Comptroller of Md. v. Broadway Services

Comptroller of Maryland v. Broadway Services, Inc., No. 2807, September Term, 2018, Argued: May 11, 2020 PRINCIPAL-AGENT RELATIONSHIP – ANALYSIS OF THE RELATIONSHIP When analyzing whether an agency relationship exists between parties to a contract, the contract is the starting point for analyzing the nature of the parties’ relationship, particularly whether a fiduciary relationship has been established or is precluded by the terms of the contract. PRINCIPAL-AGENT RELATIONSHIP – ANALYSIS OF THE RELATIONSHIP When analyzing whether an agency exists between affiliated business entities, the distinct nature of the entities should be respected unless a cognizable reason for disregarding the separateness of the entities has been established. PRINCIPAL-AGENT RELATIONSHIP-POWER TO ALTER LEGAL RELATIONSHIPS When analyzing whether an agency relationship exists, courts should consider whether the agent had the power to alter the principal’s legal relations with third parties or even with the agent. PRINCIPAL-AGENT RELATIONSHIP - DUTY TO ACT FOR BENEFIT OF THE PRINCIPAL When analyzing whether an agency relationship exists, in determining whether a party has a duty to act for the benefit of another, courts should consider whether, in providing the service, the provider had a duty to place the interests of its client above its own interests.

PRINCIPAL-AGENT RELATIONSHIP - THE PRINCIPAL’S RIGHT TO CONTROL THE AGENT A contractual requirement for a party to comply with company policies or legal obligations does not provide the control indicative of an agency relationship. Circuit Court for Anne Arundel County Case No. C-02-CV-18-000554 REPORTED IN THE COURT OF SPECIAL APPEALS OF MARYLAND No. 2807 September Term, 2018 ______________________________________ COMPTROLLER OF MARYLAND v. BROADWAY SERVICES, INC. ______________________________________ Leahy, Gould, Eyler, Deborah S. (Senior Judge, Specially Assigned), JJ. ______________________________________ Opinion by Gould, J. ______________________________________ Filed: March 31, 2021 Pursuant to Maryland Uniform Electronic Legal Materials Act (§§ 10-1601 et seq. of the State Government Article) this document is authentic. * Fader, C.J., and Nazarian, J., did not participate 2021-04-01 in the Court’s decision to report this opinion 10:21-04:00 pursuant to Maryland Rule 8-605.1. Suzanne C. Johnson, Clerk This appeal requires us to review the Maryland Tax Court’s determination that appellee Broadway Services, Inc. (“Broadway”) was entitled to a refund for sales taxes it paid when, as part of the housekeeping supervisory services it provided to three non-profit hospital clients, it purchased the cleaning supplies used at each of the hospitals.

Broadway’s refund request was based on its contention that because it resold the supplies to the hospitals, its purchases fell outside the statutory definition of “retail sales” and thus were not subject to sales taxes. The request made its way to the Tax Court, which rejected Broadway’s “reseller” theory. The Tax Court nevertheless granted the refund on the basis that Broadway purchased the supplies as an agent for the hospitals which, as tax exempt non-profits, were not subject to sales and use taxes. The Comptroller petitioned the circuit court for judicial review, which affirmed the Tax Court’s decision.

The Comptroller timely appealed the circuit court’s judgment and presents the following question: Did the Maryland Tax Court err when it determined that Broadway was the Hospitals’ agent when no evidence showed a manifestation of an intent for Broadway to be the hospitals’ agent, and Broadway failed to introduce evidence proving 1) that it had a fiduciary obligation to act for the Hospitals’ benefit, 2) that it could alter the Hospitals’ legal relationships, or 3) that it acted subject to the Hospitals’ control? We conclude that the answer to this question is yes and reverse. FACTS AND PROCEDURAL BACKGROUND Broadway is in the business of providing security, parking, housekeeping, transportation, and facilities and property management services to its clients. Broadway is a for-profit company that provides services to clients both inside and outside of The Johns Hopkins Health System (“JHHS”).

