Rossville Vending MacHine Corp. v. Comptroller of Treasury

HARRELL, Judge. This appeal by Rossville Vending Machine Corp. (Rossville or appellant) arises from an order of the Circuit Court for Baltimore County (Smith, J.) affirming a decision of the Maryland Tax Court (Tax Court), which had sustained an assessment for delinquent admissions and amusement taxes issued by the Comptroller of the Treasury (Comptroller) against Rossville. The sole question posed by appellant for our review, as framed by Rossville, is “[w]hether the [c]ircuit [c]ourt erred in affirming the Maryland Tax Court’s decision that cash payments made to players of Rossville’s amusement machines were includable as gross receipts and therefore subject to the admissions and amusement tax[.]” We agree with the judg ³⁰⁷ ments of the circuit court and Tax Court and, accordingly, shall affirm. FACTS Rossville owned a number of video poker machines that it placed in bars, restaurants, and other establishments frequented by the general public (collectively referred to hereafter as “establishments” or singularly as “establishment”).

The machines were activated by patrons placing quarters in them. A player accumulated “points” or “credits” as he or she played and got winning poker hands. When the player accumulated sufficient “credits” or “points,” he or she would be paid winnings in cash directly by the owner, or owner’s employee, of the establishment (not Rossville), based on the player’s number of accumulated “credits” or “points.” It was conceded that such payouts constituted violations of Maryland’s anti-gambling laws. Rossville’s financial arrangements with each owner of an establishment included a fifty-fifty split of the revenues received from the play of the machines in that establishment, after reimbursement for the owner’s winnings payouts and deduction of expenses such as fees and taxes.

The establishment would keep records of the payouts made and provide the information to Rossville’s routemen. Sometimes Rossville would advance funds to an establishment owner and allow that person to pay back the loan out of the establishment’s future share of the net revenues as earned. Rossville’s routemen would periodically visit each establishment where Rossville’s machines were placed (only the route-men had access to the quarters in the machines). Generally, their visits were of two different types.

A “dump” involved emptying machines of coins, counting the coins, repackaging them for continued use by the establishment, and noting the machines’ total receipts. A “collection” visit consisted of again emptying the machines of coins, computing the total receipts during a particular time period (including monies removed during previous “dumps” within that time period), and settling ³⁰⁸ up with the establishment owner in accord with the financial arrangement described earlier. When the routeman “settled up,” he obtained information as to the amount of payouts made during the time period, generally from the records kept by the establishment’s owner or employees, which the routeman could verify against internal accounting mechanisms in the video poker machines. The routemen then returned to Rossville with its share of the monies and documentation reflecting the gross receipts, payouts, and adjustments for fees, taxes, and the split.

A statewide investigation of illegal gambling and the video poker industry in particular, dubbed “Operation Quarter-match,” commenced in 1984, with Rossville as one of its targets. Detective Douglas Dunlap of the Baltimore County Police Department was a part of the task force. Detective Dunlap, and others, conducted undercover surveillance of establishments where Rossville’s machines were located. They witnessed not only the illegal payouts, but also the activities of the routemen.

Based on the activities thus observed, search warrants were obtained on 7 March 1985 for Rossville’s headquarters and fourteen establishments where its machines were located. Various records were seized at each location. William Watts, an auditor with the Comptroller’s office, reviewed the records seized by the police. Based on what these records revealed to him, he conducted a formal amusement tax audit of Rossville.

From the seized records and the audit, Watts was able to calculate the total amount of money collected from the machines in the assessment period and the amount of payouts made to players. He computed the total amusement taxes due on the total monies collected (with no deduction for the payouts), and subtracted the amusement taxes previously paid by Rossville for the time period involved, resulting in a deficiency owed to the Comptroller of $736,-033.98. Watts testified before the Tax Court that it was the practice of the Comptroller’s office during the period of as ³⁰⁹ sessment involved in this case to tax the total amount in the machines. The Comptroller levied a deficiency assessment 1 against Rossville on 25 September 1985, plus interest and penalties, for the period 15 December 1982 through 6 March 1985.

