Steiner Construction Co. v. Comptroller of Treasury

⁴⁵⁶ Bruñe, C. J., delivered the opinion of the Court. This is an appeal from an order of the Baltimore City Court, which affirmed a determination by the Comptroller of the Treasury of Maryland (the “Comptroller”) upholding the assessment of retail sales and use taxes against Steiner Construction Company, Inc. (“Steiner”), the appellant. The asssessment was made on the basis of the cost to Steiner of items of personal property which were purchased by Steiner and were used in the performance of forty-seven different contracts between Steiner and The Baltimore & Ohio Railroad Company (the “Railroad”) entered into between July 1, 1947, and November 20, 1950. Under these contracts Steiner agreed to make alterations, improvements or repairs to real property belonging to the Railroad.

All of the facts are set forth in a stipulation between the parties and in sundry exhibits filed therewith and as a part thereof, and are agreed to be taken as true and fully proven for purposes of this case. This stipulation and the accompanying exhibits were before the Comptroller and also before the trial court. Item 10 of the stipulation states (in part) that “Under the provisions of the Maryland Retail Sales Tax Act the Comptroller of the Treasury issued to the Railroad Company in July of 1947, his Exemption Certificate No. 151.” This certificate states that “The Baltimore & Ohio Railroad Company, Tax Dept., Baltimore, 1, Md. is Exempt from Payment of Sales Tax on all Purchases of Taxable Personal Property and Services Purchased for use in Carrying on the Work of the Organization.” For the purposes of this case it is conceded that the Railroad is exempt from Maryland sales and use taxes. Under the 1947 Supplement to the 1939 Code, Article 81, Section 310 (b), tangible personal property expressly exempted from the retail sales tax under Section 261 of the same Article was also exempt from the use tax.

(For corresponding provisions of the 1951 Code see Article 81, Sections 370 (b) and 322.) ⁴⁵⁷ With the Railroad’s exemption conceded, two questions arise: First. Is a contracting company exempt from Maryland sales and use taxes on building materials purchased by it in order to carry out contracts for alterations, additions or repairs to real property owned by a corporation which is exempt from such taxes? Second. Is a contracting company exempt from Maryland sales and use taxes on building materials purchased by it in order to carry out contracts for alterations, additions or repairs to real estate owned by a corporation exempt from such taxes, if these contracts provide that the contracting company is to sell such materials to the owner at agreed prices?

During the period within which the contracts involved in this case were entered into (July 1, 1947 — November 20, 1950), there was no difference in the substantive provisions of the Retail Sales Act and of the Use Tax Act applicable to these contracts, and the Rules promulgated by the Comptroller involved herein are stated to be under both Acts. 1. The Exemption Claimed by the Contractor on the Basis of the Owner’s Exemption. The Retail Sales Tax Act, (1947 Supplement to the 1939 Code, Article 81, Section 259 (f) (3) ; 1951 Ed., Article 81, Section 320 (f) (3)) and the Use Tax Act, (1947 Supplement to the 1939 Code, Article 81, Section 308 (h) (2) ; 1951 Ed., Article 81, Section 368 (h) (2)), as applicable to this case, both define a “sale at retail” as including the “sale of building materials to contractors, builders or landowners for use or resale in the form of real estate.” Steiner bases its claim of exemption on the Railroad’s exemption and contends that it resold the building materials here involved to the Railroad as tangible personal property. The Comptroller contends that Steiner, the contractor, did not purchase these materials for the purpose of reselling them to the Railroad, but for the purpose of fulfilling its contracts with the Railroad which ⁴⁵⁸ were to furnish to the Railroad a finished product in the form of real estate.

