Carbond, Inc v. Comptroller

Carbond, Inc. v. Comptroller of the Treasury, No. 2767, September Term, 2018. Opinion by Zarnoch, J. TAX – STATUTORY INTERPRETATION – ADMISSIONS AND AMUSEMENT TAX Appellants’ electronic gaming devices—being refrigerator-sized machines that entertained customers with spinning wheels and lights, and licensed as “coin-operated amusement devices”—were subject to the Admissions and Amusement Tax as “games of entertainment” within the meaning of the Tax-General Article. TAX – STATUTORY INTERPRETATION – ADMISSIONS AND AMUSEMENT TAX The General Assembly’s addition of the phrase “game of entertainment” to the Admissions and Amusement Tax statute in 1979 was intended “to clarify the application of the tax to those ‘games of entertainment’ that require . . . the use or rental of recreational or sports equipment.” 78 Md. Att’y Gen. Op. 347, 350 (1993).

Circuit Court for Baltimore City Case No. 24-C-18-001681 REPORTED IN THE COURT OF SPECIAL APPEALS OF MARYLAND No. 2767 September Term, 2018 ______________________________________ CARBOND, INC., ET AL. v. COMPTROLLER OF THE TREASURY ______________________________________ Friedman, Shaw Geter, Zarnoch, Robert A. (Senior Judge, Specially Assigned), JJ. ______________________________________ Opinion by Zarnoch, J. ______________________________________ Filed: July 29, 2020 Pursuant to Maryland Uniform Electronic Legal Materials Act (§§ 10-1601 et seq. of the State Government Article) this document is authentic. Suzanne Johnson 2020-07-29 12:29-04:00 Suzanne C. Johnson, Clerk Appellants Carbond, Inc.; Carroll Bond, III; and August Papa (collectively, “Carbond”)1 were assessed by the Comptroller of the Treasury (the “Comptroller”) for millions of dollars that Carbond failed to pay in Admissions and Amusement Taxes (the “A&A Tax” or “A&A Taxes”) relating to amusement devices placed by Carbond in other businesses in Baltimore City and Baltimore County. Carbond challenges the assessment, maintaining that the video machines at issue are not the sort of “games of entertainment” that are subject to the A&A Tax under the Tax-General Article.

See Md. Code (1988, 2010 Repl. Vol.), Tax-General Article (“TG”), §§ 4-101–4-102. The Maryland Tax Court and the Circuit Court for Baltimore City were not persuaded by Carbond’s claim. Nor are we.

Therefore, we affirm. BACKGROUND & PROCEDURAL HISTORY This appeal concerns electronic gaming devices placed by Carbond in various bars, restaurants, and convenience stores throughout Baltimore City and Baltimore County. A 2010 audit showed that business owners who operated the machines in question (and which Carbond had licensed as “coin-operated amusement devices”) were making illegal payouts to customers who “won” while using the machines. That is to say, Carbond’s devices were effectively being operated as illegal slot machines.

Of more 1 We refer to the appellants collectively as “Carbond” for simplicity. Although Mr. Bond and Mr. Papa were individually and separately assessed for the periods of time that each was president of Carbond (Mr. Bond from April 2000 through September 2008, Mr. Papa from October 2008 through March 2010), there is nothing distinct about Carbond, Inc.; Mr. Bond; or Mr. Papa for the purposes of the legal arguments they make on appeal. direct relevance to this appeal: the audit showed that Carbond had not paid A&A Taxes 2 on the amounts that were illegally paid out to customers as winnings from the machines. Based on the audit, the Comptroller assessed Carbond for the additional millions in A&A Taxes that should have been paid on the machines’ total gross receipts from April 1, 2000 through March 31, 2010, plus interest, and a fraud penalty.3 Carbond, which prior to the audit had otherwise paid A&A Taxes on the machines’ net receipts (i.e., excluding the amounts that had been paid out as illegal winnings), subsequently responded by filing for a tax refund, claiming that its machines should not have been subject to the A&A Tax at all, because they were not “games of entertainment” within the meaning of § 4-101(b) of the Tax-General Article. (TG § 4- 101(b) defines an “[a]dmissions and amusement charge” as meaning, among other 2 Section 4-102 of the Tax-General Article (“TG”) authorizes counties to impose a tax on “admissions and amusement” charges in the county.

Baltimore City and Baltimore County each impose a tax of 10% on the gross receipts from the amounts charged in each jurisdiction for the use of a “game of entertainment” or the use of “recreational or sports equipment.” See Baltimore City Code, Article 28, § 19-1; Baltimore County Code, Article 11, § 11-4-601 (each mirroring the language from TG § 4-101(b)). Even though counties impose the A&A Tax, “businesses are required to remit admissions and amusement taxes to the Comptroller.” Zorzit v. Comptroller, 225 Md. App. 158, 162 (2015). 3 Though not necessarily relevant to the legal question Carbond raises on appeal, we note that Carbond originally paid the A&A Tax on net receipts from the machines in question. The Comptroller’s assessment was based upon the determination that Carbond should have paid taxes on the machines’ gross receipts—i.e., that Carbond should also have paid A&A Taxes on the amounts that business owners had (illegally) paid out to customers in winnings from the machines. See TG § 4-102(b) (“A county may impose, by resolution, a tax on . . . the gross receipts derived from any admissions and amusement charge in that county[.]”). 2 taxable charges, a charge for the “use of a game of entertainment” and/or the “use or rental of recreational or sports equipment[.]”).

