State Department of Assessments & Taxation v. Greyhound Computer Corp.

Murphy, C. J., delivered the opinion of the Court. Appellee Xerox Corporation manufactures duplicating equipment and appellees Xerox Data Systems, Inc. and ⁵⁷⁸ Sperry Rand Corporation manufacture data processing equipment; each manufacturer leases the equipment to its customers. Appellees LMC Leasing Corporation and Greyhound Computer Corporation are “non-manufacturers” who purchase and thereafter lease data processing equipment to their customers. For a number of years prior to the tax year 1970, the State Department of Assessments and Taxation (the Department) had assessed the equipment of the appellees on the basis of the lesser of its “cost to the taxpayer,” or its market value (if the taxpayer could demonstrate that market value was less than the original cost of acquisition), less an allowance for depreciation.

Thus the property manufactured and leased by Xerox, Xerox Data and Sperry Rand was assessed, in years prior to 1970, at its cost of manufacture while like property purchased and leased by LMC and Greyhound was assessed on the higher valuation basis of its purchase price. 1 Consistent with this long-standing assessment practice, the Department, for the 1969 tax year, assessed data processing equipment owned by the Boothe Computer Corporation, which Boothe had purchased from a lessee of the IBM Corporation and had thereafter leased to its customers, on the basis of its purchase price. Boothe protested the assessment in October of 1969, maintaining that the “cost to the taxpayer” basis of assessment resulted in nonuniform assessments of identical property in that the assessment of its equipment, based on its purchase price, was five times higher than the assessment of identical equipment owned by IBM — a manufacturer of data processing equipment who leased it to its customers and who was assessed on the lower basis of its cost of manufacture. ⁵⁷⁹ Pending decision of the issue presented by Boothe’s protest, the Department, prior to January 1, 1970, instructed its assessors not to levy assessments for the 1970 tax year on equipment leased by manufacturers; it reasoned that if Boothe’s position was ultimately upheld, the proper method to achieve uniformity would be to increase the assessment of Boothe’s competitors — the “manufacturer-lessors.” On January 23, 1970, following a hearing before the Department on Boothe’s protest, Boothe’s assessment was finalized and it appealed to the Maryland Tax Court. That court, on July 16, 1970, concluded that “the practice of the Department in assessing leased equipment owned by a manufacturer-lessor at manufacturer’s cost, while assessing the same equipment owned by a nonmanufacturer-lessor at the purchase price is intentional, arbitrary and systematic”; [and that the Department’s action] “violates the requirement of the Maryland Constitution, Article 15 of the Declaration of Rights, that all taxes shall be uniform within each class, and also denied to the Petitioner the equal protection guaranteed by the 14th Amendment to the United States Constitution.” The Tax Court held that Boothe was “entitled to have its property assessed on the same basis as that of similar property in the same subclassification i.e., at manufacturer’s cost.” Immediately following the Tax Court’s decision in Boothe, the Department determined that for the 1970 tax year all personal property leased by its manufacturer would be assessed at the selling price which the manufacturer would have charged for that equipment at the time its leases were consummated, less an allowance for depreciation. After reviewing the personal property tax returns of thousands of corporations on record, the Department sent letters in early September of 1970 to those corporations which it had determined might lease property which they manufactured.

