Maryland Pennysaver Group, Inc. v. Comptroller of the Treasury

RODOWSKY, Judge. This is a sales tax refund case. The taxpayer, Maryland Pennysaver Group, Inc. (MPG), publishes opuscules of a type known as shoppers’ guides, or shopping advertisers, or pennysavers. MPG claims the statutory exemption for newspapers and that, if excluded from the exemption, its rights under the first and fourteenth amendments of the United States Constitution would be violated.

We reject these contentions for the reasons set forth below. MPG began publishing pennysavers in Maryland during the summer of 1979. There were then no similar publications in Maryland. Businesses pay MPG to place commercial ads in a pennysaver, and individuals pay MPG to place classified ads in a pennysaver.

Pennysavers are published weekly for specific areas. 1 Pennysavers are mailed to every resident and business in the particular edition’s spe ⁶⁹⁹ cific area, without charge to the recipient. There is no newsstand distribution. MPG pennysavers are printed on newsprint in quarterfold format, as distinguished from a tabloid or broadsheet. The pages measure 7% inches by 10% inches, and they are stitched or glued along the fold.

Prior to April 1985 MPG used an outside printer to print pennysavers, and thereafter, MPG has printed in house. The sales tax assessment involved in the instant litigation covers the period December 1, 1982, through November 30, 1986. It includes tax on the cost to MPG of outside printing and tax on the cost to MPG of newsprint and ink for in-house printing. Copies of four separate pennysavers are included in the record extract as illustrative of pennysavers published during the period covered by the tax assessment.

One is the Kent Island/Grasonville Pennysaver for the week of May 18, 1983. The masthead occupies approximately twenty percent of the page at the top, while the balance of that page is an ad for a sports clothing store. The edition consists of fifty-six pages, unnumbered. With the exception of four and one-half pages, the publication is entirely ads, ranging from full page ads to two or three line classified ads.

The twenty-sixth and forty-fourth pages are headed “Community News,” and the fifty-second page has one column (a half-page) headed “Community News.” “Community News” consists primarily of announcements of activities, such as meetings, fundraisers, and social events, to be held by various church, civic, and other community organizations. Each of two pages of the edition contains a chapter of a serialized Western novel. The reader is advised that the book is available in hardcover edition from MPG. The four illustrative pennysavers reproduced in the record extract total 249 pages.

Within that total there are three half-pages consisting of columns written respectively by the Mayor of Annapolis (on national building safety week), by a member of the Maryland House of Delegates (interviewing an Anne Arundel County police officer con ⁷⁰⁰ cerning crime prevention), and by the County Executive of Anne Arundel County (on preserving the Chesapeake Bay). The retail sales tax is imposed “[f]or the privilege of selling certain tangible personal property at retail ... and for the privilege of dispensing certain selected services defined as sales at retail by § 324(f)____” Maryland Code (1957, 1980 Repl. Vol.), Art. 81, § 325(a). 2 During the assessment period, and currently, the tax rate is five percent beginning where the sales price is $.20. § 325(a)(1). For sales tax purposes “the term ‘sale at retail’ includes ... [a]ny ... printing of tangible personal property on special order for a consideration.” § 324(f)(2).

MPG had not paid sales tax on the outside printing of its pennysavers. Nor had it paid sales tax on its ink and paper purchases for in-house printing. 3 MPG paid the tax and interest assessed by the Comptroller, obtained a waiver of penalty, and sought a refund. MPG claimed exemption under § 326(n). It provides exemption for “[s]ales of transportation services, and the printing and sales of newspapers of any and all types, and the sales of any photographic materials used in the composition and printing of newspapers.” The term “newspaper” is not defined in the statutes.

Regulations of the Comptroller set forth standards for determining whether a publication is a newspaper. See Md. ⁷⁰¹ Regs.Code (COMAR), Title 3, § 06.01.05 (1990). This regulation specifically excludes a “shopping advertiser” from “newspapers.” Applying the regulation, the Comptroller denied the refund. MPG appealed to the Maryland Tax Court.

Its petition, to the extent here relevant, averred that the Comptroller had erred because pennysavers were entitled to the § 326(n) exemption for newspapers, and because Regulation .05, both facially and as applied by the Comptroller, violated MPG’s rights under the first and fourteenth amendments of the United States Constitution. The Tax Court held that MPG’s pennysavers were not newspapers of any type intended to be embraced within § 326(n), that Regulation .05 was valid, and that the pennysavers were “shopping advertisers,” excluded from the exemption. Nor was there any constitutional violation, in the Tax Court’s opinion, because MPG’s publications were “not within the class (newspaper)” with which MPG sought to have its publications associated. The Circuit Court for Anne Arundel County, on MPG’s appeal, affirmed the Maryland Tax Court.

