Director of Finance v. Charles Towers Partnership

DAVIS, Judge. This is an appeal from three orders of the Circuit Court for Baltimore City, each affirming a separate decision by the Maryland Tax Court. Pursuant to an ordinance first enacted in 1947, Baltimore City imposes a tax on the “gross sales price” of “sales for consumption” of electricity. In 1991, C & P Telephone, Santoni’s, Inc., Charles Towers Partnership, Baltimore Budget Hotel Partnership, Apartment Services, Inc., and United Holdings Co., Inc. (the taxpayers) filed separate claims with appellant, the City’s Director of Finance (the Director), seeking a refund of taxes paid on certain portions of their monthly electric bills.

After those requests were denied, the taxpayers sought relief in the Maryland Tax Court, where some of the cases were consolidated. The Tax Court rendered three separate decisions, each of which was decided on a motion for summary judgment. In each case, the Tax Court concluded that the customer and demand charges at issue were not for “sales for consumption” of electricity and thus were not taxable under the ordinance. The cases were consolidated on appeal to the circuit court, and the trial judge affirmed.

Appellant presents three questions for our review, which we restate as follows: I. Did the Tax Court err when it concluded, as a matter of law, that the “customer charge” and “demand charge” are not taxable under the Baltimore City ordinance?

II

Did the Tax Court err by failing to give proper deference to the administrative construction placed on the ordinance by the City’s Director of Finance?

III

Did the Tax Court err by awarding interest on the amount of the refunds? ⁷¹³ FACTS In 1947, the Mayor and City Council of Baltimore first levied a tax on sales of electricity delivered to consumers in Baltimore City. 1 The ordinance, now codified as art. 28, § 55 of the Baltimore City Code, provides in pertinent part: (a)(1) Artificial or natural gas, electricity, and steam rates. There is hereby levied and imposed on all sales for consumption of artificial or natural gas, electricity and steam delivered in Baltimore City through pipes, wires or conduits within the limits of Baltimore City, hereinafter referred to as “energy sales,” and billed after the effective date hereof, a tax at the rate of 8% upon the gross sales price thereof; (emphasis added). It is undisputed that the taxpayers purchased electricity “for consumption” from Baltimore Gas & Electric Company (BG & E). The issue here is whether the tax may be levied against certain portions of their monthly electric bills that do not vary in direct proportion to the actual amount of electricity consumed.

Before the tax court, the parties stipulated that each monthly electric bill includes: (a) a “customer charge,” billed at a flat monthly rate; (b) “demand charges,” based on the maximum monthly demand in kilowatts (KW) during any single half-hour interval; (c) “energy charges,” based on total monthly consumption in kilowatt-hours (Kwh); ⁷¹⁴ (d) “fuel rate charges,” calculated by multiplying the total Kwh consumed during the month by the dollar amount of the current fuel rate; (e) a small environmental surcharge, as mandated by Md. Code Ann. Natural Resources § 3-302; and (f) the City’s electricity tax, which is levied against items (a) through (d). Those charges were billed pursuant to a rate schedule approved by the Public Service Commission (the PSC). Each of the first four charges is designed to recover some portion of the costs incurred by BG & E in producing and delivering electricity to its customers. For example, the customer charge is intended to recover the costs associated with metering, billing, and other administrative functions.

Demand charges, on the other hand, are designed to recover the costs associated with the equipment and facilities needed to produce, transmit, and distribute electricity. The applicable rate schedule, designated as Schedule GL, applies to all BG & E customers who establish a monthly demand of sixty kilowatts or more. Consumers who are billed under Schedule GL pay the same customer charge each month, regardless of the amount of electricity they actually purchase and consume. To determine the amount of the demand charge, BG & E monitors a customer’s electricity use each month and identifies the half-hour period in which the customer’s consumption of electricity was greatest.

The demand charge is calculated by multiplying the number of kilowatts consumed during that half-hour period by a specified dollar amount. Unlike the energy charges and fuel rate charges, the customer charge and demand charges are not based on the actual amount of electricity consumed. In 1991, the taxpayers each requested a refund of taxes paid on the customer and demand charges during the preceding three years. After those requests were denied, the taxpayers sought relief in the Maryland Tax Court.

