Comptroller of the Treasury v. Glenn L. Martin Co.

Bruñe, C. J., delivered the opinion of the Court. This case arises out of a claim by The Glenn L. Martin Company (now known as “The Martin Company” and referred to below simply as “Martin”) for the refund of Maryland sales and use taxes paid by Martin to the Comptroller on purchases of tangible personal property made by Martin during the period from March 1, 1951, through April 30, 1954, pursuant to three so-called facilities contracts between Martin and departments of the United States Government. The Comptroller denied Martin’s claim for refund, Martin appealed to the Circuit Court for Baltimore County and that Court, by its order, reversed the action of the Comptroller and entered judgment for Martin in the amount of $311,539.28. The Comptroller appeals from that order.

The amount of the judgment was stipulated by both parties to be correct, if Martin should be held entitled to a refund under paragraph I of its claim, and the decision of the Circuit Court was based upon contentions made in that paragraph. The essential facts of this case are very similar to those pertaining to the Army contract involved in Comptroller v. Aerial Products, Inc., 210 Md. 627, 124 A. 2d 805 . Martin is a manufacturer of airplanes and parts and of missiles or special weapons for military use. As a result of the Korean War the United States wanted such articles in greater quantity than Martin’s existing facilities could produce, and Martin did not have the capital resources to expand its productive capacity to meet the Government’s needs.

Martin and the Government accordingly entered into three contracts, in two of which the Navy was the interested Department and ²⁴⁰ in the other the Air Force, in order to supply Martin with the tools and equipment needed to produce the articles wanted by the Government. Under these contracts (referred to below as the “facilities contracts”) the Government was to furnish to Martin such available tools and equipment as it had in reserve, Martin was not to procure facilities known to be so available, Martin was to purchase other facilities that might be needed, title thereto was to pass to the Government upon delivery thereof to Martin, the Government was to reimburse Martin for the cost of facilities purchased pursuant to the contract and Martin was to be permitted to use the facilities free of charge or rent in order to manufacture munitions for the Government. All articles purchased by Martin were to be tagged so as to indicate Government ownership and they were so tagged. The Government had the right at any time to remove any property to which it acquired title pursuant to the contract and in one instance, involving a milling machine valued at $200,000, it exercised this power.

The Navy contracts further provided that the Government should have the right to inspect and (at least under some circumstances) to reject property purchased by Martin before payment was completed, but generally all items that were within the scope of the contracts had to be accepted, subject to provisions relating to the correction of defects, if any should exist. Provisional payments were to be made by the Government to Martin, and the Government was to have a lien for advance payments on articles contracted for or acquired under any of the facilities contracts “except to the extent that the Government, by virtue of any other provisions of this contract shall have valid title to such articles, things, materials or other property as against other creditors of the contractor.” The Navy facilities contracts also contained provisions under which the Government would reimburse Martin for any sales and use taxes imposed by any state or local taxing authorities if Martin paid the same under protest and took appropriate steps to preserve any claims for refund. The Air Force contract contained a somewhat similar provision for reimbursement of “all taxes * * * properly and legally taxed, assessed ■or imposed upon the Contractor's interest made or created ²⁴¹ pursuant to the provisions of this contract with respect to part or all of the facilities provided hereunder or the use thereof.” None of the facilities contracts used the words “for resale to the Government” which are found at two or more points in the Army contract involved in the Aerial Products case where the facilities to be acquired or purchased thereunder are spoken of as being so acquired or purchased. None of them permits Martin to make a profit on the resale of any of the facilities to the Government.

The first of the two principal questions presented in this case is whether or not the purchases of facilities made by Martin between 1951 and 1954 under the facilities contracts were subject to sales or use taxes under the provisions of Article 81 of the Code relating to such taxes as they read at the times when the purchases in question were made. The second, which arises only if the answer to the first question is “no”, is whether or not such purchases may constitutionally be subjected to sales and use taxes by amendments to Article 81 of the Code effected by Chapter 3 of the Acts of 1957, which that Act undertook to make retroactive to July 1, 1947, which was the effective date of the Sales and Use Tax Acts adopted in that year. Taxability Prior to January, 1957. The Comptroller contends that the dominant purpose of Martin in making the purchases in question was to build up its own production facilities and that no purpose of the purchaser to resell the property was shown.

