of an adverse administrative decision, before a court can properly adjudicate the merits of the alternative judicial remedy.
Third, the administrative remedy and the alternative judicial remedy may be fully concurrent, with neither remedy being primary, and the plaintiff at his or her option may pursue the judicial remedy without the necessity of invoking and exhausting the administrative remedy.

Zappone, 349 Md. at 60-61.

         Which of the three categories is applicable to a particular administrative remedy is ordinarily a question of legislative intent. Id. at 61 (citations omitted). On occasion, the General Assembly will "expressly set forth its intent in this regard." Id. at 61-62 (providing examples of express legislative intent with regard to each of the three categories: exclusive, primary, and concurrent). Most often, however, statutes fail to specify the category in which an administrative remedy falls, leaving the task up to the courts. Id. at 62.

         With respect to exclusivity, "[o]rdinarily a statutory administrative and judicial review remedy will be treated as exclusive only when the Legislature has indicated that the administrative remedy is exclusive or when there exists no other recognized alternative statutory, common law, or equitable cause of action." Id. Courts may also evaluate the comprehensiveness of an administrative remedial scheme to determine that the Legislature intended the administrative remedy to be primary, whereas a non-comprehensive administrative scheme suggests the contrary.[16] Zappone, 349 Md. at 64 (citing Luskin's Inc. v. Consumer Protection Div., 338 Md. 188, 196-97 (1995); Bd. of Ed. for Dorchester Cty. v. Hubbard, 305 Md. 774, 787-92 (1986)).

         Before determining whether appellants needed to exhaust their administrative remedies before the Maryland Tax Court when they challenged the reduction of the interest rate on their Wynne refunds, we will first determine whether individuals challenging a refund on income tax must exhaust their administrative remedies before the Tax Court. With respect to the recovery of refunds, before Zappone, the Court of Appeals, in Apostol v. Anne Arundel County, reasoned that the remedies contained in the tax code were exclusive:

It is firmly established in this State that once a taxpayer voluntarily pays a tax or other governmental charge, under a mistake of law or under what he regards as an illegal imposition, no common law action lies for the recovery of the tax absent a special statutory provision sanctioning a refund. This is true even if payment is made under protest. Moreover, in these circumstances, no common law or declaratory judgment action lies to challenge the validity of tax so paid. . . . [W]here there is statutory authorization for a refund and a special statutory remedy set forth, that remedy is exclusive.

288 Md. 667, 672 (1980) (citing Baltimore Cty. v. Xerox Corp., 286 Md. 220 (1979); White v. Prince George's Cty., 282 Md. 641, 650-54 (1978); Rapley v. Montgomery Cty., 261 Md. 98 (1971)). In Washington Suburban Sanitary Commission v. C.I. Mitchell and Best Co., 303 Md. 544, 577 (1985), the Court further explained its holding in Apostol, stating that, "once the taxes were paid, the refund remedy necessarily became exclusive because under the voluntary payment rule, the declaratory judgment and injunction remedies had been extinguished." See also Bowman v. Goad, 348 Md. 199, 204 (1997) (stating that, in the context of refunds, "the General Assembly has now provided broad administrative refund remedies covering every type of tax, fee, or charge improperly collected by a Maryland governmental entity.").[17]

         Utilizing the Zappone standard to determine exclusivity, we reach the same result regarding refunds of income taxes. The Tax-General Article, in its entirety, is comprehensive because it extensively, if not exhaustively, governs the means by which state and local taxes are to be collected. See Comptroller v. Science Applications Intern. Corp., 405 Md. 185, 199 n. 4 (2008) (stating that the creation of the Tax-General Article, enacted by Chapter 2 of the Laws of Maryland 1988, was a comprehensive re-enactment of the general tax code). The Tax-General Article is also comprehensive in nature in that it details specific procedures an aggrieved party must take when seeking relief from an adverse decision of a tax collector, [18] which includes matters raised before the Maryland Tax Court. See Furnitureland South, Inc., 364 Md. at 134-35 (stating that the special statutory remedies for the resolution of tax controversies, "involving both administrative and judicial proceedings," provided by the General Assembly are "comprehensive" and that the Court "has consistently treated the special statutory administrative remedies for the determination of tax questions to be exclusive or primary."); Comptroller v. Zorzit, 221 Md.App. 274, 293-94 (2015) ("Given the extensive and comprehensive administrative remedies available to taxpayers under the Tax-General Article, we are persuaded that it is important to clarify and reinforce the necessity of exhausting those remedies before seeking relief in the circuit court[.]").

         Within the breadth of the tax code is the inclusion of the Maryland Tax Court. The Maryland Tax Court, created by Chapter 757 of the Laws of Maryland 1959 (HB619), is "an independent administrative unit of the State government."[19] Maryland Code (1988, 2016 Repl. Vol.), Section 3-102 of the Tax-General ("Tax-Gen.") Article. As a "quasi-judicial" agency, the Tax Court, has the authority to "hear, try, determine, or remand any matter before it." Tax-Gen. § 13-528(a)(1). Its jurisdiction, which is delineated in Section 3-103(a) of the Tax-General Article, provides that

[t]he Tax Court has jurisdiction to hear appeals from the final decision, final determination, or final order of a property tax assessment appeal board or any other unit of the State government or of a political subdivision of the State that is authorized to make the final decision or determination or issue the final order about any tax issue, including:
(1) the valuation, assessment, or classification of property;
(2) the imposition of a tax;
(3) the determination of a claim for refund;
(4) the application for an abatement, reduction, or revision of any assessment or tax; or (5)the application for an exemption from any assessment or tax.

(1988, 2016 Repl. Vol.).

         The Tax-General Article further delineates instances in which an aggrieved person or entity may appeal an adverse decision of the Comptroller, or other tax collector, to ...

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