State Department of Assessments & Taxation v. Andrecs

McDonald, J. An overarching principle of real property taxation, enshrined in the Maryland Constitution, is that like properties of like value are to be taxed alike. This is known as the requirement that property taxes be “uniform.” 1 For a longtime homeowner whose residence has increased dramatically in value due to inflation or market-related forces beyond the control of the homeowner, strict adherence to the uniformity principle may cause financial hardship. To mitigate that effect, the Legislature created the homestead tax credit nearly 40 years ago to provide temporary relief from increasing property taxes for homeowners who can satisfy certain conditions. But what about increases in value that are unrelated to external market conditions and are instead the result of the ⁵⁸⁸ homeowner’s own actions in making substantial renovations to the property?

In the original version of the statute, a substantially renovated home was taxed at its full enhanced value and the homeowner lost the credit. When concerns were raised about such situations, the Legislature modified the homestead tax credit statute in certain respects to provide that a homeowner would retain an existing credit, but that the full value of the renovations would be included for tax purposes. This case requires us to construe one of those provisions. Respondent Kevin Andrecs had lived in his home for approximately 10 years and benefited from the application of the homestead tax credit with respect to increases in the value of his home during that period.

During 2008 and 2009, he razed the existing home, moved off the property, and built a new home that increased the value of the property by nearly $500,000. The tax assessor, although retaining Mr. Andrecs’ existing credit, included the full value of the renovation in the value to be taxed — an interpretation that was affirmed by the Maryland Tax Court. Mr. Andrecs argues for an alternative construction of the homestead tax credit statute under which he could effectively escape tax on the renovations for many years into the future. This would result in Mr. Andrecs’ property being taxed at a much lower rate than similarly-situated and similarly-valued properties — in conflict with the constitutional uniformity principle.

We hold that the interpretation endorsed by the Maryland Tax Court accords better with the statutory language and legislative intent and better respects the uniformity principle. I Background This case requires us to construe a statute — the homestead tax credit statute. As in any exercise in statutory construction, the language of the statute must be considered in context. 2 This is especially important in the interpretation of ⁵⁸⁹ statutes that do not have a lineage of prior judicial construction. We start with a constitutional principle governing all property taxes in the State.

We then proceed to a brief primer on the statutes governing real property taxation in Maryland, with particular attention to the homestead tax credit statute and the key amendments to that statute pertinent to this case. We then turn to the particular facts of this case. A. The Constitutional Mandate for Uniformity in Taxation of Real Property Article 15 of the Maryland Declaration of Rights establishes a uniformity requirement with respect to the taxation of real and personal property. 3 It requires that property assessments and taxes be “uniform” within each class or sub-class of property as those classes are defined by the Legislature. This uniformity provision requires that all property taxes within a particular class or sub-class be assessed based on an equivalent proportion of the property’s actual value.

State v. Cumberland & Penn. R.R. Co., 40 Md. 22, 49-51 (1874) (“the Legislature is required to cause all public taxation for the support of Government to be fair and equal in proportion to the value of the property assessed”). It is a violation of the uniformity requirement for the Legislature to tax property within the same class or sub-class at different proportions of market value. See Sears, Roebuck v. State Tax Comm., 214 Md. 550 , 136 A.2d 567 (1957).

These two principles of the uniformity requirement — (1) that property taxes be based on actual value and (2) that they be assessed based on an equivalent proportion of value within each class or sub-class of property — have been a part of ⁵⁹⁰ Maryland constitutional law since the Declaration of Rights was adopted in 1776. 4 See Susquehanna Power Co. v. State Tax Comm’n, 159 Md. 334, 343 , 151 A. 29 (1930) (amendments of the language of Article 15 did not affect the principle that taxes should be uniformly assessed based on the actual value of real property). This Court has recognized that “perfect uniformity in assessments [is] impossible” and suggested that temporary inequalities in assessments do not violate Article 15, so long as the inequalities are ultimately reconciled. See Rogan v. Calvert County Comm’rs, 194 Md. 299, 311 , 71 A.2d 47 (1950). Referring to this Court’s Rogan decision, the Attorney General has advised the Governor and General Assembly that a lack of uniformity in assessments among properties within the same class might not conflict with Article 15’s uniformity requirement if the disparity is temporary and does not persist for more than five years. 72 Opinions of the Attorney General 350 (1987).

B. The Uniformity Requirement and Real Property Taxes Unless otherwise exempted by statute, all property located in the State is subject to assessment and property tax and is taxable to the owner of the property. Maryland Code, Tax-Property Article (“TP”), § 6-101(a)(1). Generally, to determine the amount of property tax due, the assessment of the property is multiplied by the applicable rate. TP § 6-401.

