At&T Communications of Maryland, Inc. v. Comptroller of the Treasury

HARRELL, J. I. This case involves a sales and use tax imposed by Maryland on charges made by out-of-state vendors to Maryland consumers of telecommunications information services beginning with the area code “900.” We are asked whether AT&T Communications of Maryland (AT&T), over whose long-distance lines the communications from out-of-state vendors were transmitted to Maryland consumers, was obligated to collect the tax from the Maryland consumers and, failing to have done that, to be responsible for payment of the tax to the Comptroller. Telephone numbers beginning with the 900 area code are assigned by the Federal Communications Commission (FCC) to telecommunications service providers, such as AT&T. Designation of a 900 area code reflects that information or services (such as sports scores, weather information, computer technical support, “date lines,” or psychic readings) are being transferred over the carrier’s lines. The telecommunications provider markets these lines to information providers who pay a tariffed rate to the telecommunications provider for carriage of the information services over an assigned line. When the end-consumer dials a 900 number, he or she is charged a fee by the information vendor.

Typically, this fee is included on, or as an insert to, the consumer’s monthly telephone bill. According to the record, four parties participated in the transmission of the 900 number calls at issue in this case: the out-of-state information vendor, the local exchange carrier (such as Verizon), the long distance carrier (AT&T), and a Maryland consumer who placed the call. The out-of-state information vendor is the party who offered the information ⁸⁸ for sale and decided what that information would be, created the content of the messages (including advertisements and scripts used by the persons providing the information to the consumers), determined the price to charge for the information, and marketed the 900 service to customers. The out-of-state information vendor purchased telecommunications services (transport) from the long distance carrier, AT&T. The out-of-state information vendor was responsible for payment to AT&T of a preset rate, found in and prescribed by tariffs published with either or both the FCC and the Maryland Public Service Commission.

In short, the consumer dialed an AT&T-distributed 900-type number, a local carrier (such as Verizon) relayed the call to AT&T who, at a tariffed rate, relayed it to the out-of-state information vendor, and the out-of-state information vendor charged the customer for providing information. As an option, an out-of-state information vendor also might use the carrier for billing and collection services for the 900-line services. In a majority of the transactions at issue here, AT&T generated a bill by combining its records of the length of the call made by the Maryland consumer with the information vendor’s charge to the consumer. This charge was then included on, or with, the customer’s telephone bill and labeled non-telecommunication charges. 1 When the customer paid for the information services, the carrier passed on the funds to the information vendor, less the fees AT&T charged for carrier, billing/collection, and arbitration services (to be explained further later in this opinion).

Since 1992, the Maryland General Assembly imposed a tax on the sale or use in Maryland of area code 900 telecommunication services. Maryland Code (1988, 2004 Replacement Volume), Tax General, § ll-101(m)(5). 2 The consumer/pur ⁸⁹ chaser of the taxed goods or services is obligated to pay the tax and the “vendor” of the service is obligated to collect and remit it to the Comptroller. § ll-401(a). Failure to collect the tax may result in the vendor being responsible itself for payment of the tax. Id.

Two types of vendors under the statute may be liable for collection of the tax. A “retail vendor” is one who is liable for collection of the sales tax if “it sell[s] or deliver[s] tangible personal property or a taxable service in the state.” § ll-701(c). An “out-of-state vendor” may be liable if, although located outside of Maryland, it has an “agent, canvasser, representative, salesman, or solicitor operating in the state for the purpose of delivering, selling, or taking orders for tangible personal property or a taxable service ....” § 11—701(b). The Comptroller is authorized to hold an agent jointly responsible for collection of the tax. § ll-101(o)(2).

On 17 May 2001, the Maryland Comptroller of the Treasury completed an audit and assessed to AT&T $5,160,899.45, plus interest, in sales and use taxes for 900 number services completed over its network from 1 January 1992 to 28 February 2001. AT&T applied for a revision (elimination) of the assessment, arguing that it was not a vendor or an agent of a vendor. Instead, according to AT&T, the out-of-state information vendors were the sole statutory parties responsible for collecting and remitting the tax. The Comptroller held a hearing on 12 July 2001 at which AT&T’s application for revision was denied.

