Comptroller of the Treasury v. Maryland State Bar Ass'n

⁶⁵⁷ MURPHY, Chief Judge. Maryland Code (1957, 1980 RepLVol.) Art. 81, § 326(i) provides an exemption from the State’s sales tax for purchases of tangible personal property made “for use in carrying on the work” of a “nonprofit religious, charitable, or educational institution or organization.” This case arises from the Maryland Tax Court’s decision to discontinue the sales tax exemption which the Maryland State Bar Association previously enjoyed under § 326(i). 1 I. The Maryland State Bar Association, Inc. (MSBA) is a nonprofit corporation organized, according to its charter, for the purposes of advancing the science of jurisprudence, promoting reform in the law, facilitating the administration of justice, upholding the standard of integrity, honor and courtesy in the legal profession, and encouraging legal education. The MSBA is comprised of members of the bar and judiciary who have been admitted to the practice of law in the state. Membership in the MSBA is voluntary.

To become a member of the MSBA, an individual must pay annual dues; members must pay additional dues to join a particular section of the MSBA. 2 The MSBA has been exempt from the State’s sales tax since 1969. In that year, an Assistant Attorney General, in an unpublished letter opinion, concluded that the MSBA was entitled to a Retail Sales Tax Exemption Certificate. He found that the MSBA’s Articles of Incorporation established prima facie that the Association was a nonprofit charitable and educational organization under Article 81, § 326(i). The opinion noted that “all of the activities of the Association are focused upon the education of members of the Bar and that all meetings of the Association include ⁶⁵⁸ Continuing Legal Education sessions to facilitate the above-stated purposes.” The opinion further stated that “the purposes and activities of the Association are educational in nature ... and that the Association is therefore qualified under § 326(i) for an exemption from the Sales and Use Taxes.” Shortly after the issuance of this opinion, the Comptroller issued an Exemption Certificate to the MSBA: Despite this long-standing exemption, on December 30, 1981 the Comptroller assessed the MSBA for $7,824.96 in sales tax, plus appropriate penalty and interest, for the period December 2, 1977 through November 23, 1981.

The MSBA made a timely application for revision, which, after an informal conference, was denied. . The MSBA then filed an appeal, requesting that a formal hearing be held on the matter. Before the formal hearing was held, MSBA paid the Comptroller’s office $1,289.95 to cover the tax on the sale of books, and that part of the assessment is no longer in dispute. On September 30, 1982, a formal hearing was held before a hearing officer of the Comptroller’s office with respect to the balance of $6,535.01 in tax, which represented the amount allegedly due on the purchase of office supplies and equipment.

After receiving evidence and hearing arguments from both the Comptroller and the MSBA, the hearing officer found that the MSBA’s primary purpose was not “educational” and that the “overwhelming majority of the Association’s activities are inconsistent with the generally accepted meaning of the term.” Consequently, the hearing officer ruled in favor of revoking the MSBA’s exemption certificate and therefore denied the Association’s request for an abatement of the assessment. The MSBA appealed to the Maryland Tax Court, claiming that its exemption certificate was erroneously revoked. The sole issue before the Tax Court was whether the purchases of equipment and supplies by the MSBA during the assessment period were exempt from the Maryland sales tax by virtue of the MSBA’s status as a nonprofit charitable or educational organization under § 326(i). ⁶⁵⁹ In support of its argument for exemption, the MSBA presented the testimony of William J. Smith, then Executive Director of MSBA, and Robert H. Dyer, Executive Director of the Maryland Institute for the Continuing Professional Education of Lawyers, Inc. (MICPEL). The MSBA also submitted into evidence its articles of incorporation, its sales tax exemption certificate, its annual budgets for the years 1977-78, 1978-79, and 1980-81, programs from its 1977 annual meeting, several MSBA pamphlets, a number of brochures from legal education seminars which the association co-sponsored with MICPEL, and the unpublished letter opinion of the Assistant Attorney General.

