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

• Decision Date: 01 April 2022
• Docket Number: 19, Sept. Term, 2021
• Parties: BROADWAY SERVICES, INC. v. COMPTROLLER OF MARYLAND
• Court: Court of Special Appeals of Maryland

478 Md. 200

272 A.3d 800

BROADWAY SERVICES, INC.

v.COMPTROLLER OF MARYLAND

No. 19, Sept. Term, 2021

Court of Appeals of Maryland.

April 1, 2022

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

Argued by Benjamin M. Grossman, Asst. Atty. Gen. (Brian E. Frosh, Atty. Gen. of Maryland, Baltimore, MD), on brief, for Respondent.

Argued before: Getty, C.J., McDonald,^* Watts, Hotten, Booth, Biran and Alan M. Wilner (Senior Judge, Specially Assigned) JJ.

Getty, C.J.

The case before us involves contracts between three non-profit tax-exempt hospitals of the Johns Hopkins Health System ("JHHS"), and Broadway Services, Inc. ("Broadway"), a for-profit business. Under the contracts, Broadway provided management services to the hospitals, including purchasing and providing cleaning supplies for use by the hospitals’ janitorial staff. Broadway paid sales and use tax on these purchases.

The Comptroller of Maryland ("Comptroller") is responsible for the fair and efficient collection of taxes. To aid in performing the principal duty of collecting taxes, the Comptroller conducts audits, assesses taxes, and considers applications for tax refunds. The Comptroller audited Broadway, and Broadway filed a request for an offset and refund of the taxes it paid to cleaning supply vendors, asserting that Broadway was reselling the cleaning supplies and was therefore exempt from paying sales and use tax. The Comptroller denied Broadway's requested refund and assessed additional unpaid taxes discovered from the audit.

Broadway appealed the Comptroller's decision to the Maryland Tax Court ("Tax Court"). The Tax Court reversed the Comptroller's denial of Broadway's requested offset and refund and held that Broadway was not a reseller but, because it acted as the hospitals’ agent, should not have been charged sales tax.

The Tax-General Article of the Annotated Code of Maryland states that, except as otherwise provided, a sales and use tax is imposed on "a retail sale in the State[,] and ... a use, in the State, of tangible personal property, a digital code, a digital product, or a taxable service." Md. Code (1988, 2016 Repl. Vol., 2020 Supp.), Tax-General Article ("TG") §§ 11-102(a)et seq. A retail sale includes the sale of "(i) tangible personal property; (ii) a taxable service; (iii) a digital code; or (iv) a digital product." TG § 11-101(h)(1). However, a retail sale does not include "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[.]" TG § 11-101(h)(3)(ii)(1). Tangible personal property is defined as "(i) corporeal personal property of any nature; (ii) an accommodation; or (iii) a short-term rental." TG § 11-101(k)(1).

Exemptions to the sales and use tax are located in Title 11, Subtitle 2 of the Tax-General Article. Section 11-204(a)(3) identifies an exemption to sales and use tax for certain nonprofit organizations and states in pertinent part:

(a) The sales and use tax does not apply to:

***

(3) a sale to a nonprofit organization made to carry on its work, if the organization:

(i) 1. is located in the State;

***

(ii) is a charitable, educational, or religious organization;

(iii) is not the United States; and

(iv) except for the American National Red Cross, is not a unit or instrumentality of the United States[.]

TG § 11-204(a)(3).

To qualify as an organization exempt from sales and use tax under TG § 11-204(a)(3), "the organization shall file an application for an exemption certificate with the Comptroller." TG § 11-204(c). Buyers are required to produce evidence showing exempt status from sales and use tax, and must "provide[ ] the vendor with: (1) evidence that the buyer has an exemption certificate; or (2) the evidence that the Comptroller requires by regulation." TG § 11-408(a). The vendor's duty to collect sales and use tax from a buyer is "waived if the buyer provides the vendor with a signed resale certificate that" complies with the standards set forth in TG § 11-408(b)(1).

The question before us is whether the Tax Court erred in concluding that Broadway should not have been charged sales tax on the purchases. Further, we consider whether our holding in John McShain v. Comptroller supports a conclusion that Broadway should not have been charged sales tax. 202 Md. 68, 95 A.2d 473 (1953). For the reasons explained below, we answer that the Tax Court erred in concluding that Broadway acted as an agent of the hospitals when it purchased cleaning supplies. We also decline to extend our narrow holding in McShain to the present circumstances because the cleaning supplies were not incorporated into the realty of the hospitals.