Rossville countered with a refund claim. After the assessment was affirmed and the refund denied by the Comptroller’s hearing officer, Rossville concurrently, but separately, appealed both actions to the Tax Court. Because the refund claim aspect has been fully litigated, we will not address it further in this opinion. 2 The Tax Court held a hearing on the assessment appeal on 17 October 1991. The issue before the Tax Court was whether, for the purpose of computing gross receipts that are subject to the admissions and amusement tax, Rossville could deduct the cash payouts made to the players.

At the hearing, Watts and Dunlap, among others, testified. Dunlap, because of his extensive experience and knowledge of the video poker industry, was offered and received as an expert witness. He testified, among other things, that a company such as Rossville only places video poker machines in locations where it has the exclusive right to do so. He opined that the financial arrangements between Rossville and the establishment owners were typical of the industry, including ³¹⁰ the necessity to make payouts to the customers so people would play the machines.

Watts essentially explained the bases and calculations for the Comptroller’s assessment in terms of the information obtained from the seized records and the audit. The Tax Court (Calvert, J.) issued an oral ruling at the end of its hearing affirming the Comptroller’s assessment. It followed that with an order to like effect on 19 November 1991. The circuit court, by its 27 July 1992 Opinion and Order, filed on 29 July, affirmed the Tax Court’s decision.

The court found that the Tax Court’s factual determination concerning the calculation of the assessment was supported by substantial evidence. It rejected Rossville’s claim that gross receipts did not include cash payouts made to winning players on the amusement devices holding: “the Maryland Tax Court was not erroneous as a matter of law in its determination that gross receipts included all charges for use of Appellant’s amusement devices without deduction for payouts made to customers who played.” Rossville filed a timely appeal from the decision of the circuit court. 3 We will supply additional facts as may be necessary or desirable in our discussion of appellant’s issue. ANALYSIS Standard of Review Section 13-532 of the Tax-General Article of the Annotated Code of Maryland provides in pertinent part: A final order of the Tax Court is subject to judicial review as provided for contested cases in §§ 10-215 and 10-216 of the State Government Article. [4] ³¹¹ Md.Tax-Gen.Code Ann. § 13-532(a)(l) (1988). Section 10-215 of the State Government Article provided in pertinent part: Decision. — In a proceeding under this section, the court may: (1) remand the case for further proceedings; (2) affirm the decision for the agency; or (3) reverse or modify the decision if any 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) (1984) (1993 Repl.Vol.). It is well settled that judicial review of decisions of the Maryland Tax Court is severely limited. See CBS, Inc. v. Comptroller of the Treasury, 319 Md. 687, 697-98 , 575 A.2d 324 (1990); See also Comptroller of the Treasury v. Diebold, Inc., 279 Md. 401, 406-08 , 369 A.2d 77 (1977). Nevertheless, “a reviewing court is under no statutory constraints in reversing a Tax Court order which is premised solely upon an erroneous conclusion of law.” Ramsay, Scarlett & Co. v. Comptroller of the Treasury, 302 Md. 825, 834 , 490 A.2d 1296 (1985).