MPG appealed to the Court of Special Appeals. Before consideration of the matter by that court we granted MPG’s petition for certiorari. It raises two questions, the presentation of which we reorder below. “[1] Do the Sales Tax Regulations improperly limit the scope of the statutory exemption from sales tax for ‘the printing and sales of newspapers of any and all types’? “[2] Does the Comptroller’s refusal to allow the Penny-saver an exemption granted by statute for ‘the printing and sales of newspapers of any and all types’ violate the Petitioner’s fundamental rights of free speech under the First and Fourteenth Amendments of the United States Constitution?” I The Tax Court’s conclusion that MPG’s pennysavers are shopping advertisers is well supported by the record, ⁷⁰² and MPG does not attack that factual finding implicit in the Tax Court’s holding. Rather, MPG’s argument is that Regulation ,05’s exclusion of shopping advertisers from the newspaper exemption violates § 326(n) which exempts newspapers “of any and all types.” The evolution of the regulation and of the exemption statute, and the regulation’s status as a legislative rule, negate MPG’s argument.

The Maryland Retail Sales Tax and Use Tax Acts were first enacted by Chapters 281 and 681 of the Acts of 1947, and codified as Md.Code (1939, 1947 Cum.Supp.), Art. 81, §§ 259-307 and §§ 308-336. The 1947 enactment contained no exemption for the printing or sale of newspapers, and did not define that term. 4 The original sales tax statute “authorized and empowered” the Comptroller, “[i]n addition to the powers granted to the Comptroller” in the sales tax sub-title “[t]o make, adopt and amend such rules and regulations as he shall deem necessary to carry out the provisions of this sub-title and to define any terms used herein.” Code (1947 Cum.Supp.), § 301(a). That conferral of rule-making power remained unchanged to and through the assessment period involved here. See § 365(a).

Rule 5, Retail Sales and Use Tax Rules, adopted by the Comptroller in 1947, exempted receipts from the sale of newspapers. With the advent of COMAR in 1976, Rule 5 became COMAR § 03.06.01.05. Set forth below is original Rule 5, with numerals in brackets indicating the paragraph numbering which conformed original Rule 5 to the COMAR style. “[.05] NEWSPAPERS “[A.] Receipts from the sale of newspapers are not subject to the tax. “[1.] In order to constitute a newspaper, the publication must contain at least the following elements: ⁷⁰³ “(a) It must be published at stated short intervals (usually daily or weekly). “(b) It must not when its successive issues are put together constitute a book. “(c) It must be intended for circulation among the general public. “(d) It must contain matters of general interest and reports of current events. “[2.] Notwithstanding the fact that the publication may be devoted primarily to matters of specialized interest, such as legal, mercantile, political, religious or sporting matters, if in addition to the special interest it serves, the alleged newspaper contains general news of the day, information of current events and news of importance and of current interest to the general public, it is entitled to be classified as a newspaper. “[B.] Press clipping services are exempt from tax. “[C.] Sales of mailing lists are taxable. “[D.] Subscriptions to magazines or periodicals are not taxable, newsstand sales of the same are taxable.” 5 The exemption for newspapers in § 326(n) was enacted by Chapter 112 of the Acts of 1956. As introduced, the bill ⁷⁰⁴ would have added to the exemption in Code (1951), § 322(n) for “[sjales of transportation and communication services,” the language “including the printing and sales of newspapers and periodicals of any and all types.” Periodicals were amended out of the bill, and the effective date was postponed one year to June 1, 1957.

Thereafter, in 1957, the Comptroller amended Rule 5 to add a paragraph which became ¶ E of Regulation .05 in COMAR. 6 In relevant part that paragraph read: “E. The law was amended, effective June 1, 1957, to specifically exempt ‘the printing and sales of newspapers’. Since the sale of newspapers had already been exempted under the provisions of this regulation, the sole effect of this amendment is to exempt from tax the printing of giveaway newspapers which are printed by an outside printer for a consideration.” The Comptroller’s present regulation, COMAR § 03.06.-01.05, that was applied in the matter before us, was promulgated by a notice of proposed rulemaking on November 17, 1978. See 5 Md.R. 1742 (1978). The notice states that the “regulation will provide a more precise definition of the term ‘newspaper’ as used in the Retail Sales Tax Act, and delete obsolete and unrelated material from the existing regulation.” The regulation was adopted January 12, 1979, in the form proposed.

