Chesapeake and Potomac Telephone Co. of Maryland v. Comptroller of the Treasury

• Decision Date: 01 September 1986
• Docket Number: No. 1699,1699
• Citation: Chesapeake and Potomac Telephone Co. of Maryland v. Comptroller of the Treasury, 528 A.2d 536, 72 Md.App. 293 (Md. App. 1986)
• Parties: CHESAPEAKE AND POTOMAC TELEPHONE COMPANY OF MARYLAND v. COMPTROLLER OF THE TREASURY. ,
• Court: Court of Special Appeals of Maryland

Page 293

72 Md.App. 293

528 A.2d 536

CHESAPEAKE AND POTOMAC TELEPHONE COMPANY OF MARYLAND v.COMPTROLLER OF THE TREASURY.

No. 1699, Sept. Term, 1986.

Court of Special Appeals of Maryland.

July 17, 1987.

The Chesapeake and Potomac Telephone Company of Maryland (C & P) paid that tax to the Comptroller on the cost of the telephone directories that it caused to be printed and distributed to its customers between October, 1977 and April, 1982.Asserting that it had paid the tax erroneously, C & P sought a refund, which, in major portion, the Comptroller denied.The Maryland Tax Court affirmed the Comptroller's denial of the claim for October, 1977--April, 1979 but ordered a refund for the May, 1979-- April, 1982 period.On further review, the Circuit Court for Baltimore City affirmed the Tax Court's ruling on the 1977-79 claim but reversed on the 1979-82 claim, thereby effectively denying any refund beyond that granted by the Comptroller.The company is aggrieved and shall remain so.

I. Introduction--Issues

The directories are those with which we are all familiar.Primarily, they contain the names, addresses, and telephone numbers of C & P subscribers in the geographic area to which they pertain.They also include information on how to use the telephone, how and where to make billing inquiries and obtain repair service, and other matters of interest to subscribers.The "yellow page" directories, as we know, contain business listings and advertising.C & P has divided the State into 26 geographic areas and prepares separate directories for each area.The directories are printed annually; they are distributed free to C & P subscribers, the cost being included in the charges for telephone service.

The directories at issue here were printed out-of-State.C & P compiled the data to be included in them and sent it to an independent compositor, who, in turn made a "camera ready" copy of it and sent that copy to printers selected by and under contract with C & P. Directories destined for subscribers in Garrett County and certain other rural areas of the State were printed by Ruralist Press, Inc. in Atlanta, Georgia; all other directories distributed in Maryland were printed by R.R. Donnelley & Sons Co. in Lancaster, Pennsylvania.On instructions from C & P, Ruralist delivered the Garrett County directories, to which it attached preprinted address labels supplied by C & P, to the United States Postal Service in Maryland; they were then distributed to subscribers through the normal delivery procedures of the Postal Service.The Comptroller conceded that those directories were not subject to the use tax; he approved the claim for refund, for 1979-82, as to them.

The other directories were not distributed by the Postal Service but by Directory Distributing Associates(DDA), an independent delivery service selected by and under contract with C & P. Donnelley and Ruralist delivered those directories from their respective plants to designated locations in Maryland, through carriers approved by C & P. DDA personnel met those carriers at those locations, transferred the directories either directly into DDA vehicles or into a storage facility for later loading into DDA vehicles, and effected the ultimate distribution to C & P or its subscribers.¹The issues before us concern those directories.

C & P filed its initial application for refund with the Comptroller's Retail Sales Tax Division on June 16, 1982.It sought recovery of $460,403 for taxes paid on directories printed from October, 1977 through April, 1979 and $949,677 for taxes paid on directories printed from May, 1979 through April, 1982.These amounts included taxes paid on directories distributed throughout the State, including Garrett County.In an attachment to its application, C & P asserted that the $949,677 claimed for the 1979-82 period was based on printing charges of $18,993,545, but there was no breakdown as between Garrett County and other directories.

The Retail Sales Tax Division denied the application on June 30, 1982.The 1977-79 claim for $460,403 was rejected on the ground that it was not filed within the three-year period of limitations set forth in art. 81, §§ 348and399.²

Pursuant to § 351(a)(4) of art. 81, C & P requested a formal hearing before the Comptroller, which, for some reason, was not held until July 3, 1983--a year later.On the day of the hearing, C & P presented what it regarded as a supplemental claim for the 1979-82 period, increasing the amount of refund sought from $949,677 to $1,634,971, based on printing charges of $33,096,595.It was not possible, facially, to compare the initial and supplemental claims, to determine what the latter included that the former did not.The initial claim simply showed aggregate charges and taxes paid during four periods--May-December 1979, calendar year 1980, calendar year 1981, and January-April 1982--without any breakdown as to "yellow page,""white page," or combined directories.The "supplemental" claim showed, on a monthly basis, separate charges for "white page,""yellow page," and combined directories, but the totals of the columns for the whole period bear no similarity to the figures shown on the initial claim.

