Comptroller of the Treasury v. Chesapeake & Potomac Telephone Co.

Marbury, J., delivered the opinion of the Court. At issue is whether appellee, The Chesapeake and Potomac Telephone Company (Telephone Company), is subject to Maryland retail sales tax on the money received from certain subscribers for the use of private line teletypewriter facilities. The appellant, Comptroller of the Treasury, claims that this money is payment for the rental of tangible personal property (equipment) and is subject to the tax under the following definition of “sales” set out in Code (1965 Replacement Vol.), Article 81, Section 324 (d) : “‘Sale’ and ‘selling’ mean any transaction whereby title or possession, or both, of tangible personal property is or is to be transferred by any means whatsoever for a consideration including rental, lease or license to use, or royalty, by a vendor to a purchaser, or any transaction whereby services subject to tax under § 325 of this subtitle are rendered for consideration to any purchaser by any vendor. Such consideration may be either in the form of a price in money, rights or property or by exchange or barter, and may be payable immediately, in the future, or by installments. * * *.” (Emphasis added.) The appellee Telephone Company contends that it is not obliged to pay the tax mentioned in Section 325 by virtue of the exemption granted to those who supply communication services, as defined in Section 326 (n) of the same Article, to wit: “326.

Exemptions. The tax hereby levied shall not apply to the following sales: h= * * ³⁴⁸ (n) Transportation and conmiunication services and newspapers.—Sales of transportation and 'communication .services, including the printing and sales of newspapers of any and all types.” The sole question to be resolved on this appeal is whether the Telephone Company is furnishing to its teletypewriter subscribers a communication service, or is it renting to them tangible personal property, i.e., equipment. The facts which give rise to this appeal were adduced at a hearing before Edward A: Smith, a hearing officer for the appellant Comptroller’s office, who considered various exhibits introduced by both parties, as well as the testimony of the lone witness at the hearing, Joseph B. Stack, an employee of the Telephone Company for some twenty-three years, who testified on behalf of the appellee herein. At the conclusion of the hearing, Smith filed an opinion in which he concluded that the Telephone Company was subject to the sales tax imposed by Article 81, Section 325, since in his view the money was received by it from its subscribers for the rental of tangible personal property.

Pursuant to Article 81, Section 352, an appeal was taken from the Comptroller’s decision to the Baltimore City Court, and on that appeal Judge Cullen reversed the Comptroller’s final determination and found that the payments here involved were exempt since they were deemed to be payments for communication services and thus not subject to the sales tax. The Comptroller has appealed Judge Cullen’s decision and accompanying order. The appellee’s telephone and teletypewriter operations can be conveniently divided into two categories: “Exchange Service” and “Private Line Service”. In the Exchange Service the subscriber is able to communicate with all other subscribers to the service, whereas in Private Line Service, the subscriber is limited to communication between specified locations, but has exclusive use of the communication channels connecting those locations.

Except for the difference between oral and written communications, the telephone and teletypewriter services supplied by the appellee are closely comparable. In each the sending and receiving instruments are located on the premises of the sub ³⁴⁹ scriber, in each the subscriber himself may send and receive messages, in each the function of the appellee Telephone Company is to furnish and maintain the communication channels and the instruments at either end so that the subscriber can communicate satisfactorily. In the above respects there is no difference between telephone and teletypewriter or between private line service and exchange service. These similarities have some significance to the resolution of the instant question since the appellant admits that payment for exchange telephone service is payment for communication service within the Section 326 (n) exemption.

Involved in the present appeal are private line teletypewriter networks furnished by the Telephone Company to seven subscribers in this State. The largest subscriber is the Bethlehem Steel Company, and the present proceeding arose out of an inquiry made by the Comptroller as to the private line teletypewriter networks furnished to it by the appellee. For this reason, and because Bethlehem has the most complicated teletypewriter system, the evidence in the present case was adduced primarily with respect to Bethlehem Steel, although both parties to this appeal concede that the same principles apply to all seven subscribers. The appellee Telephone Company furnishes four private line teletypewriter networks to Bethlehem Steel: (1) The Interstate Network, (2) the Steel Production Network, (3) the Transportation Network, and (4) the Shipyard Network.

