United Parcel Service, Inc. v. Comptroller of Treasury

BISHOP, Judge. United Parcel, Inc. (UPS or appellant) filed claims for refunds of Maryland sales and use taxes that it alleges to have paid erroneously for the period January 1, 1977 through July 31, 1980. The Comptroller of the Treasury, Retail and Sales Tax Division (Comptroller or appellee), refused to refund $98,363.68 of UPS’s claims and then on September 24, 1980 assessed an additional $38,181.77 for unpaid sales and use taxes plus penalty and accrued interest. The total amount in dispute is approximately $146,-200.00.

After conducting a formal hearing, the Hearing Officer for the Comptroller affirmed the tax assessment and denied appellant’s claims for refunds. This determination was reversed by the Tax Court, which held that the rental of delivery vans and the purchases of replacement parts and accessories for these and other vans were exempt from sales and use taxes pursuant to article 81, subsections 326(f), 326(gg), and 375(b) of the Maryland Code. From ⁴⁶¹ that decision, the Comptroller appealed to the Circuit Court for Prince George’s County where Judge G.R. Hovey Johnson overturned the Tax Court’s determination and reinstated the Comptroller’s tax assessment and denial of UPS’s requests for refunds. Appellant raises three issues on appeal: I. Whether the circuit court applied the correct standard of review when it reversed the Tax Court’s decision; II.

Whether the Tax Court correctly ascertained the scope of the sales and use tax exemption pursuant to article 81, subsections 326(f), 326(gg) and 375(b) of the Maryland Code; and III. Whether the circuit court’s construction of sales and use tax exemptions violates the commerce clause of the United States Constitution. FACTS UPS operates a common carrier service that picks up, transports and delivers small parcels, packages and freight throughout the continental United States. To carry out its service in the most efficient manner, appellant has devised an elaborate delivery system consisting of fifty-eight districts, the boundaries of which are roughly contiguous with state borders or large metropolitan areas.

Within each district, appellant has established a network of package centers and “hubs”, the latter of which are the major sorting centers that service the smaller package centers. The intricacies of UPS’s delivery system were succinctly explained in the Tax Court’s factual findings: A typical package route, from origin to destination, would entail the following: a package is picked up by a delivery van at the shipper’s address and carried to the assigned package center where it is sorted for further travel. If the package is to be delivered to a destination point within the area covered by that package center, it is delivered the next day to that point by delivery van. If the package is destined to a point outside the package ⁴⁶² center area, it must then be routed to another package center before final delivery.

This is accomplished through the use of tractor-trailers either by direct transfer from package center to package center, or the more likely situation, from package center to the centrally-located hub, the major sorting center which services a number of package centers. At the hub, the package is sorted and loaded onto tractor-trailers and then transported to the hub servicing the destination package center. From there, it goes to the proper package center and finally to the destination itself. The final leg of the package’s journey is by way of delivery van.

As this description indicates, UPS relies on both tractor trailers and package delivery vans in conducting its business. The tractor trailers must obviously transverse state lines in the transportation of packages between hubs of different states. In contrast, the delivery vans never cross state lines. Their function is purely intrastate: the pick-up and delivery of packages within a limited geographic region inside state boundaries.

The vans operating in the Maryland geographic area do so within the Maryland state lines. UPS does not dispute this fact. Because the vans do not cross state lines and thus are not directly engaged in the interstate transportation of packages, the Comptroller has assessed sale and use taxes on UPS for the rental of delivery vans and the purchases of replacement parts and accessories for those vans. UPS objects to this assessment, contending that the vans are integral components of its nationwide interstate delivery service and are thus exempt from taxation pursuant to article 81, subsections 326(f), 326(gg) and 375(b) of the Maryland Code.

In support of its position, UPS presents uncontroverted statistics indicating that over ninety percent of the freight handled by package delivery vans either originates within Maryland and is destined to points outside of Maryland or originates outside of Maryland and is destined to points inside Maryland. The Tax Court recognized the implications of this data: the vans, even though their ⁴⁶³ movement was purely intrastate, are an integral part of UPS’s interstate operations, with nine out of ten packages that they handle being interstate cargo. As a result, the Tax Court ruled that UPS qualified for the interstate commerce exemption. The Comptroller appealed this determination to the circuit court, which reversed and reinstated the Comptroller’s tax assessments.

