Comptroller of the Treasury v. Clise Coal, Inc.

EYLER, JAMES R., J. The Comptroller of the Treasury, appellant/cross-appellee (“appellant”), appeals from an order of the Circuit Court for Allegany County, reducing a motor fuel tax assessment against Clise Coal Co., Inc., appellee/cross-appellant (“appellee”), from $9,036.28 to $5,491.90. The circuit court reasoned that a portion of the assessment, affirmed by the Maryland Tax Court, was not supported by substantial evidence. On appeal, appellant contends that it was not required to introduce affirmative evidence in support of its assessment because it could rely on a presumption of correctness. In response, appellee contends that the circuit court’s partial reversal of appellant’s assessment was correct.

On cross appeal, appellee contends that appellant was not authorized to base any portion of its assessment upon a methodology that disregarded appellee’s records; and the Tax Court abused its discretion by denying appellee’s request for a jury trial. We reverse in part and affirm in part the circuit court’s order, thereby affirming the Tax Court’s decision in its entirety. Factual Background Appellee owns a coal mining and trucking business, which operates in Maryland, West Virginia, and Pennsylvania. Pursuant to Title 9, subtitle 3 of the Maryland Code, Tax General Article, the State imposes a motor fuel tax on motor fuel sold ⁶⁹³ in the State.

Appellee holds a “special fuel user license” that allows it to purchase fuel in bulk without having to pay motor fuel tax to its seller. Each month, appellee must file a return in appellant’s office setting forth the amount of taxable fuel used and pay the tax on that fuel. The tax is payable on fuel used in Maryland but not fuel used in other states. Appellant has a statutory right to audit a license holder’s monthly fuel tax returns for accuracy.

Appellee has been the subject of such audits. Appellee’s vehicles operate on two different types of diesel fuel, also called “special fuel.” On-road vehicles must use lowsulphur “clear fuel,” which is subject to the motor fuel tax. High sulphur diesel fuel is permitted only for use in off-road equipment, such as bulldozers and earth movers. This off-road fuel is not subject to the motor fuel tax.

High sulphur fuel (“dyed fuel”) is injected with dye that changes its color so that an inspection officer can tell whether a vehicle is using dyed fuel simply by performing a visual inspection. Appellee stored both low and high sulphur fuel at its facilities. In February 2003, two of appellee’s vehicles were stopped by an inspection officer who withdrew fuel and found that the vehicles were using dyed fuel in on-road vehicles. The officer issued citations for each truck, and appellee paid two $1,000 fines.

As a result, appellant audited appellee’s records. By statute, appellant is authorized to audit appellee for four years from the date of the audit. Accordingly, appellant audited appellee for the period from March 1999 to March 2003. Some of this time period had been the subject of prior audits.

As described by the Tax Court, the audit resulted in the following findings: 1) The fleet miles per gallon reported by [appellee] was higher than that determined by [appellant]; 2) [Appellee] reported receipts, inventories and usage from fuel stored in out-of-state tanks on its Maryland return; ⁶⁹⁴ 3) [Appellee] reported fuel usage by odometer miles rather than the actual fueling amounts; 4) [Appellee] maintained inadequate receipts of fuel purchased; 5) [Appellee] maintained inadequate documentation to backup [sic] its summary sheet of off-road usage; 6) Additional diesel powered vehicles were fueled from [ap- ! pellee’s] bulk storage tanks, which fuel was not reported on [appellee’s] Maryland returns; 7) [Appellee’s] inventory records inaccurately calculated inventory levels by erroneously using readings for tanks [sic] sizes which were not the actual tanks maintained by [appellee]. Accordingly, appellant determined that appellee’s records were inadequate and computed fuel usage based upon a miles per gallon formula. Appellant determined the mileage that each of appellee’s vehicles had been driven during the audit period from odometer readings. Appellant then calculated the average miles per gallon for the fleet.

Appellant divided the number of miles driven by the fleet by the estimated miles per gallon to determine the amount of fuel used. Appellant used this calculation to develop the initial assessment. Appellee pursued the administrative review process within appellant’s office. At the hearing, the hearing officer determined, based upon evidence submitted by appellee, that the actual miles per gallon that its vehicles achieved was higher than that originally estimated by appellant, which would result in a lower amount of fuel used.

Appellant reassessed, using a new miles per gallon figure, but it also added additional vehicles to its calculation. The initial assessment had included only appellee’s vehicles regulated by the International Fuel Tax Agreement (“IFTA”). 1 In ⁶⁹⁵ the reassessment, appellant also included non-IFTA vehicles. The addition of these non-IFTA vehicles increased the gallons of fuel used by approximately 14,000 gallons. Appellant then issued a reassessment in the amount of $15,401.90 plus interest and penalty.

