Roberts Oxygen Co. v. Comptroller of Treasury

ROBERT M. BELL, Judge. This is an appeal by Roberts Oxygen Co., Inc., appellant, from the judgment of the Circuit Court for Montgomery County reversing an order of the Maryland Tax Court. The only issue presented for resolution is the propriety of that ruling. 1 Because we will hold that the court erred, we will reverse. ⁵⁸⁹ Appellant is a wholesale distributor of compressed gases, compressed gas cylinders, welding supplies and equipment. The gases when sold are contained in cylinders, which may be owned by appellant or by the customer.

The price of the gas sold does not depend upon the ownership of the cylinder; rather, the price of the gas is the same whether the cylinder is owned by appellant or the customer. The customer is billed for the gas when the customer receives a full cylinder. The customer is not charged for the use of the cylinder, either as a separate charge or in the price of the gas. The customers using their own cylinders receive but one invoice, an invoice for the price of the gas.

When the gas is sold in cylinders owned by appellant, however, the transaction is somewhat different. In those cases, the customer receives two invoices, one for the price of the gas and, at the end of each calendar month in which the customer has had a cylinder, a “demurrage invoice”. If at the end of the month covered by the demurrage invoice, appellant’s cylinders have been returned, no demurrage fee is paid and the invoice can be disregarded. On the other hand, if the customer retains possession of appellant’s cylinders at the end of the month covered by the demurrage invoice, a demurrage fee of $27.50 per cylinder per month is payable. 1 2 Thus, transactions involving the use of appellant’s cylinders have two aspects: (1) the sale of the gas and (2) transfer of possession of the cylinders in what appellant characterizes ⁵⁹⁰ as a “demurrage transaction”.

In demurrage transactions, only possession of the cylinders is transferred to the customer; appellant retains title to the cylinders, which are capitalized and depreciated on appellant’s books. Appellant’s demurrage transactions result in a demur-rage charge being payable by its customers approximately 99 percent of the time. These fees account for approximately 18.2 percent of appellant’s gross sales income and 66.65 percent of its total operating profit. Appellant treats the demurrage revenue as sales income and the cost of owning the cylinders it provides to customers as a cost of goods sold.

This treatment is consistent with the practice in the industry. Appellant purchases the cylinders it uses in demurrage transactions. Some of the cylinders are purchased without valves, in which case appellant also purchases valves for installation on those cylinders. The valves are then attached to the cylinders and the cylinder and valve are used as one unit in the demurrage transactions.

All cylinders are interchangeable and none of the cylinders are used by áppellant for the storage of the gases, which are stored in large bulk storage tanks on appellant’s premises. Appellant neither collected sales tax on its demurrage transactions in Maryland nor paid an excise tax on its use, storage, or consumption of cylinders. Likewise, appellant did not pay use taxes on cylinder valves that it purchased for incorporation into the cylinders, purchased without valves, it used for demurrage transactions. On January 27, 1984, the State of Maryland Retail Sales Tax Division, Comptroller of the Treasury (Comptroller), appellee, levied an assessment against appellant for past due sales and use taxes, including interest and penalty, he alleged were due on appellant's cylinder and valve purchases.

Following a formal hearing, held to consider appellant’s request that the assessment be revised, the Comptroller affirmed the assessment, although he waived the penalty charges. Appellant appealed to the Maryland Tax Court. ⁵⁹¹ That court viewed the issue presented as whether transfers of the cylinders to its customers on a demurrage basis constituted “sales”. Relying upon the sales/use tax exemption contained in Maryland Code Ann. Art. 81 § 326(x), it held that they were. It reasoned: The General Assembly need not have provided an exemption from sales tax for demurrage charges were they not considered sales.

Moreover, the statute explicitly calls such charges “sales.” Thus Petitioner is correct that its initial purchases of liquid cryogenic cylinders are excluded from use tax. (Footnote omitted) 3 The Comptroller successfully appealed to the Circuit Court for Montgomery County. In reversing the decision of the Tax Court, the court relied upon the definition of “demurrage” in the maritime context, i.e., as the charge for “storage beyond the ‘free time’ ”, Pine Street Trading Corp. v. Farrell Lines, Inc., 278 Md. 363, 381 , 364 A.2d 1103 (1976), and held that “penalty demurrages are not resales that fall within § 324(d).” It determined that appellant “gives a free period on every cylinder” and, therefore, the demurrage charge is not consideration for transfer of these cylinders. Moreover, it asserted that because appellant derived a business benefit as an ultimate consumer of the cylinders during the free period, the cylinders were not held solely for resale during that period.

