Mayor of Ocean City v. Purnell-Jarvis, Ltd.

ROSALYN B. BELL, Judge. This case involves a request for a refund of fees paid by Purnell-Jarvis, Inc. (appellee, cross-appellant) to Ocean City (appellant, cross-appellee) in connection with the development of and construction on certain properties in Ocean City during 1983 and 1984. The Mayor and City Council did not respond to this request. Therefore, the request was deemed denied.

Purnell-Jarvis appealed to the Maryland Tax Court, claiming that the fees charged during this period were excessive, unreasonable and illegal. The Tax Court ruled Purnell-Jarvis was entitled to a refund for 1984, but not for ³⁹⁷ 1983. The Tax Court remanded the case to the Mayor and City Council with instructions to enact reasonable fee schedules for 1984 and to refund the difference between what Purnell-Jarvis did pay and what it should have paid. The Tax Court also held that Purnell-Jarvis was entitled to six percent per annum interest from the date of payment of each fee subject to a refund.

Purnell-Jarvis appealed to the Circuit Court for Worcester County and Ocean City noted a cross-appeal. The circuit court reversed and remanded the case to the Tax Court. Ocean City appealed and Purnell-Jarvis cross-appealed. The issues on appeal are: 1 — Whether the circuit court erred in holding that Purnell-Jarvis had standing to claim a refund of fees for building permits and zoning approvals? — Whether the circuit court erred in holding that the validity of regulatory fee schedules is determined by the reasonableness of the revenues derived therefrom? — Whether the circuit court erred in remanding the case to the Tax Court for a determination of whether ³⁹⁸ the revenues produced by the fee schedules for 1983 and 1984 were reasonable? — Whether the circuit court erred in holding that the applicable interest rate is the rate provided for in Md.Code Ann. Art. 24, § 9-713? 2 FACTS In 1981, the Mayor and City Council of Ocean City (City) amended the City’s charter to provide for a City Manager whose responsibilities would include supervision of all department heads.

In 1982, the City hired Anthony Barrett as its first City Manager. One of his first tasks as City Manager was to prepare a budget in which each department of the City government would bring in enough revenue to support the cost of running its programs. For Barrett, increasing the revenues for the Department of Planning and Community Development 3 (Department) meant making budgetary changes. He suggested imposing a site plan review fee to increase the revenues for the Planning and Zoning Divisions.

He also suggested increasing the fee schedule for building permits to increase revenues for the Building Inspection Division. Revenues from those fees were to be used to support the costs of the entire division, rather than solely the costs of maintaining site plan review and building inspection programs. The City Council adopted Barrett’s proposal. As a result of the City’s revised budget, the revenues for each division of the Department increased dramatically.

The City’s records indicate that, in fiscal year 1983, the ³⁹⁹ income generated by the fees collected by the Planning and Zoning Divisions totalled $219,163, while expenditures totaled $122,555. 4 Thus, Purnell-Jarvis claims that revenues exceeded the actual costs of the Planning and Zoning Divisions by $96,685. Documents presented to the Tax Court show that the income generated by the fees collected by the Building Inspection Division totaled $657,361, while expenditures totaled $86,412. Thus, revenues for the Building Inspection Division exceeded costs by $570,949. PurnellJarvis also contends that, in fiscal year 1984, the gap between revenues and expenses for the planning and zoning division widened to $198,182, with an income of $371,911 and expenditures of $173,729.

According to Purnell-Jarvis, the Building Inspection Division had a revenue/expense gap of $933,513, with an income of $1,047,086 and expenditures of $113,573. Therefore, Purnell-Jarvis claims that, for fiscal year 1983 and fiscal year 1984, the City generated a surplus of more than $1,800,000 through site plan review fee and building permit fee collections. Purnell-Jarvis is a general contractor located in Ocean City. The company has been doing business there for approximately 25 years.

It builds multi-family residential structures and commercial properties. For the most part, it builds for developers pursuant to a lump-sum contract. Occasionally, it builds on a cost-plus basis. 5 ⁴⁰⁰ On February 13, 1986, Purnell-Jarvis filed a written request with the City for a refund of all building permit and site plán review fees paid by it from July 1, 1982 to June 30, 1984, the two fiscal years in question. The Mayor and City Council did not respond to this request.

