James McHugh Construction Co. v. Comptroller of the Treasury

Davidson, J., delivered the opinion of the Court. This case presents the question whether a 1968 amendment to Maryland Code (1957, 1980 Repl. Vol.), Art. 81, § 326 (a) conflicts with Art. XVI-78 of the Washington Metropolitan Area Transit Authority (WMATA) Compact, Maryland Code (1977, 1980 Repl. Vol.) § 10-204 of the Transportation Article.* 1 Maryland, Virginia and the District of Columbia entered into the Compact 2 for the purpose of regulating transit on a coordinated basis throughout the area by establishing a ⁵⁰ common agency designed to alleviate transit and traffic problems in the metropolitan area.

The Compact declared that the Authority was created for a public purpose and should not be required to pay taxes upon any property acquired by it. § 10-204, Art. XVI-78. In addition, it provided that the signatory states’ power to levy and collect taxes upon any material, equipment, or supplies purchased by any company subject to the Compact was not affected. § 10-203, Art. VII. At the time the WMATA Compact was adopted in 1965, the Retail Sales Tax Act, Art. 81, § 324 through § 371, contained an exemption for the State of Maryland. Article 81, § 326 (a) provided: "The tax hereby levied shall not apply to the following sales: (a) State sales. — Sales to the State of Maryland or any of its political subdivisions.” Tax Laws and Regulations, Rule 70, promulgated by the Comptroller of the Treasury, then provided that contractors performing jobs for the State were not required to pay a sales tax on materials and supplies to be incorporated into the job. 3 In 1968, Art. 81, § 326 (a) was amended (1968 Amendment) to subject previously exempt contractors to a sales tax on property to be used for the construction, repair, or alteration of real property owned by the State of Maryland.

As amended, § 326 (a) provides: "The tax hereby levied does not apply to the following sales: (a) State sales. — Sales to the State of Maryland or any of its political subdivisions. Provided that ⁵¹ this subsection shall not be construed or applied to exempt any sale, otherwise taxable under this subtitle, of tangible personal property to contractors or builders to be used for the construction, repair or alteration of real property, on contracts advertised for bids after July 1, 1968.” (Emphasis added.) In 1968, Rule 70 was amended to provide that contractors performing jobs for the State of Maryland must pay a sales tax on all of their purchases. Tax Rules and Regulations, Rule 70; Rule 70A. 4 ⁵² In 1974, the petitioner, James McHugh Construction Company (contractor), entered into a contract with WMATA to construct a portion of a subway system located in Bethesda, Maryland. Thereafter, the contractor paid sales tax on all materials incorporated into the subway structure.

The contractor filed various claims for the refund of the paid sales tax. The Comptroller of the Treasury denied the claims and, on appeal, the Maryland Tax Court affirmed that decision. The Circuit Court for Montgomery County affirmed. The contractor appealed to the Court of Special Appeals.

Before that court considered the case, the contractor filed a petition for a writ of certiorari that we granted. We shall affirm. The contractor contends that a state that is a party to an interstate compact may not unilaterally amend its laws to conflict with the terms of that compact. It initially points out that the express language of § 10-204, Art. XVI-78 provides an exemption for the Authority from sales tax on property acquired by it to be used for a public purpose.

Relying on John McShain, Inc. v. Comptroller, 202 Md. 68 , 95 A.2d 473 (1953), the contractor maintains that because the Authority was entitled to an exemption from sales tax on materials that it acquired directly for the public purpose of constructing a subway, the contractor, too, was entitled to an exemption from sales tax on materials that it acquired for the Authority for that purpose. Thus, the contractor asserts, in essence, that under the terms of the Compact, it was entitled to be exempt from a sales tax on all materials incorporated into the subway structure. The contractor concludes that the 1968 Amendment, which deprived it of its previous exemption and subjected it to a tax on materials to be incorporated into the subway structure, is in conflict with the terms of the Compact. We do not agree with this conclusion.

Section 10-204, Art. XVI-78 provides in pertinent part: "It is hereby declared that the creation of the Authority and the carrying out of the corporate purposes of the Authority is in all respects for the benefít of the people of the signatory states and is ⁵³ for a public purpose and that the Authority and the board will be performing an essential governmental function, including, without limitation, proprietary, governmental and other functions, in the exercise of the powers conferred by this title. Accordingly, the Authority and the board shall not be required to pay taxes or assessments upon any of the property acquired by it or under its jurisdiction, control, possession or supervision.... This exemption shall include ... sales tax....” (Emphasis added.) The language of this section is plain and unambiguous. It expressly provides an exemption for the Authority from sales tax on property acquired by it to be used for a public purpose.