Broadway is a subsidiary of the DOME Corporation (“DOME”), which in turn is owned in equal shares by The Johns Hopkins University (the “University”) and JHHS. In addition to its partial and indirect ownership in Broadway, JHHS owns multiple academic and community hospitals, some of which are non-profit corporations.1 Certain types of non-profit organizations are exempt from sales and use taxes pursuant to Section 11-204 of the Tax-General Article (“TG”) of the Maryland Annotated Code (1988, 2016 Repl. Vol.). This case involves the services that Broadway provided between 2007 and 2011 to three non-profit hospitals within the JHHS system: Johns Hopkins Hospital (“Hopkins Hospital”), Johns Hopkins Bayview Medical Center (“Bayview”), and Howard County General Hospital (“Howard”).2 The Comptroller of Maryland (the “Comptroller”) conducted a sales tax audit of Broadway for the time-period of December 1, 2007 through November 30, 2011.

Broadway responded to the audit with an application for an offset credit and refund in the amount of $76,161.96 for the sales tax it had paid to its vendors for cleaning supplies used at the three non-profit hospitals. Broadway stated on its application that the taxes were “improperly paid on services and products purchased for resale.” Broadway’s legal theory 1 The word “own” in this context is used loosely, because, as discussed below, non- profit entities are technically not “owned” by anyone. 2 These three hospitals are collectively referred to as the “hospitals.” 2 was that although a sales and use tax is imposed on retail sales pursuant to TG § 11-102,3 its purchases of supplies were governed by TG § 11-101(h)(3)(ii)(1), which excludes from the definition of a retail sale “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[.]” Broadway contended that this provision applied to it because it purchased the supplies and resold them to the hospitals. The Comptroller rejected Broadway’s reseller theory, denied its refund request, and assessed Broadway $9,073.93 in unpaid sales and use taxes. Broadway appealed to the Tax Court.

In its petition, Broadway asserted, under the penalty of perjury, that the supplies were purchased “for resale to three tax-exempt hospitals” and that “[a]ll of the cleaning supplies were used by employees of the three exempt hospitals.” The Comptroller moved for summary judgment in the Tax Court proceeding. The Comptroller argued that Broadway did not qualify as a reseller because it did not sell the supplies to the hospitals. In addition, based on deposition testimony of Broadway’s President and CEO, Peter Seidl, the Comptroller was anticipating that Broadway would advance the alternative theory that it purchased the cleaning supplies as a purchasing 3 TG § 11-102(a) provides that: “Except as otherwise provided in this title, a tax is imposed on (1) a retail sale in the State; and (2) a use, in the State, of tangible personal property or a taxable service.” 3 agent.4 Thus, in a preemptive attack on an agency theory that Broadway had not yet made, the Comptroller argued in its motion for summary judgment that Broadway was not acting as an agent for the hospitals when it purchased the cleaning supplies. In response, Broadway rebuked the Comptroller for even raising the principal-agent issue, stating that the Comptroller “provides absolutely no background or authority to explain how this is even relevant to the matter before the Court.” Finding that material facts were disputed, the Tax Court denied the Comptroller’s motion and held a one-day evidentiary hearing on Broadway’s appeal.

Broadway presented testimony from five individuals: (1) Mr. Seidl; (2) Linda Bushell-English, finance administrator of JHHS; (3) Patrick Michael Kastendike, Broadway’s CFO; (4) Ken Dickard, Broadway’s retained independent auditor; and (5) Andrew J. Maschas, an attorney in the Comptroller’s office. From the testimony of these witnesses, the following picture emerged regarding Broadway’s business relationship with the hospitals. The housekeeping functions at the hospitals were performed by the hospitals’ employees. The hospitals contracted with Broadway to supervise, evaluate, and train their janitorial staff.

Broadway had separate written contracts with each hospital for the provision of these services. The contracts also required Broadway to provide the cleaning supplies, which Broadway purchased from its vendors. The hospitals had to approve the supplies chosen 4 Mr. Seidl testified in his deposition that there was a written agency agreement which apparently appointed Broadway as a purchasing agent under certain circumstances. However, the agreement did not, according to Mr. Seidl, authorize Broadway to act as an agent to purchase the cleaning supplies at issue in this case. 4 by Broadway to ensure compliance with their infectious disease protocols.