Purnell-Jarvis deemed the lack of response a refusal to refund the fees. Purnell-Jarvis then filed an appeal to the Maryland Tax Court. It contended that the charges and fees were excessive, illegal, and unreasonable because they were assessed and used by the City to raise revenue for general purposes. Purnell-Jarvis believed the revenues should have been used solely to defray the costs of administering the building and zoning codes.

The City argued that the fees and charges were for regulatory purposes only. They also argued that Purnell-Jarvis is not the party entitled to a refund as it did not itself pay the fees. The Tax Court found that PurnellJarvis did have standing to claim a refund for the fees paid. It held, however, that Purnell-Jarvis was actually entitled to a refund only for the fees paid in 1984.

The Tax Court remanded the case to the Mayor and City Council, ordering them to enact reasonable fee schedules for 1984 and to give Purnell-Jarvis a refund for fees paid in that year. The Tax Court also found that Purnell-Jarvis was entitled to payment of interest on the refund at the rate of six percent per annum from the date of payment. Purnell-Jarvis noted an appeal to the Circuit Court for Worcester County. The City noted a cross-appeal.

The circuit court held that the decision of the Tax Court was erroneously based on the subjective intent of the City Council in making the fee schedules rather than on the reasonableness of the revenues generated. The circuit court remanded the case to the Tax Court to make the determination of the validity of the fee schedules. Purnell-Jarvis then filed a motion to alter judgment and the City filed a motion to reconsider. They both requested the circuit court to address issues not addressed in the previous opinion.

At a hearing held on March 21, 1990, the City concurred in Purnell-Jarvis’s suggestion that the ques ⁴⁰¹ tion of the reasonableness of the fees was a question of law which should be decided by the circuit court rather than the Tax Court. In its April 12, 1990 opinion and order, the circuit court again remanded the adjudication of the validity of the fee schedules to the Tax Court. It found that Purnell-Jarvis had standing to claim refunds for the 13 lump-sum contracts and that Purnell-Jarvis was entitled to interest at the rate noted in Md.Code Ann. Art. 24, § 9-713. In response, the City noted an appeal and Purnell-Jarvis noted a cross-appeal.

SCOPE OF REVIEW A final order of the Tax Court is subject to judicial review in accordance with §§ 10-215 and 10-216 of the Maryland Administrative Procedure Act. Md.Tax-Gen.Code Ann. § 13-532(a) (1988). Section 10-215 provides for judicial review of an agency decision in the circuit court. Md.State Gov’t Code Ann. § 10-215 (1984).

Section 10-216 provides for appellate review of a final judgment of the circuit court by this Court. Md.State Gov’t Code Ann. § 10-216 (1984). An agency decision may be reversed or modified if a “substantial right of the petitioner may have been prejudiced because a finding, conclusion, or decision of the agency: (i) is unconstitutional; (ii) exceeds the statutory authority or jurisdiction of the agency; (iii) results from an unlawful procedure; (iv) is affected by any other error of law; (v) is unsupported by competent, material, and substantial evidence in light of the entire record as submitted; or (vi) is arbitrary or capricious.” Md.State Gov’t Code Ann. § 10-215(g)(3). The court’s role upon reviewing an agency decision goes very little beyond its inherent power of review to ⁴⁰² prevent illegal, unreasonable, arbitrary or capricious administrative action.

Harford Memorial Hospital v. Health Services Cost Review Commission, 44 Md.App. 489, 506 , 410 A.2d 22 (1980). Thus, judicial review of an agency decision is limited to determining whether a reasoning mind could have reached the factual conclusions reached by the agency. Supervisor of Assessments of Montgomery County v. Asbury Methodist Home, 313 Md. 614, 625 , 547 A.2d 190 (1988). Moreover, this substantial evidence test applies when the only question is whether the agency, using the correct legal standard, properly applied the law to the facts.

Asbury Methodist Home, 313 Md. at 627 , 547 A.2d 190 . Where,' however, the agency’s decision is based on an erroneous conclusion of law, this deferential test does not apply. Asbury Methodist Home, 313 Md. 626 , 547 A.2d 190 . The reviewing court, therefor, may substitute its judgment for that of the agency concerning questions of law.

Asbury Methodist Home, 313 Md. at 626 , 547 A.2d 190 . STANDING The Tax Court held that Purnell-Jarvis had standing to seek a refund of site plan review and building permit fees. It did not differentiate between the lump-sum contracts and the cost-plus contracts. The circuit court affirmed the Tax Court in part and held that Purnell-Jarvis had standing to seek a refund of fees on 13 lump-sum contracts.

