Maryland: Taxpayer not Foreclosed from Seeking Judicial Review of Sales Tax Refund

The Maryland Court of Special Appeals recently decided a sales and use tax case with an interesting procedural history. The substantive issue in the case was whether the taxpayer owed sales and use tax on its purchases of cleaning supplies that were used to provide services to related not-for-profit hospitals. While janitorial staff employed by the individual hospitals performed the cleaning, the taxpayer trained, supervised, and evaluated the staff. Following an audit, the taxpayer sought a refund of sales tax paid on cleaning supplies that it argued were purchased for resale to the hospitals. The Comptroller denied the claim, and the taxpayer appealed to the Tax Court. The Tax Court disagreed that the resale exemption applied, but determined that the taxpayer purchased the supplies as an agent of the nonprofit hospitals and should not have been charged sales tax. This was rather extraordinary because the taxpayer had not made this argument. Rather, the Comptroller had preemptively argued that the taxpayer was not a purchasing agent of the hospitals. A circuit court later affirmed the Tax Court, and the Comptroller sought appellate review.

The appeals court noted at the outset that the focus of its review was the Tax Court decision, which was not due any deference because the issue of agency was beyond its area of expertise. After a lengthy analysis of the principal-agent relationship, the court found that the lack of control over the taxpayer by the hospitals was conclusive evidence against an agency relationship. Next, the court moved to the reseller argument. The taxpayer contended that the Tax Court’s decision to approve the refund claim could be upheld based on the reseller theory that the Tax Court rejected. The Comptroller disagreed, relying on the general rule that an “administrative agency may be affirmed only on the basis of the grounds on which it decided the case” and also noting that the taxpayer did not file a cross-petition for judicial review of the Tax Court’s denial of its reseller theory. In response, the taxpayer claimed that it was not permitted to seek judicial review because it was not aggrieved by the final decision of the Tax Court as the refund claim was ultimately approved.

The appeals court noted that the Comptroller was generally correct – that the court may affirm solely on the grounds and reasons as stated by the Tax Court and was not permitted to affirm the circuit court on other grounds adequately appearing in the record. However, the court, acknowledging the novelty of the situation, found that the taxpayer was not foreclosed of the right to seek judicial review of its reseller theory and could have filed a conditional cross-petition to preserve the issue for judicial review and thereby provide an alternative basis to reach the same result as the Tax Court. The court ordered the case back to the Tax Court with instructions to enter a new final decision denying the taxpayer’s refund claim based on the Tax Court’s prior rejection of the taxpayer’s reseller theory. For more information on Comptroller v. Broadway, please contact Sarika Bakshi