On appeal to this Court, UPS asseverates that the circuit court’s ruling should be overturned on three grounds. First, that the circuit court applied the incorrect standard of review. Second, the statutory provisions, subsections 326(f), 326(gg) and 375(b) of article 81 of the Maryland Code, entitle taxpayers such as UPS to the sales and use exemptions for intrastate vans that carry freight, ninety percent of which is being transported across state lines. And third, if the statute, as a matter of law, does not afford such an exemption, then this Court must hold the statutory provisions unconstitutional under the commerce clause.

U.S. CONST, art. I, § 8, cl. 3. Because the statutory issues are dispositive, we will not address the constitutional issue. I. Standard of Review of Tax Court’s Findings Article 81, section 229(o) of the Maryland Code sets out the standard for reviewing the findings of the Tax Court: Decision of circuit court.—In any case, the circuit court for the county 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. Under this standard, the nature of the findings reviewed determines the level of judicial scrutiny. Findings of fact ⁴⁶⁴ by the Tax Court receive greatest deference: a reviewing court may not reverse factual findings if they are supported by substantial evidence.

Ramsay, Scarlett & Company, Inc. v. Comptroller of the Treasury, 302 Md. 825, 834 , 490 A.2d 1296 (1985) (construing section 229 (o)). In contrast, no deference is accorded to a tax court’s legal conclusions if a reviewing court finds them to be erroneous. Ramsay, Scarlett, 302 Md. at 834 , 490 A.2d 1296 ; Comptroller of the Treasury v. World Book Childcraft International, Inc., 67 Md.App. 424, 437 , 508 A.2d 148 (1986). 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.” 302 Md. at 838 , 490 A.2d 1296 .

On two recent occasions, we have reviewed Tax Court decisions pursuant to section 229(o) in light of the Court of Appeals gloss in Ramsay, Scarlett. See World Book, 67 Md. at 436-42, 508 A.2d 148 ; Matthew Bender & Company, Inc. v. Comptroller of the Treasury, 67 Md.App. 693, 703-12 , 509 A.2d 702 (1986). To guide further the reviewing court in its evaluation of the Tax Court’s findings, we formulated a methodology, a three-step analysis, that is consistent with and elaborative of the principles enunciated in Ramsay, Scarlett : 1. First, the reviewing court must determine whether the agency recognized and applied the correct principles of law governing the case.

The reviewing court is not constrained to affirm the agency where its order “is premised solely upon an erroneous conclusion of law.” 2. Once it is determined that the agency did not err in its determination or interpretation of the applicable law, the reviewing court next examines the agency’s factual findings to determine if they are supported by substantial evidence, i.e., by such relevant evidence as a reasonable mind might accept as adequate to support a conclusion. Id. At this juncture, the Ramsay, Scarlett court reminds ⁴⁶⁵ us that “it is the agency’s province to resolve conflicting evidence, and, where inconsistent inferences can be drawn from the same evidence, it is for the agency to draw the inference.” 3.

Finally, the reviewing court must examine how the agency applied the law to the facts. This, of course, is a judgmental process involving a mixed question of law and fact, and great deference must be accorded to the agency. The test of appellate review of this function is “whether, ... a reasoning mind could reasonably have reached the conclusion reached by the [agency], consistent with a proper application of the [controlling legal principles]”. World Book, 67 Md.App. at 438-39 , 508 A.2d 148 ; Matthew Bender, 67 Md.App. at 705-06 , 509 A.2d 702 (quoting World Book in full).

Implicit in this methodology is the requirement that the reviewing court must distinguish among the Tax Court’s factual findings, legal conclusions, and applications of fact to law. Only when the reviewing court has accomplished this task, is the court capable of assessing the Tax Court’s decision under the correct standard of review. In the case sub judice, the controversy on appeal begins over this precise point: whether the circuit court, when reviewing the Tax Court decision, properly distinguished findings of fact, law, and those findings comprised of both. UPS argues that the Tax Court’s conclusion that the package vans qualified for tax exemptions even though they never crossed state lines, was a mixed question of law and fact.