To support its claim, the Comptroller presented the testimony of its auditor, Albert Laws, and introduced into evidence the auditor’s work papers, the December 1981 assessment notice, the MSBA’s 1981-82 budget, and a 1985 MICPEL report. The parties agreed that the activities of the MSBA could be analyzed through a review of the organization’s annual budget. The evidence revealed that the MSBA’s operating budget is derived almost exclusively from membership dues and from fees for special events and services. The largest part of the MSBA’s yearly expenditures, approximately 44%, is for administrative and salary expense required to support the separately budgeted activities of its 13 standing committees, 21 special committees, and 17 sections. 3 The remaining expenditures are principally allotted to the annual and mid-year meetings, the conference of Local Bar Presidents, the luncheons for new admittees to the Bar, the University of Maryland and University of Baltimore Law Reviews, the Bar Journal, and the Lawyers’ Manual.

At the hearing, MSBA Executive Director Smith testified as to the charitable and educational nature of the special committees, standing committees, and sections. This testi ⁶⁶⁰ mony revealed that the 21 special committees are organized to perform work in a wide variety of areas, which included the Bicentennial Celebration, the Commemoration of the 200th Anniversary of the Court of Appeals, Environmental Law, Advocacy, Bench/Bar Liaison, Law Day, Citizen’s Advisory, Judicial Selection, Editorial Advisory, Law and the Handicapped, Seminar on Ethics, Bar Insurance, Travel Program, Advertising, and Arbitration of. Fee Disputes. Those special committees with the largest budgets included the Citizens Advisory Committee which sponsors a program designed to teach primary and secondary school students about the legal aspects of our society, the Law arid the Handicapped Committee, which educates lawyers about the representation of handicapped persons and educates the handicapped as to their legal rights, the Seminar on Ethics, and the Arbitration of Fee Disputes Committee.

The special committees with the smallest budgets include the Travel Program, Advertising, and Bar Insurance. In addition to these special committees, 13 standing committees perform much of the MSBA’s work. They consist of the Membership Committee, the Continuing Legal Education Committee, the Economics of Law Practice Committee, the Ethics Committee, the Budget and Finance Committee, the Laws Committee, the Legal Services Committee, the Long Range Planning Committee, the Judicial Appointments Committee, the Medico-Legal Problems Committee, the Program Committee, the Unauthorized Practice of Law Committee, and the Public Awareness Committee. The Membership, Budget and Finance, Program, and Long Range Planning Committees are involved with internal planning and administration.

Thé committees with the largest budgets include the Economics of Law Practice Committee, the Ethics Committee, the Laws Committee, the Judicial Appointments Committee, and the Public Awareness Committee. The Economics of Law Practice Committee provides information to MSBA members on how to run their offices more economically. The Ethics Committee interprets ethical standards for lawyers. The Laws Committee ⁶⁶¹ performs a number of functions.

It educates both the public and lawyers concerning legislation that could affect them. It identifies and tracks bills that affect the bar association and lawyers and in some instances may lobby for the passage or defeat of a particular piece of legislation. The Judicial Appointments Committee makes recommendations to judicial nominating commissions as to whom it considers qualified to serve as judges. The Public Awareness Committee works to educate the public about the legal profession and includes efforts to improve the public’s view of attorneys.

The committees with the smallest budgets include the Legal Services Committee, the Medico-Legal Problems Committee, and the Continuing Legal Education Committee. The Legal Services Committee is involved with legal services to the poor and elderly; the Continuing Legal Education Committee is involved with continuing legal education to the bar. Much of the controversy in this case centers upon the Continuing Legal Education Committee which receives a relatively small budget in comparison to the other committees and MSBA projects. Prior to 1975, this committee possessed a relatively large budget and was in charge of organizing and presenting the bulk of the legal education seminars available to the bar.