This contention is rested heavily on the absence from the facilities contracts of the words “for resale to the Government,” on the absence of any profit to Martin on sales of the facilities to the Government and on the claim that Martin could, for at least a “taxable moment,” use the facilities before title passed to the Government. The Sales Tax and Use Tax Acts are included as sub-titles in Article 81 of the Code (1951), and references below to pertinent portions of those Acts as in force during the years 1951-1954, inclusive, will be made simply by section numbers. ²⁴² Section 320 (d), a part of the Sales Tax Act, defines “sale” as including “any transaction whereby title or possession, or both, of tangible personal property is * * * transferred * * * for a consideration by a vendor to a purchaser * * Section 320 (f) defines a “retail sale” or a “sale at retail” as including “the sale in any quantity or quantities of any tangible personal property” and states that “[S]aid term shall mean all sales of tangible personal property to any person for any purpose other than those in which the purpose, of the purchaser is to resell the property so transferred in the form in which the same is, or is to be received by him, * * *.” The Use Tax Act is complementary to the Sales Tax Act (Comptroller v. Crofton Co., 198 Md. 398 , 84 A. 2d 86 , Comptroller v. Thompson Trailer Corp., 209 Md. 490 , 121 A. 2d 850 ). Judge Raine, in his comprehensive opinion in the Circuit Court, said in part: “The language of the Use Tax sections differs from the Sales Tax provisions, but there is nothing in the record before this Court to indicate what, if any, portion of the taxes paid are ‘Use’ Taxes and not ‘Sales’ Taxes. * * * The Comptroller concedes, and it is well established by administrative interpretation that the taxes are complementary and that the Use Tax only applies to those transactions subject to a Sales Tax, but on which no tax has been paid. Consequently, if the transactions are not subject to the Sales Tax, they are not subject to the Use Tax.” To this we add the following passage from Judge Collins’ opinion in the Aerial Products case ( 210 Md. 631 -632) : “At the argument in this Court the appellant [Comptroller] admitted that there was no evidence under which the Maryland Use Tax could be collected.

The question here, therefore, involves only the Maryland Retail Sales Act.” In the present case both sales taxes and use taxes are involved, but they have been dealt with throughout the proceedings on the basis that the exclusion stated in Section 320 (f) was as applicable to use taxes as to sales taxes. This is shown by the absence of any breakdown between the two types of taxes, by the stipulation above mentioned as to the amount, if any, which Martin would be entitled to recover, by the Opinion of the Comptroller (signed by the Hearing ²⁴³ Officer), in which it is said that “[e]xactly this same test [whether Martin purchased the property for resale or for manufacturing its own products] should be used in determining whether or not the facilities purchased outside the State of Maryland were subject to the use tax”, by the concession in the trial court above referred to, and by the absence of any argument for separate treatment in the appellant’s brief. 1 On this state of the record we think that no question as to possibly different treatment for the two taxes is before us for decision. Rules 831 c 2 and 4 (relating to Contents of Briefs) and Rule 885 (relating to Scope of Review) of the Maryland Rules; Comptroller v. Aerial Products, Inc., supra, and cases therein cited at 210 Md. 645 . We think that the Aerial Products case, supra, and Baltimore Foundry & Machinery Corp. v. Comptroller, 211 Md. 316 , 127 A. 2d 368 , are conclusive in establishing the sufficiency of Martin’s purpose to resell the facilities purchased by it to the Government to obtain the benefit of the exclusion under Section 320 (f), as in force in 1951-1954, since these cases establish the rule that under that Section the purpose of the purchaser to resell the property need not be his sole purpose in making the purchase in order to make the exclusion operative.

The absence from the facilities contracts here involved of the words “for resale to the Government” is not controlling. The contracts made it perfectly clear that title to facilities purchased by Martin was to be transferred to the Government immediately upon delivery of the equipment to Martin, and the Government became obligated to reimburse Martin for the cost thereof. The right of rejection reserved under the Navy contracts, the precise scope of which is somewhat ²⁴⁴ obscure, still would not detract from Martin’s purpose to resell to the Government, nor would it prevent the passage of title to the Government when the equipment was delivered to Martin. Likewise, in view of this provision for the immediate passage of title to the Government upon delivery of the equipment to Martin, there was no moment at which Martin could use the equipment prior to the passage of title.

Even if there had been such an interval of time, the result would not have been altered. See Baltimore Foundry & Machinery Corp. v. Comptroller, supra, where the fact that some time might elapse between the purchase of a pattern by the foundry and its resale to the customer did not change the result. The appellant urges that the absence of any profit to Martin on the resale of equipment to the Government manifests a lack of genuine purpose to resell. We think that this does not follow.

In the Baltimore Foundry case, the expectation or realization of a profit on resale was regarded as a factor indicating that a genuine resale was intended, but there was no possibility of a profit to the contractor on resale under the Army contract in the Aerial Products case. In the latter case, as in this, the contract provided for resale to the Government at cost. The Retroactive Amendments. The opinions in the Aerial Products and Baltimore Foundry cases were filed, respectively, on July 30, and December 6, 1956.

