Bancroft Information Group, Inc. v. Comptroller of Treasury

ROSALYN B. BELL, Judge. Bancroft Information Group, Inc. is a Maryland Corporation which, since September 1, 1989, has published a biweekly publication circulated among the general public, known as The Maryland Report. The Maryland Report ¹⁰³ contains news items, legal and general intelligence, reports of current events, editorial comments, advertising matter and other miscellaneous information of public interest. Bruce Bortz is President and sole owner of Bancroft.

Bancroft and Bortz together are the appellants in the instant case. Although he was advised by appellee, the Comptroller of the Treasury, that the publication did not qualify as a newspaper and was thus subject to sales tax under the provisions of COMAR .03.06.01.04 1 (the regulation), Bancroft nevertheless filed with the Comptroller a refund application relating to the four previous quarters of sales tax. Bancroft attached to its refund application — which was founded on the “constitutional invalidity of tax as applied to newspaper publishers under Arkansas Writers’ Project v. ¹⁰⁴ Ragland, 481 U.S. 221 , 107 S.Ct. 1722 , 95 L.Ed.2d 209 (1987),” 2 — copies of the quarterly tax returns in question. The Comptroller returned the application to Bancroft with a request that additional information be supplied within 45 days.

Bancroft and Bortz instead brought suit in the Circuit Court for Anne Arundel County. Bancroft’s and Bortz’s complaint alleged that the Comptroller was acting beyond the scope of his authority in enacting the regulation. Bancroft and Bortz also alleged First Amendment violations by the Comptroller and asked for damages equal to the amount of sales tax Bancroft had paid, injunctive relief to halt further implementation of the regulation, and attorney’s fees under 42 U.S.C. § 1988 (1989). Count 1 of appellants’ complaint alleged that the regulation was ultra vires the authority of the Comptroller.

Count 2 alleged that the regulation violated the First Amendment and Equal Protection clause of the United States Constitution. Count 3 alleged deprivations of constitutionally protected personal and property rights under 42 U.S.C. § 1983 (1986) and attorney’s fees under § 1988. Each of these counts incorporated by reference the allegations contained in all other counts. The circuit court granted the Comptroller’s Motion to Dismiss on the grounds that Bancroft and Bortz had not exhausted their administrative remedies.

The circuit court also stayed any determination of constitutionality of the statute pending the exhaustion of administrative remedies. Bancroft and Bortz have appealed, contending: —the circuit court erred in staying a facial attack on a regulation asserted to violate the First Amendment; —the circuit court erred in dismissing on exhaustion grounds an attack on regulations affecting First ¹⁰⁵ Amendment rights asserted to be ultra vires any statutory authorization; —a regulation according the Comptroller discretion to determine what constitutes a nontaxable newspaper violates the First Amendment; and —the periodicity requirement in the State regulation violates the First Amendment. We prefer to rephrase the issues appellants’ raise and will address them as follows: —the First Amendment challenge to the regulation and the Comptroller’s authority to promulgate that regulation; —appellants’ § 1983 cause of action 3 ; and —the exhaustion of administrative remedies requirement and the circuit court’s disposition of the case. We will hold that appellants were not required to exhaust their administrative remedies before making a First Amendment challenge to the regulation.

In reviewing the portion of the regulation upon which the Comptroller based his decision, we find it to be constitutional. Furthermore, we hold that appellants are required to exhaust their administrative remedies prior to bringing any additional causes of action in the circuit court. We explain. THE FIRST AMENDMENT Appellants’ challenges to the regulation and the Comptroller’s exercise of authority in implementing it revolve ¹⁰⁶ around what appellants consider to be the regulation’s infringement on their First Amendment rights. 4 Specifically, appellants attack the grant of discretion in the regulation to the Comptroller to determine what constitutes a taxable newspaper.

Appellants also attack the periodicity (frequency of publication) requirement of the regulation. The circuit court stayed further proceedings on appellants’ action with respect to the First Amendment challenges to the regulation, pending appellants’ exhaustion of all other claims. In delivering its ruling, the court declared: “COURT: Well, of course, unfortunately I’ve probably had too much exposure to this type of case before. I did have another one very similar with the Pennysaver and got to read all of those Supreme Court cases on the question, but what it really boils down to I think is that the — I think under the existing law the comptroller does have a right to have regulations with regard to what is or isn’t a newspaper.