Under Ramsay, Scarlett, World Book, and Matthew Bender , UPS insists that the circuit court failed to accord the Tax Court the “great deference” to which it is entitled under this standard of review. Strongly contesting this characterization, appellee asseverates that the Tax Court erroneously interpreted the meaning of particular words in the statute. Since questions of pure statutory construction are subject to broad judicial review, appellee concludes that the circuit court was “under no statutory constraints in reversing a Tax Court order which is premised solely upon ⁴⁶⁶ an erroneous conclusion of law.” Ramsay, Scarlett, 302 Md. at 834 , 490 A.2d 1296 . On this point, we agree with appellee that the Tax Court’s decision ultimately involved the application of the law to the facts of the case, i.e.

UPS’s package vans that transport predominantly interstate cargo without crossing state lines fall within the purview of the statutory exemptions for sale and use taxes. The outcome of the case, however, turns on the court’s legal conclusion as to the breadth of the exemption. The Tax Court construed it to be sufficiently broad so that it encompassed motor vehicles as being involved in interstate commerce which do not cross state lines, while the circuit court disagreed and construed the exemption to require vehicles to cross state lines before they qualified for the tax exemption. The legal conclusions that the Circuit Court and the Tax Court reached obviously determines the result of the case, i.e. a broad interpretation of the exemption relieves UPS from tax liability under the facts of the case, while a narrow interpretation does not.

This situation differs substantially from that in Ramsay, Scarlett and World Book , in which the reviewing court in each case accorded the Tax Court “great deference” and refused to overturn its decision if “a reasoning mind could have reached the [same] conclusion.” Ramsay, Scarlett, 302 Md. at 835 , 490 A.2d 1296 . In Ramsay, Scarlett , the Tax Court had correctly outlined the correct legal tests to be applied. Id. at 837 , 490 A.2d 1296 . The resolution of the case hinged upon the proper application of that law to the facts of the case: i.e. whether Ramsay, Scarlett’s operations in Maryland and Louisiana constituted a unitary business pursuant to what had already been correctly identified as the legal standard.

Similarly, this Court in World Book reversed the Tax Court’s conclusion that World Book’s business activities in Maryland rose above the level of “mere solicitation” as defined by the federal statute. World Book, 67 Md.App. at 437-40 , 508 A.2d 148 . Since the resolution of the issue did not involve a reinterpretation ⁴⁶⁷ of the applicable law independent of the facts, we limited the scope of our review. Accordingly, we hold that the circuit court had unlimited review of the Tax Court’s legal conclusion that substantial involvement of UPS’s vans in interstate commerce, without crossing state lines, is sufficient to qualify for the tax exemption.

In passing, we note that there is no dispute regarding the factual conclusions that the Tax Court reached. The record amply supports these findings and we will not disturb them.

II

Scope of Tax Exemptions Although the circuit court possessed unlimited power of review, this power was restricted only to erroneous legal conclusions. Obviously, if the statute is construed correctly, the reviewing court must let the Tax Court’s legal conclusion stand. In the instant case, UPS argues that the Tax Court, and not the circuit court, apprehended the correct interpretation of the statute. In support of its position, appellee points to the plain language and legislative history of the statute and urges us to reinstate the Tax Court’s decision.

We agree and hold that the statute and relevant regulations clearly exempted UPS’s package vans from the assessment of sales and use taxes. A. Statutory Scheme The period for which UPS contests the Comptroller’s assessment of sales and use taxes spans over three and one-half years, from January 1, 1977 to July 31, 1980. During this assessment period, a change in the law occurred which requires us to consider two applicable statutory provisions. Between January 1, 1977 and June 30, 1977, the operative statutory provision was article 81, section 326(f) of the ⁴⁶⁸ Maryland Code which exempted from sales tax 1 “[s]ales which are not within the taxing power of this State under the Constitution of the United States.” To provide substantive guidance as to the scope of this exemption, over 30 years ago the Comptroller adopted, as an interpretative regulation, Rule 64 which provided, in pertinent part: If goods are sold within this State, but possession is taken by the purchaser without the State the sales tax does not apply.

Possession will be considered to be taken by the purchaser without this State if: (c) ... the taxable items are sold to a person regularly engaged in interstate or foreign commerce for incorporation into or use on or by their vehicles which transport or move either passengers or property across State lines or in foreign commerce. Sales of vehicles which will regularly transport passengers or property across State lines or in foreign commerce are also exempt. Section 326(f)