Comptroller of Md. v. Broadway Servs., Inc.

250 Md.App. 102

248 A.3d 1117

COMPTROLLER OF MARYLAND

v.BROADWAY SERVICES, INC.

No. 2807, Sept. Term, 2018

Court of Special Appeals of Maryland.

March 31, 2021

Argued by: Benjamin M. Grossman (Brian E. Frosh, Atty. Gen., on the brief), Baltimore, MD, for Appellant.

Argued by: Alexander H. Bushel (Basik, Bushel & Bushel, on the brief), Lutherville, MD, for Appellee.

Panel: Leahy, Gould, Deborah S. Eyler, Senior Judge, Specially Assigned, JJ.^*

Gould, J.

This appeal requires us to review the Maryland Tax Court's determination that appellee Broadway Services, Inc. ("Broadway") was entitled to a refund for sales taxes it paid when, as part of the housekeeping supervisory services it provided to three non-profit hospital clients, it purchased the cleaning supplies used at each of the hospitals. Broadway's refund request was based on its contention that because it resold the supplies to the hospitals, its purchases fell outside the statutory definition of "retail sales" and thus were not subject to sales taxes. The request made its way to the Tax Court, which rejected Broadway's "reseller" theory. The Tax Court nevertheless granted the refund on the basis that Broadway purchased the supplies as an agent for the hospitals which, as tax exempt non-profits, were not subject to sales and use taxes.

The Comptroller petitioned the circuit court for judicial review, which affirmed the Tax Court's decision. The Comptroller timely appealed the circuit court's judgment and presents the following question:

Did the Maryland Tax Court err when it determined that Broadway was the Hospitals’ agent when no evidence showed a manifestation of an intent for Broadway to be the hospitals’ agent, and Broadway failed to introduce evidence proving 1) that it had a fiduciary obligation to act for the Hospitals’ benefit, 2) that it could alter the Hospitals’ legal relationships, or 3) that it acted subject to the Hospitals’ control?

We conclude that the answer to this question is yes and reverse.

FACTS AND PROCEDURAL BACKGROUND

Broadway is in the business of providing security, parking, housekeeping, transportation, and facilities and property management services to its clients. Broadway is a for-profit company that provides services to clients both inside and outside of The Johns Hopkins Health System ("JHHS"). Broadway is a subsidiary of the DOME Corporation ("DOME"), which in turn is owned in equal shares by The Johns Hopkins University (the "University") and JHHS.

In addition to its partial and indirect ownership in Broadway, JHHS owns multiple academic and community hospitals, some of which are non-profit corporations.¹ Certain types of non-profit organizations are exempt from sales and use taxes pursuant to Section 11-204 of the Tax-General Article ("TG") of the Maryland Annotated Code (1988, 2016 Repl. Vol.).

This case involves the services that Broadway provided between 2007 and 2011 to three non-profit hospitals within the JHHS system: Johns Hopkins Hospital ("Hopkins Hospital"), Johns Hopkins Bayview Medical Center ("Bayview"), and Howard County General Hospital ("Howard").²

The Comptroller of Maryland (the "Comptroller") conducted a sales tax audit of Broadway for the time-period of December 1, 2007 through November 30, 2011. Broadway responded to the audit with an application for an offset credit and refund in the amount of $76,161.96 for the sales tax it had paid to its vendors for cleaning supplies used at the three non-profit hospitals. Broadway stated on its application that the taxes were "improperly paid on services and products purchased for resale." Broadway's legal theory was that although a sales and use tax is imposed on retail sales pursuant to TG § 11-102,³ its purchases of supplies were governed by TG § 11-101(h)(3)(ii)(1), which excludes from the definition of a retail sale "a sale of tangible personal property if the buyer intends to ... resell the tangible personal property in the form that the buyer receives or is to receive the property[.]" Broadway contended that this provision applied to it because it purchased the supplies and resold them to the hospitals.

The Comptroller rejected Broadway's reseller theory, denied its refund request, and assessed Broadway $9,073.93 in unpaid sales and use taxes.

Broadway appealed to the Tax Court. In its petition, Broadway asserted, under the penalty of perjury, that the supplies were purchased "for resale to three tax-exempt hospitals" and that "[a]ll of the cleaning supplies were used by employees of the three exempt hospitals."