He also can promulgate those regulations so they apply, and, of course, a publication has the right to contest that, but before you contest it, I think you have to establish yourself as a — as fitting within the category of something that’s been denied. We don’t even have anything here where there’s been a refund claim made and denied. All it was sent back for further information, and so I think what you’re really asking for is a premature advisory opinion as to whether this category of bi-weekly publication is — is unconstitutionally being denied it status as a newspaper, but I think there’s certainly some other thing that or some other basis that the comptroller could find that might be a reason for his denial of your status as a newspaper. I don’t think you call yourself a newspaper.

You call yourself a bi-weekly newsletter. You have volumes and issues that apparently appear to be of a nature to be put together as a book ¹⁰⁷ which is another requirement that it not be, and so there are a lot of things that are at issue here other than the fact that it’s a bi-weekly publication, and I’m not going to make a preliminary advisory decision or allow anyone to jump ahead of the process that requires some kind of a evidentiary hearing after a denial. Of course, the comptroller may say you’re all right, once you file a — whatever supporting documentation he says you should, and that’s his privilege, but I don’t think it’s for the courts to intervene at this point so I think it’s premature and will grant the Motion to Dismiss. “[ASSISTANT ATTORNEY GENERAL]: Thank you, Your Honor. “COURT: I will stay the portion about the facial constitutional challenge if you want to just keep that open while you determine whether or not you’re a newspaper or otherwise. “[ASSISTANT ATTORNEY GENERAL]: Your Honor, then I assume you’re dismissing on the exhaustion ground and not the ripeness ground? “COURT: Yeah. “[ASSISTANT ATTORNEY GENERAL]: Okay. “[APPELLANTS’ COUNSEL]: Do I understand Your Honor’s ruling is that the counts other than the facial constitutionality are dismissed and the facial constitutionality is stayed? “COURT: Stayed pending the determination of whether every other category of qualification as a newspaper is approved. First of all, you’ve got to have some kind of a denial or exhaustion of administrative remedy.

Somebody has to do something.” The issuance of a stay lies “within the sound discretion of the trial court” and will not be disturbed on appeal absent an abuse of that discretion. Dodson v. Temple Hill Baptist Church, Inc. 254 Md. 541, 546 , 255 A.2d 73 (1969). In the instant case, the circuit court stayed the determination of the constitutional issues, pending the ¹⁰⁸ exhaustion of administrative remedies. Where First Amendment interests are raised, however, they must be vindicated prior to the disposition of other claims.

Dombrowski v. Pfister, 380 U.S. 479, 486 , 85 S.Ct. 1116, 1120 , 14 L.Ed.2d 22 (1965). 5 In addition, where differential taxation implicates the First Amendment the case becomes constitutionally suspect. Courts are then required to look for suppression of the expression of particular ideas or viewpoints. Leathers v. Medlock, — U.S.-, 111 S.Ct. 1438 , 113 L.Ed.2d 494 (1991). Absent a compelling justification, the government may not exercise its taxing power to single out a small group of the press.

Leathers, 111 S.Ct. at 1443 . See also Grosjean v. American Press Co., 297 U.S. 233, 244-49 , 56 S.Ct. 444, 446-49 , 80 L.Ed. 660 (1936). Ordinarily, we would remand this case to the circuit court for a disposition of the First Amendment issues. We choose, however, in the interest of judicial economy and to avoid the possibility of another appeal, to address the First Amendment issues raised by appellants.

Rule 8-131(a); Aetna Cas. & Sur. Co. v. Brethern Mut. Ins. Co., 38 Md.App. 197, 214 , 379 A.2d 1234 (1977).