The vendors shipped the supplies directly to the hospitals. The vendors’ invoices were issued to and paid by Broadway. From time to time, although not frequently, the hospitals purchased office supplies directly from a vendor and asked Broadway to pay for the items on their behalf. Broadway tracked those payments separately from the costs incurred in providing services and supplies to the hospitals.5 The contracts required the hospitals to pay Broadway a fixed annual fee for its services.

This fee covered Broadway’s labor and other costs, including cleaning supplies, plus an additional fifteen percent to cover Broadway’s overhead. The fixed fee was based on Broadway’s annual budget for such costs. Broadway invoiced the hospitals on a monthly basis for one-twelfth of the annual fixed fee. The hospitals did not see Broadway’s detailed budgets or a breakdown of the expenses.

The monthly invoices did not contain itemized charges for the cleaning supplies. The invoices would “just say housekeeping monthly fee.” The hospitals therefore did not know how much Broadway spent on cleaning supplies. Only in rare circumstances, such as when the parties agreed to increase the scope of the services, did the parties adjust the fixed fees mid-stream, and such changes were memorialized in a contract amendment. Otherwise, the fixed fee remained the same even 5 Mr. Seidl testified that Broadway provided this service pursuant to a contract, which he called a “security contract,” which was separate and distinct from the contracts at issue here.

Thus, such purchases are not relevant to the purchases made pursuant to the three contracts at issue here. 5 if the prices of cleaning supplies fluctuated during the contract year. If Broadway’s expenses increased, the parties would adjust the fee in the contract for the next year. Broadway was in a “tight margin” business and expected to make a nominal profit on its contracts with the hospitals. Mr. Seidl’s testimony underscored the risk Broadway assumed under this arrangement, explaining that when predicting the expenses for the upcoming year, “[y]ou can’t afford to be wrong.” At the conclusion of the evidence and the parties’ closing arguments, the Tax Court ruled, without any explanation, that Broadway’s purchases on the supplies did not qualify for the reseller exemption under TG § 11-101(h)(3)(ii)(1).

The Tax Court found, however, that Broadway purchased the supplies as an agent of the hospitals, and on that basis concluded that Broadway “should not have been charged [a] sales tax.” Thus, the Tax Court concluded that Broadway was entitled to a refund from the State in the amount of $76,161.96, plus interest.6 The Comptroller filed a petition seeking judicial review of the Tax Court’s decision in the circuit court.7 The circuit court denied the Comptroller’s petition and affirmed the decision of the Tax Court. This timely appeal followed. 6 The court’s ruling did not require Broadway to remit the refund to the hospitals. 7 The Comptroller filed its petition with the Circuit Court for Baltimore County, which transferred the matter to the Circuit Court for Anne Arundel County. 6 DISCUSSION The focus of our review is the decision of the Tax Court, not the decision of the circuit court. Supervisor of Assessments v. Stellar GT, 406 Md. 658, 669 (2008). We do not disturb factual findings and conclusions that are supported by substantial evidence in the record.

Frey v. Comptroller of the Treasury, 422 Md. 111, 137 (2011). Substantial evidence means “such evidence as a reasonable mind might accept as adequate to support a conclusion[.]” Id. (cleaned up). The Tax Court’s legal conclusions are another matter.

We accord “great weight to the agency’s legal conclusions when they are premised upon an interpretation of the statutes that the agency administers and the regulations promulgated for that purpose[,]” but if the decision is based on “the application and analysis of caselaw, that decision rests upon a purely legal issue uniquely within the ken of a reviewing court[,]” and in such cases, “we evaluate an agency’s legal conclusions to determine whether they are based upon an error of law” without deference. Id. at 138 (cleaned up). Here, the Tax Court’s agency finding was not based on an analysis of statutes or regulations within the ambit of the Tax Court’s expertise, but instead rested on widely applicable agency principles. Thus, we shall not accord any deference to the Tax Court’s legal analysis of the underlying agency principles. 7 I. AGENCY ANALYSIS A. GENERAL PRINCIPLES Writing for the Court of Appeals, Judge Chasanow described the essence of the principal-agent relationship as follows: According to the RESTATEMENT (SECOND) OF AGENCY, “Agency is the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act.” RESTATEMENT (SECOND) OF AGENCY § 1 (1958).