Those fees were included in the contracts’ “miscellaneous cost” figure which did not rise when fees rose. The circuit court also held, however, that Purnell-Jarvis did not have standing to seek a refund of fees on three cost-plus contracts. Those fees were directly billed to the developers and thus the court held that Purnell-Jarvis was a mere conduit of the developers. We agree with the Tax Court and will reverse the circuit court.

We explain. The City argues that Purnell-Jarvis does not have standing to seek a refund of any fees. The City contends that Purnell-Jarvis did not pay the fees but passed them on to the developers. ⁴⁰³ Purnell-Jarvis responds that it did not pass on the fees any more than it passed on the costs of concrete, steel or electrical wire. This, however, is exactly what any contractor does in a construction contract.

Both the City’s argument and Purnell-Jarvis’s response miss the point. The question of who ultimately bears the economic burden of the fees is not determinative of the standing issue. Generally, whether a party has standing to sue depends on whether that party has an actual, real and justiciable interest susceptible of protection through litigation. 1A C.J.S. Actions § 60(a) (1985). More specifically, the modern rule in tax refund cases is that the party who is required to pay the tax, and who pays the tax is the party entitled to claim a refund.

Latrobe Brewing Co. v. Comptroller, 232 Md. 64, 71 , 192 A.2d 101 (1963). Additionally, Md.Code Ann. Art. 24, § 9-710 (1957, 1990 Repl.Vol.), provides: “A claim for refund may be filed with the tax collector who collects the tax, fee, charge, interest, or penalty by a claimant who: “(1) Erroneously pays to a county or municipal corporation a greater amount of tax, fee, charge, interest, or penalty than is properly and legally payable; or “(2) Pays to a county or municipal corporation a tax, fee, charge, interest, or penalty that is erroneously, illegally, or wrongfully assessed or collected in any manner.” Latrobe and Art. 24, § 9-710 are dispositive of the standing issue. Purnell-Jarvis, in fact, paid the fees which it alleges were illegally assessed. The fact that those fees may have been passed on, directly or indirectly, to the developer is immaterial.

We decline to require the trier of fact to investigate the murky question of who ultimately bears the economic burden of the site plan review and ⁴⁰⁴ building permit fees. 6 Therefore, we hold that Purnell-Jarvis has standing to seek the refund of the fees it paid in conjunction with both lump-sum and cost-plus contracts. TEST OF VALIDITY The Tax Court held that the fee schedule for 1983 was valid because the new fees were intended to correct the deficit in the site plan review and building inspection programs. The Tax Court also held, however, that the fee schedule for 1984 was not valid. Both the City and Purnell-Jarvis argue that the Tax Court applied the wrong test for determining the validity of the fee schedules.

The City argues that it was error for the Tax Court to hold the 1984 fee schedule invalid when it held that the same fee schedule for 1983 was valid. Purnell-Jarvis argues that the Tax Court applied an incorrect test of validity to the 1983 fee schedule. The appropriate test for determining the validity of regulatory fees is solely a question of law. Therefore, the decision of the Tax Court on this issue is not entitled to deferential treatment and this Court may substitute its judgment for that of the Tax Court.

Asbury Methodist Home, 313 Md. at 626 , 547 A.2d 190 . It is undisputed that the building permit and site plan approval fees are part of a comprehensive plan to regulate the development of the community. Generally, if a fee is imposed as part of a regulatory scheme, the amount of the fee must be reasonable and have some definite relation to the purpose of that scheme. Maryland Theatrical Corp. v. Brennan, 180 Md. 377, 381 , 24 A.2d 911 (1942).

Thus, “where an act is passed under the police power, the money collected under it must be not more than that neces ⁴⁰⁵ sary to carry out its provisions.” County Comm’rs of Anne Arundel County v. English, 182 Md. 514, 520-21 , 35 A.2d 135 (1943). —1983 Fee Schedule— The City argues that the Tax Court properly considered whether the Mayor and City Council intended to raise revenues when they enacted the fee schedules for 1983. The City, in essence, contends that the intent of the Mayor and City Council is relevant to a determination of whether the fee schedules were reasonable. We disagree and explain. Whether a particular act is a regulatory measure or a revenue raising measure determines which rules of construction apply.