Appellee then appealed to the Tax Court. Appellee requested a jury trial, which the Tax Court denied without explanation. The Tax Court conducted a hearing at which both sides presented evidence. The Tax Court issued findings of fact and conclusions of law, thereby affirming the assessment and interest, but waiving the penalty.

Appellee then filed a petition for judicial review in circuit court. In circuit court, appellant acknowledged an error in calculation and agreed to reduce the assessment to $9,036.28. The circuit court reversed the Tax Court’s decision with respect to the non-IFTA portion of the assessment on the ground that it was not supported by substantial evidence and affirmed the remainder of the decision. The circuit court’s decision resulted in an assessment in the amount of $5,491.90.

This appeal followed. Discussion Substantial Evidence Requirement Appellant argues that the “substantial evidence requirement within the standard of review does not require [appellant] to introduce affirmative evidence to support an assessment.” I. The Motor Fuel Tax Appellee is permitted to buy diesel fuel tax free as a “special user,” pursuant to a license issued by the State. Maryland Code (2004 Repl.Vol.) § 9-318 of the Tax-General Article (“T.G.”). Those who obtain such a license are subject to certain obligations, which include keeping records, for four ⁶⁹⁶ years, of the motor fuel that the licensee buys, receives, sells, delivers, or uses in Maryland, including bills of lading, invoices, and any other pertinent records required to be maintained by the Comptroller.

See T.G. § 9-309. Further, special users must make such records available for inspection by the Comptroller at any time during business hours. Id. T.G. § 13-406, entitled “Motor fuel tax assessment when records not kept,” states that “[i]f a person fails to keep the records required under § 9-309 ... the Comptroller may: (1) compute the motor fuel tax due by using the best information in the possession of the Comptroller, and (2) assess the tax due.” Such an assessment is prima facie correct.

T.G. § 13-411. If the taxpayer wishes to challenge the Comptroller’s initial assessment, it can do so through an application to the Comptroller to revise the assessment. T.G. § 13-508(a)(l). If the taxpayer is still dissatisfied with the revised assessment, it can appeal to the Tax Court.

T.G. § 13-510. “An appeal before the Tax Court shall be heard de novo and conducted in a manner similar to a proceeding in a court of general jurisdiction sitting without a jury.” T.G. § 13-523. The burden is upon the taxpayer to show error in the assessment. Fairchild Hiller Corp. v. Supervisor of Assessments for Washington County, 267 Md. 519, 523 , 298 A.2d 148 (1973) (citing State Tax Comm’n v. C. & P. Tel. Co., 193 Md. 222 , 66 A.2d 477 (1949)). “Absent affirmative evidence in support of the relief being sought or an error apparent on the face of the proceeding from which the appeal is taken, the decision, determination, or order from which the appeal is taken shall be affirmed.” T.G. § 13-528(b).

II

Standard of Review A final order of the Tax Court is subject to judicial review as provided in sections 10-222 and 10-223 of the State Government Article (“S.G.”). T.G. § 13-532(a)(l). “Any party to the Tax Court proceeding, including a governmental unit, may appeal a final order of the Tax Court to the circuit court.” ⁶⁹⁷ T.G. § 13-532(a)(2). The inquiry in this Court on appeal is not whether the circuit court erred, but rather whether the administrative agency erred. Consumer Prot.

Div. v. Morgan, 387 Md. 125, 160 , 874 A.2d 919 (2005). In reviewing the agency’s decision, we apply the same standard applicable to the circuit court. “[J]udicial review of decisions of the Maryland Tax Court is severely limited.” Comptroller of the Treasury, Income Tax Div. v. Diebold, Inc., 279 Md. 401, 407 , 369 A.2d 77 (1977). The court may: (1) remand the case for further proceedings; (2) affirm the decision of the agency; or (3) reverse or modify the decision if any substantial right of the petitioner may have been prejudiced because a finding, conclusion, or decision of the agency: (i) is unconstitutional; (ii) exceeds the statutory authority or jurisdiction of the final decision maker; (iii) results from unlawful procedure; (iv) is affected by any other error of law; (v) is unsupported by competent, material, and substantial evidence in light of the entire record as submitted, or (vi) is arbitrary and capricious. S.G. § 10-222(h).

S.G. section 10-222(h)(v) embodies the substantial evidence standard of review. Spencer v. Md. State Bd. of Pharmacy, 380 Md. 515, 529 , 846 A.2d 341 (2004). “That provision grants a court authority to overrule an agency’s factual finding only when the finding is ‘unsupported by competent, material, and substantial evidence in light of the entire record as submitted.’ ” Id. at 529 , 846 A.2d 341 (quoting S.G. § 10-222(h)(v)). The substantial evidence standard of review asks “whether a reasoning mind reasonably could have reached the factual conclusion the agency reached. This need not and must not be either judicial fact-finding or a substitution of judicial judgment for agency judgment.” Fairchild Hiller ⁶⁹⁸ Corp., 267 Md. at 521-522 , 298 A.2d 148 (quoting Ins.

