CBS Inc. v. Comptroller of the Treasury

ADKINS, Judge. In Consumer Protection v. Consumer Pub., 304 Md. 731, 755 , 501 A.2d 48, 61 (1985), we observed that “[t]his Court has not addressed the question of when, if ever, an agency is required to proceed by rulemaking” as opposed to adjudication. On the record there before us we held that it was “appropriate” for the agency “to proceed by adjudication____” Id. at 755-756 , 501 A.2d at 61 . We now revisit that topic.

Although we do not depart from our holding in Consumer Protection , we conclude that on the record now presented, the agency was required to adopt a policy change via rulemaking. The agency here is the appellee, the Comptroller of the Treasury (the Comptroller). The taxpayer which insists that rulemaking is mandatory under the circumstances of this case is appellant, CBS, Inc. (CBS). The factual back ⁶⁸⁹ ground of the controversy between them is largely undisputed.

I. CBS is a New York corporation. In 1980 and 1981, the tax years here involved, as well as prior thereto, its headquarters were in New York City. It conducted numerous activities, including the manufacture and sale of records, tapes, musical instruments, and toys; the publication of books and magazines; and the ownership and operation of five television stations, seven AM and FM radio stations, and television and radio networks. Its physical presence in Maryland was minimal: a records division sales office in Silver Spring and a toy manufacturing plant in Hagerstown.

Both of these enterprises were conducted as CBS divisions, not as separate corporations. Also organized as divisions were the network operations, which provided advertising services to those who wished to broadcast commercials or other messages. The network broadcasting facilities, the related sales offices, and the network employees staffing them were all outside of Maryland. Some 70 percent of CBS’s net income was derived from network advertising receipts.

Prior to 1980 and 1981 and, indeed, in those years, CBS, as a unitary business, computed its Maryland taxes by using the three-factor formula now prescribed by Maryland Code (1989) Tax-General Article, § 10-402(c). 1 The formula is a method by which a multi-state corporation apportions an appropriate part of its taxable income to Maryland. The factors are sales, property, and payroll. Each factor is a fraction. “The numerator of the sales factor, for example, is the amount of a corporation's in-state sales; the denominator ⁶⁹⁰ of the sales factor is the total amount of a corporation’s in-state and out-of-state sales. The property and payroll factors are computed in the same manner.

The three factors are averaged and the resulting fraction, expressed as a percentage; is multiplied by the corporation’s business income. The resulting dollar amount constitutes the business income apportioned to this State. The applicable tax rate is then applied to the corporation’s apportioned income.” NCR Corp. v. Comptroller, 313 Md. 118, 141 , 544 A.2d 764, 775 (1988) (quoting Xerox Corp. v. Comptroller, 290 Md. 126, 130 , 428 A.2d 1208, 1211 (1981)). See also Random House v. Comptroller, 310 Md. 696, 701 , 531 A.2d 683, 685 (1987).

CBS included all income from network advertising receipts in its total apportionable business income. Because there was neither network payroll nor network property located in Maryland, those components of the formula were included in the denominator but not the numerator. The advertising receipts were attributed to states other than Maryland. This method of attribution, as the parties stipulated in the Tax Court, “was reviewed during the audits of prior years CBS’[s] Maryland corporate income tax returns, and no adjustment to the sales factor to account for advertising receipts was ever proposed.” But when the 1980 and 1981 returns were audited, the Comptroller for the first time insisted on application of the audience-share method with respect to the sales factor.

This resulted in the addition to the numerator of that factor of a part of the network advertising receipts, using a ratio calculated to compare the network audience in Maryland to the total network audience. The new approach produced a significant increase in taxes for 1980 and 1981. After a hearing officer in the Comptroller’s Income Tax Division upheld the auditor’s decision, CBS sought relief in the Tax Court. It did not attack the fairness of the new approach, but argued that such a change in policy must be accomplished by rulemaking, not by ad hoc adjudication. ⁶⁹¹ The Tax Court agreed.

The Comptroller in Ms turn appealed and persuaded the Circuit Court for Baltimore City to the contrary. We issued a writ of certiorari before any proceedings were taken in the Court of Special Appeals. 318 Md. 2 , 566 A.2d 754 (1989).

II

State legislatures ordinarily delegate express or implied authority to their agencies to issue rules after rulemaking proceedings and to issue orders after adjudicatory proceedings. As a result, legislative delegations enable agencies to elaborate agency law in a form — rules—that resembles statutes, and also in a form — orders—that resembles the case-by-case, common-law precedents of courts. That is, administrative agencies are typically authorized to make their law by directly binding prescriptive statements of general applicability in rulemaking and by individual decisions of particular applicability in adjudication which serve as precedent for future cases. Bonfield, Mandating Stale Ageney Lawmaking by Rule, 2 B.Y.U.J. of Pub.L. 161, 162-163 (1988).

So it is in Maryland. The Comptroller “shall adopt reasonable regulations to administer the provisions of the fax laws.... ” Section 2-103, Tax-General Article. 2 The Maryland Administrative Procedure Act (APA) defines a regulation (for present purposes synonymous with “rule”) as a statement or an amendment or repeal of a statement that: (i) has general application; (ii) has future effect; (iii) is adopted by a unit to: 1. detail or carry out a law that the unit administers ... and (iv) is in any form, including: 1. a guideline; 2. a rule; 3. a standard; 4. a ⁶⁹² standard of interpretation; or 5. a statement of policy.... Md.Code (1984, 1989 Cum. Supp.), § 10-101(e)(1), State Government Article.