Tax Rate Property is divided into classes and subclasses. Real property is one class of property and is divided into 11 subclasses. ⁵⁹¹ TP § 8-101(b). Consistent with the uniformity requirement of Article 15, a single tax rate applies to a subclass. The State and each county (including Baltimore City) set the property tax rates for property within their respective jurisdictions.

See TP §§ 6-201, 6-202. Property Valuation Calculation of a property assessment begins with a determination of the property’s value. Real property is valued separately for the land and improvements to the land. TP § 8-104(a).

The value of real property is determined by a physical inspection of the property by the State Department of Assessments and Taxation (“SDAT”) once every three years. TP § 8-104(b). The “date of finality” — when assessments become final for the next tax year — is January 1 of the year immediately before the first tax year to which the new valuation applies. TP §§ l-101(i), 8-104(b)(2).

In any year of a three-year cycle, however, real property must be revalued if, among other things, “substantially completed improvements are made which add at least $100,000 in value to the property.” 5 TP § 8-104(c)(l)(iii). Another event that can trigger a mid-cycle revaluation of property is “a change in use or character” of the property. TP § 8-104(c)(l)(ii). Phase-in of the Valuation The assessment of real property is the value to which the property tax rate may be applied.

TP § l-101(b). Except for a few exceptions not relevant here, the assessment of real property is its “phased-in value.” TP § 8-103(c)(l). Instead of immediately taxing the property at its full value calculated during each physical inspection, the increase in value between one physical inspection and the next is phased in over three years. TP § 8-103(c)(l).

Thus, the phased-in value for the first year increases by one-third of the amount ⁵⁹² by which the value increased over that yielded by the prior physical inspection of the real property; the assessment for the second year increases by two-thirds of the amount by which the value increased over the prior physical inspection; and the assessment for the third year includes the full amount by which the value increased over the prior physical inspection. TP § 8 — 103(a)(3). If the physical inspection did not reveal an increase in value, the assessment for all three years is the value determined in the most recent valuation. Id.

Tax Computation In sum, once the real property is inspected and valued, the increase in value from the most recent inspection is phased-in over three years. For each tax year, the amount of tax due is calculated by multiplying the phased-in value for that year by the tax rate applicable to the particular subclass of real property. The next step is to determine whether any tax credits apply. C. The Homestead Tax Credit During the 1970s, the country experienced significant inflation generally, and in real property values in particular.

This resulted in substantial increases in the market value of real property and corresponding increases in real property taxes. A number of proposals were considered by the General Assembly to provide tax relief to homeowners from the effect of inflation on residential property values and tax assessments. See 62 Opinions of the Attorney General 54 (1977) (analyzing various proposals for residential property tax reform). Ultimately, the Legislature enacted a provision now known as the homestead tax credit.

Chapter 959, Laws of Maryland 1977, now codified, as extended and amended, in TP § 9-105. Under the homestead tax credit statute, even though a residential property increases in value, the value used for purposes of computing property taxes is effectively capped at a certain percentage increase for each year, with the result that the homeowner owes less in real property taxes with respect to the home than if the cap did not apply. ⁵⁹³ Conditions for Application of the Credit Pertinent to this case, in order to qualify for the tax credit, an owner of real property must satisfy certain requirements. First, the taxpayer must be an individual who has a legal interest in a dwelling. TP § 9 — 105(a)(7). 6 Second, the house must be used as the principal residence of the homeowner.

TP § 9-105(a)(5)(i)l.A. Third, the house must be actually occupied or expected to be actually occupied by the homeowner for more than 6 months of a 12-month period beginning with the date of finality for the taxable year for which the homestead tax credit is sought. TP § 9-105(a)(5)(i)l.B. Calculation of the Credit The statute provides for the computation of the credit as follows: For each taxable year, the homestead property tax credit is calculated by: (i) multiplying the prior year’s taxable assessment by the homestead credit percentage as provided under paragraph (2) of this subsection; (ii) subtracting that amount from the current year’s assessment; and (iii) if the difference is a positive number, multiplying the difference by the applicable property tax rate for the current year. TP § 9 — 105(e)(1). This formula includes two terms — “taxable assessment” and “homestead credit percentage” — defined elsewhere in the statute. “Taxable assessment” is defined as: the assessment on which the property tax rate was imposed in the preceding taxable year, adjusted by the phased-in assessment increase resulting from a revaluation under § 8-104(c)(l)(iii) of this article, less the amount of any assess ⁵⁹⁴ ment on which a property tax credit under this section is authorized.