The Comptroller accordingly contends that the contractor was the actual user and consumer of the materials involved and that the contractor is subject to the sales and use taxes in respect thereof. The appellant starts with the premise that the Railroad is entitled to an exemption under Article 81, Section 261 (f) of the 1947 Supplement to the 1939 Code, Article 81, Section 322 (f), (Code 1951), on the ground that sales to the Railroad are not within the taxing power of this State under the Constitution of the United States. This claim is based upon the original charter of the Railroad and the Settlement Act of 1878. By reason of the concession above referred to, the Railroad’s right to an exemption from sales and use taxes is not an issue in this case.

The appellant’s principal argument on this branch of the case is based upon the holding in John McShain, Inc. v. Comptroller, 202 Md. 68 , 95 A. 2d 473 , that an exemption from sales and use taxes granted under Section 261 (i) of Article 81 of the 1947 Supplement to the 1939 Code (Section 322 (i) of the same Article of the 1951 Code) to a charitable, scientific or educational institution of property purchased for use in carrying on the work of the institution, was available to a building contractor purchasing materials to be incorporated in a building which the contractor was constructing for the use of such an institution. In reaching this conclusion the Court took into consideration both the text of the statute and Rule 70 promulgated by the Comptroller, which undertook to construe the exemptions granted under sub-sections (a) and (i), respectively, of Section 322, Article 81, of the 1951 Code (Section 261 of Article 81 of the 1947 Supp. to the 1939 Code) to the State and its political subdivisions and to religious, charitable, scientific, literary or educational institutions, and, to some extent, the exemption granted under sub-section (f). The first sentence of the first paragraph of Rule 70 reads as follows: ⁴⁵⁹ “Contractors who are performing jobs for the State of Maryland or any of its political sub-divisions or a nonprofit religious, charitable, scientific, literary or educational institution or organization on a lump-sum basis are not required to pay the tax on materials and supplies which will be incorporated into the job.” The second paragraph states that contractors working on such jobs must pay the tax on all equipment purchased to perform them. The third paragraph reads as follows: “Contractors who are working on lump-sum, cost plus a fixed fee, or cost plus contracts containing an upset or guarantee clause with the Federal Government must pay the tax on all personal property which they purchase in fulfilling such contracts.” (The provisions relating to cost plus contracts were added by an amendment effective on July 15, 1950.) Judge Henderson, writing the opinion for the Court in the McShain Case, said: “The most serious objection to the allowance of the exemption is that the section, in terms, applies to sales made directly to the person operating, and not to a contractor with such person.

We think, however, that it would be a strained construction to hold that persons operating the activities mentioned should be entitled to the exemption when they purchase directly from a supplier, but not when they acquire the property through an intermediary contractor. The Comptroller’s regulation is very specific on the point, and while it is conceded that the Comptroller lacks the power to create an exemption beyond that granted by the statute, his interpretation is entitled to great weight as an administrative construction acquiesced in by the legislature. Cf. Tidewater Fisheries v. Sollers, 201 Md. 603 , 95 A. 2d 306 , * * * and cases there cited.

Since 1949, there must have been a considerable volume of new construction for hospitals and other institutions within the exempted classes who have received the benefit of the exemption. We are not prepared to say that the Comptroller was wrong in failing to collect the sales tax on items of personal ⁴⁶⁰ property going into these buildings or additions merely because they were contracted for rather than built by the owners. To now hold that all such transactions were taxable would subject many persons to tax claims on transactions completed in good faith in reliance upon the administrative ruling.” ( 202 Md. 72 -73, 95 A. 2d 474 -475.) The actual contracting party in the McShain Case was the United States of America, which was acting for one of its agencies, the National Institute of Health. The exemption was sustained not because of any immunity of the United States from taxation by a State, but because of the intended use of the building.

