Comptroller v. J/Port

• Decision Date: 10 March 2009
• Docket Number: No. 114, September Term, 2008.,114, September Term, 2008.
• Parties: COMPTROLLER OF the TREASURY v. J/PORT, INC.
• Court: Court of Special Appeals of Maryland

967 A.2d 253

184 Md. App. 608

COMPTROLLER OF the TREASURY v. J/PORT, INC.

No. 114, September Term, 2008.

Court of Special Appeals of Maryland.

March 10, 2009.

Christina A. Milnor (Leslie M. Romine, Douglas Gansler, Atty. Gen., on brief), for Appellant.

Todd D. Lochner (Jonathan pomerance, Lochner & Schwenk, LLC, on brief), Annapolis, for Appellee.

Panel: KRAUSER, C.J., DAVIS, ROBERT E. CAHILL, JR. (specially assigned), JJ.

DAVIS, J.

The Comptroller of the Treasury (Comptroller), appellant, denied a request by J/Port, Inc., appellee, for a refund of certain admissions and amusement taxes and sales and use taxes imposed on fees charged by appellee in relation to its sailing and boating club. Appellee sought judicial review of this decision in the Maryland Tax Court (Tax Court) (Martz, C.J.). After a hearing on the merits held on April 18 and May 30, 2007, the Tax Court affirmed the Comptroller's denial of the refund request. Appellee noted an appeal and oral arguments were held on the matter before the Circuit Court for Anne Arundel County. On March 7, 2008, the circuit court (1) vacated the Tax Court's judgment as to both the admissions and amusement and the sales and use tax¹ and (2) affirmed the Tax Court's determination that appellee's constitutional argument was without merit. The Comptroller noted his timely appeal of the circuit court's judgment and presents two questions for our review, which we have rephrased and reorganized as follows:

I. Did the circuit court err by ruling that the Tax Court's legal conclusion that appellee's membership fees are subject to an admissions and amusement tax was not supported by substantial evidence?

II. Did the circuit court err by ruling that the Tax Court's legal conclusion that appellee's membership fees are subject to a sales and use tax was not supported by substantial evidence?

For the reasons that follow, we answer both questions in the affirmative. Accordingly, we reverse the judgment of the Circuit Court for Anne Arundel County and affirm the decision of the Tax Court.

FACTUAL BACKGROUND

Appellee was incorporated in 1992 to sell boats. Appellee also operates the J/Port Sailing Club and the Chesapeake Boat Club (the Club). The Club represents approximately half of appellee's gross profits. The boat sale operations, the Club and a sailing school are all operated out of a marina leased by appellee. The only taxes at issue in this case are those related to Club membership fees.

From 2002 to 2005, the time covered by appellee's refund request, appellee maintained a fleet of fourteen sailboats and four Albin powerboats. The fleet of sailboats was comprised of eight J/80's (twenty-six-foot day sailers), three J/105's (thirty-four and one-half-foot day sailers/overnighters) and three J/32's (overnight cruisers).² Appellee maintains that, during this time, the Club had between 142 and 171 members. Informational material produced by appellee describes the Club as follows:

The concept of J/Port Sailing Club was founded in 1993 out of the needs of our own clients—to have easy-to-sail, high performance J/Boats available on short notice and at a fraction of the cost you might anticipate for this much FUN! Becoming a member is a perfect way to get on the water and enjoy sailing with minimal expense and hassle.

There are various levels of membership in the Club, each of which allow use of certain boats at certain periods of time. Generally, Level One membership allows unlimited use of the J/80, with a smaller annual fee for members seeking unlimited "midweek" use of the J/80 Monday through Friday. Under Level One membership, three session slots are available for use of the boats, which may be reserved up to seven days in advance.

Level Two membership generally allows access to larger boats. A member of Level Two is allowed unlimited day sailing of the J/80 plus fourteen days of guaranteed advance reserve time that can be used for extended cruising aboard the J/105, J/32 and J/28. Level Two membership also provides unlimited standby days, allowing, inter alia, reservations to be made within twenty-four hours of sailing. Level Two's annual fee is approximately double that of Level One. Level Two membership is also available for a period of two years. Both Level One and Level Two require a mandatory sea tow insurance fee along with one time charges for an orientation fee and a refundable deposit.