In deciding the cases at hand, the Tax Court relied upon its decision in the cases consolidated as Blue Circle Atlantic, et al. v. Baltimore ⁷¹⁵ County, et al., Misc. Nos. 684-688 (August 15,1990). 2 Accordingly, a brief review of the Tax Court’s earlier decision is in order. The Blue Circle case involved a Baltimore County ordinance that levied a tax against “sales for consumption of electricity.” The Baltimore County ordinance was modelled after the Baltimore City ordinance at issue here, and the language was virtually identical. 3 Blue Circle Atlantic, Inc. and four other corporations alleged that the tax was unlawfully levied against the customer and demand charges on their bill. Because the case involved construction of a tax statute, the Tax Court noted that any ambiguity in the statutory language “must be construed strictly against [Baltimore County] and in favor of Petitioners.” The Court then quoted from State v. Fabritz, 276 Md. 416, 421-22 , 348 A.2d 275 (1975), cert. denied, 425 U.S. 942 , 96 S.Ct. 1680 , 48 L.Ed.2d 185 (1976), wherein Chief Judge Murphy explained: [W]here statutory language is plain and free from ambiguity and expresses a definite and sensible meaning, courts are not at liberty to disregard the natural import of words with ⁷¹⁶ a view towards making the statute express an intention which is different from its plain meaning.

Applying those principles to the issue presented here, the Tax Court concluded: Thus we must determine whether the statutory language is “plain and free from ambiguity.” We conclude that the words “sales for consumption of electricity” express a “definite and sensible meaning,” namely, sales of electricity actually consumed. We find that customer and demand charges, which are not based on KWH consumed, are not “sales for consumption,” and therefore are exempt from the county tax. In each of the cases consolidated under the present appeal, the Tax Court granted the taxpayers’ motions for summary judgment. The Tax Court determined that there was no genuine issue of material fact, and concluded as a matter of law that the City ordinance does not authorize the assessment of the electricity tax against the customer and demand charges, “as those charges are not sales of electricity actually consumed.” The Director was instructed to refund the pertinent taxes with interest. 4 The circuit court affirmed the Tax Court’s rulings, and this appeal followed.

LEGAL ANALYSIS A final order of the Maryland Tax Court is subject to judicial review as provided for contested cases under the Administrative Procedure Act. See Md.Code Ann., Tax-General (TG) § 13-532(a) (1988 & Supp.1994). Because the cases before us were decided as a matter of statutory interpretation, ⁷¹⁷ we must determine whether the Tax Court’s decision was “premised solely upon an erroneous conclusion of law.” Comptroller of Treas. v. Shell Oil Co., 65 Md.App. 252, 259 , 500 A.2d 315 (1985) (quoting Ramsay, Scarlett & Co. v. Comptroller, 302 Md. 825, 834 , 490 A.2d 1296 (1985)). The standard of review is expansive, and we may freely substitute our judgment for the Tax Court’s legal conclusions.

Ramsay, Scarlett & Co., 302 Md. at 834 , 490 A.2d 1296 ; Supervisor of Assessments v. Asbury Methodist Home, Inc., 313 Md. 614, 626-27 , 547 A.2d 190 (1988). The cardinal rule of statutory construction is to ascertain and carry out the actual intent of the legislature. Montgomery County v. Buckman, 333 Md. 516, 523 , 636 A.2d 448 (1994). As a general rule, statutes involving taxation must be strictly construed.

In Fair Lanes, Inc. v. Comptroller, 239 Md. 157, 162 , 210 A.2d 821 (1965), the Court of Appeals explained that a reviewing court may not extend the reach of a tax statute “beyond the clear import of the language employed,” and where there is doubt as to such a statute’s scope, it should be construed “most strongly” in favor of the taxpayer. A strict construction must nonetheless be fair, reasonable, and consistent with the legislative intent. Maryland State Fair v. Supervisor of Assessments, 225 Md. 574, 588 , 172 A.2d 132 (1961). See also Supervisor of Assessments v. Trustees of Bosley Methodist Church Graveyard, 293 Md. 208, 212-13 , 443 A.2d 91 (1982); Hearst Corp. v. State Dept. of Assessments and Taxation, 269 Md. 625, 643 , 308 A.2d 679 (1973).

