At&T v. Comptroller

• Decision Date: 12 June 2008
• Docket Number: No. 111, Sept. Term, 2007.,111, Sept. Term, 2007.
• Citation: 405 Md. 83,950 A.2d 86
• Parties: AT&T COMMUNICATIONS OF MARYLAND, INC. v. COMPTROLLER OF the TREASURY.
• Court: Court of Special Appeals of Maryland

950 A.2d 86

405 Md. 83

AT&T COMMUNICATIONS OF MARYLAND, INC. v. COMPTROLLER OF the TREASURY.

No. 111, Sept. Term, 2007.

Court of Appeals of Maryland.

June 12, 2008.

Paul Walter (William C. Sammons and Craig R. Haughton of Tydings & Rosenberg LLP, Baltimore), on brief, for petitioner.

John K. Barry, Assistant Attorney General (Douglas F. Gansler, Attorney General of Maryland, and Gerald Langbaum, Assistant Attorney General, Annapolis), on brief, for respondent.

Argued before BELL, C.J., RAKER,^* HARRELL, BATTAGLIA, GREENE, and JOHN C. ELDRIDGE,^** (Retired, specially assigned) and DALE R. CATHELL, (Retired, specially assigned), JJ.

HARRELL, J.

I.

This case involves a sales and use tax imposed by Maryland on charges made by out-of-state vendors to Maryland consumers of telecommunications information services beginning with the area code "900." We are asked whether AT&T Communications of Maryland (AT&T), over whose long-distance lines the communications from out-of-state vendors were transmitted to Maryland consumers, was obligated to collect the tax from the Maryland consumers and, failing to have done that, to be responsible for payment of the tax to the Comptroller.

Telephone numbers beginning with the 900 area code are assigned by the Federal Communications Commission (FCC) to telecommunications service providers, such as AT&T. Designation of a 900 area code reflects that information or services (such as sports scores, weather information, computer technical support, "date lines," or psychic readings) are being transferred over the carrier's lines. The telecommunications provider markets these lines to information providers who pay a tariffed rate to the telecommunications provider for carriage of the information services over an assigned line. When the end-consumer dials a 900 number, he or she is charged a fee by the information vendor. Typically, this fee is included on, or as an insert to, the consumer's monthly telephone bill.

According to the record, four parties participated in the transmission of the 900 number calls at issue in this case: the out-of-state information vendor, the local exchange carrier (such as Verizon), the long distance carrier (AT&T), and a Maryland consumer who placed the call. The out-of-state information vendor is the party who offered the information for sale and decided what that information would be, created the content of the messages (including advertisements and scripts used by the persons providing the information to the consumers), determined the price to charge for the information, and marketed the 900 service to customers. The out-of-state information vendor purchased telecommunications services (transport) from the long distance carrier, AT&T. The out-of-state information vendor was responsible for payment to AT&T of a preset rate, found in and prescribed by tariffs published with either or both the FCC and the Maryland Public Service Commission. In short, the consumer dialed an AT&T-distributed 900-type number, a local carrier (such as Verizon) relayed the call to AT&T who, at a tariffed rate, relayed it to the out-of-state information vendor, and the out-of-state information vendor charged the customer for providing information.

As an option, an out-of-state information vendor also might use the carrier for billing and collection services for the 900-line services. In a majority of the transactions at issue here, AT&T generated a bill by combining its records of the length of the call made by the Maryland consumer with the information vendor's charge to the consumer. This charge was then included on, or with, the customer's telephone bill and labeled non-telecommunication charges.¹ When the customer paid for the information services, the carrier passed on the funds to the information vendor, less the fees AT&T charged for carrier, billing/collection, and arbitration services (to be explained further later in this opinion).

Since 1992, the Maryland General Assembly imposed a tax on the sale or use in Maryland of area code 900 telecommunication services. Maryland Code (1988, 2004 Replacement Volume), Tax General, § 11-101(m)(5).² The consumer/purchaser of the taxed goods or services is obligated to pay the tax and the "vendor" of the service is obligated to collect and remit it to the Comptroller. § 11-401(a). Failure to collect the tax may result in the vendor being responsible itself for payment of the tax. Id. Two types of vendors under the statute may be liable for collection of the tax. A "retail vendor" is one who is liable for collection of the sales tax if "it sell[s] or deliver[s] tangible personal property or a taxable service in the state." § 11-701(c). An "out-of-state vendor" may be liable if, although located outside of Maryland, it has an "agent, canvasser, representative, salesman, or solicitor operating in the state for the purpose of delivering, selling, or taking orders for tangible personal property or a taxable service ...." § 11-701(b). The Comptroller is authorized to hold an agent jointly responsible for collection of the tax. § 11-101(o)(2).