See 6 Md.R. 16 (1979). It reads in relevant part: “.05 Newspapers. A. The sale of newspapers is not subject to the tax. ⁷⁰⁵ (1) A publication is not a newspaper unless: (a) It is published and distributed no less frequently than once each week; (b) It does not, when its successive issues are put together, constitute a book; (c) It is intended for circulation among the general public; (d) It contains news items, legal and general intelligence, reports of current events, editorial comments, advertising matter, and other miscellaneous information of public interest generally found in the ordinary newspaper. (2) The criteria set forth in § A(l), above, are minimum requirements, the meeting of which does not necessarily result in a publication being classified as a newspaper.

A publication which meets the criteria set forth in § A(l), above, but which is in fact a magazine, shopping advertiser, community newsletter, tip sheet, or other publication which is not a newspaper in the common and popularly-accepted usage of the term, is not a newspaper for the purpose of this exemption. A publication is not disqualified solely because it is devoted primarily to matters of specialized interest, such as legal, mercantile, political, religious, or sporting matters. (8) The sale of an item which is to be distributed as a component part of a newspaper, such as an advertising supplement, is not subject to the tax.” Present Regulation .05 was in effect approximately six months before MPG started business. For MPG’s argument to prevail this Court must conclude that the General Assembly intended “newspapers of any and all types,” as used in § 326(n), to include pennysavers or shopping advertisers, so that Regulation .05’s exclusion is invalid.

Cf. Comptroller v. Rockhill, Inc., 205 Md. 226 , 107 A.2d 93 (1954) (where statute taxed, as sales, the charges for accommodations “regularly” furnished to the public for a consideration, Comptroller’s rule invalid which applied statute to “all rentals in resort areas for terms of ⁷⁰⁶ four months or less,” including occasional rentals by owners of non-investment vacation cottages). In common and ordinary parlance the term “newspaper” does not conjure the image of a pennysaver. In the context of a sales and use tax statute, “newspaper” has been held not to include a pennysaver; see Redwood Empire Publishing Co. v. State Bd. of Equalization, 207 Cal.App.3d 1334 , 255 Cal.Rptr. 514 (1989); Green v. Home News Publishing Co., 90 So.2d 295 (Fla.1956); Department of Revenue v. Skop, 383 So.2d 678, 680 (Fla.App.1980); G & B Publishing Co. v. Department of Taxation & Fin., 57 A.D.2d 18 , 392 N.Y.S.2d 938 , appeal denied, 42 N.Y.2d 807 , 368 N.E.2d 45 , 398 N.Y.S.2d 1029 (1977); Memphis Shoppers News, Inc. v. Woods, 584 S.W.2d 196 (Tenn.1979); Shoppers Guide Publishing Co. v. Woods, 547 S.W.2d 561 (Tenn.1977); and not to include an advertising supplement; see Ragland v. K-Mart Corp., 274 Ark. 297 , 624 S.W.2d 430 (1981); Caldor, Inc. v. Heffernan, 183 Conn. 566 , 440 A.2d 767 (1981); K Mart Corp. v. South Dakota Dep’t of Revenue, 345 N.W.2d 55 (S.D.1984); Wisconsin Dep’t of Revenue v. J.C. Penney Co., 108 Wis.2d 662 , 323 N.W.2d 168 (1982).

Contra see Hadwen, Inc. v. Department of Taxes, 139 Vt. 37 , 422 A.2d 255 (1980), appeal dismissed, 451 U.S. 977 , 101 S.Ct. 2300 , 68 L.Ed.2d 834 (1981) (a pennysaver is a newspaper); Greenfield Town Crier, Inc. v. Commissioner of Revenue, 385 Mass. 692 , 433 N.E.2d 898 (1982) (publication which contained eighty-seven percent advertising but included matters of interest to a significant segment of the public was a newspaper); Sears, Roebuck & Co. v. State Tax Comm’n, 370 Mass. 127 , 345 N.E.2d 893 (1976) (an advertising supplement is a newspaper); Daily Record Co. v. James, 629 S.W.2d 348 (Mo.1982) (an advertising supplement is a newspaper). Even if the legislative sponsor of the exemption initially intended a very broad application for newspapers and periodicals of any and all types, the exclusion of periodicals from the bill necessarily made the meaning of “newspaper” critical to the exemption’s application. The 1957 amend ⁷⁰⁷ ment not only furnished no definition, but operated against the background of an existing regulation that required a “newspaper” to contain “general news of the day, information of current events, and news of importance and of current interest to the general public.” If the Legislature intended to override the Comptroller’s existing requirements and to include as “newspapers” periodicals devoted almost entirely to advertising, it would seem that the General Assembly would have adopted a statutory definition and effected a repeal of the Comptroller’s existing regulatory definition. After the 1957 enactment, the Comptroller amended Rule 5, stating “the sole effect” of the statutory amendment was to exempt printing of giveaway newspapers.

