Broadway Services v. Comptroller

Broadway Services, Inc. v. Comptroller of Maryland, No. 19, September Term, 2021. Opinion by Getty, C.J. PRINCIPAL-AGENT RELATIONSHIP — IMPLIED AGENCY RELATIONSHIPS The Court of Appeals held that the Maryland Tax Court incorrectly applied the implied agency factors and therefore erroneously concluded that Broadway Services, Inc. was exempt from paying sales tax on purchases of cleaning supplies for Johns Hopkins Hospital, Johns Hopkins Bayview Hospital, and Howard County General Hospital where Broadway Services, Inc. acted as an agent of the hospitals. ADMINISTRATIVE LAW AND PROCEDURE — JUDICIAL REVIEW The Court of Appeals held that issues not encompassed in an agency’s final decision, here John McShain v. Comptroller, 202 Md. 68 (1953), and Md. Code (1988, 2016 Repl. Vol., 2020 Supp.), Tax-General Article § 11-204, could not serve as a basis to review the agency’s decision.

Circuit Court for Anne Arundel County Case No. C-02-CV-18-000554 Argued: November 1, 2021 IN THE COURT OF APPEALS OF MARYLAND No. 19 September Term, 2021 BROADWAY SERVICES, INC. v. COMPTROLLER OF MARYLAND Getty, C.J. *McDonald, Watts, Hotten, Booth, Biran, Wilner, Alan M. (Senior Judge, Specially Assigned) JJ. Opinion by Getty, C.J. Filed: April 1, 2022 *McDonald, J., now a Senior Judge, participated in the hearing and conference of this case while Pursuant to Maryland Uniform Electronic Legal an active member of this Court. After being Materials Act (§§ 10-1601 et seq. of the State Government Article) this document is authentic. recalled pursuant to Md. Const., Art. IV, § 3A, 2022-04-01 he also participated in the decision and adoption 11:15-04:00 of this opinion.

Suzanne C. Johnson, Clerk The case before us involves contracts between three non-profit tax-exempt hospitals of the Johns Hopkins Health System (“JHHS”), and Broadway Services, Inc. (“Broadway”), a for-profit business. Under the contracts, Broadway provided management services to the hospitals, including purchasing and providing cleaning supplies for use by the hospitals’ janitorial staff. Broadway paid sales and use tax on these purchases. The Comptroller of Maryland (“Comptroller”) is responsible for the fair and efficient collection of taxes.

To aid in performing the principal duty of collecting taxes, the Comptroller conducts audits, assesses taxes, and considers applications for tax refunds. The Comptroller audited Broadway, and Broadway filed a request for an offset and refund of the taxes it paid to cleaning supply vendors, asserting that Broadway was reselling the cleaning supplies and was therefore exempt from paying sales and use tax. The Comptroller denied Broadway’s requested refund and assessed additional unpaid taxes discovered from the audit. Broadway appealed the Comptroller’s decision to the Maryland Tax Court (“Tax Court”).

The Tax Court reversed the Comptroller’s denial of Broadway’s requested offset and refund and held that Broadway was not a reseller but, because it acted as the hospitals’ agent, should not have been charged sales tax. The Tax-General Article of the Annotated Code of Maryland states that, except as otherwise provided, a sales and use tax is imposed on “a retail sale in the State[,] and . . . a use, in the State, of tangible personal property, a digital code, a digital product, or a taxable service.” Md. Code (1988, 2016 Repl. Vol., 2020 Supp.), Tax-General Article (“TG”) §§ 11-102(a) et seq. A retail sale includes the sale of “(i) tangible personal property; (ii) a taxable service; (iii) a digital code; or (iv) a digital product.” TG § 11-101(h)(1).