Brennan, 180 Md. at 381 , 24 A.2d 911 . The amount of the tax is not reviewable if the act is a revenue raising measure. Brennan, 180 Md. at 381 , 24 A.2d 911 . If the act is a regulatory measure, however, the amount of revenue it produces must be reasonable and have some definite relation to the purpose of the regulation.

Brennan, 180 Md. at 381 , 24 A.2d 911 . Generally, an act is a revenue raising measure when it appears from the act itself that revenue is its main objective. Brennan, 180 Md. at 381 , 24 A.2d 911 . “In general, ... where the fee is imposed for the purpose of regulation, and the statute requires compliance with certain conditions in addition to the payment of the prescribed sum, such sum is a license proper, imposed by virtue of the police power; but where it is exacted solely for revenue purposes and its payment gives the right to carry on the business without any further conditions, it is a tax.” English, 182 Md. at 520 , 35 A.2d 135 , quoting 33 Am.Jur. Licenses, ¶ 19, p. 340 (emphasis added).

It seems clear that the purpose of the act or the intent of the persons enacting it is relevant to deciding only whether the act is a regulatory or revenue raising measure. ⁴⁰⁶ See Brennan, 180 Md. at 381-82 , 24 A.2d 911 ; English, 182 Md. at 520 , 35 A.2d 135 ; McBriety v. Mayor of Baltimore, 219 Md. 223, 237 , 148 A.2d 408 (1959). Once that determination is made, other rules of construction are applied. Brennan, 180 Md. at 381 , 24 A.2d 911 . Thus, where an act is a regulatory measure, the sole inquiry is whether the amount of money to be collected under it is reasonable and is not more than necessary to fund the enforcement of the regulation.

English, 182 Md. at 520-21 , 35 A.2d 135 ; Bren nan, 180 Md. at 381 , 24 A.2d 911 . Because it is clear that the fee schedules at issue were in the nature of regulatory measures, the amount of money that the Mayor and City Council intended to raise, as opposed to what those measures actually raised, is not the test to be applied in determining reasonableness. Therefore, we hold that the Tax Court erred when it considered the intent of the Mayor and City Council dispositive in determining whether the 1983 fee schedule was reasonable. —1984 Fee Schedule— The City next contends that, having found the 1983 fee schedule reasonable, it was error for the Tax Court to find the identical fee schedule for 1984 unreasonable. The Tax Court found that the Mayor and City Council were aware of the inordinate amount of construction and the revenue raised as a result.

It also found that they were aware that the high volume of construction was continuing into 1984. The Tax Court inferred that the Mayor and City Council intended to raise revenues far in excess of any expenditures associated with the programs by adopting a fee schedule identical to the 1983 fee schedule. Therefore, the Tax Court held that the 1984 fee schedules were unreasonable. The City argues that it is logically inconsistent to find a fee schedule in one year to be reasonable and yet find the identical fee schedule in another year unreasonable.

It also argues that the Tax Court erred in failing to consider that the fee schedules for 1985 were lowered, demonstrating the ⁴⁰⁷ intent of the Mayor and City Council to enact reasonable fee schedules as regulatory measures. The City’s argument might have some merit if the intent of the Mayor and City Council was the test of the validity of the fee schedule. As pointed out previously, however, the actual intent of the Mayor and City Council in enacting the fee schedules is simply not relevant. Nevertheless, to the extent that the Tax Court did consider their intent to be dispositive, that Court committed an error of law in ruling on the 1984 schedule.

REMAND The circuit court ruled that the case should be remanded to the Tax Court for a determination of the reasonableness of the 1983 and 1984 fee schedules. Both the City and Purnell-Jarvis argue that the circuit court erred in remanding the case. They also argue that this Court should determine the reasonableness or unreasonableness of the fee schedules as a matter of law. We disagree and explain.

Purnell-Jarvis argues that, once the amount of money collected from the fees and expenditures are established, the courts have treated the reasonableness of fee schedules as a matter of law. For this proposition, it cites McBriety v. Baltimore City, 219 Md. 223 , 148 A.2d 408 (1959). The Court of Appeals stated “the chancellor found as a fact that the estimated expenses over a five-year period would average several thousand dollars more than the average annual income from fees during the same period, and we are unable to say he was clearly wrong.” McBriety, 219 Md. at 236-37 , 148 A.2d 408 . The Court went on to affirm the chancellor’s ruling that the license fee was valid.

McBriety, 219 Md. at 241 , 148 A.2d 408 . Purnell-Jarvis apparently interprets this