See also Supervisor of Assessments of Montgomery County v. Asbury Methodist Home, Inc., 313 Md. 614, 626 , 547 A.2d 190 (1988). Where the interpretation of a statute or ³¹² regulation is at issue, the substituted judgment standard is used since such an interpretation involves a question of law. State Dep’t of Assessments & Taxation v. Consumer Programs, Inc., 331 Md. 68, 71-72 , 626 A.2d 360 (1993); Baltimore Building & Construction Trades Council v. Barnes, 290 Md. 9, 14-15 , 427 A.2d 979 (1981). “On the other hand, where the Tax Court’s decision is based on a factual determination, and there is no error of law, the reviewing court may not reverse the Tax Court order if substantial evidence of record supports the agency’s decision.” Ramsay, Scarlett & Co., 302 Md. at 834 , 490 A.2d 1296 . “As to mixed questions of fact and law, an intermediate level of scrutiny applies: such findings must be affirmed if, after deferring to the Tax Court’s expertise and to the presumption that the decision is correct, ‘a reasoning mind could reasonably have reached the [tax court’s] conclusion.’ ” United Parcel Serv., Inc. v. Comptroller of the Treasury, 69 Md.App. 458, 464 , 518 A.2d 164 (1986) quoting Ramsay, 302 Md. at 838 , 490 A.2d 1296 ); See also Comptroller of the Treasury v. World Book Childcraft International, Inc., 67 Md.App. 424, 439 , 508 A.2d 148 , cert. denied, 307 Md. 260 , 513 A.2d 314 (1986). Gross Receipts The statute at issue in this case, former Article 81, § 402 of the Annotated Code of Maryland, provided in pertinent part: “(a) Except as otherwise provided in this subtitle, any county by resolution may levy a tax on the gross receipts of every person, firm or corporation obtained from sources within the county derived from the amounts charged for ... ❖ * # * * * (in) The use of sporting or recreational facilities or equipment, including the rental of sporting or recreational equipment, and games of entertainment” [5] (emphasis supplied) ³¹³ The statute did not otherwise define the phrase “gross receipts”, nor did the Comptroller in its regulations.

As we shall discuss later, the Comptroller did, through its administration of the admissions and amusement tax, establish a purportedly uniform interpretation and practice regarding treatment of “gross receipts” that it urges we should consider persuasive in our analysis of the statute. Appellant asserts that the pertinent statutory language is ambiguous. If that be so, it argues, any amounts paid out, either to players or to the location owners to reimburse them for payoffs on its amusement machines, should not have been included in calculating its “gross receipts”, because Rossville was not entitled to retain those monies. It points to several aspects of its arrangements with the establishment owners, which it characterized as a joint venture of partnership, to demonstrate its lack of entitlement to the disputed quarters.

First, the net receipts derived from the video poker machines were shared equally. Second, the establishment owners and/or its employees made cash payouts to people who accumulated points while playing the video poker machines. The Comptroller acknowledged that these payouts were an integral part of the video poker industry because the payouts were a financial necessity to encourage play of the machines. Establishment owners and Rossville maintained records of the amount of payouts made and Rossville reimbursed the establishment for these payouts.

Rossville reimbursed the establishment owners because the machines did not make instant payouts and only Rossville employees had access to the money in the machines. From this state of affairs, Rossville reasons that its partners or co-venturers, the establishment owners, were entitled to reimbursement for the payouts and Rossville, having no claim of right to those monies, should not be taxed on this “phantom income.” Rossville also makes a secondary argument that the reimbursed payouts should be treated as ³¹⁴ trade discounts and accorded the status of an adjustment to gross receipts because the payouts are necessary to maintain its competitive position in the video poker machine industry. The Comptroller, endeavoring to strike a clean line with its reasoning, counters that by the plain meaning of the statute, case law, and the Comptroller’s longstanding administrative practice, no deductions are permitted to determine the gross receipts subject to admissions and amusement tax. As in any case that pivots on the application of a statute, we should not commence our analysis without first recalling the applicable and often-stated rules in aid of statutory construction.