TP § 9-105(a)(9). We discuss the significance of this definition in greater detail below. 7 The “homestead credit percentage” essentially sets a cap on the increase in the taxable assessment of a principal residence for any one year. State law sets that percentage at 110% of the prior year’s taxable assessment for purposes of the State property tax. TP § 9 — 105(e)(2)(i).

Each county and municipal corporation is also authorized to establish its own percentage, between 100% or 110%. TP § 9 — 105(e)(2), (5). In practice, this means that ordinarily the taxable assessment of the property will not increase more than 10% from the previous year, as long as the homeowner remains eligible for the homestead tax credit. Pertinent to this case, Anne Arundel County has established a homestead credit percentage of 102% of the prior year’s taxable assessment for purposes of the County property tax.

Credits of Long Duration Conflict with the Uniformity Principle When the homestead tax credit statute was first enacted in 1977, the Attorney General reviewed it for consistency with the State and federal constitutions, as with all bills passed by the Legislature. The Attorney General found the bill to be constitutional but noted “certain constitutional concerns,” in light of the uniformity requirement of Article 15 of the Maryland Declaration of Rights and this Court’s decision in Rogan . 62 Opinions of the Attorney General 859 (1977). In particular, the Attorney General explained that “any statutory scheme to place a percentage limitation on assessment increases over a long duration would become unconstitutional as applied.” Id. ⁵⁹⁵ The Attorney General noted that, if a tax credit continued indefinitely, it would become unconstitutional as applied because a person whose property increased substantially in value would be taxed at a lower percentage of actual market value compared to a similar person whose property remained the same or increased insignificantly in value. 62 Opinions of the Attorney General 859 (1977); see also 62 Opinions of the Attorney General 54 (1977). This would violate the uniformity requirement of Article 15.

The Attorney General concluded, however, that since the homestead tax credit was intended to provide temporary relief to homeowners facing financial hardship from increasing property values and, as initially enacted, was expressly intended to be limited in duration, it might not be unconstitutional. 62 Opinions of the Attorney General 859 (1977). In the same opinion, in interpreting an ambiguous provision within the tax credit statute, the Attorney General opted for the interpretation that was more consistent with the constitutional uniformity requirement. Id. at 862-63 & n. 4. 8 D. The Problem of Substantial Renovations and Retaining Eligibility for Credit 1991 Amendment — Retaining Eligibility while including Value of Renovations Prior to 1991, a homeowner would lose eligibility for the homestead tax credit if, during the previous calendar year, the ⁵⁹⁶ dwelling was improved substantially. TP § 9 — 105(d)(1) (1986 Vol., 1990 Supp.).

This resulted in an increase in the taxable assessment of the house to its full market value and a concomitant increase in a homeowner’s property taxes, not only for the year in which the homeowner failed to qualify for the credit, but also for subsequent years, even if the homeowner re-entered the homestead tax credit program. 9 In 1991, the General Assembly amended the homestead tax credit statute to allow a homeowner who made a substantial renovation to retain an existing credit, although the value of the renovations would still be added to the taxable assessment. Chapter 246, Laws of Maryland 1991. 10 Before the amendment, “taxable assessment” was defined as the difference between the assessment to which property tax rate was applied the previous year and the amount of the assessment on which the tax credit was authorized. TP § 9-105(a)(5) (1986 Yol. & 1990 Supp.). The 1991 legislation amended that definition to include the increase in assessment resulting from a revaluation.

This meant that, while a homeowner who made extensive renovations would no longer lose eligibility for the ⁵⁹⁷ credit, the value of the renovations would be included in the computation of the “taxable assessment” for the prior year, which meant that the value of the improvements would become subject to the property tax. This part of the bill was adopted by the General Assembly as proposed and has remained unchanged to the present. 11 As indicated in Part I.C of this opinion, this definition is now codified in TP § 9-105(a)(9). 2006 Amendment — Retaining Eligibility while including Value of Rebuilt Home The Legislature extended the homestead credit statute in a similar fashion in 2006, to cover circumstances when a homeowner razed the homeowner’s current principal residence and vacated the property for an extended period of time in order to rebuild the home. Under the law as it then existed, the razing of an existing home would be considered a change in use of the property— ie., it was no longer a principal residence. The change in use of the property would require a revaluation under TP § 8-104(c)(1)(ii).