The canon in favor of strict construction “is not an inexorable command to override common sense and evident statutory purpose.” Wynn v. State, 313 Md. 533, 540 , 546 A.2d 465 (1988) (quoting United States v. Brown, 333 U.S. 18, 25-26 , 68 S.Ct. 376, 380 , 92 L.Ed. 442 (1948)). The task of statutory interpretation begins with the ordinary and natural meaning of the words employed. Buckman, 333 Md. at 523 , 636 A.2d 448 ; Harford County v. Univ. of Md. Med. System, 318 Md. 525, 529 , 569 A.2d 649 (1990).

Thus, “where statutory language is plain and free from ambiguity ⁷¹⁸ and expresses a definite and sensible meaning,” there is no need to look elsewhere to ascertain the intent of the legislative body. Fabritz, 276 Md. at 421-22 , 348 A.2d 275 . See also In re Criminal Investigation No. 1-162, 307 Md. 674, 685 , 516 A.2d 976 (1986). The statute must be construed as a whole, so that no word, clause, or phrase is rendered superfluous.

Condon v. State, 332 Md. 481, 491 , 632 A.2d 753 (1993). We do not agree with the Tax Court’s conclusion that the language of the ordinance is “plain and free from ambiguity.” The tax at issue here is levied against “sales for consumption” of electricity, at a rate of eight percent “upon the gross sales price thereof.” Under the Tax Court’s interpretation, the City Council’s use of the phrase “sales for consumption” was intended to distinguish charges billed for electricity actually consumed from charges billed for the service of providing electricity. We believe that the Director’s interpretation of the statute is also reasonable. The Director contends that the phrase “sales for consumption” means that the tax applies to a purchase for consumption by the ultimate consumer, in contrast to a purchase for the purpose of reselling electricity to other consumers.

See Black’s Law Dictionary 1315 (6th ed. 1990) (defining “retail” as “[a] sale for final consumption in contrast to a sale for further sale or processing”). In other words, the Director suggests that “sales for consumption” of electricity may reasonably be construed to mean “retail sales” of electricity. Our conclusion that the Director’s interpretation is reasonable finds support in the language of a decision rendered by the United States Supreme Court. See McGoldrick v. Berwind-White Coal Mining Co., 309 U.S. 33 , 60 S.Ct. 388 , 84 L.Ed. 565 (1940).

Berwind-White involved a retail sales tax imposed by the City of New York. Writing for the Court, Justice Stone noted that “[t]he question for decision is whether the New York City tax laid upon sales of goods for consumption, as applied to respondent, infringes the commerce clause of the Federal Constitution.” Id. at 41 , 60 S.Ct. at 390 (emphasis added). Justice Stone explained the nature of the tax as follows: “The ultimate burden of the tax, both in ⁷¹⁹ form and in substance, is thus laid upon the buyer, for consumption, of tangible personal property, and measured by the sales price.” Id. at 43 , 60 S.Ct. at 391 (emphasis added). The Court’s opinion makes it clear that the Court regarded the phrase “sales of goods for consumption” as being synonymous with “sales of goods at retail.” We find further support in Topps Garment Mfg.

Corp. v. State, 212 Md. 23 , 128 A.2d 595 (1957), where the Court of Appeals considered a constitutional challenge to a Maryland statute requiring vendors to collect a tax on tangible personal property sold for “use, storage, or consumption” within the state. With regard to the Benoind-White case, Judge Hammond noted that “the Supreme Court equated the New York City tax on sales for consumption in the City with the ordinary use tax ... that the Court had previously sustained as constitutional.” Id. at 29 , 128 A.2d 595 (emphasis added). Because the precise phrase “sales for consumption” does not appear in the Benoind-White opinion, we assume that Judge Hammond deliberately selected those words to convey a particular meaning. Thus, Judge Hammond and the other members of the Court plainly understood the phrase “sales for consumption” to mean “retail sales.” The opinions in both Topps and Benoind-White support our conclusion that the ordinance at issue here may reasonably be construed as a tax upon the “gross sales price” for “retail sales” of electricity.

The Tax Court and circuit court, however, endorsed a different interpretation. When a statute is plainly susceptible of more than one meaning, “courts consider not only the literal or usual meaning of the words, but their meaning and effect in light of the setting, the objectives and purpose of the enactment.” Allied Vending v. City of Bowie, 332 Md. 279, 306 , 631 A.2d 77 (1993) (quoting Kaczorowski v. City of Baltimore, 309 Md. 505, 513 , 525 A.2d 628 (1987)). See also Fabritz, 276 Md. at 421-22 , 348 A.2d 275 . Under those circumstances, a reviewing court may consider the consequences flowing from one meaning rather than another, and should avoid a construction that produces an unreasonable result or is inconsistent with common sense.

