Hearst Corp. v. State Department of Assessments & Taxation

Singley, J., delivered the opinion of the Court. Murphy, C. J., and Digges, J., dissent and Murphy, C. J., filed a dissenting opinion in which Digges, J., concurs at page 646 infra. This case, on appeal from the Maryland Tax Court, is a reprise of American Newspapers v. Tax Comm’n, 174 Md. 56 [American Newspapers v. McCardell], 197 A. 574 (1938). It involves the same parties and presents the same issue: are the equipment and raw materials used in printing a newspaper exempt from taxation under the Baltimore City ordinance which exempts from local taxation the machinery and raw materials used in manufacturing?

American Newspapers held that the printing of a newspaper did not constitute manufacturing. In the 35 years which have intervened since that decision, there have been a number of significant developments. The provisions of the Baltimore City ordinance which granted the exemption have been substantially altered. The equipment used in printing a newspaper has become much more sophisticated and more fully automated.

In the four jurisdictions which have considered the question since the decision in American Newspapers , three have flatly held that the printing of a newspaper is manufacturing. Most important of all, a year ago, in Perdue Foods, Inc. v. State Department of Assessments & Taxation, 264 Md. 672 , 288 A. 2d 170 (1972), we concluded that a highly automated chicken processing plant was entitled to a manufacturer’s exemption. It now ⁶²⁸ becomes necessary to reconsider American Newspapers in the light of these developments. The Facts Hearst Corporation (News American Division) (Hearst) owns a plant which occupies almost an entire city block in Baltimore in which it prints The Baltimore News American, a daily newspaper.

Each day, it uses between 86 and 92 tons of newsprint to print some 200,000 newspapers on weekdays and 300,000 on Sundays. There are about 1,000 employees, 300 of whom are directly involved in the printing operation, with an annual payroll in the mechanical departments of about $3,000,000. For the year 1967, the State Department of Assessments and Taxation (the Department) assessed Hearst’s plant for state and city tax purposes. The following portions of the assessment were challenged by Hearst in the petition filed by it in the Tax Court on 31 January 1968: 1 Subject to state and city taxes Subject to state tax only Manufactured products and raw material [consisting principally of Hearst’s entire inventory of newsprint] $170,440.00 $113,620.00 Tools and machinery [which the Department maintained were not used in manufacturing] 3,110,900.00 3,281,340.00 113,620.00 Total $3,394,960.00 ⁶²⁹ Hearst argued that the raw material assessment included its entire inventory of newsprint, some of which was located in its plant, some in boxcars on its railroad siding, and some in storage warehouses, which when averaged over the year amounted to a 17.6 days’ supply for the year 1967.

This, Hearst argued, was not only contrary to the Department’s prior practice, which involved an assessment of a 7 days’ supply apparently reached by compromise, 1 but was an unconstitutional imposition. Its argument was that since all of the newsprint was imported from either Canada or Finland, the taxation of more than was required for its immediate needs violated the prohibition against a state’s levying imposts on imports contained in the United States Constitution, Article I, Section 10, Clause 2, see Youngstown Sheet & Tube Co. v. Bowers, 358 U. S. 534 , 3 L.Ed.2d 490 , 79 S. Ct. 383 (1959) and Virtue Bros. v. County of Los Angeles, 239 Cal. App. 2d 220 , 48 Cal. Rptr. 505 (1966), cert. denied, 385 U. S. 820 , 17 L.Ed.2d 58 , 87 S. Ct. 45 (1966).

Hearst also challenged the assessment of what it regarded as manufacturing tools and machinery and raw materials on the basis not only that they were exempt from taxation in the hands of the manufacturer under the Baltimore City ordinance but also on the ground that similar machinery and materials in the hands of other printers were customarily granted an exemption from taxation by the Department. As Hearst saw it, this was an unlawful discrimination in violation of the Fourteenth Amendment to the Constitution of the United States and of Article XV of Maryland’s Declaration of Rights. By the time the matter was considered by the Tax Court, Hearst’s assessments for the years 1968, 1969 and 1970 were also before it and were consolidated with the petition which attacked the 1967 assessment. The amounts of the several assessments need not be considered; they are of consequence only because in each successive year, the Department ⁶³⁰ followed the approach which it had adopted for the year 1967.