The Comptroller's hearing officer refused to consider the supplemental claim.She regarded it as a new claim that had not been presented within 30 days after notice of the assessment, as required by COMAR 03.06.01.80A(1).She denied the 1977-79 claim for $460,403 on limitations grounds.With respect to the initial 1979-82 claim for $949,677, C & P presented three arguments why the tax was not applicable:

(1) C & P did not "use, store, or consume" those directories in Maryland, that being, under art. 81, § 373(a), the statutory basis for the tax (2) The directories were continuously in the stream of interstate commerce and therefore were exempt both by Constitutional law and by §§ 326(f)and375(b) of art. 81; and

(3) The directories constituted "instruction books [or] other printed matter packaged with or obtainable only with the purchase of products held for sale" and were therefore exempt under COMAR 03.06.01.30A(2)(c).

The hearing officer agreed that C & P did not "use, store, or consume" the Garrett County directories and therefore approved a refund for those directories, subject to C & P establishing the amount of tax it paid with respect to them.She rejected all three arguments as to the DDA-delivered directories, however, and denied the balance of the claim.

In the Tax Court, C & P challenged the Comptroller's conclusions with respect to the $949,677 claim and the hearing officer's refusal to consider the supplemental claim for 1979-82.It acknowledged that the claim for 1977-79 was not timely but, complaining of a "gross inequity" in the law allowing the Comptroller four years to make a deficiency assessment but requiring taxpayers to seek refunds within three years, asked that the claim be considered on grounds of fairness.³Alternatively, it claimed the right to set off the amount paid in 1977-79 against any sales or use tax deficiency that may be assessed in an unrelated case.The Tax Court rejected C & P's argument as to the stale claim, including any right of setoff, and thus affirmed the Comptroller as to that.With respect to the 1979-82 claim, the Tax Court decided (1) that the Comptroller should have considered the supplemental claim and that it would do so, (2) that C & P did "use, store, or consume" the DDA-delivered directories in Maryland, (3) that those directories were not Constitutionally exempt from the tax by reason of continuously being in the stream of interstate commerce, but (4) that they were exempt under the regulation.On that basis, it reversed the Comptroller's decision as to the 1979-82 claim.

The Circuit Court agreed with the Tax Court's rejection of both the 1977-79 claim and the statutory and Constitutional arguments made by C & P with respect to the 1979-82 claim.It disagreed with the Tax Court's construction of the regulation, however, and held that the directories were not exempt under that regulation.The court therefore affirmed the Tax Court on the 1977-79 claim but reversed on the 1979-82 claim.

The same questions presented below are raised before us: (1) did C & P "use, store, or consume" the DDA-delivered directories in Maryland; (2) if so, were those directories Constitutionally exempt from taxation; (3) were they exempt under the regulation; (4) was the Tax Court correct in considering the "supplemental" claim for 1979-82; and (5) is C & P entitled to a "setoff" of the amount paid in 1977-79 against taxes due in an unrelated matter?It will not be necessary for us to address question (4).The others we shall consider seriatim.

II.The Facts

Questions (1) and (2)--whether the DDA-delivered directories fall within the ambit of § 373(a) and, if so, whether they are Constitutionally exempt from the tax imposed by that section--require us to look more closely at the procedures used for the delivery of the directories by the printers and their ultimate distribution by DDA.The underlying facts are not in substantial dispute.

Through negotiation, C & P and the printers established a production schedule for the directories and a given time span within which the printers were to make delivery of the directories.Prior to actual printing, C & P instructed the printers how many copies to print and where to deliver the copies.Directories destined for Baltimore were to be shipped to C & P "c/o Directory Distributing Associates," and the printer was told to contact one Lee Morris at a C & P number upon arrival in Baltimore "for delivery details."Directories headed for Landover, for distribution in the metropolitan Washington area, were to be shipped directly to DDA.In its General Instructions, C & P told the printer that "[s]hipping schedule details will be arranged through the coordinated efforts" of C & P, DDA,...