The revaluation might well result in a lower valuation of the property in the short term, particularly because the existing home was razed. However, because the property was no longer the “principal residence” of the homeowner, and because a homeowner must live in the property at least six months during a calendar year to qualify for the homestead tax credit, the owner lost eligibility for the homestead tax credit. See TP § 9-105(a)(5)(i)(1). Once the new structure was built, the property would be revalued at a presumably higher value and the homeowner would no longer have the benefit of the tax credit that the homeowner had previously enjoyed.

This resulted in dramatic increases in ⁵⁹⁸ property tax liability for some homeowners in those circumstances. The General Assembly responded by allowing a homeowner in such a situation to retain the tax credit if the homeowner met certain conditions. Chapter 169, Laws of Maryland 2006, enacting TP § 9 — 105(c)(5). In particular, if the homeowner had used the property as the homeowner’s principal residence for the three years before razing the home, the homeowner would remain eligible for the credit for the year in which the dwelling was razed and a subsequent year.

Once the new improvements were completed and the property was revalued, the calculation of the credit would include the revaluation based on the substantial improvements. In other words, “while the full benefit of the credit ... may not be reduced, the calculation of the credit associated with the first taxable assessment after the new improvements are added must include the revaluation, as provided under current law.” 12 Floor Report of House Ways and Means Committee for House Bill 275 at p. 1 (2006); see also Revised Fiscal and Policy Note for House Bill 275 (May 4, 2006) at p. I. 13 The proponents of that legislation testified that the legislation was not designed to avoid taxation of the improvements, but simply to retain the homestead tax credit that would otherwise be lost because the homeowner had temporarily moved off the property. 14 ⁵⁹⁹ TP § 9-105(c)(5) As a result of the 2006 amendments, the statute now includes a provision specifically directed to the application and computation of the credit when a homeowner razes and rebuilds the homeowner’s principal residence. That provision, pertinent to this case, reads as follows: (5) (i) This paragraph applies only if the homeowner owned and occupied a dwelling on the subject property as the homeowner’s principal residence for at least the 3 tax years immediately preceding the razing of the dwelling or the commencement of substantial improvements on the property. (ii) If a homeowner otherwise eligible for a credit under this section does not actually reside in a dwelling on the subject property for the required period of time under subsection (a)(2) or (d)(2) of this section because the dwelling was razed by the homeowner for the purpose of replacing it with a new dwelling or was vacated by the homeowner for the purpose of making substantial improvements to the property, the homeowner may continue to qualify for a credit under this section for the tax year in which the razing of the substantial improvements were commenced and 1 succeeding tax year even if the dwelling has been removed from the assessment roll.

(iii) If a homeowner qualifies for a credit under this paragraph, the full benefit of the credit existing at the commencement of the tax year in which the razing or vacating of the dwelling occurred may not be diminished during that tax year except that neither the calculation of the abatement nor the assessment under this paragraph shall include an assessment less than zero. ⁶⁰⁰ (iv) If a homeowner qualifies for a credit under this paragraph, the calculation of the credit associated with the initial taxable assessment of the substantially completed new improvements, which is effective on or before the second July 1 after the razing or vacating of the dwelling, shall include the revaluation under § 8 — 104(c)(1 )(iii) of this article. TP § 9-105(c)(5). E. Renovation and Taxation of the Andrecs Property Razing and Rebuilding the Home Mr. Andrecs and his wife purchased their home in August 1999 and lived in the home as their primary residence until August 2008. In 2008, they razed the existing house in order to build a new house on the lot.

The Andrecs lived elsewhere from August 2008 until their new home was completed in December 2009. It is undisputed that the Andrecs lived in the home for at least three years prior to razing it, thus retaining eligibility for the homestead tax credit under TP § 9-105(c)(5)(1) and (ii). It is also undisputed that the new construction increased the value of the property by more than $100,000 — thus triggering a mandatory revaluation under TP § 8-104(c)(iii). Revaluation of the Property by SDAT It appears from the record that the prior structure was valued by SDAT at $126,290 and its phased-in value for July 1, 2010 was $117,476.

After the original house was razed, SDAT reduced the value of the improvements on the property to a nominal $100. During this time, in accordance with TP § 9-105(c)(5), Mr. Andrecs was able to retain the homestead tax credit even though the property was not used as a principal residence for 17 months. 15 ⁶⁰¹ Pursuant to TP § 9 — 105(e)(5)(ii), 16 SDAT calculated a homestead tax credit as if the house had not been vacated for the year and the 2009-2010 and 2010-2011 tax years. The phased-in assessment of the property for that 2010-2011 tax year was $885,476. The taxable assessments for that tax year were $647,704 (for purposes of the State tax) and $354,026 (for purposes of the County tax). 17 Mr. Andrecs received a total homestead tax credit of $4,447.06 and the resulting Fiscal Year 2011 tax levy was $4,115.