The applicable standard of review of Tax Court decisions is set forth in Maryland Code Ann. Art. 81, § 229(o): ⁵⁹² In any case, the circuit court ... shall determine the matter upon the record made in the Maryland Tax Court. The circuit court shall affirm the Tax Court order if it is not erroneous as a matter of law and if it is supported by substantial evidence appearing in the record. In other cases, the circuit court may affirm, reverse, remand, or modify the order appealed from. This section makes clear that what standard of review to apply is dependent upon the nature of the Tax Court decision being reviewed.

Ramsey, Scarlett & Co. v. Comptroller, 302 Md. 825, 834 , 490 A.2d 1296 (1985); Thames Point Associates v. Supervisor, 68 Md.App. 1, 9 , 509 A.2d 1207 , cert. denied, 307 Md. 433 , 514 A.2d 1211 (1986); Comptroller v. World Book Childcraft International, Inc., 67 Md.App. 424, 438-39 , 508 A.2d 148 , cert. denied, 307 Md. 260 , 513 A.2d 314 (1986). Thus, appellate review of Tax Court orders based upon an erroneous conclusion of law is expansive, that is, the appellate court may substitute its judgment for that of the Tax Court. Ramsay, Scarlett & Company v. Comptroller, 302 Md. at 834 , 490 A.2d 1296 ; Comptroller of the Treasury v. World Book Childcraft International, Inc., supra, 67 Md. at p. 438, 508 A.2d 148 . Review is limited, however, where there is no error of law and the Tax Court’s factual determinations are at issue.

Ramsey Scarlett, supra; World Book, supra. Under this scenario, the Tax Court’s factual determinations must be upheld if there is substantial evidence in the record to support them. Board of Educ., Mont. Co. v. Paynter, 303 Md. 22, 34 , 491 A.2d 1186 (1985); Ramsey, Scarlett, supra; Balto.

Lutheran High Sch. v. Emp. Sec. Adm., 302 Md. 649, 662 , 490 A.2d 701 (1985); Supervisor of Assess. v. Carroll, 298 Md. 311, 318 , 469 A.2d 858 (1984); Supervisor v. St. Leonard Shores Joint Ven., 61 Md.App. 204, 212 , 486 A.2d 206 , cert. granted, 303 Md. 115 , 492 A.2d 616 (1985). Yet a different test applies, whether applying the appropriate legal principle, a reasoning mind could have reached the conclusion reached by the agency, Ram ⁵⁹³ sey, Scarlett, 302 Md. at 838, 490 A.2d 1296 , when the ’issue involves a mixed question of law and fact. Id.; Comptroller v. Diebold, Inc., 279 Md. 401, 407 , 369 A.2d 77 (1977); World Book, supra, 67 Md. App. p. 439, 508 A.2d 148 .

Thames Point Associates, 68 Md.App. at 10 , 509 A.2d 1207 . With these principles in mind, we proceed to set forth the statutory framework which governs the resolution of this appeal. Whether a taxpayer is liable for payment of a use or sales tax is governed by Maryland Code Ann. Art. 81, “Revenue and Taxes”. Section 373(a) of that article imposes an excise tax on the “use, storage, or consumption in this State of tangible personal property____” “Use, storage, or consumption”, however, does not include: (1) the purchase of tangible personal property by any vendor, or the keeping or retention of possession in this State of tangible personal property, for the purpose of resale within in the meaning of § 324(f)(i) of this article.

(2) the consumption of tangible personal property, or the keeping or retention of possession in this State of tangible personal property for the purpose of consuming said property, in the manufacturing, assembling, processing or refining of other tangible personal property to be produced for sale or in the generation of electricity within the meaning of § 324(f)(ii) of this article. (3) the incorporation of tangible personal property, or the keeping or retention of possession in this State of tangible personal property for the purpose of incorporating said property, as a material or part of other tangible personal property to be produced for sale by manufacturing, assembling, or processing or refining within the meaning of § 324(f)(iii) of this article. Section 372(d). A sale of tangible personal property to a purchaser is not a taxable retail sale or a sale at retail if the purpose of the purchaser is to (1) resell the property so transferred in the form which the property is received by him, § 324(f)(i), or (2) “to use or incorporate the property so ⁵⁹⁴ transferred as a material or part of other tangible personal property to be produced for sale by manufacturing, assembling, processing or refining.” § 324(f)(iii).

Section 325 requires a seller to collect and pay to the State a sales tax on any “retail sale” of tangible personal property. Section 324(d) defines “sale” as any transaction whereby title or possession or both, of tangible personal property is or is to be transferred by any means whatsoever for a consideration. More particularly, a “retail sale” is the sale in any quantity or quantities of any tangible personal property, section 324(f), subject, of course, to the exceptions in § 324(f)(i)-(iii).