By its order, the Tax Court affirmed the assessments entered by the Department for the years 1967-1970, excepting only the item “manufactured products and raw materials” which it modified by including in the assessable basis an 11 days’ supply of newsprint, rather than an average of Hearst’s entire inventory of newsprint, annualized for each of the years. As a practical matter, this had the effect of reducing the 1967 figures of $170,440.00 and $113,620.00 adopted by the Department to $77,150.00 and $51,430.00, respectively, and of correspondingly reducing the comparable figures for each of the succeeding years. Hearst appealed from the Tax Court order, mounting its heaviest attack on the denial of the manufacturer’s exemption, primarily because, should this be successful, it .would carry with it an exemption of the entire inventory of newsprint as a raw material used in manufacturing. The Department entered a cross-appeal, its argument being that Hearst’s entire average inventory of newsprint, and not simply an 11 days’ supply was properly taxable.

The Issues On appeal to us, Hearst raises three questions: “I. The printing of a newspaper which uses over $5,000,000 worth of specialized machinery and equipment, employs over 300 persons in its mechanical departments, generating a mechanical department payroll in excess of $3,000,000 annually and which each day transforms between 86 and 92 tons of raw newsprint into over two hundred thousand individual newspapers from that newsprint constitutes ‘manufacturing’ as that term is used in Article 81, Section 9, Sub-Sections 23 and 24 of the Annotated Code of Maryland (1957, 1969 Repl. Vol.) and Article 28, Section 83 of Baltimore City Code (1966 Edition). ⁶³¹ “II. The withholding of a manufacturer's tax exemption from the News American but granting such an exemption to job printers which use the same machinery and raw materials, produce the same products as the News American, and are in competition with the News American for advertising revenue, discriminates unfairly against the News American and therefore deprives it of the equal protection of the laws and unlawfully infringes upon freedom of the press in violation of the Fourteenth and First Amendments to -the Constitution of the United States and Articles 15, 23, and 40, of the Declaration of Rights to the Constitution of the State of Maryland. “HI. The Tax Court erred in not receiving evidence of increased mechanization which was planned during but not put into use until shortly after the end of the taxable period.” The Ordinance Baltimore City Code (1966) Art. 28, § 83 (a) (the Ordinance) provides, in part: “Tax exemption formula.

In order to encourage the growth and development of manufacturing industries in Baltimore City and thereby promote the general welfare of the inhabitants of said City, machinery and equipment used in the pasteurization, and processing of milk, laundry and dry cleaning machinery and equipment when employed or used in the business of laundering and dry cleaning, and all mechanical tools or implements, whether worked by hand or steam or other motive power, machinery, manufacturing apparatus or engines, actually and directly employed in the manufacturing process of a manufacturer, raw material on hand, and manufactured products in the hands of the ⁶³² manufacturers, shall be exempt from taxation for all ordinary municipal purposes of the Mayor and City Council of Baltimore . . . .” It should be noted that the 1 exemption is extended to tools and machinery, not to the taxpayer. This should be carefully compared with the text of the ordinance which was considered by our predecessors in American Newspapers, supra, 174 Md. at 58 . Then, Baltimore City Code (1927) Art. 46, § 80 provided, in part: “The Appeal Tax Court is authorized and directed upon the application, as hereinafter provided, of any individual, firm or corporation, actually engaged in the business of manufacturing articles of commerce in the City of Baltimore, to abate any and all personal taxes which may be levied hereafter by authority of the Mayor and City Council of Baltimore for any of the corporate uses thereof, upon any mechanical tools or implements, whether worked by hand or by steam or other motive power, or upon any machinery or manufacturing apparatus owned by such individuals, firm or corporation and actually employed and used in the business of manufacturing articles of commerce in the said city; provided, that this section shall not be construed as exempting any manufacturing apparatus, tools or machinery used in the business of manufacturing or generating illuminating gas for sale or any manufacturing apparatus, tools and machinery used in the business of generating or producing for sale electric light or electricity to be used as motive power or for any other purpose, or any manufacturing apparatus, tools, type or machinery used in the preparation, printing or issuing, by the printers or publishers thereof, of any daily journal or other periodical publication. 2 (Emphasis supplied) ⁶³³ Both of these ordinances were enacted pursuant to enabling legislation which has a venerable history in this State, see Kimball-Tyler v. Baltimore City, 214 Md. 86, 90-93 , 133 A. 2d 433 (1957). At the time of the enactment of the Ordinance which was before the Tax Court, the provision was found in Maryland Code (1957, 1969 Repl.