In 1975, MICPEL was formed for the purpose of centralizing the administration of the continuing legal education programs of the University of Maryland Law School, the University of Baltimore Law School and the MSBA. At the hearing, the Comptroller argued that the MSBA transferred its educational function to MICPEL when it was formed, and thus the MSBA no longer qualified as an educational organization. The testimony of MICPEL’s Executive Director revealed that MICPEL is an independent corporate entity completely separate from the MSBA, although there is a great deal of interaction between the two organizations. Of the 28 voting members of MICPEL’s board at the time of the assessment, five were specifically designated representatives of ⁶⁶² the MSBA. 4 No part of MICPEL’s annual budget, approximately $300,000 during the assessment period, is provided by the MSBA.

MICPEL has a very small staff and lacks the expertise to present the wide range of educational programs which it sponsors. Consequently, MICPEL depends upon the MSBA and other organizations to aid in the development of its educational seminars. Often MICPEL relies upon the sections of the MSBA to provide MICPEL with the attorneys who organize and teach the seminars and who produce the written materials which accompany the seminars. In addition to helping MICPEL with its educational seminars, the sections of the MSBA also work to provide educational exchanges independent of MICPEL.

MSBA’s Executive Director testified that the sections bring together attorneys who are involved in particular fields of law and give them an opportunity to. meet with their peers, to review legislation and plan the educational programs that are presented at its annual and mid-year meetings. Many of the educational programs sponsored by the sections, however, are essentially limited to the education of attorneys practicing in a particular field. In addition, some sections, in particular the Young Lawyers’ Section which has the largest budget among all the sections, focus in some part on providing social activities for members. The MSBA also expends a significant sum on publishing the Bar Journal, the Lawyer’s Manual, and on operating the Lawyer’s Referral Service.

The Bar Journal is a monthly magazine which is distributed primarily to lawyers and which contains reports of the sections and committees and articles dealing with subjects of interest to lawyers. The Lawyer’s Manual is a directory of Maryland attorneys with their addresses and phone numbers, as well as a listing of judicial, legislative, and executive branch officials. The ⁶⁶³ Lawyer’s Referral Service provides information to individuals who wish to retain an attorney in a specific geographic area to handle a specific type of legal problem. Attorneys pay a fee to be listed on the referral panel.

After considering this evidence, the Tax Court ruled that the MSBA did not qualify for a sales tax exemption under § 326(i). At the outset of its opinion, the Tax Court recognized the rule that tax exemptions are to be narrowly construed in favor of the taxing authority and that to doubt an exemption is to deny it (citing Central Credit v. Comptroller, 243 Md. 175 , 220 A.2d 568 (1966)). It then concluded from its “analysis of the facts” that the “bulk of the services provided by MSBA are provided to and for its members, and these members must pay dues in order to receive these services.” Expressing doubt as to MSBA’s charitable nature, it said that while the Association was nonprofit and formed for a worthy cause, nevertheless it was not “primarily charitable.” The Tax Court also disagreed with MSBA’s claim that it was an educational organization because it “provides the educational content for the programs offered by MICPEL.” As to this, the Tax Court said: “Testimony brought out that MICPEL, although working with other organizations, is an autonomous incorporated entity which provides continuing legal education programs. MSBA provides no funds for the support of MICPEL.

Its members may have some input into MICPEL’s programs, but MICPEL also seeks input from other bar associations and its members as well as unaffiliated attorneys. MICPEL is free to coordinate its programs with any organizations or persons. The fact that MICPEL may involve members of MSBA in some of its programs does not entitle MSBA to claim that it is the educational arm of MICPEL.” The Tax Court, after reviewing MSBA’s corporate purposes, said that MSBA’s claim that its activities were primarily educational was not supported by the evidence. It also said that while some of MSBA’s activities, e.g., “the conventions, ⁶⁶⁴ meetings, committees, sections, etc.,” may have an educational element to them, “that element [is] incidental.” These activities, the Tax Court stated, foster all of MSBA’s corporate purposes, and not just legal education.