This Court said (at page 74 of 202 Md., page 475 of 95 A. 2d) : “The controlling factor upon which the exemption is based is not the instrumentality that does the purchasing, but the use of the items purchased in carrying on in Maryland the work to be promoted.” Since Alabama v. King & Boozer, 314 U. S. 1 , decided more than eleven years before the McShain Case (and referred to therein) it has been established that there is no prohibition under the Federal Constitution against a State sales tax upon materials bought by a contractor in order to carry out a “cost-plus” building contract with the United States. The companion case of Curry v. U. S., 314 U. S. 14 (also cited in the McShain Case), held that the contractors were not exempt from the Alabama use tax on materials purchased outside the State for use in performing the same “cost-plus” contract with the United States. It is not contended that any constitutional immunity from State taxation to which the Railroad may be entitled is greater than that to which the United States is entitled. The appellant does argue earnestly that the reasoning of the McShain Case is applicable to any owner of real estate who or which is exempt from sales and use taxes, regardless of whether the exemption is founded upon sub-section (i) or some other sub-section of what is ⁴⁶¹ now Section 322 (formerly 261) of Article 81 of the Code (1951).

As a matter of the construction of the statute we think that the MeShain Case not only fails to support, but actually runs counter to, the appellant’s contention. If the immunity from sales and use taxes of the owner of real estate had been the criterion of the exemption of the building contractor, the MeShain Case could easily have been decided on the basis of sub-section (f) of Section 322 (formerly 261) of Article 81. It was not so decided; on the contrary, the Court relied upon subsection (i). Rule 70, which was given great weight in construing sub-section (i) explicitly refused (by its third paragraph) to treat building contractors performing certain types of contracts with the United States Government on the same basis as contractors performing similar contracts with persons entitled to exemptions under sub-sections (a) and (i).

The Comptroller sought to use the third paragraph of the Rule as a somewhat back-handed way of limiting the exemption to contractors who were not working for the Government. This Court rejected that argument and, as has been pointed out, upheld the exemption because the use involved fell within sub-section (i), saying, “We think it is quite immaterial that the activity is conducted by a federal agency, rather than by a private agency or by the State.” Later the Court added, “The exemption recognized in the first paragraph [of Rule 70] depends upon the use to which the property is put, and not upon the immunity of the user, even though such immunity does not extend to its contractors under other circumstances.” In the instant case there is no use comparable to that involved in the McShain Case. The exemption relied upon by the appellant is contained in Section 261, paragraph (f) of Article 81 of the 1947 Supplement to the 1939 Code [1951 Edition, Article 81, Section 322 (f)]. It covers “Sales which are not within the taxing powers of this State under the Constitution of the United States.” This is no more than an express recognition of the in ⁴⁶² escapable; it manifests no legislative intent to further the activities of the beneficiaries of this unavoidable exemption.

Consequently, there is no such foundation as in the case of charitable or educational institutions for deducing a legislative intent which would support a broad interpretation of the exemption. Likewise, there is no such consideration as might prompt the State to exempt itself or its political subdivisions from paying State taxes. The appellant also contends that Rule 70 adopts the view that the contractor makes a resale of tangible personal property to the ultimate purchaser, the owner of the realty. We do not think this is a correct construction of Rule 70.

Such a construction would run contra to the theory upon which a sale at retail was defined under both the Retail Sales Tax Act and the Use Tax Act as including the “sale of building materials to contractors * * * for use or resale in the form of real estate.” Building materials when incorporated into a building lose their character as tangible personal property and are transformed into real estate. On this matter (and apart from the second question in this case), what was said in State v. Christhilf, 170 Md. 586, 591 , 185 A. 456, 458 , seems controlling: “It is the contractor or builder who is the ultimate user or consumer of the materials which in one of these cases are converted and fabricated into a building and in the other into a road.” Just before this the Court had said: “We cannot agree with the view that there is a transfer of title to so many feet of lumber, kegs of nails, thousands of brick, perches of stone, cubic yards of concrete, or other items of materials entering into a lump sum contract, for a complete job or structure, which, when erected on the customer’s land, is as much real property as the land itself and is by no sort of definition or reasoning ‘tangible personal property’.” The fact that the incidence of the emergency gross receipts tax of 1935 was different from that of the present Retail Sales Tax Act does not detract from ⁴⁶³ the force or applicability of the above quotation.