The Comptroller moved for summary judgment in the Tax Court proceeding. The Comptroller argued that Broadway did not qualify as a reseller because it did not sell the supplies to the hospitals. In addition, based on deposition testimony of Broadway's President and CEO, Peter Seidl, the Comptroller was anticipating that Broadway would advance the alternative theory that it purchased the cleaning supplies as a purchasing agent.⁴ Thus, in a preemptive attack on an agency theory that Broadway had not yet made, the Comptroller argued in its motion for summary judgment that Broadway was not acting as an agent for the hospitals when it purchased the cleaning supplies.

In response, Broadway rebuked the Comptroller for even raising the principal-agent issue, stating that the Comptroller "provides absolutely no background or authority to explain how this is even relevant to the matter before the Court."

Finding that material facts were disputed, the Tax Court denied the Comptroller's motion and held a one-day evidentiary hearing on Broadway's appeal. Broadway presented testimony from five individuals: (1) Mr. Seidl; (2) Linda Bushell-English, finance administrator of JHHS; (3) Patrick Michael Kastendike, Broadway's CFO; (4) Ken Dickard, Broadway's retained independent auditor; and (5) Andrew J. Maschas, an attorney in the Comptroller's office.

From the testimony of these witnesses, the following picture emerged regarding Broadway's business relationship with the hospitals. The housekeeping functions at the hospitals were performed by the hospitals’ employees. The hospitals contracted with Broadway to supervise, evaluate, and train their janitorial staff. Broadway had separate written contracts with each hospital for the provision of these services.

The contracts also required Broadway to provide the cleaning supplies, which Broadway purchased from its vendors. The hospitals had to approve the supplies chosen by Broadway to ensure compliance with their infectious disease protocols. The vendors shipped the supplies directly to the hospitals. The vendors’ invoices were issued to and paid by Broadway.

From time to time, although not frequently, the hospitals purchased office supplies directly from a vendor and asked Broadway to pay for the items on their behalf. Broadway tracked those payments separately from the costs incurred in providing services and supplies to the hospitals.⁵

The contracts required the hospitals to pay Broadway a fixed annual fee for its services. This fee covered Broadway's labor and other costs, including cleaning supplies, plus an additional fifteen percent to cover Broadway's overhead. The fixed fee was based on Broadway's annual budget for such costs. Broadway invoiced the hospitals on a monthly basis for one-twelfth of the annual fixed fee. The hospitals did not see Broadway's detailed budgets or a breakdown of the expenses. The monthly invoices did not contain itemized charges for the cleaning supplies. The invoices would "just say housekeeping monthly fee." The hospitals therefore did not know how much Broadway spent on cleaning supplies.

Only in rare circumstances, such as when the parties agreed to increase the scope of the services, did the parties adjust the fixed fees mid-stream, and such changes were memorialized in a contract amendment. Otherwise, the fixed fee remained the same even if the prices of cleaning supplies fluctuated during the contract year. If Broadway's expenses increased, the parties would adjust the fee in the contract for the next year. Broadway was in a "tight margin" business and expected to make a nominal profit on its contracts with the hospitals. Mr. Seidl's testimony underscored the risk Broadway assumed under this arrangement, explaining that when predicting the expenses for the upcoming year, "[y]ou can't afford to be wrong."

At the conclusion of the evidence and the parties’ closing arguments, the Tax Court ruled, without any explanation, that Broadway's purchases on the supplies did not qualify for the reseller exemption under TG § 11-101(h)(3)(ii)(1). The Tax Court found, however, that Broadway purchased the supplies as an agent of the hospitals, and on that basis concluded that Broadway "should not have been charged [a] sales tax." Thus, the Tax Court concluded that Broadway was entitled to a refund from the State in the amount of $76,161.96, plus interest.⁶

The Comptroller filed a petition seeking judicial review of the Tax Court's decision in the circuit court.⁷ The circuit court denied the Comptroller's petition and affirmed the decision of the Tax Court. This timely appeal followed.

DISCUSSION

The focus of our review is the decision of the Tax Court, not the decision of the circuit court. Supervisor of Assessments v. Stellar GT , 406 Md. 658, 669, 961 A.2d 1119 (2008). We do not disturb factual findings and conclusions that are supported by substantial evidence in the record. Frey v. Comptroller of the Treasury , 422 Md. 111, 137, 29 A.3d 475 (2011). Substantial evidence means "such evidence as a reasonable mind might accept as adequate to support a conclusion[.]" Id . (cleaned up).

The Tax Court's legal conclusions are another matter. We accord "great weight to the agency's legal conclusions when they are premised upon an interpretation of the statutes that the agency administers and the regulations promulgated for that purpose[,]" but if the decision is based on "the application and analysis of caselaw,...