The letter briefly summarized the decision in Boothe and then stated: in order to obtain uniformity of assessments, that beginning with the tax year 1970, that such manufactured property as leased by a ⁵⁸⁰ manufacturer shall be assessed on the same basis as if said property had been sold to the lessee. By this décision then, manufactured property being leased by a manufacturer will no longer be assessed on the basis of cost to the manufacturer, but rather on the basis of what the purchaser of said property would have paid in the year the lease was consummated.” The letter concluded with a request that “[i]f your corporation is leasing property which it manufactures, you are to furnish a new listing of all such leased property at the cost it would have charged said lessee in the year the lease contract was made.” Xerox, Xerox Data and Sperry Rand received such letters, supplied the information under protest, and the equipment which they manufactured and leased was assessed on the basis of its selling price, less an appropriate allowance for depreciation. 2 The Department continued its practice for the tax year 1970 of assessing personal property which had been purchased and leased, including that of Greyhound and LMC, on the basis of its purchase price, less depreciation. The appellees unsuccessfully protested their 1970 assessments and each thereafter appealed to the Maryland Tax Court where the cases were consolidated for a hearing on common issues. The Tax Court held that the Department, in instituting a new standard of valuation based on “selling price” for equipment manufactured and leased by manufacturers, while applying the established standard based on cost to the taxpayer for other personal property, had violated Article 15 of the Maryland Declaration of Rights and the Equal Protection clause of the Fourteenth Amendment of the United States Constitution by creating an unauthorized subclass of personal property and assessing property within the same subclass in a nonuniform manner. ⁵⁸¹ The Department has appealed from the order of the Tax Court, remanding the cases for reassessments for the tax year 1970 “at [manufacturer’s] cost less depreciation or market value, whichever is lower.” (1) Article 15 of the Maryland Declaration of Rights provides in pertinent part: “. . . [T]he General Assembly shall, by uniform rules, provide for the separate assessment, classification and sub-classification of land, improvements on land and personal property, as it may deem proper; and all taxes thereafter provided to be levied by the State for the support of the general State Government, and by the Counties and by the City of Baltimore for their respective purposes, shall be uniform within each class or sub-class of land, improvements on land and personal property which the respective taxing powers may have directed to be subjected to the tax levy;____” Consistent with this constitutional mandate, the Legislature, by Chapter 73 of the Acts of 1958, made provision for the separate classification of real and personal property and for the sub-classification of personal property for assessment purposes.

That Act, codified as Maryland Code (1957, 1969 Repl. Vol.), Article 81, §§ 14, 15, and 23 provided in 1970 as follows: “§ 14 (a) Classificatum. — Real and personal property shall be separately classified, and personal property separately subclassified for assessment purposes. The following shall be separately subclassified for the purposes of personal property assessments: (1) Stock in business. (2) Distilled spirits.

(3) All other personal property directed in this article to be assessed. ⁵⁸² “(b) Valuation. — Except as hereinafter provided: (1) All real property directed in this article to be assessed, shall be assessed at the full cash value thereof on the date of finality. The term full cash value as used in this subsection shall mean current value less an allowance for inflation, if in fact inflation exists. (2) All personal property directed in this article to be assessed, shall be assessed at the full cash value thereof on the date of finality. The term full cash value as used in this subsection shall mean current value without any allowance for inflation.” Section 15 (a), pertaining to “stock in business,” provided in 1970: “(a) Stock in business.—The stock in business of every person, firm or corporation engaged in any manufacturing or commercial business in this State shall be valued and assessed to the owner thereof on the date of finality at its fair average value for the twelve months preceding the date of finality.

The term fair average value as used in this section shall mean .cost or market value, whichever is lower, without any allowance for inflation.” Section 23, pertaining to the assessment of “distilled spirits,” provided in 1970 that: “... said spirits shall be valued and assessed at fair value. The term fair value as used in this section shall mean cost oi market value, whichever is lower, without any allowance for inflation.. ..” The Department contends that the appellees’ property falls within the subclass “[a]ll other personal property directed in this article to be assessed.” The Department claims that its long-standing practice has been to so classify ⁵⁸³ the appellees’ property and that the assessment thereof, utilizing selling price and purchase price as methods of valuation, achieves the statutory mandate of assessment at “full cash value” on the date of finality, as required by § 14 (b) (2); and that all property within that subclass has been uniformly assessed upon that basis. Xerox, Xerox Data and Sperry Rand contend, however, that the property falls within the class of “stock in business,” requiring assessment at its cost of manufacture, to fulfill the mandate of § 15 (a) that all such property be assessed on the basis of “cost or market value, whichever is lower.” They contend that even if their property is not “stock in business,” but rather is assessable at “full cash value” under § 14 (b)(2), the term “full cash value” has been judicially and administratively recognized as meaning cost or market value, whichever is lower, requiring assessment of their property at its cost of manufacture. They urge that the Department, in assessing their property at its selling price, while assessing the property of others within the same subclass at its cost of acquisition, has violated the uniformity requirements of Article 15 of the Maryland Declaration of Rights and the Equal Protection clause of the Fourteenth Amendment and that the Department has illegally changed its standard of valuation without notice after the date of finality (specified in Article 81, § 29A (a) as January 1).