However, a retail sale does not include “a sale of tangible personal property . . . if the buyer intends to . . . resell the tangible personal property . . . in the form that the buyer receives or is to receive the property[.]” TG § 11-101(h)(3)(ii)(1). Tangible personal property is defined as “(i) corporeal personal property of any nature; (ii) an accommodation; or (iii) a short-term rental.” TG § 11-101(k)(1). Exemptions to the sales and use tax are located in Title 11, Subtitle 2 of the Tax-General Article. Section 11-204(a)(3) identifies an exemption to sales and use tax for certain nonprofit organizations and states in pertinent part: (a) The sales and use tax does not apply to: *** (3) a sale to a nonprofit organization made to carry on its work, if the organization: (i) 1. is located in the State; *** (ii) is a charitable, educational, or religious organization; (iii) is not the United States; and (iv) except for the American National Red Cross, is not a unit or instrumentality of the United States[.] TG § 11-204(a)(3).

To qualify as an organization exempt from sales and use tax under TG § 11-204(a)(3), “the organization shall file an application for an exemption certificate with the Comptroller.” TG § 11-204(c). Buyers are required to produce evidence showing 2 exempt status from sales and use tax, and must “provide[] the vendor with: (1) evidence that the buyer has an exemption certificate; or (2) the evidence that the Comptroller requires by regulation.” TG § 11-408(a). The vendor’s duty to collect sales and use tax from a buyer is “waived if the buyer provides the vendor with a signed resale certificate that” complies with the standards set forth in TG § 11-408(b)(1). The question before us is whether the Tax Court erred in concluding that Broadway should not have been charged sales tax on the purchases.

Further, we consider whether our holding in John McShain v. Comptroller supports a conclusion that Broadway should not have been charged sales tax. 202 Md. 68 (1953). For the reasons explained below, we answer that the Tax Court erred in concluding that Broadway acted as an agent of the hospitals when it purchased cleaning supplies. We also decline to extend our narrow holding in McShain to the present circumstances because the cleaning supplies were not incorporated into the realty of the hospitals. BACKGROUND A. Factual Background Broadway is a for-profit company that provides security, parking, housekeeping, transportation, and facilities and property management services.

Broadway is a subsidiary of the DOME Corporation, which is equally owned by The Johns Hopkins University and the JHHS. Between 1994 and 2001, Broadway entered into written Hospital Service Agreements (“HSA”) with Johns Hopkins Hospital, Johns Hopkins Bayview Hospital, and Howard County General Hospital (collectively, the “hospitals”). The hospitals are exempt from sales and use tax as non-profit organizations. 3 Each hospital entered into its own HSA with Broadway, but the contracting procedures were uniform, and the HSAs themselves were largely similar. To create the HSAs, Broadway “mimicked” similar contracts from its competitors.

The HSAs did not reference the creation of an express agency relationship. Under the HSAs, Broadway provided janitorial management, including furnishing cleaning supplies to the hospitals, managing overall operations, and supervising janitorial staff. Specifically, Broadway “provid[ed] housekeeping services to [the hospitals] in accordance with the terms and conditions” of the HSAs. These services explicitly included “provid[ing] cleaning supplies and equipment to [the hospitals’] personnel performing housekeeping duties in and about the facility.” Third-party vendors assessed sales tax on Broadway’s purchases of cleaning supplies, which Broadway paid.

The vendors shipped the cleaning supplies directly to the hospitals for use by the hospitals’ janitorial staff. The hospitals required the cleaning supplies to comply with infectious control standards. Before Broadway altered its purchases, Broadway presented the products to the hospitals for approval under their infectious control standards for hospital use. Broadway’s personnel did not clean the hospitals.

At each hospital, the janitorial staff was unionized and prohibited non-union individuals and entities from cleaning. However, Broadway supervised the cleaning operations, inspected the work done by janitorial staff, and ensured the janitorial staff correctly completed the work Broadway assigned. The hospitals compensated Broadway in twelve monthly installments based on an agreed-upon annual price. The HSAs provided that “[a]t the beginning of each month 4 during the term of [the HSAs,]” Broadway “shall submit to [the hospitals] an invoice covering” one-twelfth of the lump-sum amount.

The HSAs and monthly invoices did not contain an itemized breakdown of the costs, such as the specific costs of the cleaning supplies or of Broadway’s management expenses. The payments were not adjusted based on the actual costs incurred. Instead, any additional expenses above the agreed-upon annual rate factored into the following year’s calculation. Adjustments to the annual rate required an agreement between both parties.