Vol.) Art. 81, § 9 (23) and § 9 (24). The first subsection provided, in part: “(23) Tools, implements, etc. used in manufacturing or farming. — Tools (including mechanical tools), implements, whether worked by hand, steam or other motive power, machinery, manufacturing apparatus or engines used in manufacturing, whether temporarily idle or not, in any county or city, as herein defined (including the City of Baltimore), whether exempted by the county in which said city is located or not, in any political subdivision in which by law, resolution or ordinance the same are or may be exempt from county or city taxation; and the county commissioners of any county and any city, as herein defined, including the mayor and city council of Baltimore, are hereby authorized to pass such resolution or ordinance.” The other subsection provided, in part: “(24) Raw materials and manufactured products of manufacturers. — Raw materials on hand and manufactured products in the hands of the manufacturer in any city and/or county in which by law, resolution or ordinance the same are or may be exempt from county and/or city taxation; provided that nothing in this subsection shall ⁶³⁴ exempt any such property from State taxation or from assessment therefor.” 3 Thirteen years before American Newspapers , our predecessors considered and rejected a manufacturer’s exemption claimed by a publishing firm in H. M. Rowe Co. v. Tax Comm’n, 149 Md. 251 , [H. M. Rowe Co. v. Beck] 131 A. 509 (1925). Faced with an agreed statement of facts that the Rowe Company was engaged in the preparation of manuscripts which were printed and bound by others, the Court concluded that Rowe was not engaged. in manufacturing. In the course of the opinion which Judge Offutt wrote for the Court, we find the following: “But even if its business could be. considered as like in its essential features to that of a newspaper, it does not necessarily follow that it is manufacturing, because a newspaper which merely gathers news and assembles it, together with such other matter as it deems suited to the tastes and demands of its readers, in final form, and then sends it to be actually printed and made ready for sale by others, is not in the same class as a newspaper which does that work on its own machinery and with its own labor. “It may be conceded, without however so deciding, that the business of printing, binding and preparing for use or sale by manual or mechanical labor, books, pamphlets, forms, stationery and similar articles, is manufacturing, but that concession alone cannot help the appellant, because it does none of those things itself, but has them done by others; and it can only avail the appellant if it be also conceded that in doing that work by the hands of another it does it itself.” 149 Md. at 260-61 (Emphasis supplied) ⁶³⁵ Earlier in the opinion appears a definition which has threaded its way through later opinions of this Court: “ ‘Manufacture’ as used in those statutes is a plain word in every day use, and as ordinarily understood means the process of converting some material into a different form adapted to uses to which in its original form it could not be so readily applied, and is associated nearly always with the use of manual or mechanical energy, and it is not ordinarily used to describe the creation of products by labor entirely or mainly intellectual, literary, or clerical in character.” 149 Md. at 258 In Baltimore v. Hanover Shirt Co., 168 Md. P74, [Mayor and City Council of Baltimore v. Price] 177 A. 160 (1935), the Court reviewed the definitions of the term “manufacture” which appeared in the earlier cases: “In Carlin v. Western Assurance Co., 57 Md. 515, 526 , [1882] in discussing the meaning of that word, this Court said: ‘Its meaning has expanded as workmanship and art have advanced, so that now nearly all artificial products of human industry, nearly all such materials as have acquired changed conditions or new and specific combinations, whether from the direct action of the human hand, from chemical processes devised and directed by human skill, or by the employment of machinery, which after all is but a higher form of the simple implements with which the human hand fashioned its creations in ruder ages, are now commonly designated as “manufactured.” ’ ” “In Carroll County v. Shriver Co., 146 Md. 412, 417 , 126 A. 71, 72 , [1924] this court, in an opinion rendered by Judge Pattison, said: ‘It is difficult to say in the abstract what is and what is not a manufacturing industry.

What might be a manufacturing industry when defined or construed in connection with a statute exempting tools, ⁶³⁶ machines, engines, etc., from taxation, might not be so held when considered in connection with a statute having a different object or purpose. As said in 26 Cyc. 524: “There is of course a multitude of cases in which particular industries and products have been held respectively to be or not to be manufactured, but it would be useless to cite these cases under the names of the industries or products there the subject of decision; * * * since the fact that a given thing or industry has been held to be manufactured under one set of circumstances is no assurance that it will be so held under another.” ’ ” 168 Md. at 179 -80 Judge W. Mitchell Digges, writing for the Court in Amreich v. State, 150 Md. 91 , 132 A. 430 (1926), after reviewing Carlin v. Western Assurance Co., Carroll County v. Shriver Co. and H. M. Rowe Co. v. Tax Comm ’n, all supra, concluded: “The citation of authorities, as stated, as to what does and what does not constitute manufacturing or what does or does not constitute a person a manufacturer, is of little value in determining the instant case, for the reason that all the decided cases have had to do with many different statutes with varying purposes to be accomplished; and, without citing numerous cases which have held pro and con on this subject, it is sufficient to say that we do not regard the occupation of the appellants, as disclosed by the record, as that of manufacturing.” 150 Md. at 101 We can only speculate where the Department’s long-standing custom of granting manufacturers’ exemptions to job printers found its genesis, Tax Commission v. Standard Oil Co., 181 Md. 637, 642 , 31 A. 2d 621 (1943). The simple fact is that it was well rooted when this case came before the Tax Court, as was abundantly illustrated by the Department’s stipulation that manufacturers’ exemptions were granted to photoengravers, typesetters, composition ⁶³⁷ firms and printers in Baltimore. There was testimony that at least one of the printing firms printed newspapers for its customers.