The administrator’s contemporaneous interpretation of the statute saw no expansion of the regulatory definition of “newspaper”; rather, the statute expanded the prior, regulatory based, exemption for sales of newspapers to include their printing as well. This administrative interpretation of the effect of the 1957 statute has been confirmed by at least two amendments to § 326(n) which left the Comptroller’s interpretation undisturbed. The original Sales Tax Act had exempted “[s]ales of transportation and communication services,” Code (1947 Cum.Supp.), § 261(n), and, in 1957, the newspaper exemption was tacked onto communication services by an “including.” By Chapter 452 of the Acts of 1968 (1968 Md.Laws at 789), communication services were deleted from subsection (n), and the newspaper exemption was tacked onto transportation services by an “and.” In 1973, by Chapter 722 of the Acts of that year, § 326(n) was repealed and reenacted in order to add the exemption for photographic materials. These reenactments, while the Comptroller’s interpretation of the effect of the 1957 newspaper exemption was expressed in the pre-1979 version of Regulation .05, are approvals by the General Assembly of that administrative interpretation.

See Washington Suburban Sanitary Comm ’n v. C.I. Mitchell & Best Co., 303 Md. 544, 559 , 495 A.2d 30, 37 (1985); Board of Examiners in Op ⁷⁰⁸ tometry v. Spitz, 300 Md. 466, 477 , 479 A.2d 363, 369 (1984); Valentine v. Board of License Comm’rs of Anne Arundel County, 291 Md. 523, 533-34 , 435 A.2d 459, 464-65 (1981). The above analysis has treated Rule 5 and Regulation .05 as interpretative rules. Whether Rule 5, prior to 1957, validly exercised the Comptroller’s rule-making power under the Sales Tax Act to exempt sales of newspapers is perhaps only of historic interest today. The 1957 statute ratified Rule 5 as to sales and extended the exemption to printing.

But the 1957 statute left undisturbed the administrative exercise of the power delegated to the Comptroller by the General Assembly to state the criteria which must be satisfied in order for a publication to be a newspaper for § 326(n) purposes. Regulation .05, pre- and post-1979, is a legislative rule. The significance of the distinction between interpretative and legislative rules was stated by the Court in Batterton v. Francis, 432 U.S. 416 , 97 S.Ct. 2399 , 53 L.Ed.2d 448 (1977), where the issue was the meaning of “unemployed” in federal statutes establishing an experimental program for aid for dependent children of unemployed fathers (AFDC-UF). The district court had held that a person discharged for cause was unemployed, because that person was out of work.

The Court approved a legislative rule, adopted by the delegate of the Secretary of the Department of Health, Education and Welfare, which excluded from unemployed persons those out of work because they had been discharged for misconduct. The Court reasoned: “Congress ... expressly delegated to the Secretary the power to prescribe standards for determining what constitutes ‘unemployment’ for purposes of AFDC-UF eligibility. In a situation of this kind, Congress entrusts to the Secretary, rather than to the courts, the primary responsibility for interpreting the statutory term. In exercising that responsibility, the Secretary adopts regulations with legislative effect.

A reviewing court is not free to set aside those regulations simply because it would have interpreted the statute in a different manner. ⁷⁰⁹ “The regulation at issue in this case is therefore entitled to more than mere deference or weight. It can be set aside only if the Secretary exceeded his statutory authority or if the regulation is ‘arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.’ ” Id. at 425-26 , 97 S.Ct. at 2405-06 (citations and footnotes omitted). See also id. at 425 n. 9, 97 S.Ct. at 2405 n. 9; 2 K. Davis, Administrative Law Treatise § 7:11, at 57 (2d ed. 1979). Nor did the Comptroller exceed the powers delegated by the General Assembly when the Comptroller amended Regulation .05 in 1979, in order to provide “a more precise definition” which “may result in the collection of taxes on certain sales upon which taxes are not presently being collected because of possible ambiguities in the existing regulation.”