Frey v. Comptroller

Decision Date26 February 2009
Docket NumberNo. 1360, September Term, 2007.,1360, September Term, 2007.
Citation184 Md. App. 315,965 A.2d 923
PartiesTimothy A. FREY, et al. v. COMPTROLLER OF THE TREASURY.
CourtCourt of Special Appeals of Maryland

Harry D. Shapiro (Robert A. Spar, Saul Ewing, LLP on the brief), Baltimore, for Appellant.

John K. Barry (Gerald Langbaum, Douglas F. Gansler, Atty. Gen. on the brief), Baltimore, for Appellee.

Pnael: JAMES R. EYLER, ZARNOCH, ROBERT L. KARWACKI, (Ret., specially assigned), JJ.

ROBERT L. KARWACKI, Judge, (Ret., specially assigned).

In July 2005, the Maryland Comptroller of the Treasury, appellee, issued Notices of Income Tax Assessment to David S. Antzis and Judith W. Antzis ("the Antzises"), Timothy A. Frey and Mary S. Frey ("the Freys"), and Rudolph Garcia and Randi E. Pastor-Garcia ("the Garcias"), appellants, with respect to each of their joint Maryland Nonresident Tax Returns for the year ended December 31, 2004. Following an informal hearing before a hearing officer, the Antzises, Freys, and Garcias each received a Notice of Final Determination assessing them for failure to calculate the Special Nonresident Tax on their tax returns. Appellants were also assessed penalties and interest. They appealed to the Maryland Tax Court, where the cases were consolidated. The Tax Court affirmed the assessments but abated the penalties. Appellants petitioned for judicial review in the Circuit Court for Anne Arundel County. The circuit court affirmed the assessment of the Special Nonresident Tax against appellants, but remanded the case to the Maryland Tax Court for consideration of abatement of interest. Appellants noted a timely appeal to this Court and present the following issues for our review:

I. Whether the Special Nonresident Tax violates the Interstate Commerce Clause of the United States Constitution;

II. Whether the Special Nonresident Tax violates the Equal Protection Clause of the United States Constitution;

III. Whether the Special Nonresident Tax violates the Privileges and Immunities Clause of the United States Constitution;

IV. Whether the Special Nonresident Tax violates the Maryland Constitution and Declaration of Rights because it is discriminatory against a special class of taxpayer; and

V. Whether there is reasonable cause for the waiver of both penalties and interest.

Appellee noted a cross-appeal and raises one issue:

I. Whether the Tax Court has discretionary authority to reduce or abate interest on the assessments against appellants when the interest is assessed by statute and no statute gives the Tax Court authority to reduce or modify the interest.

For the reasons stated below, we hold that the Special Nonresident Tax does not violate the United States Constitution, Article 24 of the Declaration of Rights, or the Maryland Constitution. We also hold that the Tax Court has authority to consider the abatement of interest.

FACTS AND LEGAL PROCEEDINGS

In 2004, appellants, three married couples, resided in the Commonwealth of Pennsylvania and paid Pennsylvania income taxes and various local taxes to its subdivisions. They did not own property in the State of Maryland and had no children enrolled in Maryland schools, but each couple filed a joint nonresident income tax return in Maryland because the husband was a partner in Saul Ewing, LLP ("the law firm" or "the partnership"), a multi-state law firm with offices in Maryland, Pennsylvania, Delaware, Washington, D.C., New York, and New Jersey.

During the 2004 calendar year, Mr. Antzis conducted his legal practice at his office in Chesterbrook, Pennsylvania; Mr. Frey's office was located in Wilmington, Delaware; and Mr. Garcia's office was in Philadelphia, Pennsylvania. Messrs. Antzis, Frey, and Garcia each paid Maryland State income taxes with respect to their allocable share of the profit from the law firm. The law firm apportions its income among the states in which it does business, which, under Md.Code (2004), § 10-210 of the Tax-General Article ("T.G."), creates Maryland taxable income for appellants. There is also a withholding obligation for the law firm under T.G. § 10-102.1. These taxes are not in dispute.

In 2004, the General Assembly enacted a Special Nonresident Tax ("SNRT"), which applied to all taxable years beginning after December 31, 2003. 2004 Md. Laws 1915, 1928. The SNRT was imposed on an individual subject to Maryland State income tax, but not subject to the county or local income tax.1 T.G. § 10-106.1(a). The tax rate of the SNRT "shall be equal to the lowest county income tax rate set by any Maryland county[.]" T.G. § 10-106.1(b). Appellants did not pay the amount required by T.G. § 10-106.1 and thus were assessed by appellee.2 Appellants requested an informal hearing, which was held before a hearing officer on September 19, 2005.