The creation of an agency relationship ultimately turns on the parties’ intentions as manifested by their agreements or actions. Green v. H&R Block, Inc., 355 Md. 488, 503 (1999). The agency relationship can arise from an express agreement or by inferences drawn from the parties’ words and conduct. Id.

Ascertaining the parties’ intent is the central focus of a court’s analysis. Id. at 505 . The inquiry has been framed as follows: There are two fundamental elements for the creation of the agency relationship: (1) some manifestation or indication by the principal to the agent that he consents to the agent’s acting for his benefit; and (2) consent by the agent to act for the principal. In sum, the agency relationship can arise only when there is mutual consent between the two parties that it should arise.

However, consent may be inferred from words or conduct, including acquiescence. Whereas, however, some manifestation of the principal’s consent must actually come to the attention of the agent, the agent need not necessarily communicate his consent to the principal if, under the circumstances, embarking on the purpose of the agency is, itself, a sufficient indication of consent. Id. at 505-06 (quoting W. Edward Sell, Sell On Agency § 7, at 7-8 (1975)). 8 To guide its analysis of the relationship between the putative principal and agent, a court may look at the following three factors: “(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. at 503. These factors are not “essential elements” of a principal-agent relationship, but instead are non-exclusive “considerations” to be “viewed within the context of the entire circumstances of the transaction or relations.” Id. at 506.

The party asserting a principal-agent relationship by inference has the burden of proving the existence of the relationship, “including its nature and its extent.” Id. at 504 (citations omitted). If that party produces “legally sufficient evidence . . . of an agency relationship,” whether an agency relationship exists becomes an issue of fact. Id. B. ANALYSIS OF THE RELATIONSHIPS 1.

Distinguishing the Entities As discussed above, Broadway and the hospitals are part of a larger corporate structure consisting of entities affiliated with JHHS. Here, the Tax Court treated “Johns Hopkins” and the hospitals as one and the same. The Tax Court started with the observation that the “basic facts of what was going on aren’t in dispute.” The Tax Court then used “Hopkins” as shorthand for the hospitals, stating “[i]t was an arrangement by, for lack of a burden, I’ll call it Hopkins and Broadway; that Hopkins on an annual basis entered into an agreement to pay a fixed amount of money to Broadway to supervise some of the Hopkins’ 9 employees[.]” The Tax Court also stated that “Hopkins paid attention . . . on an annual basis [to] how much they were being charged” but “it was not as detailed as it would have been if they hadn’t owned Broadway.” But, the Tax Court concluded, “it didn’t matter what they paid Broadway because if they paid too much, they would get it back at the end as profits.” The Tax Court’s conflation of “Hopkins” and the three hospitals permeated its description of how the supplies were chosen. For example, the Tax Court stated that “[t]he supplies were specified by Hopkins,” and then later, referring to the hospitals, stated that “[t]hey told [Broadway] what to buy, and those were the items that were purchased.” In addition, the Tax Court noted that the “supplies certainly were [for] the benefit of the hospital” and later stated that the supplies “were purchased as agents for Hopkins for the benefit of Hopkins so that they should not have been charged sales tax.” Tax Court’s conflation of the entities was factually incorrect and legally improper, but to understand why this is so requires at least a rudimentary understanding of some of the attributes of non-profit organizations.

Generally, a non-profit entity “is an organization in which no part of the income is distributable to its members, directors, or officers.” MARILYN E. PHELAN, NONPROFIT ORGANIZATIONS: LAW AND TAXATION, 2D § 1.1 (vol. 1, Nov. 2017 ed.). Although Maryland recognizes and allows for the formation of various forms of entities, including corporations, limited liability companies, and partnerships, “Maryland does not have a separate corporation code for nonprofit corporations.” Id. at § 1:33. Instead, in Maryland, non-profits usually take the form of a special corporation known as a non-stock corporation. Id.