Amendments to the HSAs did not take effect unless the parties agreed to written amendments. On one occasion, Broadway and one of the hospitals agreed to amend the HSA to change the rate before the end of the contract term. This amendment was necessary because one of the hospitals added two new towers, which caused Broadway to incur additional expenses, including the costs of purchasing larger quantities of cleaning supplies to account for the expansion. This case arises from a sales tax audit of Broadway conducted by the Comptroller between December 1, 2007 and November 30, 2011.

Broadway responded to the audit with a request for an offset credit and refund of $76,161.96, which equals the amount of sales tax Broadway paid. In its request, Broadway contended that it paid excess tax for services and products purchased for resale to the hospitals. The Comptroller denied Broadway’s refund request and further assessed an additional $9,073.93 in unpaid sales and use tax. 5 B. Procedural Background Broadway appealed to the Tax Court and asserted that it purchased supplies for resale to three tax-exempt hospitals under TG § 11-101(h)(3)(ii)(1). The Comptroller moved for summary judgment and argued that (1) Broadway was not a reseller; and (2) Broadway was not an agent of the hospitals when it purchased the cleaning supplies.

In its response, Broadway stated that the Comptroller “provide[d] absolutely no background or authority to explain how [the agency argument was] even relevant to the matter before the [Tax Court].” The Tax Court denied the Comptroller’s motion for summary judgment and held an evidentiary hearing on the matter. After a one-day hearing, the Tax Court ruled, without explanation, that Broadway’s purchases did not satisfy the reseller exemption. The Tax Court did not directly mention McShain, but counsel for Broadway briefly mentioned the case in closing argument. The Tax Court stated, “I’m going to suggest that these items were – I’m not going to call them resold to [the hospitals].”1 However, the Tax Court conducted an agency analysis on the record and found that Broadway purchased supplies as an agent of the hospitals and should not have been charged sales tax.

The Tax Court noted that “no written document [made] Broadway the agent of [the hospitals] for the purchase of these supplies” but found an implied agency relationship existed between Broadway and the hospitals, exempting Broadway from paying sales and use tax. 1 The Tax Court made oral findings of fact and conclusions of law on the record. In doing so, instead of referring to the hospitals separately, “for lack of a burden,” the Tax Court identified the parties as “Hopkins” and “Broadway.” 6 The Comptroller appealed the Tax Court’s decision to the Circuit Court for Baltimore County, and that court transferred the matter to the Circuit Court for Anne Arundel County. The Circuit Court for Anne Arundel County affirmed the Tax Court’s decision. In an opinion dated March 31, 2021, the Court of Special Appeals reversed the circuit court.

Comptroller v. Broadway Servs., Inc., 250 Md. App. 102, 109 (2021). Broadway petitioned for a writ of certiorari, which we granted on July 9, 2021. Broadway Servs., Inc. v. Comptroller, 475 Md. 2 (2021). The question before us is whether the Tax Court erred in concluding that Broadway should not have paid sales and use tax on the cleaning supplies because Broadway was an agent of the hospitals.

Further, we consider whether our holding in McShain provides grounds to conclude that Broadway should not have paid sales and use tax on the purchases. STANDARD OF REVIEW The Tax Court is an administrative agency of the State. TG § 3-102; F.D.R. Srour P’ship v. Montgomery Cty., 407 Md. 233, 243 (2009). The Tax Court consists of five judges who have jurisdiction to hear appeals of final decisions relating to tax issues.

TG § 3-103(a); TG § 3-106(a). Matters within the Tax Court’s jurisdiction include: “(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.” TG § 3-103(a). Judicial review of Tax Court decisions is subject to the same standards used to review other agency decisions. TG § 13-532(a)(1); Comptroller 7 v. Wynne, 431 Md. 147, 160 (2013), aff’d, 575 U.S. 542 (2015); see also Md. Code (1984, 2021 Repl.

Vol.) State Government II Article § 10-222. When reviewing decisions of an administrative agency, this Court does not review the decisions of the circuit court or the Court of Special Appeals. Frederick Classical Charter Sch., Inc. v. Frederick Cty. Bd. of Educ., 454 Md. 330, 369 (2017); Spencer v. Md. State Bd. of Pharmacy, 380 Md. 515 , 523–24 (2004).