The next session of the General Assembly held thereafter opened in January, 1957, and one of the first bills enacted became Chapter 3 of the Acts of 1957, approved on January 28th of that year. This Act was declared (by Section 5 thereof) to be an emergency measure and it was therefore stated to take effect from the date of its passage. In one sense this declaration as to the effective date was an understatement, since the Act undertook to amend certain provisions of the Sales and Use Tax Acts as of July 1, 1947. There is no question that this enactment was a direct consequence of the Aerial Products and Baltimore Foundry de ²⁴⁵ cisions and was intended to bring about an opposite result in similar cases, past as well as future.

The Act contains three recital clauses. These, so far as here relevant, say that “it is and has always been the intent of the General Assembly * * * that the definition of ‘Retail Sale’ and ‘Sale at Retail’ should include all sales, except sales in which the sole purpose of the purchaser is to resell the tangible personal property * * that “the definition of ‘Use’ in the Maryland Use Tax should exclude only such property * * * which is held solely for resale in the regular course of business * * and that “the uniform administrative interpretation and enforcement by the Comptroller * * * since the inception of the Retail Sales Tax Act and the Maryland Use Tax has been in conformity with the provisions of this ACT * * (Italics supplied.) The word “ACT” was substituted for the word “amendment” as the last word in the above quotation by an amendment made while the bill was under consideration by the Legislature. These recitals do not constitute a part of the actual enactments made by the statute. Hammond v. Frankfeld, 194 Md. 487 , 71 A. 2d 482 ; Gibson v. State, 204 Md. 423 , 104 A. 2d 800 .

They do not in terms state the law to have been otherwise than as this Court determined it to be in the Aerial Products and Baltimore Foundry cases; and if they had undertaken to do so, they would, to that extent, have encountered an insurmountable constitutional obstacle to their validity. Md. Declaration of Rights, Art. 8; Crane v. Meginnis, 1 Gill & J. 463, 476; Baltimore v. Horn, 26 Md. 194 ; Marburg v. Mercantile Bldg. Co., 154 Md. 438 , 140 A. 836 ; Montgomery County v. Bigelow, 196 Md. 413 , 77 A. 2d 164 . We turn then to the operative provisions of Chapter 3 of the Acts of 1957.

The first section added to the Sales Tax Act a new paragraph of sub-section (f) of Section 320, designated as (6). The second section of the Act amended the definition of “use” in Section 368 (d), which is a part of the Use Tax Act. Each of these sections was enacted as “effective July 1, 1947.” The third section of the Act exempted any person from criminal prosecution or penalties “because of any violation of the provisions of these sections which oc ²⁴⁶ curred prior to the passage of this Act.” (“These sections” are not identified, but presumably mean Section 320 (f) (6) and 368 (d) as added or amended by Chapter 3, Acts of 1957.) Section 3 was evidently intended in part to avoid making the Act an ex post facto statute. It also states that the Act shall not render taxable any sale or use which was exempt from taxation under the expressed terms of Section 322 or Section 370.

(In the Baltimore Foundry case, the sales of patterns to the Foundry Corporation were held to be excluded from taxability under Section 321 by the definition of “retail sale” or “sale at retail” contained in Section 320 (f) and not by reason of an exemption under Section 322. See 211 Md. at 319 .) The fourth section of Chapter 3 of the Acts of 1957 is a separability clause, and the fifth .section (as already noted) is the emergency measure clause. Section 320 (f), as amended by Chapter 3 of the Acts of 1957, so far as here material, reads as follows: “For the purpose of the tax imposed by this subtitle, the term ‘sale at retail’ shall include but shall not be limited to the following: * * * (6) Sales of tangible personal property * * * to any person who will use the same as facilities, tools, tooling, machinery or equipment (including, but not limited to ■dies, molds and patterns) even though such person intends to transfer and/or does transfer title to such property or ■service either before or after such person uses the facilities, tools, tooling, machinery or equipment.” Then follows a provision exempting from taxation a resale, pursuant to a contract, made at a price not less than the cost to the purchaser-reseller of the property acquired in a transaction declared taxable by the quoted portion of paragraph (6). The principal amendment to Section 368 (d) was the addition of this ■ sentence to the definition of the term “use”: “This term shall also include but not be limited to use of facilities, tools, tooling, machinery or equipment (including, but not limited to dies, molds and patterns) by a purchaser thereof even though he transfers title to another either before or after use by him and without regard to whether title is ..transferred to the other within or without this State.” Obviously these provisions are intended to cover just the ²⁴⁷ kinds of transactions here involved, and equally obviously they are retroactive.