Appellants contend that the regulation on its face is violative of their First Amendment rights. They argue that the regulation allows the Comptroller too much discretion to decide what qualifies as a newspaper and is thus exempt from the sales tax. Appellants in their brief complain: “Neither Maryland Report nor other aspiring publishers can do more than guess at what about it, other than its periodicity, offends the Comptroller. Perhaps the paper it is printed on is not flimsy enough____ Perhaps ¹⁰⁹ it omits too many of the typical contents of a true newspaper — reports of Women’s Sodality meetings, information about the fishing season for pickerel and the bounty paid for porcupine ears, recipes for Calvert County turnip soup, and advertisements of execution sales.” 6 Appellants rely on Arkansas Writers’ Project, 481 U.S. at 221 , 107 S.Ct. at 1723 , to bolster their position that the regulation violates the First Amendment.

We disagree. The Supreme Court faced a similar set of facts in Arkansas Writers’ Project . In that case, Arkansas had imposed a tax on receipts from sales of tangible personal property, but exempted numerous items, including newspapers and some magazines, such as “religious, professional, trade and sports journals.” The Arkansas Writers’ Project, Inc. (Writers) published a general interest monthly magazine, Arkansas Times, with a circulation of approximately 28,-000. The magazine included articles on a variety of subjects, including religion and sports.

The Commissioner of Revenue of Arkansas (Commissioner) refused the Writers refund application. The Arkansas State Chancery Court granted the Writers summary judgment, construing the magazine exemption to include Arkansas Times. The Arkansas Supreme Court reversed, holding that the magazine exemption applied only to religious, professional, trade, or sports periodicals. The United States Supreme Court reversed the Arkansas Supreme Court, holding that the Arkansas sales tax scheme was unconstitutional because of its “selective application” to magazines.

Arkansas Writers’ Project, 481 U.S. at 233 , 107 S.Ct. at 1729 . After examining how the Arkansas tax was directed at what was printed in the periodical, the Court held that Arkansas “has advanced no compelling justification for selective, content-based taxation of certain magazines.” Arkansas Writers’ ¹¹⁰ Project, 481 U.S. at 234 , 107 S.Ct. at 1730 . Admittedly, Arkansas Writers’ Project possesses some similarities to the case now before us. We hold, however, that it is distinguishable.

In the instant case, the Comptroller returned appellants’ refund application with a request for additional information. Prior to the return of the refund application, the Comptroller, in November, 1988, informed appellants by letter that the Maryland Report would not qualify as a newspaper for the sales tax exemption. The Comptroller wrote in pertinent part: “A definition of the term ‘newspaper’ is provided in Sales Tax Regulation .05, a copy of which is enclosed herewith. Among other things, the regulation has a threshold requirement that a publication must be published and distributed no less frequently than once each week in order to be a newspaper.

This is a requirement which the legislature has specifically considered on a number of occasions in recent years but declined to alter. “Since your proposed publication will not meet the frequency of publication requirement of the regulation, it will not be a newspaper for sales tax purposes.” Additional correspondence between appellants and the Comptroller, presented as exhibits at trial, focused on the frequency of publication requirement of the regulation. Therefore, unlike Arkansas Writers’ Project , the denial of the refund in this case was based, not on what was published in the newsletter, but on how many times it was circulated. Here, the Comptroller did not determine The Maryland Report’s tax status based on its content — which the Supreme Court found constitutionally offensive in Arkansas Writers’ Project . Instead, he based his determination on how many times it was published.

This is a content-neutral criteria, which does not “restrict expression because of its message, its ideas, its subject matter or its content.” Arkansas Writers’ Project, 481 U.S. at 229 , 107 S.Ct. at 1727 , quoting Police Dept. of Chicago v. Mosley, 408 U.S. 92, 95 , 92 S.Ct. 2286, 2289 , 33 L.Ed.2d 212 (1972). Thus, it does not raise the same type of constitutional suspicion. ¹¹¹ In determining whether a tax violates the First Amendment, the Supreme Court looks for “[regulations which permit the government to discriminate on the basis of the content of the message.” Arkansas Writers’ Project, 481 U.S. at 230 , 107 S.Ct. at 1728 . “The First Amendment’s hostility to content-based regulation extends not only to restrictions on particular viewpoints, but also to prohibition of public discussion of an entire topic.” Consolidated Edison Co. v. Public Serv. Comm’n of New York, 447 U.S. 530, 537 , 100 S.Ct. 2326, 2333 , 65 L.Ed.2d 319 (1980). Thus, the test becomes whether the tax is directed at the content or ideas espoused by the publication or whether it is