BACKGROUND

A. Factual Background

Broadway is a for-profit company that provides security, parking, housekeeping, transportation, and facilities and property management services. Broadway is a subsidiary of the DOME Corporation, which is equally owned by The Johns Hopkins University and the JHHS. Between 1994 and 2001, Broadway entered into written Hospital Service Agreements ("HSA") with Johns Hopkins Hospital, Johns Hopkins Bayview Hospital, and Howard County General Hospital (collectively, the "hospitals"). The hospitals are exempt from sales and use tax as non-profit organizations.

Each hospital entered into its own HSA with Broadway, but the contracting procedures were uniform, and the HSAs themselves were largely similar. To create the HSAs, Broadway "mimicked" similar contracts from its competitors. The HSAs did not reference the creation of an express agency relationship.

Under the HSAs, Broadway provided janitorial management, including furnishing cleaning supplies to the hospitals, managing overall operations, and supervising janitorial staff. Specifically, Broadway "provid[ed] housekeeping services to [the hospitals] in accordance with the terms and conditions" of the HSAs. These services explicitly included "provid[ing] cleaning supplies and equipment to [the hospitals’] personnel performing housekeeping duties in and about the facility." Third-party vendors assessed sales tax on Broadway's purchases of cleaning supplies, which Broadway paid. The vendors shipped the cleaning supplies directly to the hospitals for use by the hospitals’ janitorial staff. The hospitals required the cleaning supplies to comply with infectious control standards. Before Broadway altered its purchases, Broadway presented the products to the hospitals for approval under their infectious control standards for hospital use.

Broadway's personnel did not clean the hospitals. At each hospital, the janitorial staff was unionized and prohibited non-union individuals and entities from cleaning. However, Broadway supervised the cleaning operations, inspected the work done by janitorial staff, and ensured the janitorial staff correctly completed the work Broadway assigned.

The hospitals compensated Broadway in twelve monthly installments based on an agreed-upon annual price. The HSAs provided that "[a]t the beginning of each month during the term of [the HSAs,]" Broadway "shall submit to [the hospitals] an invoice covering" one-twelfth of the lump-sum amount. The HSAs and monthly invoices did not contain an itemized breakdown of the costs, such as the specific costs of the cleaning supplies or of Broadway's management expenses. The payments were not adjusted based on the actual costs incurred. Instead, any additional expenses above the agreed-upon annual rate factored into the following year's calculation.

Adjustments to the annual rate required an agreement between both parties. Amendments to the HSAs did not take effect unless the parties agreed to written amendments. On one occasion, Broadway and one of the hospitals agreed to amend the HSA to change the rate before the end of the contract term. This amendment was necessary because one of the hospitals added two new towers, which caused Broadway to incur additional expenses, including the costs of purchasing larger quantities of cleaning supplies to account for the expansion.

This case arises from a sales tax audit of Broadway conducted by the Comptroller between December 1, 2007 and November 30, 2011. Broadway responded to the audit with a request for an offset credit and refund of $76,161.96, which equals the amount of sales tax Broadway paid. In its request, Broadway contended that it paid excess tax for services and products purchased for resale to the hospitals. The Comptroller denied Broadway's refund request and further assessed an additional $9,073.93 in unpaid sales and use tax.

B. Procedural Background

Broadway appealed to the Tax Court and asserted that it purchased supplies for resale to three tax-exempt hospitals under TG § 11-101(h)(3)(ii)(1). The Comptroller moved for summary judgment and argued that (1) Broadway was not a reseller; and (2) Broadway was not an agent of the hospitals when it purchased the cleaning supplies. In its response, Broadway stated that the Comptroller "provide[d] absolutely no background or authority to explain how [the agency argument was] even relevant to the matter before the [Tax Court]." The Tax Court denied the Comptroller's motion for summary judgment and held an evidentiary hearing on the matter.

After a one-day hearing, the Tax Court ruled, without explanation, that Broadway's purchases did not satisfy the reseller exemption. The Tax Court did not directly mention McShain , but counsel for Broadway briefly mentioned the case in closing argument. The Tax Court stated, "I'm going to suggest that these items were – I'm not going to call them resold to [the hospitals]."¹ However, the Tax Court conducted an agency analysis on the record and found that Broadway purchased supplies as an agent of the hospitals and should not have been charged sales tax. The Tax Court noted that "no written document [made] Broadway the agent of [the hospitals] for the purchase of these supplies" but found an...