To ascertain and effectuate the actual legislative intention in enacting any statute is, of course, the cardinal rule of statutory interpretation, the primary source of which is the language of the statute itself. In re Criminal Investigation, No. 1-162, 307 Md. 674, 685 , 516 A.2d 976 (1986); State v. Intercontinental, Ltd., 302 Md. 132, 137 , 486 A.2d 174 (1985); Bd. of License Comm’rs of Carroll County v. Pizza Hut of Md., Inc., 95 Md.App. 291, 301 , 620 A.2d 953 (1993); Gray v. Anne Arundel County, 73 Md.App. 301, 309 , 533 A.2d 1325 (1987). The Court of Appeals pointed out in Kaczorowski v. City of Baltimore, 309 Md. 505 , 525 A.2d 628 (1987), that we must first look to the words of the statute “because what the legislature has written in an effort to achieve a goal is a natural ingredient of analysis to determine that goal.” Id. at 513 , 525 A.2d 628 . But if the statutory language is susceptible of more than one meaning and thus is ambiguous, courts should consider “not only the literal or usual meaning of words, but their meaning and effect in light of the setting, the objectives and purpose of the enactment.” Id. at 513 , 525 A.2d 628 , (quoting Tucker v. Fireman’s Fund Ins.

Co., 308 Md. 69, 75 , 517 A.2d 730 (1986)). Kaczorowski further demonstrates that, in the rare case in which it is apparent to the court that plain, clear, and unambiguous language in the statute does not express or carry out the intent of the legislature, the legislative intent as discerned by the court will prevail over the plain meaning of the words of the statute. ³¹⁵ Judge Robert M. Bell, then writing for this Court in Ford Motor Land Dev. v. Comptroller of the Treasury, 68 Md.App. 342 , 511 A.2d 578 , cert. denied, 307 Md. 596 , 516 A.2d 567 (1986), also chronicled the rubrics that we follow in our approach to the kind of task at hand: “ “Where the language [of the statute] is clear and free from doubt the Court has no power to evade it by forced and unreasonable construction.’ Thus where ‘there is no ambiguity or obscurity in the language of a statute, there is usually no need to look elsewhere to ascertain the intent of the General Assembly.’ Furthermore, the statute must be construed considering the context in which the words are used and viewing all pertinent parts, provisions, and sections so as to assure a construction consistent with the entire statute. And, if there is no clear indication to the contrary, a statute must be read so that no part of it is ‘rendered surplusage, superfluous, meaningless, or nugatory.’ On the other hand, we ‘shun a construction of the statute which will lead to absurd consequences,’ or ‘a proposed statutory interpretation if its consequences are inconsistent with common sense.’” 68 Md.App. at 346-47 , 511 A.2d 578 (citations omitted) (emphasis in original). See also Chesapeake Indust.

Co., v. Comptroller of the Treasury, 331 Md. 428, 440, 441 , 628 A.2d 234 (1993). In those instances where the applicability of a tax statute is being construed, the established rule is “not to extend the tax statute’s provisions by implication, beyond the clear import of the language used, to cases not plainly within the statute’s language, and not to enlarge the statute’s operation so as to embrace matters not specifically pointed out. In case of doubt, tax statutes are construed ‘most strongly against the government, and in favor of the citizen.’ ” Comptroller of the Treasury v. John C. Louis Co., 285 Md. 527, 539 , 404 A.2d 1045 (1979) (citations omitted). With all of these principles in focus, we set about our task. ³¹⁶ Appellate courts at all levels often consult dictionaries as an aid in their analysis of the meaning to be given legislatively-selected words or phrases in statutes.

See, e.g., State Dep’t of Assessments and Taxation v. Consumer Programs, Inc., supra, 331 Md. at 72-73, 626 A.2d 360 . Many times the reason for the choice of the particular dictionary, or the particular edition thereof, goes unexplained explicitly and is not readily ascertainable by implication from the context of its use. Why a particular edition of a particular dictionary illuminates the “natural and ordinary significance” of the word or phrase being scrutinized is a legitimate question any Maryland reader might pose. It seems no court is immune to criticism for a failure to justify this step in its analysis.

See David O. Stewart, “By the Book”, ABA Journal, July 1993, at 46-47. The admissions tax was first enacted in Maryland in 1936 with the addition of § 73 to Article 56 of the Code. 6 That enactment contained the operative phrase “gross receipts” as the basis for computation of the tax. It seems logical, at least in a linear way, that a popular dictionary of