On 17 May 2001, the Maryland Comptroller of the Treasury completed an audit and assessed to AT&T $5,160,899.45, plus interest, in sales and use taxes for 900 number services completed over its network from 1 January 1992 to 28 February 2001. AT&T applied for a revision (elimination) of the assessment, arguing that it was not a vendor or an agent of a vendor. Instead, according to AT&T, the out-of-state information vendors were the sole statutory parties responsible for collecting and remitting the tax. The Comptroller held a hearing on 12 July 2001 at which AT&T's application for revision was denied. The Comptroller found that AT&T was a co-vendor, or at least the agent of a vendor, of 900 telecommunication services responsible for collecting and remitting the sales tax, together with the information vendor.

AT&T appealed the assessment to the Maryland Tax Court and, on 17 and 18 March 2004, a hearing was held. The Comptroller asked the Tax Court to affirm his decision to assess to AT&T the tax because AT&T was either a co-vendor of the 900 number services or an agent of the information service vendors. AT&T advanced several counter-arguments: 1) it was not a vendor or an agent, but merely a regulated provider of telecommunication services (common carrier) to the content vendors; 2) it was exempt from any responsibility for the tax, pursuant to the Commerce Clause (Article 1, § 8, cl. 3) of the United States Constitution, as a common carrier; 3) for taxing purposes, an insufficient nexus existed between AT&T's 900 number activities and the State of Maryland; and 4) the taxing statute was unconstitutionally vague. On 3 January 2005, the Tax Court rejected each of AT&T's contentions, concluding instead that AT&T's "function greatly exceeded that of a common carrier" and that AT&T "acted with the content providers in every step of the transaction[s]." The administrative agency determined further that the taxing statute was not unconstitutionally vague and that a sufficient nexus existed between AT&T and Maryland because AT&T has many connections with the State, although none specifically with regard to the 900 number services.

AT&T sought judicial review in the Circuit Court for Baltimore City. It again argued that it was a common carrier that could not be burdened constitutionally with either collection or remittance responsibilities for the state tax. Alternatively, AT&T argued that the statute was unconstitutionally vague and that the Tax Court's decision did not set out clearly the law and facts on which it relied to conclude that AT&T acted as a co-vendor or an agent of a vendor. Although the Circuit Court agreed that the Tax Court's opinion was not a "model of clarity," it affirmed the agency decision on the grounds that AT&T was both a co-vendor and an agent of a vendor. The court rejected AT&T's constitutional claims.

AT&T appealed to the Court of Special Appeals. It repeated its argument that it acted merely as a common carrier, exempt by virtue of the Commerce Clause from Maryland tax collection or remittance responsibilities in this case. AT&T Commc'ns of Md., Inc. v. Comptroller of the Treasury, 176 Md.App. 22, 932 A.2d 748 (2007). The intermediate appellate court concluded, however, that AT&T's role exceeded that of a common carrier. Id. at 33-35, 932 A.2d at 754-56. To support this result, the Court of Special Appeals relied on a summary of factual findings rendered by the Tax Court:

AT&T contacted an information provider and entered into an agreement with that provider and assigned a 900 telephone number.

AT&T reviewed advertisements that were placed, or I guess, prior to them being placed by the information provider to the public letting them know that a service was available.

AT&T reviewed preambles that were required to be put into the message that the consumer received over the phone, and AT&T reviewed content that was to be part of this message, at least in part, to categorize it.

. . . .

AT&T in addition to that, provided transport of the message over part of the network that was required.

AT&T provided billing for a majority of the information providers. The percentage varied over time and, in addition to that, captured information as to the length of the call, married that with the information from the information provider as to what they charged[,] and either then sent that to the [local exchange carrier] to create the bill for the consumer, sent the bill themselves or provided it to a third party biller to get the money collected, and AT&T provided dispute resolution.

. . . .

Lastly, AT&T had a share in the total revenue produced by the operation. They received funds for transport and dispute resolution services that were required. And if they did collection, they received funds for collection.

Id. at 33-34, 932 A.2d at 754-55. Thus, the court determined...