While the Interstate Network is not deemed by the appellant to be subject to the Maryland sales tax, testimony was introduced into evidence concerning that network, since it constitutes an integral part of the teleptypewriter communication system supplied to Bethlehem. The Interstate Network connects the principal office of Bethlehem Steel Company in Bethlehem, Pennsylvania, with its Sparrows Point plant and other plants, and the network is used to communicate information relating to orders and production. The Steel Production Network is used to control steel production at the Sparrows Point plant, and it connects the executive offices there with the laboratory and with the open hearth locations at which the steel is actually produced. This ³⁵⁰ Steel Production Network is made up of nineteen teletypewriters interconnected by cable; all of the stations within this network are located at the Sparrows Point plant.

The Transportation Network is used for communications controlling the movement of material into and out of the Sparrows Point plant, and it is comprised of seven teletypewriters interconnected by cable. Three of these are within the Steel Company’s office building, while the other four are located at the local railroad yards of the Western Maryland Railway Company, the Baltimore and Ohio Railroad Company, and two yards of the Pennsylvania Railroad Company. Three of these yards are at Sparrows Point, the fourth, the Wise Avenue yard of the Pennsylvania Railroad, is outside the confines of the plant. Lastly, the Shipyard Network connects the various offices and departments of the Key Highway plant of Bethlehem Steel and is used for communications controlling ship repair work done there.

The Shipyard Network is composed of twelve teletypewriters interconnected by cable, with all the teletypewriters located at the Key Highway plant of Bethlehem. In all four of the above teletypewriter networks, the Telephone Company owns, installs and maintains not only the transmitting and receiving instruments, but also the wires, cables and other apparatus connecting them. All the plants involved in the present case have both telephone and teletypewriter service, and the telephones are connected through the same cables as the teletypewriters, albeit by different wires. The subscribers furnish their own operators for the Telephone Company’s teletypewriters, as well as the electricity for their operation.

In the case, of the Transportation Network and the Interstate Network, the teletypewriters are connected through the Telephone Company’s central office located at 320 St. Paul Place, Baltimore, Maryland, whereas in the case of the other networks the teletypewriters are interconnected locally. The means used to furnish communication paths between stations in private line networks are exclusively within the discretion of the Telephone Company and the method used to interconnect these stations does not affect the rate charged the subscriber, who ordinarily does not know or care how the con ³⁵¹ nections are made, his interest being limited to his ability to communicate. Pursuant to Code (1957), Article 78, Section 28 (a), the Telephone Company is required to file with the Public Service Commission tariff schedules of its rates and charges. The Company is not permitted to furnish the services covered by such schedules except in accordance with the terms thereof.

Section 29-A of the Telephone Company’s tariff, which has been filed with the Public Service Commission, specifically applying to private line teletypewriter networks, expressly defines such networks as a service, using the following language: “B 1. “Private line teletypewriter service and private line Morse service are those of providing the requisite facilities, including channels and station equipment, to enable the customer and authorized users to communicate by means of teletypewriter or Morse equipment between specified locations continuously or for regularly recurring periods at stated hours, seven days per week.” (Emphasis added.) The charges applicable to such networks are set out in Section 12 of the Company’s tariff, dealing specifically with mileage and cable carrying charges. The tariff does not provide for a rental of equipment. Nevertheless, on at least two occasions, when the Telephone Company billed the Bethlehem Steel Company it used language in the bills which indicated some of the amount owed was for “Rental Teletypewriter Facilities”. The Telephone Company’s employee testified, however, that the language used in the bills was only a colloquialism and that it was often used to describe situations that are not rentals at all, for example, “rental on residence telephone.” All installation and maintenance work on the teletypewriters is done by employees of the Telephone Company under its exclusive control.

The record showed affirmatively that employees of Bethlehem Steel are not permitted to install, repair or