It is also contended that the Department’s assessment of the equipment manufactured and thereafter leased by the Bunker-Ramo Corporation at the cost of manufacture has established an administrative policy requiring the like assessment of the appellees’ leased property. Greyhound and LMC contend that because the property of manufacturer-lessors must be assessed at its manufacturing cost, that same value must be attributed to their property for the purpose of assessing the identical equipment which they lease. (2) We find no merit in the appellees’ contention that the property which they lease is “stock in business” within the contemplation of Article 81, § 14 (a)(1) and § 15 (a). ⁵⁸⁴ Section 8 (5) of Article 81 specifies, for purposes of assessment for personal property taxation, that stock in business of manufacturing or commercial businesses in this State shall be deemed permanently located in the county or city where such business is carried on. The Department claims that “stock in business,” as that term is used in § 15 (a), applies only to goods held by a business at its place of business for sale, and not to goods which have left the taxpayer’s possession and control and are being employed by the taxpayer’s customer in the conduct of his business.

The cases relied upon by the Department clearly tend to support this position. See State Department of Assessments & Taxation v. Bendix Corp., 270 Md. 31 , 310 A. 2d 43 (1973); National Can Corp. v. State Tax Commission, 220 Md. 418 , 153 A. 2d 287 (1959); Alban Tractor Co. v. State Tax Commission, 219 Md. 593 , 150 A. 2d 456 (1959); and Hopkins v. Baker, 78 Md. 363 , 28 A. 284 (1894). That it has been the long-standing practice of the Department (to which we accord great weight) to consider leased equipment as depreciable assets and not as “stock in business” is abundantly clear from the record; indeed, none of the appellees has ever reported leased equipment oh its return as “stock in business” or “inventory,” the two terms being synonymous for purposes of personal property taxation, National Can Corporation v. State Tax Commission, supra, and Alban Tractor Co. v. State Tax Commission, supra. Referring to stock in business in National Can, we said that “[¡Inventories are held for sale or resale in the hope and expectation of a quick turnover.” 220 Md. at 434 .

Section 15 (a) provides that stock in business shall be assessed at its “fair average value for the twelve months preceding the date of finality.” This provision, we think, manifests a legislative intent to measure the value of property held for “sale or resale,” rather than consumption and a recognition that such value cannot be derived by assessing the property at its value on a single day. The value of the appellees’ property, being of a nature of fixed assets, may be determined without resort to such a formula. The appellees rely on several Massachusetts cases to ⁵⁸⁵ support their argument that property leased by a manufacturer or other lessor is properly to be considered as inventory or stock in business for purposes of personal property taxation. 3 And they contend that the Uniform Commercial Code, Article 95B, §§ 6-102 and 9-109, recognizes leased machinery as “stock in business” of the lessor, as does the Sales Tax Act, Article 81, § 324. We are not, however, persuaded by the Massachusetts authorities that leased equipment, not “held for sale or resale in the hope and expectation of a quick turnover” (National Can Corp. v. State Tax Commission, supra), constitutes “stock in business” under § 15 (a).

Nor do we think that the provisions of the Uniform Commercial Code or the Maryland Sales Tax Act, pertaining to stock in business, evidence a legislative intent to bring the equipment leased by the appellees within the ambit of the term “stock in business,” as used for purposes of personal property taxation in § 15 (a). See County of Hennepin v. Honeywell, Inc., Minn., 210 N.W.2d 38 (1973). (3) The appellees’ property, being neither “Stock in business” nor “Distilled spirits,” necessarily falls within subclass § 14 (a)(3)—“All other personal property directed in this article to be assessed.” As heretofore indicated, § 14 (b)(2) provides that such property “shall be assessed at the full cash value thereof on the date of finality,” the term “full cash value” being defined in the subsection to mean “current value without any allowance for inflation.” The Department maintains that “full cash value” means the “market value” of the property. We agree.