Non-stock corporations do not have owners as they 10 are not permitted to issue capital stock; instead, they have “members” and “directors.” Md. Code Ann. (1975, 2014 Repl. Vol) Corporations and Associations Article (“C&A”) § 5- 202.8 In Maryland, certain “nonprofit organizations” may qualify for a sales tax exemption under TG § 11-204(a)(3). One of the requirements for this exemption is that the entity must be determined by the Comptroller to be a “charitable, educational, or religious organization.” TG § 11-204(a)(3)(ii), (c), and (d). The Court of Appeals has stated that “a determination of whether an institution is charitable must include a careful examination of the stated purposes of the organization, the actual work performed, the extent to which the work performed benefits the community and the public welfare in general, and the support provided by donations.” Comptroller of the Treasury v. Maryland State Bar Ass’n, Inc., 314 Md. 655, 669 (1989) (quotation omitted).

Thus, if an entity receives an exemption certificate from the Comptroller, it can reasonably be inferred that the Comptroller carefully examined the stated purposes and actual work performed by the entity. That’s the case here with respect to the three hospitals and JHHS, because the testimony and exhibits established that each qualified for the sales tax exemption under TG § 11-204(a)(3). And although the record does not indicate which of the categories—charitable, educational, or religious—applied, for present purposes, it 8 The record does not indicate whether these entities are non-stock corporations under Maryland law, and if so, how their internal affairs are governed. We can, however, take judicial notice from information available on the website of the Maryland State Department of Assessments and Taxation that the three hospitals and JHHS are, in fact, Maryland non-stock corporations. 11 suffices to note that the following three points are established inferentially by the evidence in the record.

One, the three hospitals and JHHS each established their own stated charitable, educational, or religious purpose. Two, each proved to the satisfaction of the Comptroller that the actual work they performed was in furtherance of their stated purpose. And three, each has its own board of directors and is separately managed and operated in accordance with their respective stated purposes. In other words, each of these entities is distinct from one another, both legally and in practice.

Under Maryland law, corporations are deemed separate and distinct from their stockholders. See Gosain v. Cnty. Council of Prince George’s Cnty., 420 Md. 197, 210 (2011). That’s generally true of subsidiaries and their parent companies.

Food Fair Stores, Inc. v. Blumberg, 234 Md. 521, 529 (1964). For income tax purposes, Maryland courts have considered whether a subsidiary corporation is a separate business entity apart from its parent corporation by assessing the following factors: 1) how dependent a subsidiary is on its parent company for income; 2) whether there is a circular flow of money from the parent company to the subsidiary and then back to the parent; 3) how much the subsidiary relies on the parent for its core functions and services; and 4) whether the subsidiary has substantive activity that is “in any meaningful way separate from” its parent. ConAgra Foods RDM, Inc. v. Comptroller of the Treasury, 241 Md. App. 547, 575 (2019); see also Gore Enter. Holdings, Inc. v. Comptroller of the Treasury, 437 Md. 492, 516-17 (2014); Comptroller of the Treasury v. Syl, Inc., 375 Md. 78, 106 (2003).

Here, the Tax Court blurred the distinction between Broadway, the hospitals, and JHHS without assessing any of these factors and without sufficient evidence in the record to do so. 12 Hospitals and universities are sophisticated entities doing business in complex and highly regulated industries. Indeed, the relationships between non-profit hospitals and affiliated for-profit entities raise complicated federal tax and other corporate issues. See, e.g., Andrea I. Castro, Comment, Overview of the Tax Treatment of Nonprofit Hospitals and their For-Profit Subsidiaries: A Short-Sighted View Could be Very Bad Medicine, 15 Pace L. Rev. 501 (1995); Melvin Horowitz, Corporate Reorganization: The Last Gasp or Last Clear Chance for The Tax-Exempt, Nonprofit Hospital?, 13 Am. J.L. & Med. 527 (1988).

Presumably the corporate structure and relationships among the various entities were established in furtherance of a carefully thought-out plan that took into consideration the relevant tax and corporate issues. And presumably the architects of this plan intended that this structure be maintained and honored, even when inconvenient or more costly to do so. The proceedings in the Tax Court—in which the only party involved in the litigation was at the lowest rung of the corporate ladder—yielded no evidence on which the Tax Court could properly treat the hospitals, JHHS, and Broadway as one and the same. 2. The Contracts Returning to the agency analysis that lies at the heart of this matter, as noted above, the central inquiry is whether each hospital and Broadway mutually intended to establish a fiduciary relationship.