It characterized the MSBA as “an organization with a professional orientation,” and concluded that “any educational aspect present in its activities is, for the most part, a by-product of its overall function to promote and protect the professional interests of its members.” The MSBA appealed to the Circuit Court for Baltimore City. The court (Steinberg, J.) ruled that the Tax Court’s determination that the MSBA did not qualify as a charitable or educational institution was not supported by substantial evidence and was erroneous as a matter of law. In the course of its opinion, the circuit court said that the Tax Court was silent on the question whether MSBA would qualify for the exemption “if its primary activities are a combination of charitable and educational activities.” (Emphasis in original.) On this point, the circuit court indicated that the correct standard in determining whether an exemption was appropriate under § 326(i) was whether the activities of the MSBA are primarily a combination of charitable and educational activities. It then conducted its own evaluation of the evidence, reviewing the MSBA’s budget line by line, and determined that the MSBA was primarily an educational and charitable organization entitled to retain its sales tax exemption.

The Comptroller appealed to the Court of Special Appeals. We granted certiorari prior to a decision by the intermediate appellate court to consider the important issues raised in the case.

II

The standard for judicial review of Tax Court decisions is contained in Art. 81, § 229(o). This provision states that a reviewing court “shall determine the matter upon the record made in the Maryland Tax Court____ [and] shall affirm the Tax Court order if it is not erroneous as a matter of law and if it is supported by substantial evidence appear ⁶⁶⁵ ing in the record.” Section 229(o) places narrow limits upon the scope of review exercised by the circuit and appellate courts over Tax Court decisions. Supervisor of Assessments of Montgomery County v. Asbury Methodist Home, Inc., 313 Md. 614, 625 , 547 A.2d 190 (1988). This standard is a deferential one and “ ‘requires restrained and disciplined judicial judgment.’ ” Id., quoting, Insurance Comm’r v. Nat’l Bureau, 248 Md. 292, 309-10 , 236 A.2d 282 (1967).

Accordingly, the agency’s decision is presumed to be correct and valid, and a court must review an agency’s decision in the light most favorable to it. Ramsay, Scarlett & Co. v. Comptroller, 302 Md. 825, 835 , 490 A.2d 1296 (1985). Under § 229(o), a reviewing court may substitute its judgment for that of the Tax Court only “when the Tax Court’s order is premised solely upon an erroneous conclusion of law.” Asbury Methodist, supra, 313 Md. at 626 , 547 A.2d 190 (emphasis in original). When “the Tax Court’s decision is based on a factual determination, and there is no error of law, the substantial evidence test applies.” Id. at 627 , 547 A.2d 190 .

A. We first consider whether the Tax Gourt correctly recognized and applied the principles of law which govern this case. It correctly found that the law controlling this case is contained in Art. 81, § 326(i). That section, as already observed, provides in relevant part that the State sales tax does not apply to “[sjales to a nonprofit religious, charitable, or educational institution or organization ... when such tangible personal property is purchased for use in carrying on the work of such institution or organization.” The Tax Court also correctly recognized that this case is not controlled by Section 501(c)(3) of the Internal Revenue Code which exempts from federal taxation organizations operated exclusively, inter alia, for charitable or educational purposes. Section 326(i) provides that the “Comptroller may treat possession of an effective determination letter from the Internal Revenue Service as to qualification under ⁶⁶⁶ § 501(c)(3) ... as evidence that an institution or organization is a nonprofit religious, charitable, or educational institution or organization within the meaning of this subsection.” As the Tax Court noted, while the possession of a § 501(c)(3) exemption may be accepted as evidence of an organization’s charitable or educational nature, § 326(i) does not indicate that lack of a § 501(c)(3) exemption disqualifies an organization from entitlement to a § 326(i) exemption.

Thus, the Tax Court correctly found that the MSBA’s lack of a federal tax exemption was not determinative of the present case. 5 Having determined that the Tax Court correctly recognized these aspects of controlling law, we next consider whether it correctly interpreted the words “charitable” and “educational” in the context of the § 326(i) exemption. In