Comm’r v. Nat’l Bureau, 248 Md. 292, 309-310 , 236 A.2d 282 (1967)). A reviewing court “must review the agency’s decision in the light most favorable to it----The agency’s decision is prima facie correct and presumed valid and ... it is the agency’s province to resolve conflicting evidence.” Md. Aviation Admin. v. Noland, 386 Md. 556, 571-72 , 873 A.2d 1145 (2005) (quoting Bd. of Physician Quality Assurance v. Banks, 354 Md. 59, 67-69 , 729 A.2d 376 (1999)) (internal citations omitted).

III

Sufficiency of Evidence A. Appellant Was Not Required To Produce Affirmative Evidence Appellant’s tax assessment is prima facie correct. TG § 13-411. The burden is upon the taxpayer to show error in the assessment. Fairchild Hiller Corp., 267 Md. at 523 , 298 A.2d 148 (citing State Tax Comm’n v. C. & P. Tel.

Co., 193 Md. 222 , 66 A.2d 477 (1949)). “Absent affirmative evidence in support of the relief being sought or an error apparent on the face of the proceeding from which the appeal is taken, the decision, determination, or order from which the appeal is taken shall be affirmed.” T.G. § 13-528(b). Accordingly, appellant had no duty to present affirmative evidence supporting its assessment, in addition to the assessment itself and the underlying methodology, but rather, the burden was on appellee to show error or to present evidence that appellant’s assessment was incorrect. Under federal tax practice, the burdens of production and persuasion are similarly on the taxpayer. See T. Ct. Rule 142(a) (“The burden of proof shall be upon the petitioner.”).

Several factors support this rule: “the usual evidentiary rule imposing proof obligations on the moving party, ... the presumption of administrative regularity, thé likelihood that the taxpayer will have access to the relevant information, and the desirability of bolstering the recordkeeping requirements of the [Tax] Code.” United States v. Rexach, 482 F.2d 10 , 16 ⁶⁹⁹ (1st Cir.1973). These factors apply equally in the context of Maryland tax law. Appellee relies upon the federal tax case, United States v. Janis, 428 U.S. 433 , 96 S.Ct. 3021 , 49 L.Ed.2d 1046 (1976), for the proposition that the presumption of correctness does not apply when the assessment authority provides no basis at all for the assessment. In Janis , the Supreme Court examined whether a tax assessment that relied exclusively on illegally seized evidence could be sustained if the illegally seized evidence could not be used to prove the tax liability.

There, the court ruled that when the assessment was “naked” and “without any foundation whatsoever,” “the determination of tax due then may be one without rational foundation and excessive, and not subject to the usual rule with respect to the burden of proof in tax cases.” United States v. Janis, 428 U.S. 433, 441 , 96 S.Ct. 3021 , 49 L.Ed.2d 1046 (1976) (internal quotation marks and citations omitted). The Maryland Court of Appeals applied a similar analysis in Balt. County v. Kelly, 391 Md. 64 , 891 A.2d 1103 (2006), an appeal from a decision by the Worker’s Compensation Commission. Like section 13-411 of the Tax-General Article, the Worker’s Compensation statute provides that the Worker’s Compensation Commission’s decision is prima facie correct on appeal and that the party seeking reversal has the burden of proving that the Commission’s decision was wrong.

The provision that the decision of the Commission shall be “prima facie correct” and that the burden of proof is upon the party attacking the same does not mean, therefore, that if no facts are established before the Commission sufficient to support its decision, that there is any burden of factual proof on the person attacking it, for the decision of the Commission cannot itself be accepted as the equivalent of facts which do not exist.... On the other hand, where the decision of the Commission involves the consideration of conflicting evidence as to essential facts, or the deduction of permissible but diverse inferences therefrom, its solution of such conflict is presumed to be correct, and the burden of ⁷⁰⁰ proof is upon the party attacking it to show that it was erroneous. Kelly, 391 Md. at 75-77 , 891 A.2d 1103 . These decisions did not require appellant to produce evidence at the hearing before the Tax Court, affirmatively supporting its assessment, in addition to proving the assessment itself.

The question is whether there is substantial evidence in the record as a whole to support the Tax Court’s decision. B. Substantial Evidence Regarding Non-IFTA Vehicles Appellee argues that appellant never produced any evidence to show that appellee’s non-IFTA vehicles were ever fueled from bulk storage tanks. 1. Evidence Supporting the Assessment There was substantial evidence in the record to support appellant’s assessment. Richard Sine, a Field Compliance Inspector for the Comptroller’s Office, testified that on February 7, 2003, two of appellee’s drivers, operating IFTA vehicles, were found using untaxed dyed fuel on the highway during