On September 26, 2005, appellee issued Notices of Final Determination to each of the appellants. In the Notices, the hearing officer summarized appellants' positions:

Mr. Harry Shapiro, Esq. appeared on behalf of the Taxpayers [appellants]. He argued that the assessment against the Taxpayers is improper because the special nonresident tax violates the Interstate Commerce Clause and Due Process Clause of the United States Constitution, as well as the Maryland Constitution. The basis for this claim is that the special nonresident tax places a tax burden on nonresidents that is not imposed on residents. Mr. Shapiro stated that the special nonresident tax is distinguishable from the local tax imposed on Maryland residents because the tax revenue from the special nonresident tax goes to the State of Maryland, while the tax revenue from the resident local tax goes to the Maryland counties.

The hearing officer then concluded:

Mr. Shapiro's constitutional challenges to the special nonresident tax exceed the scope of this hearing. Based upon the information provided, I find that the assessment was issued in accordance with Tax-General Article § 10-106.1. Therefore, the assessment is affirmed in the amounts stated above, which include additional interest accrued to date.

The assessments, as affirmed by the hearing officer, for each couple were:

                   Appellant      Tax      Interest to Date   Penalty     Total
                   --------------------------------------------------------------
                   Antzises     $579.96        $37.77          $58.00    $675.73
                   Freys        $308.33        $20.08          $30.83    $359.24
                   Garcias     $1,607.73       $104.72        $160.77   $1,873.22
                

On October 24, 2005, appellants each filed a Petition of Appeal to the Maryland Tax Court. On February 15, 2006, by Order of the Tax Court, the cases were consolidated.

On May 10, 2006, a hearing was held before the Tax Court. No testimony was presented as the parties entered into a stipulation, but the court heard oral argument. By Order dated June 22, 2006, the Tax Court affirmed the assessments levied by appellee, but abated the penalty assessments. In its written opinion, the Tax Court commented that appellants had argued that T.G. § 10-106.1 "expressly discriminates against nonresidents by levying a tax on nonresident income which has no direct corollary with respect to residents." The Tax Court agreed that, "[a]t first blush, § 10-106.1. does indeed appear to discriminate against the out-of-state taxpayer, arguably interfering with the free flow of commerce mandated by the Commerce Clause, as well as violating the privileges and immunities guaranteed by the Privileges and Immunities Clause of the United States Constitution." The Tax Court further noted that "[t]his appearance of discrimination on the surface ... does not end the inquiry" because under Fulton Corp. v. Faulkner, 516 U.S. 325, 116 S.Ct. 848, 133 L.Ed.2d 796 (1996), the government may "overcome the presumption of invalidity `by showing that the statute is a "compensatory tax" designed simply to make interstate commerce bear a burden already borne by intrastate commerce.' Id. at 331, 116 S.Ct. 848 (citations omitted)."

The Tax Court went on to apply the three-pronged test in Fulton. Under the first prong, which requires the State to identify the intrastate tax burden for which the State is attempting to compensate, Fulton, 516 U.S. at 332, 116 S.Ct. 848, the Tax Court commented that local governmental benefits, such as "police and fire protection, waste disposal, water and sewer services, and the myriad of other local governmental activities on behalf of people within each local jurisdiction, ... accrue both directly and indirectly to nonresidents while they are present or doing business in a jurisdiction." The Tax Court continued:

Obviously, both residents and nonresidents receive these local governmental benefits by mere virtue of their physical presence within a jurisdiction, either in person or as part of a business entity doing business within the jurisdiction. It seems perfectly reasonable, therefore, for the State to seek compensation for these services from non-residents through the tax system. Although there is no direct mechanism to allocate the special non-resident tax revenue to a particular county, the General Fund of Maryland exists to provide funding for the benefit of all Maryland Counties and Baltimore City, selectively, through legislation and through the legislative budgeting process. In this regard, the evidence is clear that the burden on intrastate commerce for which § 10-106.1., is compensating, is the burden of providing local governmental services, directly or indirectly, to all persons or entities situate or doing business within its local borders.

When considering the second prong under Fulton, the Tax Court concluded that the SNRT "roughly approximates, but does not exceed the amount of the tax burden imposed on residents." See Fulton, 516 U.S. at 332, 116 S.Ct. 848 ("Second, `the tax on interstate commerce must be shown roughly to approximate—but not exceed—the amount of the tax on intrastate commerce.'") The Tax Court stated: "It is clear from...

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