However, there is no express provision in the Compact granting a similar exemption to contractors from sales tax on materials acquired by them for the Authority. Indeed, there is a provision of the Compact expressly authorizing the signatory states to levy such a tax. Section 10-203, Art. VII provides in pertinent part: "Nothing herein shall be construed to amend, alter, or in any wise affect the power of the signatories and the political subdivisions thereof to levy and collect taxes on the property or income of any person or company subject to this Compact or upon any material, equipment or supplies purchased by such person or companies. ...” (Emphasis added.) The language of this provision is clear and unambiguous. It expressly states that nothing in the Compact affects the signatory states’ power to levy taxes on any material, equipment, or supplies purchased by a company subject to the Compact.

In essence, this language expressly authorizes Maryland to tax contractors performing construction, repair, or alteration of real property owned by the Authority. ⁵⁴ Here, the 1968 Amendment was an exercise of Maryland’s power, retained under the Compact, to levy a sales tax on materials purchased by a contractor subject to the Compact. Because Maryland’s right to levy such a tax is specifically retained under the Compact, the 1968 Amendment is not in conflict with the express provisions of § 10-204, Art. XVI-78 of the Compact. Moreover, the principles articulated in John McShain, 202 Md. at 72-74 , 95 A.2d at 474-75 , are inapplicable and do not establish that a contractor subject to the Compact is entitled to an exemption. At the time John McShain was decided, Art. 81, § 322 (now Art. 81, § 326) provided in pertinent part: "(Exemptions.) The tax hereby levied shall not apply to the following sales: (a) Sales to the State of Maryland or any of its political sub-divisions.

(f) Sales which are not within the taxing power of this State under the Constitution of the United States. (i) Sales to any person operating a nonprofit religious, charitable, scientific, literary or educational institution or organization situated in this State when such tangible personal property is purchased for use in carrying on the work of such institution or organization.” In John McShain, a builder contracted with the federal government (owner) to construct a building to be operated by the National Institutes of Health. The federal government was then exempt from sales tax. Art. 81, § 322 (f).

Nevertheless, the builder was required to pay sales tax on materials incorporated in the building. It sought a refund, claiming an exemption on the basis of the purposes of the owner’s use as delineated in Art. 81, § 322 (i). ⁵⁵ Under this circumstance, the Court of Appeals did not consider an exemption based on the owner’s exemption contained in Art. 81, § 322 (f). Rather, it confined its consideration to an exemption based on Art. 81, § 322 (i) and Rule 70 5 and held that the builder was exempt under Art. 81, § 322 (i). In reaching this conclusion, the Court said: "The most serious objection to the allowance of the exemption is that the section, in terms, applies to sales made directly to the person operating, and not to a contractor with such person.

We think, however, that it would be a strained construction to hold that persons operating the activities mentioned should be entitled to the exemption when they purchase directly from a supplier, but not when they acquire the property through an intermediary contractor. The Comptroller’s regulation is very specific on the point, and while it is conceded that the Comptroller lacks the power to create an exemption beyond that granted by the statute, his interpretation is entitled to great weight as an administrative construction acquiesced in by the legislature. The controlling factor upon which the exemption is based is not the instrumentality that does the purchasing, but the use of the items purchased in carrying on in Maryland the work to be promoted. The exemption recognized in the first paragraph depends upon the use to which the property is put, and not upon the immunity of the user, even though such immunity does not extend to its contractors under other circumstances.

Nor is it material that all activities of the federal government are considered governmental in determining the scope of its immunity, since the exemption is predicated ⁵⁶ upon the use and not upon the immunity.” John McShain, 202 Md. at 72-74 , 95 A.2d at 474-75 (emphasis added) (citations omitted). John McShain establishes the principle that even in the absence of an express exemption for contractors, a contractor is entitled to an exemption from sales tax on materials incorporated into a building to be used for a nonprofit religious, charitable, scientific, literary, or educational purpose as delineated in Art. 81, § 322 (i). More important, it establishes the principle that the contractor’s exemption depends upon the use to which the property is put and not upon the tax-exempt status of the user. The principles articulated in John McShain were explicated in Steiner Construction Co. v. Comptroller of Treasury, 209 Md. 453, 458-64 , 121 A.2d 838, 840-43 (1956).

In Steiner Construction, a builder contracted with The Baltimore & Ohio Railroad Company (owner) to make alterations, improvements, or repairs to real property owned by the railroad. It was conceded that sales to railroads were then exempt from sales tax. Nevertheless, the builder was required to pay sales tax on materials incorporated into the job. The builder sought a refund claiming an exemption on the basis of the owner’s exemption contained in Art. 81, § 322 (f).

No claim was made for an