Instead, this Court considers whether the administrative agency itself erred. Frederick Classical Charter Sch., Inc., 454 Md. at 369 . This Court should not “make independent findings of fact or substitute its judgment for that of the agency[,]” but may determine whether the administrative agency made an error of law. Couret-Rios v. Fire & Police Emps.’ Ret.

Sys. of City of Balt., 468 Md. 508, 528 (2020) (quoting Md.-Nat’l Cap. Park & Plan. Comm’n v. Anderson, 395 Md. 172 , 180–81 (2006)). This Court will review an agency’s decision “solely on the grounds relied upon by the agency.” Dep’t of Health & Mental Hygiene v. Campbell, 364 Md. 108, 123 (2001) (“[T]he reviewing court, restricted to the record made before the administrative agency, . . . may not pass upon issues presented to it for the first time on judicial review and that are not encompassed in the final decision of the administrative agency.”).

When the administrative agency’s decision is based on factual findings, this Court may not reverse the agency if substantial evidence supports the agency’s decision. Ramsay, Scarlett & Co., Inc. v. Comptroller, 302 Md. 825, 834 (1985). Substantial evidence exists if “a reasonable mind might accept [the evidence] as adequate to support a conclusion.” Id. This Court views the agency’s decision in the light most favorable to the agency and 8 trusts the agency’s resolution of “conflicting evidence” and inferences drawn therefrom.

Id. at 835 . An administrative agency’s legal conclusions are given deference to the extent that they are “premised upon an interpretation of the statutes that the agency administers and the regulations promulgated for that purpose.” Frey v. Comptroller, 422 Md. 111, 138 (2011) (citing People’s Couns. for Balt. Cty. v. Surina, 400 Md. 662, 682 (2007)). However, where an agency’s decision is based on the “application and analysis of case law,” the decision encompasses a “purely legal issue uniquely within the ken of a reviewing court.” Id.

(quoting People’s Couns. for Balt. Cty. v. Loyola Coll., 406 Md. 54 , 67–68 (2008)). Therefore, unless the agency’s conclusion of law is a “purely legal issue uniquely within the ken” of the agency’s expertise and experience, we review the conclusion de novo for correctness because “it is always within our prerogative to determine whether an agency’s conclusions of law are correct, and to remedy them if wrong.” Id. at 67 ; Schwartz v. Md. Dep’t Nat. Res., 385 Md. 534, 554 (2005) (citations omitted).

When determining if tax exemptions apply, we do not presume that the State surrendered its taxing power. Ballard v. Supervisor of Assessments of Balt. Cty., 269 Md. 397, 403 (1973). Therefore, we strictly construe tax exemptions against the taxpayer.

Supervisor of Assessments of Balt. Cty. v. Trs. of Bosley Methodist Church Graveyard, 293 Md. 208, 212 (1982). 9 DISCUSSION A. Agency Analysis The Tax Court concluded that Broadway’s purchases of supplies were exempt from the sales and use tax on a theory that Broadway was an implied agent of tax-exempt organizations—the hospitals. The Tax Court did not cite any specific exemption related to agency or any other legal authority to support that theory. We strongly doubt that an agent of a tax-exempt organization—other than one who makes purchases directly for the organization and presents the organization’s exemption certificate for that purpose—is exempt from the sales and use tax merely on the basis of an agency relationship.

Nevertheless, we will review the Tax Court’s agency analysis. An overview of the law of agency is helpful before reviewing the Tax Court’s agency analysis. An agency relationship is fiduciary in nature, and its creation “turns on the parties’ intentions as manifested by their agreements or actions.” Green v. H&R Block, Inc., 355 Md. 488, 503 (1999). This Court has previously identified “two fundamental elements for the creation of [an] agency relationship[.]” Id. at 505 (quoting W. Edward Sell, Sell on Agency § 7, at 7 (1975)).