Kaczorowski, ⁷²⁰ 309 Md. at 513 , 525 A.2d 628 ; Tucker v. Fireman’s Fund Ins. Co., 308 Md. 69, 75 , 517 A.2d 730 (1986). The Tax Court concluded that the City’s electricity tax may be levied only against those charges which are directly proportional to the number of kilowatt hours consumed. We think that the Tax Court’s conclusion would lead to. unreasonable, nonsensical results.

Among the documents submitted to the Tax Court was an affidavit from D. Douglas DeWitt, Director of Rate Research for BG & E. According to Mr. DeWitt: All customers pay a demand component as a part of BG & E’s product cost. For residential customers and for nonresidential customers with demands of less than 60 kilowatts, all costs including the demand component are included as part of the kilowatt hour or energy rate. (Emphasis added). In other words, the demand component paid by these customers is billed on a per-kilowatt-hour basis, and would be taxable under the interpretation advanced by the Tax Court.

We think it illogical to conclude that the City Council intended to levy a tax against the demand component paid by some customers, but not against the demand component paid by others, when the sole distinction between those customers is the manner in which the charges are calculated and billed. An opinion and order rendered by the Public Service Commission provides further support for our conclusion that the Tax Court’s interpretation is inconsistent with the legislative intent. See Re Baltimore Gas and Electric Co., 73 PSC 6 (1982). In that opinion, the Commission discussed at length the general guidelines to be used in designing BG & E’s electrical rates.

Under state law, the Commission’s rate-setting efforts are guided, in part, by Md.Ann.Code art. 78, §§ 26(a), 28(d), and 56 (1991 Repl.Vol. & Supp.1994), which collectively provide that rates shall not “extend undue or unreasonable preferences to any particular person or class of service, and that rates not discriminate against or result in undue or unreasonable prejudice to any particular person or class of service.” Baltimore Gas and Electric, 73 PSC at 12. ⁷²¹ At the time of the Commission’s decision, the proper method of allocating the cost of BG & E’s generating plant and facilities was vigorously contested. The debate centered, in part, on whether those costs should be included in the “energy charges,” which are billed on a per-kilowatt-hour basis. The Commission concluded: [T]he degree to which plant costs are allocated between demand and energy costs is a matter of judgment; it depends upon many factors, including the types of generating facilities on the utility’s system; the mix of base load, intermediate and peak units; and the load characteristics of the system and the various customer classes. Id. at 15.

The design of electric rates is a complex, technical process that relies heavily on the expertise and judgment of the Public Service Commission. Under the Tax Court’s interpretation of the City ordinance, the City’s revenues under the electricity tax would depend, in part, on decisions made by the Commission. We do not believe that the City Council intended such a result. As a final guide to construction, we must give some weight to the Director’s administrative interpretation of the ordinance.

The ordinance provides, in part: (d) Regulations. The Director of Finance is hereby authorized to adopt such rules and regulations as may be necessary to insure the collection of the tax imposed by this section and to define any terms used in this section. Baltimore City Code art. 28, § 55(d). Although the Director has not adopted formal rules or regulations, it has been the City’s long-standing practice to treat the ordinance as a tax on retail sales of electricity. 5 According to Mr. DeWitt, Director ⁷²² of Rate Research for BG & E, both Baltimore City and the State of Maryland “have continuously and consistently included customer and demand charges in their respective taxable basis calculations since 1947.” 6 When a reviewing court construes a statute, we will generally give some weight to the long-standing administrative practice of the agency responsible for administering the statute, so long as that practice is not inconsistent with the plain meaning of the words employed by the legislature.

Controller v. Pleasure Cove Yacht Club, 334 Md. 450, 466 , 639 A.2d 685 (1994); Fishkind Realty v. Sampson, 306 Md. 269, 283 , 508 A.2d 478 (1986). The weight we give to an administrative interpretation varies, depending on the facts of each particular case. The relevant factors include whether the interpretation has resulted from a rule-making process or contested adversarial proceeding, and the consistency and length of the administrative