As we indicated early on, at the time American Newspapers reached this Court, the Baltimore City ordinance specifically prohibited the granting of a manufacturer’s exemption to machinery used by newspaper publishers. Obviously, in American Newspapers the Court was troubled by an issue raised by the appellant: to validate the provision of the ordinance denying the exemption to newspapers, in the face of a long-standing administrative practice of granting the exemption to printers who used virtually the same equipment and performed substantially similar functions, would be to legitimate a constitutionally impermissible classification. The Court intimated this when it said in American Newspapers, 174 Md. at 58 -59: “The plain meaning of this [the enabling act] is that the city could not exempt some manufacturing businesses and exclude others from the benefit of the act, but that the ordinance should be general in its nature, and whatever the property exempted, it should be to all manufacturers alike. The exception of ‘any journal or other periodical’ does not depend on the ordinance, but whether in fact it is a ‘manufacturing business,’ within the meaning of the statute.” It seems plausible that the Court chose to flank the issue by grounding its conclusion on the notion that printing newspapers was not manufacturing, which relieved it of the necessity of considering the proscriptive provision of the ordinance.

Relying on a melange of decisions, which we shall analyze after a bit, the Court concluded that the printing of a newspaper did not constitute manufacturing, overlooking most of the discussion in Rowe, which we have quoted heretofore. Two cases were cited in support of the proposition that the publishing of a newspaper does constitute manufacturing: Matter of Kenyon and Fenton, 1 Utah 47 (1876), which held ⁶³⁸ that the partnership which published a newspaper was engaged in manufacturing and that its note was therefore commercial paper under the Bankruptcy Act; and State v. Dupre, 42 La. Ann. 561 , 7 So. 727 (1890) where a divided court held the publishers of a newspaper were manufacturers and not subject to a license tax. Ranged against these were Patterson v. City of New Orleans, 47 La.

Ann. 275 , 16 So. 815 (1895), a clearly inapposite holding that a printer of billheads and order forms was not a manufacturer; In re Capital Publishing Co., 3 MacArthur (10 District of Columbia) 405 (1879), another bankruptcy case 4 and Evening Journal Ass’n v. State Board of Assessors, 47 N.J.L. 36 (1884); Press Printing Co. v. Assessors, 51 N.J.L. 75 , 16 A. 173 (1888); City of Lexington v. Lexington Leader Co., 193 Ky. 107 , 235 S. W. 31 (1921); all narrow holdings that publishing a newspaper was not manufacturing for the purpose of the applicable exemption statutes; and finally, Oswald v. St. Paul Globe Publishing Co., 60 Minn. 82 , 61 N. W. 902 (1895), that newspaper publishing was not exclusively manufacturing for the purpose of a statute imposing double liability on stockholders. Developments in the Industry Hearst makes much of the fact that there have been dramatic changes in the technology utilized in the printing of newspapers, particularly in the last 10 years. In the circumstances here, the Tax Court, quite properly, we think, limited its consideration to the changes which had occurred prior to or during the taxable periods involved in the case, and declined to consider changes which were planned or contemplated, and later put in effect. As the Department points out, the Tax Court is not bound by the technical rules of evidence but must observe the basic rules of fairness, Fairchild Hiller v. Supervisor, 267 Md. 519, 523-24 , 298 A. 2d ⁶³⁹ 148 (1973).

We see nothing unfair in the position taken by the Tax Court. Without going into unnecessary detail, what Hearst relied upon was its introduction of a photo composition technique to produce plates for the printing of advertising material in place of the manually operated hot metal casting machines theretofore used. While editorial material was still composed by the use of hot metal line casting machines, these were activated by perforated tapes run through a non-memory computer which