First, there must be “some manifestation or indication by the principal to the agent that he [or she] consents to the agent’s acting for his [or her] benefit[.]” Id. Second, there must be “consent by the agent to act for the principal.” Id. Ultimately, the reviewing court must determine whether the parties 10 intended to enter into an agency relationship. Anderson v. Gen.

Cas. Ins. Co., 402 Md. 236, 247 (2007). Even though the creation of an agency relationship requires consent from both the principal and the agent, the relationship may be created expressly or implicitly.

Green, 355 Md. at 503 . Absent a written agreement, courts consider the following three factors, derived from the Restatement (Second) of Agency (“Restatement”), to determine if an agency relationship exists: (1) the agent’s power to alter the legal relations of the principal; (2) the agent’s duty to act primarily for the benefit of the principal; and (3) the principal’s right to control the agent. Id. (citing Restatement, §§ 12–14 (Am.

L. Inst. 1958)). These three factors are neither exclusive nor conclusive considerations in determining whether an agency relationship exists, and they should be viewed “within the context of the entire circumstances of the transaction or relations.” Id. at 506. When a party asserts an agency relationship through inference, that party bears the burden of proving the existence of the agency relationship, including its nature and extent. Id. at 504.

Broadway argues that the Tax Court’s decision is supported by substantial evidence. Specifically, Broadway asserts that a reasonable mind might come to the same conclusion as the Tax Court by relying on the following facts from the testimony presented at the hearing: Broadway purchased the cleaning supplies used by the hospitals’ janitorial staff, the cleaning supplies were shipped directly to the hospitals, JHHS owns Broadway and the hospitals, Broadway was paid in twelve monthly installments, and JHHS had to approve each cleaning product to ensure it met the appropriate standards. 11 The Comptroller argues that the Tax Court’s agency decision is not based on substantial evidence. First, the Comptroller asserts that the record before the Tax Court lacked evidence that Broadway and the hospitals manifested an intent for Broadway to act as the hospitals’ agent. Second, relying on the three factors used to consider whether an agency relationship exists absent express intent, the Comptroller contends that Broadway could not alter the hospitals’ legal relations, Broadway did not act subject to the hospitals’ control, and Broadway did not act for the benefit of the hospitals based on the HSAs’ compensation provisions.

General agency principles are not within the Tax Court’s ambit. Therefore, we will review the Tax Court’s agency analysis de novo but continue to give deference to the Tax Court’s factual findings while conducting our review. Ramsay, Scarlett & Co., Inc., 302 Md. at 834 ; Schwartz, 385 Md. at 554 . Broadway’s and the Comptroller’s reliance on the three factors of implied agency supports a conclusion that neither party believed there was an express agency relationship between Broadway and the hospitals.

The Tax Court found that “no written document [made] Broadway the agent of [the hospitals] for the purchase of these supplies.” Although the Tax Court did not closely examine the HSAs to ascertain the contracting parties’ intent, the HSAs do not demonstrate an intent to create an express agency relationship. The Court of Special Appeals below noted that the Tax Court “should have examined the contracts to determine the nature of the relationship they established[,]” but ultimately concluded that the HSAs appear to establish “arms-length relationships between Broadway and the hospitals.” Broadway Servs., Inc., 250 Md. App. at 120 . We agree. 12 Testimony before the Tax Court shows that Broadway obtained a similar contract from its competitors and “mimicked” it when entering into agreements with the hospitals. It follows that the HSAs between Broadway and each of the hospitals read similarly, aside from information relevant to one particular hospital, but not the others (such as the hospital’s address and the annual price owed to Broadway for its services).

The common provisions of the HSAs set out the parties’ expectations, including outlining Broadway’s responsibilities, clarifying items for which Broadway would not provide, and identifying the manner and amount of Broadway’s compensation. The HSAs lack express language indicating that the hospitals intended to create an agency relationship with Broadway. Thus, if an agency relationship existed between Broadway and the hospitals, it must have been an implicit relationship discerned by consideration of the three agency factors that courts use to determine whether parties’ conduct or acquiescence amounts to an agency relationship. 1. The Agent’s Power to Alter the Legal Relations of the Principal The first factor to consider is the agent’s power to alter the legal relations of the principal.