The Comptroller found that AT&T was a co-vendor, or at least the agent of a vendor, of 900 telecommunication services responsible for collecting and remitting the sales tax, together with the information vendor. AT&T appealed the assessment to the Maryland Tax Court and, on 17 and 18 March 2004, a hearing was held. The Comptroller asked the Tax Court to affirm his decision to assess to AT&T the tax because AT&T was either a co-vendor of the 900 number services or an agent of the information service vendors. AT&T advanced several counter-arguments: 1) it was not a vendor or an agent, but merely a regulated provider of telecommunication services (common carrier) to ⁹⁰ the content vendors; 2) it was exempt from any responsibility for the tax, pursuant to the Commerce Clause (Article 1, § 8, cl. 3) of the United States Constitution, as a common carrier; 3) for taxing purposes, an insufficient nexus existed between AT&T’s 900 number activities and the State of Maryland; and 4) the taxing statute was unconstitutionally vague.

On 3 January 2005, the Tax Court rejected each of AT&T’s contentions, concluding instead that AT&T’s “function greatly exceeded that of a common carrier” and that AT&T “acted with the content providers in every step of the transaction[s].” The administrative agency determined further that the taxing statute was not unconstitutionally vague and that a sufficient nexus existed between AT&T and Maryland because AT&T has many connections with the State, although none specifically with regard to the 900 number services. AT&T sought judicial review in the Circuit Court for Baltimore City. It again argued that it was a common carrier that could not be burdened constitutionally with either collection or remittance responsibilities for the state tax. Alternatively, AT&T argued that the statute was unconstitutionally vague and that the Tax Court’s decision did not set out clearly the law and facts on which it relied to conclude that AT&T acted as a co-vendor or an agent of a vendor.

Although the Circuit Court agreed that the Tax Court’s opinion was not a “model of clarity,” it affirmed the agency decision on the grounds that AT&T was both a co-vendor and an agent of a vendor. The court rejected AT&T’s constitutional claims. AT&T appealed to the Court of Special Appeals. It repeated its argument that it acted merely as a common carrier, exempt by virtue of the Commerce Clause from Maryland tax collection or remittance responsibilities in this case.

AT&T Commc’ns of Md., Inc. v. Comptroller of the Treasury, 176 Md.App. 22 , 932 A.2d 748 (2007). The intermediate appellate court concluded, however, that AT&T’s role exceeded that of a common carrier. Id. at 33-35 , 932 A.2d at 754-56 . To support this result, the Court of Special Appeals relied on a summary of factual findings rendered by the Tax Court: ⁹¹ AT&T contacted an information provider and entered into an agreement with that provider and assigned a 900 telephone number.

AT&T reviewed advertisements that were placed, or I guess, prior to them being placed by the information provider to the public letting them know that a service was available. AT&T reviewed preambles that were required to be put into the message that the consumer received over the phone, and AT&T reviewed content that was to be part of this message, at least in part, to categorize it. AT&T in addition to that, provided transport of the message over part of the network that was required. AT&T provided billing for a majority of the information providers.

The percentage varied over time and, in addition to that, captured information as to the length of the call, married that with the information from the information provider as to what they charged[,] and either then sent that to the [local exchange carrier] to create the bill for the consumer, sent the bill themselves or provided it to a third party biller to get the money collected, and AT&T provided dispute resolution. Lastly, AT&T had a share in the total revenue produced by the operation. They received funds for transport and dispute resolution services that were required. And if they did collection, they received funds for collection.

Id. at 33-34 , 932 A.2d at 754-55 . Thus, the court determined that AT&T’s total involvement in providing the 900 number services was adequate to support the Comptroller’s and Tax Court’s conclusion that AT&T acted as an agent of the out-of-state vendors (information service providers), creating a nexus between the service providers and Maryland sufficient for the State to require AT&T to collect and remit the tax on the information service sales. Id. at 37-38 , 932 A.2d at 757 . ⁹² We granted AT&T’s petition for a writ of certiorari. 402 Md. 355 , 936 A.2d 852 (2007). AT&T frames one question for our consideration: Whether, in light of the Supreme Court’s “bright-line” test in National Bellas Hess [Inc. v. Department of Revenue of Illinois, 386 U.S. 753 , 87 S.Ct. 1389 , 18 L.Ed.2d 505 (1967) ] and Quill [Corp. v. North Dakota, 504 U.S. 298 , 112 S.Ct. 1904 , 119 L.Ed.2d 91 (1992) ], substantial nexus is created, thereby permitting Maryland to require a common carrier to collect a use tax on a sale from an out-of-state seller to a Maryland customer, when the out-of-state seller uses the common carrier to deliver its product (or service), and when the common carrier provides the out-of-state seller with services ancillary to, and in addition to, the delivery of the product (or service).