In Schley v. Montgomery County, 106 Md. 407 , 67 A. 250 (1907), our predecessors considered the validity of the State Tax Commission’s assessment of corporate shares under what was then Article 81, § 159 of the Maryland Code. Although that section contained no specific direction as to the manner in which the value of the ⁵⁸⁶ shares was to be ascertained, we held that Article 15 of the Maryland Declaration of Rights, which at that time required that taxation be according to the taxpayers’ “actual worth,” imposed a duty upon the Commission to assess the shares by a method that would reflect their “actual value.” We stated, 106 Md. at 410 , that “[t]he value of an article is ordinarily what it will bring at a fair sale in the market, unless it be of so special a nature that no market for it exists and then its intrinsic value must be ascertained by a consideration of its cost, nature, utility and other characteristics.” Subsequent cases have relied on Schley to define the term “full cash value,” as used in Article 81, § 14, to mean “market value” — what a willing purchaser would pay to a willing seller m the open market. See Weil v. Supervisor of Assessments of Washington County, 266 Md. 238 , 292 A. 2d 68 (1972); Bornstein v. State Tax Commission, 227 Md. 331 , 176 A. 2d 859 (1962); Tax Commission v. Brandt Cabinet Works, 202 Md. 533 , 97 A. 2d 290 (1953); Rogan v. County Commissioners of Calvert County, 194 Md. 299 , 71 A. 2d 47 (1950). We think that definition is consonant with the natural meaning of the term “full cash value”; indeed, the weight of authority from other jurisdictions is in accord with this definition, and it was established precedent at the time of the enactment of Art. 81, § 14 in 1958. 4 Notwithstanding such precedent, the appellees contend that there is judicial, legislative and administrative authority for the proposition that “full cash value” means “cost or market value, whichever is lower,” and that the assessment of their property must, therefore, be at the cost of manufacture.

They argue that in Sears, Roebuck & Co. v. State Tax Commission, 214 Md. 550 , 186 A. 2d 567 (1957) — a case involving the assessment of a purchasing retailer’s stock in business — we approved of that standard as a ⁵⁸⁷ proper method of determining the full cash value of all personal property. We held in Sears that under the then existing law, the assessment practice of the State Tax Commission of making a deduction from the “full cash value” of real estate in order to allow for the effects of inflation, but of refusing to make any such deduction from the “full cash value” of personal property consisting of stock in business, constituted an unconstitutional discrimination against the owner of such personal property violative of the uniformity provisions of Article 15 of the Maryland Declaration of Rights and the Equal Protection clause of the Fourteenth Amendment. At the time of the assessment involved in Sears, Article 81, § 14 provided that “[ejxcept as hereinafter provided, all property [both real and personal] directed in this article to be assessed shall be assessed at the full cash value thereof on the date of finality.” The method then provided by statute for valuing stock in business required the assessment thereof “at its fair average value for the twelve months preceding the date of finality.” (The “cost or market value, whichever is lower” standard of valuation for stock in business was not then part of the statute.) Referring to our holding in May Stores v. State Tax Commission, 213 Md. 570 , 132 A. 2d 593 (1957), a case involving the proper method for calculating the fair average value of a purchasing retailer’s stock in business, we said that, for purposes of inventory valuation under the statute, the standard of cost or market value, whichever is lower, provided a fair indication of the reasonable value of inventory, provided that either the cost or the market value was established as of recent date. We said that the words “fair average,” as applied to stock in business, recognized the fact that the size of inventory fluctuates over the annual period and the value of the inventory should be based upon a representative amount and a representative price for the inventory, not according to the amount of stock on hand on the date of finality, but on the fair average for the twelve months preceding the date of finality.

We said that fair average means an average typical of the amount and price of goods acquired over the twelve-month period. And we stated that there was no ⁵⁸⁸ substantial difference in meaning between “fair value” and “full cash value.” Both in May Stores and Sears, we were dealing with the valuation of inventories purchased by retailers, and it was in that context that we expressed the view that the standard of “cost or market value, whichever is lower” could properly be used to arrive at the reasonable or current value of inventory. We did not approve of that test to determine the “full cash value” of all personal property; our recognition of the appropriateness of the “cost or market value” test was limited to its use to determine the fair average value of inventory and does not compel us to further define or apply that test in the case at bar. Likewise, § 15 (a) of Article 81, which directs that stock in business be assessed at its fair average value, defined as “cost or market value, whichever is lower,” evidences a legislative intent to apply that test only to inventory.

That intent is clear from the statutory framework of Article 81. Section 14 (b)(2) provides that “[e]xcept as hereinafter provided,” all personal property be assessed at its full cash value, defined as current value. Section 15 (a) then provides such an exception, stating that stock in business be assessed at its “fair average value,” defined as cost or market value, whichever is lower. In National Can Corp., supra, we noted that the “cost or market” standard in § 15 (a) affords the owner of inventory a hedge against inflation not given to owners of other personal property.

Had the Legislature intended that the standard of cost or market value, whichever is lower, was synonymous with, and would constitute the measure of full cash value for all personal property, there would have been no necessity to separately subclassify stock in business from other personal property, and no need to differentiate between the basis of valuation applicable to each subclass of