When an agency, or unit, undertakes to act by rulemaking, it ordinarily must follow specified procedures that include notice, hearing, and publication procedures. State Government Article §§ 10-109 through 10-113. Of course, an agency also may act by making an order in a contested case. See State Government Article, §§ 10-201 through 10-214.

The question we must decide is whether it was appropriate for the Comptroller to change the tax treatment afforded CBS by the latter method (in effect, by adjudication) or whether he was required to do so via the APA rulemaking process. The seminal decision in this area is S.E.C. v. Chenery Corp., 332 U.S. 194 , 67 S.Ct. 1575 , 91 L.Ed. 1995 (1947). There, the Supreme Court observed that “[t]he function of filling in the interstices of the [Holding Company] Act should be performed, as much as possible, through [the] quasi-legislative promulgation of rules to be applied in the future.” Id. at 202 , 67 S.Ct. at 1580 , 91 L.Ed. at 2002 . But the Court declined to adopt “any rigid requirement to that effect” because to do so “would make the administrative process inflexible and incapable of dealing with many of the specialized problems which arise.” Id. at 202 , 67 S.Ct. at 1580 , 91 L.Ed. at 2002 .

It made plain that in certain situations the agency must retain power to deal with the problems on a case-to-case basis if the administrative process is to be effective. There is thus a very definite place for the case-by-case evolution of statutory standards. And the choice made between proceeding by general rule or by individual, ad hoc litigation is one that lies primarily in the informed discretion of the administrative agency____ Id. at 203 , 67 S.Ct. at 1580 , 91 L.Ed. at 2002 [emphasis in original; citations omitted]. See also NLRB v. Bell Aero ⁶⁹³ space Co., 416 U.S. 267, 294 , 94 S.Ct. 1757, 1771 , 40 L.Ed.2d 134, 154 (1974).

Despite an apparent academic preference for broader use of rulemaking 3 and some judicial decisions that severely limit policy-making by adjudication, 4 the Chenery —Bell Aerospace view is the dominant one. Bonfield, supra, at 163. We recognized this in Consumer Protection, supra. Judge Eldridge, for the Court, thoroughly reviewed the federal and state authorities and observed that “most courts have allowed agencies broad discretion in choosing whether to develop policy by rulemaking or adjudication.” 304 Md. at 755, 501 A.2d at 60 .

The following year we reaffirmed that position when Chief Judge Murphy wrote for the Court, “[i]t is a well settled principle of administrative law that ‘the choice made between proceeding by general rule or by individual, ad hoc litigation is one that lies primarily in the informed discretion of the administrative agency.’ ” Baltimore Gas & Elec, v. Public Serv. Comm’n, 305 Md. 145, 168 , 501 A.2d 1307, 1319 (1986) (quoting Chenery, 332 U.S. at 203 , 67 S.Ct. at 1580 , 91 L.Ed. at 2002 ). But although the Comptroller would have it otherwise, we did not in Consumer Protection entirely reject ⁶⁹⁴ cases like Ford Motor Co. v. F.T.C., 673 F.2d 1008 (9th Cir.1981), cert denied, 459 U.S. 999 , 103 S.Ct. 358 , 74 L.Ed.2d 394 (1983), and Metromedia, Inc. v. Director, Div. of Taxation, 97 N.J. 313 , 478 A.2d 742 (1984); see n. 4, supra. We merely noted that the agency action there before us would have been appropriate for adjudicative determination “even under the restrictive view expressed in Ford Motor Co. v. F.T.C., supra." 304 Md. at 755-756 , 501 A.2d at 60-61.

That was because the administrative agency “did not change existing law or even formulate rules of widespread application.” Id. at 756, 501 A.2d at 61. Nor did we, in Baltimore Gas & Elec., say that agency discretion to choose between rulemaking and adjudication could never be reviewed. When we rejected the argument that rulemaking should have been required there, Chief Judge Murphy pointedly observed for the Court that it was “not a case ... in which materially modified or new standards were applied retroactively to the detriment of a company that had relied upon the [agency’s] past pronouncements.” 305 Md. at 169 , 501 A.2d at 1319. Our cases support the proposition that the administrative process is enhanced when an agency is allowed substantial flexibility to decide between establishing policy by way of rule or by way of adjudication.

The discretion to choose may, however, be abused. Bell Aerospace, 416 U.S. at 294 , 94 S.Ct. at 1771 , 40 L.Ed.2d at 154 . Under the circumstances of this case, it was.

III

Some courts have required policy announcements by rulemaking when an agency has been delegated rulemaking power, and when an administrative procedure act, like our APA, has defined “rule” or “regulation” and has established procedures for the adoption of such a policy statement. Those courts have held that legislative intent mandates use of the rulemaking process when the agency action falls within the statutory definition of “rule” or “regulation.” See, e.g., Sun Ray Drive-In Dairy, Inc. v. Oregon ⁶⁹⁵ Liquor Control Comm’n, 16 Or. App. 68, 70 , 517 P.2d 289, 292-293 (1973); see also Megdal v. Oregon State Bd. of Dental Examiners, 288 Or. 293, 311-317 , 605 P.2d 273, 282-285 (1980). Others hold that due process requires rule-adopted specifics to implement general statutory standards.

See, e.g., Elizondo v. State Dept. of Revenue, 194 Colo. 113, 117-119 , 570 P.2d 518, 521-522 (1977). Still others require rulemaking whenever “an agency seeks to change the law, and establish rules of widespread application.” See, e.g., Ford Motor Co., supra, 673 F.2d at