II

The Maryland Tax Court acts as an administrative agency, not a court. Harford County v. Saks Fifth Ave. Distrib. Co., 399 Md. 73 , 88 n. 14, 923 A.2d 1 , 10 n. 14 (2007) (citing Shipp v. Bevard, 291 Md. 590 , 592 n. 1, 435 A.2d 1114 , 1115 n. 1 (1981)). “[A] reviewing court must affirm the decision of the Tax Court if its order ‘is not erroneous as a matter of law,’ and if the order ‘is supported by substantial evidence appearing in the record.’ ” Comptroller of the Treasury v. Citicorp Intern.

Commc’ns, Inc., 389 Md. 156, 163 , 884 A.2d 112, 116 (2005) (quoting CBS, Inc. v. Comptroller of the Treasury, 319 Md. 687, 697-98 , 575 A.2d 324, 329 (1990)). With regard to its resolution of purely legal issues, a degree of deference to the Tax Court’s interpretation and application of a statute that it administers is often appropriate to be accorded by a reviewing court. Citicorp Intern. Commc’ns, Inc., 389 Md. at 163 , 884 A.2d at 116 (citing Charles County Dep’t of Social Servs. v. Vann, 382 Md. 286, 295-96 , 855 A.2d 313, 319 (2004)); Md. Aviation Admin. v. Noland, 386 Md. 556, 572 , 873 A.2d 1145, 1154 (2005) (citing Lussier v. Md. Racing Comm’n, 343 Md. 681, 696-97 , 684 A.2d 804, 811-12 (1996)).

It should be noted however, that although we “frequently give ⁹³ weight to an agency’s experience in interpretation of a statute that it administers, ... it is always within our prerogative to determine whether an agency’s conclusions of law are correct, and to remedy them if wrong.” Schwartz v. Md. Dept. of Natural Res., 385 Md. 534, 554 , 870 A.2d 168, 180 (2005). The Comptroller asserts that the issue before us is a mixed question of fact and law, the resolution of which implicates the exercise of the agency’s expertise and so its decision is owed greater deference on judicial review. Citicorp Intern. Commc’ns, Inc., 389 Md. at 164 , 884 A.2d at 116-17 .

AT&T does not dispute the factual connections found below as they relate to the transactions at issue. Rather, AT&T argues that these connections, as a matter of law, do not suffice to distinguish those circumstances from those of the entities in U.S. Supreme Court’s decisions in Quill and National Bellas Hess. As such, it deems the issue for resolution by us to be a purely legal question. We approach our analysis as one involving a question of law.

III

A. The Commerce Clause of the United States Constitution, Art. 1, § 8, cl. 3, reserves to Congress the power “[t]o regulate Commerce of foreign nations, and among the several states, and with the Indian Tribes.” “Even where Congress has not acted affirmatively to protect interstate commerce, the so-called dormant Commerce Clause prevents the states from discriminating against such commerce.” Chesapeake and Potomac Tel. Co. of Md. v. Comptroller of Treasury, 317 Md. 3 , 7 n. 2, 561 A.2d 1034 , 1036 n. 2 (1989). The Supreme Court established a four-prong test for assessing the validity, under the Commerce Clause, of a state tax imposed on a transaction where an out-of-state entity is one of the essential parties. In Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 , 97 S.Ct. 1076, 1079 , 51 L.Ed.2d 326 (1977), the Court stated that a tax is valid when it is “applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, ⁹⁴ does not discriminate against interstate commerce, and is fairly related to the services provided by the State.” The present case implicates the first prong of this analysis.

When a state wishes to tax an entity located beyond its borders, as in the case of a sales tax on an out-of-state seller, there must exist a “substantial nexus”—a “definitive link”— between the state and the person or transaction it seeks to tax. Scripto, Inc. v. Carson, 362 U.S. 207, 210-11 , 80 S.Ct. 619, 621 , 4 L.Ed.2d 660 (1960); Miller Bros. Co. v. State of Md., 347 U.S. 340, 344-45 , 74 S.Ct. 535, 539 , 98 L.Ed. 744 (1954). In National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753, 753 , 87 S.Ct. 1389, 1389 , 18 L.Ed.2d 505 (1967), the petitioner, National, was a mail order company incorporated in Delaware but with its principal place of business located in North Kansas City, Missouri.