This factor represents an integral component of agency relationships—an agent’s power to act on the principal’s behalf in third-party interactions. Walton v. Mariner Health of Md., Inc., 391 Md. 643, 655 (2006). Prior cases demonstrate an emphasis on legal relations with third parties, not between the parties themselves. Id.

(“An agent has the authority to enter into a contract on behalf of that principal.”); Strawn v. Jones, 264 Md. 95, 98 (1972) (“It is well established law that an agent can enter into a contractual relationship with a third party to the extent of the agent’s prescribed authority.”); Daskais 13 v. Kline, 188 Md. 541, 552 (1947) (holding the principal was bound by an offer made by the agent to a third party regarding an estate settlement). According to the Restatement, an agent’s ability to alter the principal’s legal relations may include the agent entering into binding contracts with third parties on the principal’s behalf, subjecting the principal to tort liability, or acquiring or divesting the principal of assets. Restatement, § 12 cmt. a. The Restatement also provides guidance regarding an agent’s power to alter the principal’s legal relations, emphasizing that an agent “has power to affect the legal relations of the principal to the same extent as if the principal had so acted.” Id.

In assessing Broadway’s power to alter the hospitals’ legal relations, the Tax Court stated, I don’t see that there were any alterations in terms of the chemicals in any given year. [The hospitals] told them what to buy, and those are the ones that they purchased. There was some testimony that mid-year, at least once, the contract was re-negotiated because the contract amount wasn’t enough. [The hospitals] added a building or two, and the contract – they were running out of money. They didn’t have enough money to cover it, so [the hospitals] made an amendment to the contract; that if they had too much money, which didn’t seem to happen, there was sort of an agreement that the next year they would make it up by charging less. But I didn’t hear any testimony that ever happened.

The Tax Court’s analysis of the first factor erroneously focuses on the legal relationship between Broadway and the hospitals rather than addressing whether Broadway could alter the hospitals’ legal relations with third parties. The Tax Court’s conclusion relating to the first factor is unclear, but no matter the outcome, the circumstances that the Tax Court relied upon are inconsequential in determining whether Broadway could enter 14 into binding agreements on the hospitals’ behalf, subject the hospitals to tort liability, or acquire and divest the hospitals’ interests. See Restatement, § 12 cmt. a. Instead, the Tax Court’s analysis is at odds with general agency principles, which include the agent’s power to alter the legal relations of the principal within the scope of the agency relationship.

No evidence presented before the Tax Court shows that Broadway could have entered into contracts on the hospitals’ behalf. Nor was there evidence presented that shows that the hospitals would be directly liable to the cleaning supply vendors had Broadway failed to pay the amounts owed. In fact, the evidence shows that Broadway calculated its anticipated expenses, including the price of the cleaning supplies, management services, and other costs associated with managing the hospitals. The evidence shows that, had Broadway miscalculated the annual cost, Broadway would have suffered a loss and factored it into the next year’s HSA.

Additionally, the Tax Court’s analysis appears factually inconsistent with the provisions of the HSAs and the testimony provided. The Tax Court’s analysis of the first factor suggests that Broadway had authority to alter the HSAs without the hospitals’ consent. Broadway could only amend the contract under severe circumstances with the hospitals’ consent if the parties agreed to an amendment in writing and acknowledged by signature. Each of the HSAs include provisions titled “Miscellaneous” that provide, among other things, that “[n]o amendment to this Agreement shall be effective unless in writing and signed by the parties hereto.” Further, testimony showed that Broadway and one hospital amended an HSA when the hospital added new buildings that could not be factored 15 into the initial budget.2 Otherwise, the difference in cost would have been factored into the next year’s annual payment.

Witness testimony and the language of the HSAs demonstrate 2 Regarding the amendment, the following discourse occurred between the Tax Court and a witness for Broadway: THE COURT: Did you ever find that their supplies are – you’re using too much supplies? THE WITNESS: Usually it’s the other way around. THE COURT: You have stuff left over? THE WITNESS: No, we have to order more.

THE COURT: That’s what I mean. THE WITNESS: Oh, yes, yes.