International Business Machines Corp. v. State Department of Assessments & Taxation

COLE, Judge. The appellant, International Business Machines Corporation (IBM), a manufacturer of business computers, uses its own computers to conduct internal IBM business operations throughout the country. The appellee, State Department of Assessments and Taxation (the Department), is required to impose a personal property tax on IBM property used by the manufacturer in its business. This case concerns a dispute over the amount of the personal property tax IBM is to pay for the computers it manufactured and used in its own business in 1982 in Maryland.

The parties agree to the following facts. In its 1982 Maryland personal property tax return, IBM reported the computers at their cost of manufacture. After receiving the return, the Department requested that IBM forward information relating to the approximate selling price of the computers. The Department used this information to prepare a final assessment which valued the computers in question at over three times the amount of IBM’s cost of ²¹⁷ manufacture.

IBM appealed the final assessment to the Maryland Tax Court which found in favor of the Department. The decision of the Tax Court was subsequently upheld by Judge Milton B. Allen on appeal to the Circuit Court for Baltimore City. Being persistent, IBM appealed to the Court of Special Appeals. This Court granted certiorari prior to consideration by the intermediate appellate court.

The specific question presented is whether the “full cash value” standard, represented by market value, is the appropriate measure for assessing the personal property tax on property manufactured and then utilized within the internal operations of the taxpayer’s business. In 1982, Maryland Code (1957, 1980 Repl.Vol.) Article 81, § 14(a) required that personal property be separately classified and subclassified for assessment purposes. 1 Section 14(b)(3) specifically provided: All personal property directed in this article to be assessed shall be assessed at its full cash value on the date of finality. The term full cash value as used in this subsection means current value without any allowance for inflation. In determining this value, the assessing authority shall consider any sums paid in connection with the acquisition of the property when acquired through a purchase or lease purchase or other similar kind of agreement for transfer of title after a period of use of the property.

Pursuant to this legislative directive, the Department issued a regulation, COMAR 18.03.01.04(C)(2), classifying personal property as either “stock in business/inventory” or “all other personal property” and outlining reporting considerations. COMAR 18.03.01.04(C)(2) provides: ²¹⁸ “All other personal property” is assessed at full cash value. Taxpayers shall report property which has been acquired by purchase at cost in the year of acquisition. Taxpayers shall report property which has been acquired other than by purchase {including property manufactured by the taxpayer) at what the property would have sold for in the year of acquisition.

(Emphasis added). The parties agree that the property in question in this case falls within the category of “all other personal property.” IBM argues that Article 15 of the Maryland Declaration of Rights 2 and the Equal Protection Clause of the Fourteenth Amendment to the United States Constitution 3 require that the standard of “full cash value” be applied uniformly throughout the subclass “all other personal property.” IBM asserts that the Department’s assessment is not uniform because IBM, as a user of the products it manufactures, will be assessed at what like property would have sold for to a purchaser in the retail market while those taxpayers who acquire property by purchase are required to report the property at cost of acquisition. In particular, IBM contends that a wholesaler could purchase ²¹⁹ an IBM computer for use in its internal business operations and only be assessed for the wholesale price (cost of acquisition) while if IBM uses the same computer in its operations the property will be assessed at the retail price. To avoid this purported lack of uniformity, IBM suggests that it too should be assessed at cost of acquisition which is equivalent to its cost of manufacture.

In light of IBM’s failure to present evidence of an established wholesale price for the IBM computers subject to taxation in this case we need not decide whether an assessment based on wholesale price would satisfy the statutory requirement that all assessments be based on full cash value. Rather, we focus on IBM’s contention that cost of manufacture is equivalent to full cash value. IBM also asserts that if it is assessed at the retail price of the computers, rather than the cost of manufacture, the Department will be permitted to improperly include profit and administrative overhead within the “full cash value” of the property although the property was never actually sold. IBM relies on State Dep’t of A. & T. v. Greyhound Computer, 271 Md. 575, 586 , 320 A.2d 40 (1974) which defines the term “ ‘full cash value’ ... to mean ‘market value’— what a willing purchaser would pay to a willing seller in the open market.” (Citations omitted).

IBM argues that a taxpayer would never be a willing purchaser of a product at a price exceeding that at which it could manufacture the product itself, and therefore, retail price should not be considered “full cash value.” The Department contends that the uniformity required in regard to the taxation of personal property is that “all personal property within the statutory subclassification ... be valued on the same standard or economic yardstick.” That standard, full cash value, can be measured by applying the willing purchaser—willing seller test. St. Leonard Shores Joint Venture v. Supervisor, 307 Md. 441 , 514 A.2d 1215 (1986). ²²⁰ According to the Department, the case sub judice is controlled by Greyhound Computer which allegedly establishes that the full cash value of property manufactured and utilized by a taxpayer is the market value of the property. Further, the Department argues that IBM, as the manufacturer of the property subject to taxation, is not the “willing purchaser” contemplated in the measurement of full cash value. Rather, the “willing purchaser” must be considered from an objective standpoint, without the exceptional or extraordinary interests which are reflected in IBM’s position in this case.

We agree with the Department that IBM must be assessed at the full cash value of the property it manufactures and uses in its internal business operations. Further, the full cash value of the property involved in this case is equivalent to market value (the willing purchaser-willing seller approach), rather than the cost of manufacture as IBM suggests. We explain. Article 15 of the Maryland Declaration of Rights mandates that all personal property taxes be assessed uniformly.

In accord with this constitutional directive, Article 81, § 14 provides that all personal property is to be assessed at “full cash value.” To aid in the valuation of personal property, the Department issued COMAR 18.03.01.04(C)(2) requiring those taxpayers who purchase personal property to report the property’s cost on their tax return while those taxpayers who acquire property “other than by purchase” are required to report the property’s estimated selling price on their returns. IBM objects to taxation based on the market value of the computers it manufactures and uses in its internal business operations. Those objections, however, are without merit in this case. This Court had the opportunity to analyze the taxation of “all other personal property” in Greyhound Computer .

Specifically, the Court discussed the proper method of valuation to be employed in the assessment of data processing equipment which the taxpayers had manufactured and leased. The Court decided that the property in question ²²¹ should be assessed at “full cash value” which was deemed to be the market value of the property, rather than at cost of manufacture as the taxpayers argued. 4 Although Greyhound Computer involved the leasing of property subject to taxation by the manufacturer-taxpayer, while the case sub judice involves actual use of the property by the manufacturer-taxpayer, we find Greyhound Computer to be dispositive. In that case we engaged in a lengthy discussion of the meaning of “full cash value” concluding that the phrase referred to the “market value” of the property. Greyhound Computer, 271 Md. at 585 , 320 A.2d 40 .

See also San Francisco Nat’l Bank v. Dodge, 197 U.S. 70, 79-80 , 25 S.Ct. 384, 386 , 49 L.Ed. 669 (1905) (full cash value is to be determined without exceptional and extraordinary considerations). We looked to the definition of “actual worth” as established in Schley v. Montgomery County, 106 Md. 407 , 67 A. 250 (1907) in making that determination. [T]he value of an article is ordinarily