In addition, appellee charges an annual fee for membership in the Chesapeake Boat Club, which allows use of the Albin powerboat. With this type of membership, a member receives points that can be applied towards the scheduling of boats. Appellee further offers combination sail and powerboat memberships.

Mikulski testified that all Club members, regardless of membership level, retain unlimited access to club vessels as long as a vessel is available and subject to the terms of membership. Reservations are made via a "complex" on-line system that indicates which boats are reserved at various times. Two club members testified that this system was a "tremendous value" and a "great help" in enabling use of the boats.

Appellee emphasizes that all members within each membership level pay the same annual dues regardless of how many times the member actually uses the boats. There are no additional fees for using the Club's boats, although members remain responsible for covering the cost of "running expenses," such as fuel. Mikulski testified that appellee had one operating account where all member contributions are placed, such that the fees paid by any member may be used to cover expenses for a boat to which a member is not necessarily allowed access. Even though boat usage within each level may vary according to the member, all members within a level are charged the same annual fee. A member is not charged additional money to bring a guest or to enter the Club's marina, which includes picnic tables and a covered shelter.

The Club further provides sailing lessons, organizes social events and races, and conducts community outreach activities for its members. Mikulski acknowledged that appellee used the same premises to conduct both its Club operations as well as its other business operations. Purchasers of boats are considered "honorary members" of the Club and may use Club facilities and participate in Club events.

Request for and Denial of Tax Refund

The primary issue in this case is whether the annual fees paid by members of the Club are subject to both (1) an admissions and amusement tax and (2) a sales and use tax as codified in Maryland's Tax-General Article (T.G.).³ In a letter dated December 1, 1994, the Comptroller advised the Club that annual member dues were subject to both of these taxes:

[T]here are two taxes that may apply to the fees being paid to the Club: admissions and amusement tax and sales and use tax. The admissions and amusement tax is imposed on the gross receipts for any admission and amusement charge, specifically defined to [include] charges for the use or rental of recreational equipment, of which sailboats are a common example. The use of the terms "club," "dues" and "members" does not alter or disguise the fact that the transaction you described in your letter, and that we discussed on the phone, constitutes sailboat rentals. Therefore, the fees charged to your members are subject to the admissions and amusement tax. [. . .]

If the transactions are bareboat rentals, as opposed to captained charters, then the transactions are retail sales, also subject to the 5 percent sales and use tax. In this case, the admissions and amusement tax is capped at 5 percent, in that the total of the two taxes cannot exceed 10 percent.

In your letter, you indicate that a membership in [the Club] parallels that of a health club. However, I see no correlation between the two. As an example, the J/110 membership agreement allows 14-days use of the sailboat for the cost of the annual dues. The members are charged additional fees for additional uses. This is, plain and simple, a rental of a sailboat.

Appellee has persistently maintained that neither tax is applicable to dues paid by Club members. On December 30, 2005, appellee filed for a refund of both taxes paid from 2002 to 2005.⁴ Appellee argued that the money paid by Club members was not subject to either tax because the fees paid by Club members were not used to "rent" boats. Rather, according to appellee, these fees entitled members to various privileges of the Club, which include use of boats, use of the marina and participation in Club-organized activities.

On March 6, 2006, the Comptroller denied appellee's request for a refund, stating that "the contracts submitted to the State of Maryland describe boat rentals" and "[u]sing the term `member or membership' does not alter that fact."⁵

Tax Court Appeal

Appellee appealed the Comptroller's denial of its tax refund request to the Maryland Tax Court. During the Tax Court proceedings, Mikulski and Cheryl Keyworth, appellee's office manager, testified on behalf of appellee. Appellee also presented Arthur Savage and Harold Brown, two Club members. They both stated that membership in the Club was a cost effective way to be able to sail boats as well as participate in other club activities. Savage testified that the "main purpose" of joining the Club was "to go sailing when I want to go sailing." Brown stated that he became a member for the opportunity to sail.

The Comptroller's case consisted of the testimony of Theresa Trentler, the Comptroller's Refund Supervisor, Patricia David, the Comptroller's Field Audit Manager, and Daniel Riley, an Assistant Director of the Compliance Division. Trentler, who reviewed appellee's refund request, testified that the request was denied because the agreements entered into between the Club and its members involved boat rentals. Trentler based this determination on the "terminology used in the contracts," which included use...