Mr. Andrecs does not contest the calculation of the homestead tax credit and resulting tax levy for the 2010-2011 tax year. After the new house was constructed on the property, SDAT conducted a revaluation of Mr. Andrecs’ property in accordance with TP § 8 — 104(c)(iii) in April 2011 for the 2011-2012 tax year. 18 It found that the market value of the land ($718,000) had not changed as a result of the new house but that the market value of the improvements on the property had increased from $100 to $504,100. Accordingly, it valued the property (including both land and improvements) at $1,222,100. While SDAT included Mr. Andrecs’ existing homestead tax credit in its computation, it also included the increase in value attributable to the newly constructed home in calculating the 2011-2012 taxable assessments.

This resulted in a taxable assessments of $1,137,761 (for purposes of the State property tax) and $755,463 (for purposes of the County property tax). Applying the State and County tax rates to the full value of the property for tax year 2011-2012 would yield a ⁶⁰² tax liability of $12,804.86. 19 Application of the existing credit — now totaling $4,340.86 — against that amount resulted in Fiscal Year 2012 tax levy of $8,464. The tax levy was considerably higher than the tax levy for the previous tax year due to the inclusion of the value of the new house. Mr. Andrecs Appeals the Assessment Mr. Andrecs contested SDAT’s calculation of the 2011-2012 taxable assessments and homestead tax credit.

Mr. Andrecs argued that the statute did not permit SDAT to include the value of the newly constructed home in its calculation of the initial taxable assessments used in the computations. Rather, according to Mr. Andrecs, the statute required that the taxable assessments for the 2011-2012 tax year be capped at 102% (for County purposes) and 110% (for State purposes) of the 2010-2011 taxable assessments and the revaluation would be used elsewhere in the computations in a way that increased the amount of the credit to $8,405.82. Mr. Andrecs outlined his argument and calculations in a written appeal to SDAT, which rejected that argument. Mr. Andrecs then appealed the decision to the Property Tax Assessment Appeals Board for Anne Arundel County (the “Appeals Board”) which concluded that SDAT had correctly calculated the homestead tax credit.

In a separate appeal by Mr. Andrecs concerning the valuation of the property with the new house, the Appeals Board reduced the assessment by $100,000 from $1,222,100 to $1,122,100 on the ground that the property was not compared to similar properties within its value range. SDAT has not appealed that determination and it is not at issue here. Tax Court Mr. Andrecs then appealed SDAT’s calculations to the Maryland Tax Court. The Tax Court held a hearing on May 15, 2012, at which Mr. Andrecs and the Supervisor of Assessments for Anne Arundel County testified.

In an oral ruling at ⁶⁰³ the conclusion of the hearing, the Tax Court concluded that SDAT had correctly calculated the 2011-2012 taxable assessments and homestead tax credit. The Tax Court further concluded that Mr. Andrecs’ interpretation of the homestead tax credit statute was contrary to the statute and to the legislative intent underlying the statute. The Tax Court issued a brief written order incorporating its conclusions. Attached to the order was a chart displaying figures used in the calculation of the credit derived from an exhibit submitted by SDAT. 20 Judicial Review Mr. Andrecs then filed in the Circuit Court for Anne Arundel County a petition for judicial review of SDAT’s calculations.

The Circuit Court reversed the decision of the Tax Court and concluded that SDAT should not have relied on TP § 9 — 105(c)(5) when calculating the credit, and that it should not have included the value of the renovations in the calculation of the initial taxable assessment. SDAT appealed the decision of the Circuit Court. The Court of Special Appeals affirmed the judgment of the Circuit Court in an unreported decision. This Court granted SDAT’s petition for certiorari to determine whether the “taxable assessment” used to compute the homestead tax credit under TP § 9-105 should include the value of renovations when a homeowner razes and rebuilds a home.

II Discussion A. Standard of Review In this case, our task is to review the decision of the Tax Court — as opposed to the decisions of the courts that previously reviewed that decision. Green v. Church of Jesus ⁶⁰⁴ Christ of Latter-Day Saints, 430 Md. 119, 132 , 59 A.3d 1001 (2013) (“we look through the decision of the Circuit Court and evaluate directly the conclusions reached by the Tax Court”). The Maryland Tax Court is an independent administrative agency designated by the Legislature to hear certain appeals concerning certain tax issues under State law. Maryland Code, Tax-General Article, § 3-101 et seq.

The Tax Court’s findings of fact are reviewed on a deferential “substantial evidence” standard. Gore