As we will discuss further, Carbond has relied upon the reasoning of a 1993 published opinion of the Maryland Attorney General to support its claim that its machines are not “games of entertainment” that are subject to the tax. Specifically, Carbond likens its video machines to the game of Instant Bingo, given that the Attorney General’s 1993 opinion concluded that pre-printed pull-tab Instant Bingo tickets should not be considered “games of entertainment” for the purposes of the A&A Tax. 78 Md. Att’y Gen. Op. 347 (1993). According to Carbond, because its machines offer “the purchase of random chances to win prizes or money,” they are materially indistinguishable from Instant Bingo, and thus, are excluded from the A&A Tax outside of Anne Arundel County or Calvert County.4 In May 2012, the Comptroller’s Office of Hearings and Appeals (1) denied Carbond’s refund claim; (2) reduced the A&A Tax assessment against Carbond; and (3) upheld the fraud penalty, in Notices of Final Determination.

(Not including interest or the fraud penalty, Carbond, Inc. was assessed $2,907,081.71, Mr. Bond $2,471,019.36, and Mr. Papa $436,062.24). 4 Subsequent to the 1993 Attorney General opinion, the General Assembly amended the A&A Tax statute to expressly state that “[the phrase] ‘[g]ame of entertainment’ includes, in Anne Arundel County or Calvert County, the game of instant bingo permitted under a commercial bingo license.” TG § 4-101(c). The General Assembly is “presumed to [know]” of the Attorney General’s interpretation, Benco Vending, Inc. v. Comptroller of Treasury, 244 Md. 377, 383 (1966), which could place a “gloss” on subsequent legislation. Id. 3 Carbond appealed to the Maryland Tax Court; after a three-day trial, the Tax Court denied the refund claim and affirmed the Comptroller’s assessments, but reduced the fraud penalty from 100% to 75% of the tax liability. In an oral decision rendered from the bench, on September 26, 2017, the Tax Court determined that Carbond’s machines were “both a game of chance and a game of entertainment,” and that “[g]ames of entertainment are subject to [the A&A] tax.” The Tax Court also noted that Carbond’s machines seemed “identical” to electronic Instant Bingo machines that are currently available for play in Calvert County, as well as to other casino machines, which entertain customers with “spinning wheels, bells, flashing lights, et cetera[.]” Carbond noted appeals that were consolidated in the Circuit Court for Baltimore City.

The circuit court originally remanded the case back to the Tax Court to enter factual findings in support of the conclusion that Carbond’s machines were “games of entertainment” subject to the A&A Tax. In an order dated February 23, 2018, the Tax Court reaffirmed its earlier oral decision that Carbond’s “refrigerator-sized”5 machines were electronic “games of entertainment” subject to the A&A Tax. Notably, the Tax Court found that while the phrase “game of entertainment” was added to the A&A Tax statute in 1979, before 1979 coin-operated amusement devices would have been equally subject to the A&A Tax as “the use of recreational equipment.” 5 The Tax Court found that Carbond’s machines “may be a separate console the size of an apartment refrigerator or they may be mounted on a wall in an establishment.” Presumably, the Tax Court meant by this description that the consoles are the size of a “mini-fridge,” as a normal refrigerator would be the same size in either an apartment or a house. 4 After the Circuit Court for Baltimore City affirmed the Tax Court’s decision, this appeal followed. DISCUSSION “As the Tax Court is an adjudicative administrative body of the executive branch, its decisions are subject to the same standards of judicial review as adjudicatory decisions of other administrative agencies.” NIHC, Inc. v. Comptroller of Treasury, 439 Md. 668, 682 (2014).

Thus, on appellate review “[w]e review the decision of the Tax Court, not the ruling of the circuit court . . . .” Comptroller of Treasury v. Johns Hopkins Univ., 186 Md. App. 169, 181 (2009). Our review “is limited to determining if there is substantial evidence in the record as a whole to support the [Tax Court’s] findings and conclusions, and to determine if the administrative decision is premised upon an erroneous conclusion of law. We cannot uphold the Tax Court’s decision on grounds other than the findings and reasons set forth by the Tax Court.” Comptroller of Treasury v. Taylor, 465 Md. 76, 86 (2019) (Citation omitted). We give “great weight to the Tax Court’s interpretation of the tax laws, but review[] its application of case law without special deference.” NIHC, 439 Md. at 683 .

Additionally, published opinions of the Attorney General are generally entitled to “careful consideration” by the courts. Brown v. County Comm’rs of Carroll County, 338 Md. 286, 296 (1995) (Internal quotation marks omitted); cf. State ex rel. Attorney General v. Burning Tree Club, Inc., 301 Md. 9, 34 (1984) (“[M]embers of the General Assembly rely upon the advice of the Attorney General as to whether a proposed enactment is valid.”). 5 The issue before us on appeal is whether Carbond’s electronic gaming devices are subject to the A&A Tax under § 4-101(b) of the Tax-General Article. Relying