The record is limited as to the hospitals’ intentions because none of the employees, officers, or directors from the hospitals testified at the Tax Court hearing. And, none of the witnesses called by Broadway purported to have such knowledge. 13 The hospitals did, however, express their intent through their execution of the contracts. See Credible Behav. Health, Inc. v. Johnson, 466 Md. 380, 393-94 (2019) (the intent of parties to a contract is discerned from the words of the contract); Adloo v. H.T. Brown Real Est., Inc., 344 Md. 254, 261 (1996) (“determining the intention of the parties to a contract involves construing the language of the contract, more particularly, the words of the subject clause”).

As acknowledged by Broadway in its brief and before the Tax Court, though it is true that the hospitals required cleaning services, it is not true that Broadway was the only company capable of providing such services. On this record, therefore, the relationships between Broadway and the three hospitals were voluntary and contractual.9 Thus, if one wanted to ascertain the intentions of the hospitals and Broadway with respect to the purchase of cleaning supplies, the contracts would be the first place to look. The Tax Court did this to a limited degree when it summarily ruled out an agency by express agreement. This was a start, but instead of jumping straight to the three factors discussed above, the Tax Court should have examined the contracts to determine the nature of the relationship they established.

Our own examination leads us to the conclusion that the contracts established arms- length relationships between Broadway and the hospitals. Mr. Seidl testified that Broadway “mimicked” the contracts used by Broadway’s more well-known national 9 This conclusion is one of the consequences of honoring the overall corporate plan in which Broadway and the hospitals were purposefully separated as distinct entities. 14 competitors, Sodexo, Crothall, and Aramark. Thus, the parties’ choice of contract template indicates a purposeful effort to create an arms-length relationship, notwithstanding their shared connection to JHHS. Moreover, under the plain language of each contract, and with slight variations in the specific wording of the contracts, Broadway was required to “provide” the cleaning supplies “to” the hospitals’ housekeeping employees.10 The word “provide” in this context is synonymous with words such as “bring,” “make available,” or “furnish,” none of which connote or confer the status of a purchasing agent of cleaning supplies.

So long as the supplies were permitted under the hospitals’ infectious control standards, Broadway was left to its own devices in choosing what, how much, and when. Broadway alone was 10 Section IX of the Howard contract provided: [Broadway] shall provide[] cleaning supplies and minor cleaning equipment to [Broadway] personnel performing housekeeping duties in and about the facility. It is understood that all paper and plastic supplies will be provided by the [C]lient. Major equipment such as buffing machines, floor scrubbers, vacuums, etc. are to be provided by the Client.

Section VIII of the Hopkins Hospital contract provided: [Broadway] shall provide cleaning supplies and equipment to Client personnel performing housekeeping duties in and about the facility. The provision of plastic trash can liners, paper restroom supplies and hand soap is the responsibility of the Client. Section VIII of the Bayview contract provided: [Broadway] shall provide cleaning supplies, minor and major cleaning equipment to [Broadway] and the Client personnel performing services in and about the facility. The [C]lient shall supply plastic trash can liners, paper restroom supplies, and hand soap. 15 responsible for payment for the products and coordinating the orders.

Broadway had no duty to disclose pricing data to the hospitals. If the prices of the supplies went down during the contract term, Broadway suffered the loss; if the prices went up, Broadway enjoyed the gain.11 Moreover, the contracts each contain an integration clause and a “no oral modifications” clause that preclude the assumption of any duties not expressed in the contracts. Each contract states: This agreement represents the entire Agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements, written or oral. . . . No amendment of this Agreement shall be valid and effective unless in writing and signed by the parties hereto. . . .

In the absence of fraud, which is not alleged here, integration clauses in contracts are generally enforceable. See Hovnanian Land Inv. Group, LLC v. Annapolis Towne Ctr. at Parole, LLC, 421 Md. 94, 126 (2011) (“Maryland law generally recognizes the validity and effect of integration clauses.”). This is especially so where, as here, the contracting parties are sophisticated entities.

See Cent. Truck Ctr., Inc. v. Cent. GMC, Inc., 194 Md. App. 375 , 391–92 (2010). Thus, the parties mutually agreed to cabin the terms of