Of concern was an Illinois use tax that, according to the Illinois Department of Revenue and the Illinois Supreme Court, National was required to collect from Illinois purchasers of its products and pay over to Illinois. Nat’l Bellas Hess, 386 U.S. at 753-54 , 87 S.Ct. at 1389-90 , 18 L.Ed.2d 505 . The Court explained National’s relationship with Illinois: National does not maintain in Illinois any office, distribution house, sales house, warehouse or any other place of business; it does not have in Illinois any agent, salesman, canvasser, solicitor or other type of representative to sell or take orders, to deliver merchandise, to accept payments, or to service merchandise it sells; it does not own any tangible property, real or personal, in Illinois; it has no telephone listing in Illinois and it has not advertised its merchandise for sale in newspapers, on billboards, or by radio or television in Illinois. All of the contacts which National does have with the State are via the United States mail or common carrier.

Twice a year catalogues are mailed to the company’s active or recent customers throughout the Nation, including Illinois. This mailing is supplemented by advertising ‘flyers’ which are occasionally mailed to past and potential custom ⁹⁵ ers. Orders for merchandise are mailed by the customers to National and are accepted at its Missouri plant. The ordered goods are then sent to the customers either by mail or by common carrier.

Nat’l Bellas Hess, Inc., 386 U.S. at 754 , 87 S.Ct. at 1390 , 18 L.Ed.2d 505 (1967) (citing Dept. of Revenue v. Nat’l Bellas Hess, Inc., 34 Ill.2d 164 , 214 N.E.2d 755, 757 (1966)). Justice Fortas, in dissent, noted that many of the goods were purchased on credit or C.O.D. 3 Id. at 761, 87 S.Ct. at 1394 , 18 L.Ed.2d 505 (Fortas, J., dissenting). The Court, in reflecting on its earlier relevant cases, observed that it “has never held that a State may impose the duty of use tax collection and payment upon a seller whose only connection with customers in the State is by common carrier or the United States mail.” Id. at 758 , 386 U.S. 753 , 87 S.Ct. at 1392 , 18 L.Ed.2d 505 . The Court found that “to uphold the power of Illinois to impose use tax burdens on National in this case, [it] would have to repudiate totally the sharp distinction which these and other decisions have drawn between mail order sellers with retail outlets, solicitors, or property within a State, and those who do no more than communicate with customers in the State by mail or common carrier as part of a general interstate business.” Id.

The Court declined to do so. Id. In Quill Corp. v. North Dakota, 504 U.S. 298 , 112 S.Ct. 1904 , 119 L.Ed.2d 91 (1992), the Supreme Court reconsidered Bellas Hess in light of its Commerce Clause decisions rendered between 1967, when Bellas Hess was decided, and 1992. The Court detected in those more recent decisions a movement away from a “stringent physical presence test” toward a “more flexible substantive approach”; nonetheless, the Court refused to overturn entirely Bellas Hess. 4 Quill, 504 U.S. at ⁹⁶ 314, 112 S.Ct. at 1914 , 119 L.Ed.2d 91 .

The Court reasoned that, “[although we have not, in our review of other types of taxes, articulated the same physical-presence requirement that Bellas Hess established for sales and use taxes, that silence does not imply repudiation of the Bellas Hess rule.” Id. The Court went on to explain that the bright-line rule of Bellas Hess furthers the ends of the dormant Commerce Clause. Undue burdens on interstate commerce may be avoided not only by a case-by-case evaluation of the actual burdens imposed by particular regulations or taxes, but also, in some situations, by the demarcation of a discrete realm of commercial activity that is free from interstate taxation. Bellas Hess followed the latter approach and created a safe harbor for vendors whose only connection with customers in the taxing State is by common carrier or the United States mail.

Under Bellas Hess, such vendors are free from state-imposed duties to collect sales and use taxes. Like other bright-line tests, the Bellas Hess rule appears artificial at its edges: Whether or not a State may compel a vendor to collect a sales or use tax may turn on the presence in the taxing State of a small sales force, plant, or office. Cf. National Geographic Society v. California Bd. of Equalization, 430 U.S. 551 , 97 S.Ct. 1386 , 51 L.Ed.2d 631 (1977); Scripto, Inc. v. Carson, 362 U.S. 207 , 80 S.Ct. 619 , 4 L.Ed.2d 660 (1960).

This artificiality, however, is more than offset by the benefits of a clear rule. Such a rule firmly establishes the boundaries of legitimate state authority to impose a duty to collect sales and use taxes and reduces litigation concerning those taxes. Id. at 315-16 , 112 S.Ct. at 1914-15 , 119 L.Ed.2d 91 . The Supreme Court then applied the “bright-line test” of Bellas Hess to the facts before it.

Quill, like Bellas Hess, involved a ⁹⁷ large mail order house (a Delaware corporation with offices and warehouses in Illinois, California, and Georgia) that solicited business and sold merchandise in North Dakota (among other places)