The question is: Are they valid ? Both Article 23 of the Maryland Declaration of Rights and the Due Process Clause of the Fourteenth Amendment to the Constitution of the United States are invoked by the appellee against the validity of Chapter 3 of the Acts of 1957. Since that Act was passed after this case had been submitted to the Circuit Court on appeal from the Comptroller’s action, the question as to the validity of the Act was raised by amendment of the appellee’s original petition with regard to the questions of law presented. It is well established that a tax is not necessarily invalid simply because it is retroactive.

See Diamond Match Co. v. State Tax Comm., 175 Md. 234 , 200 A. 365 , and the exhaustive review of authorities therein contained; Leser v. Wagner, 120 Md. 671 , 87 A. 1040 , affd. sub nom.; Wagner v. Baltimore, 239 U. S. 207 ; Welch v. Henry, 305 U. S. 134 ; to cite only a few of many cases. There are, however, a number of cases in which retroactive taxes have been held invalid as violative of due process, to some of which we shall refer below. The problem is the familiar one in due process cases as to where the line should be drawn. It is not easy of solution, and it is difficult, if not impossible, to deduce a clear line of demarcation applicable to all cases.

The question of the validity of retroactive tax laws has arisen in a variety of circumstances and has been met in several different ways. We may first note the so called ratification cases, among which United States v. Heinszen & Co., 206 U. S. 370 , is probably the leading case. It upheld an Act of Congress which validated customs duties previously imposed under Presidential, rather than Congressional, authority. Other Supreme Court decisions had established the lack of power to impose such duties without the authorization of Congress.

The case was rested squarely upon ratification of the acts of an agent done without prior authority from the principal. The Heinszen case was followed in Tiaco v. Forbes, 228 U. S. 549 , and in Rafferty v. Smith, Bell & Co., 257 U. S. 226 . In Tiaco v. Forbes, 228 U. S. at 556, Mr. Justice ²⁴⁸ Holmes thus stated the ratification doctrine: “[I]t generally is recognized that * * * where the act originally purports to be done in the name and by the authority of the state, a defect in that authority may be cured by the subsequent adoption of the act. The person who has assumed to represent the will and person of the superior power is given the benefit of the representation if it turns out that his assumption was correct. [Cases cited.]” But the doctrine is not without limitations, as was held in Forbes Pioneer Boat Line v. Board of Commissioners, 258 U. S. 338 .

There the plaintiff boat line sued to recover tolls charged by the defendant board for the use of a canal lock made in or prior to 1917. At that time the Board had no power to impose such charges. As the report of the original case below, ( 77 Fla. 742 ) shows, the canal and lock were parts of a drainage system which the Board was authorized to construct and maintain, and the statute imposed taxes on lands within the drainage district to cover the expenses of the Board in the construction and maintenance of the system, but it said nothing whatever about tolls for use of the canal or locks. In 1919 the Florida Supreme Court upheld the plaintiff’s declaration, and on the very day that it did so. the Florida Legislature passed an act to validate the collection of tolls.

The Florida Supreme Court later upheld this act, basing its decision on the Heinszen case. The Supreme Court of the United States reversed the judgment. The opinion, also written by Mr. Justice Holmes, said in part: “Stripped of conciliatory phrases the question is whether a state legislature can take away from a private party a right to recover money that is due when the act is passed. The argument that prevailed below was based on the supposed analogy of United States v. Heinszen & Co., 206 U. S. 370 , (Rafferty v. Smith, Bell & Co., 257 U. S. 226 ,) which held that Congress could ratify the collection of a tax that had been made without authority of law.

That analogy, however, fails. A tax may be imposed in respect of past benefits, so that if instead of calling it a ratification Congress had purported to impose the tax for the first time the enactment would have been within its power. Wagner v. Baltimore, ²⁴⁹ 239 U. S. 207, 216, 217 . Stockdale v. Atlantic Insurance Co., 20 Wall. 323 .

But generally ratification of an act is not good if attempted at a time when the ratifying authority could not lawfully do the act. * * * If we apply that principle this statute is invalid. For if the Legislature of Florida had attempted to make the plaintiff pay in 1919 for passages through the lock of a canal, that took place before 1917, without any promise of reward, there is nothing in the case as it stands to indicate that it could have done so any more effectively than it could have made a man pay a baker for a gratuitous deposit of rolls.” ( 258 U. S. at 339 .) We think that under the Forbes Pioneer Boat Line case the application of the doctrine of ratification would not be supportable, even if there were a clear legislative ratification; but we also think that any actual ratification is lacking. The nearest approach to it that we have in the