State Dep't of Assessments & Taxation v. Andrecs

• Decision Date: 21 August 2015
• Docket Number: No. 50, Sept. Term, 2014.,50, Sept. Term, 2014.
• Citation: 444 Md. 585,120 A.3d 734
• Parties: STATE DEPARTMENT OF ASSESSMENTS AND TAXATION v. Kevin ANDRECS.
• Court: Court of Special Appeals of Maryland

444 Md. 585

120 A.3d 734

STATE DEPARTMENT OF ASSESSMENTS AND TAXATION

v.Kevin ANDRECS.

No. 50, Sept. Term, 2014.

Court of Appeals of Maryland.

Aug. 21, 2015.

William K. Hammond, Asst. Atty. Gen. (Douglas F. Gansler, Atty. Gen. of Maryland, Baltimore, MD), on brief, for Petitioner.

Daniel P. Shanahan (Williams & Connolly, LLP, Washington, DC), on brief, for Respondent.

Argued before: BARBERA, C.J., HARRELL^* , BATTAGLIA, GREENE, ADKINS, McDONALD, and WATTS, JJ.

Opinion

McDONALD, J.

An overarching principle of real property taxation, enshrined in the Maryland Constitution, is that like properties of like value are to be taxed alike. This is known as the requirement that property taxes be “ uniform.”¹ For a long-time homeowner whose residence has increased dramatically in value due to inflation or market-related forces beyond the control of the homeowner, strict adherence to the uniformity principle may cause financial hardship. To mitigate that effect, the Legislature created the homestead tax credit nearly 40 years ago to provide temporary relief from increasing property taxes for homeowners who can satisfy certain conditions.

But what about increases in value that are unrelated to external market conditions and are instead the result of the homeowner's own actions in making substantial renovations to the property? In the original version of the statute, a substantially renovated home was taxed at its full enhanced value and the homeowner lost the credit. When concerns were raised about such situations, the Legislature modified the homestead tax credit statute in certain respects to provide that a homeowner would retain an existing credit, but that the full value of the renovations would be included for tax purposes. This case requires us to construe one of those provisions.

Respondent Kevin Andrecs had lived in his home for approximately 10 years and benefited from the application of the homestead tax credit with respect to increases in the value of his home during that period. During 2008 and 2009, he razed the existing home, moved off the property, and built a new home that increased the value of the property by nearly $500,000. The tax assessor, although retaining Mr. Andrecs' existing credit, included the full value of the renovation in the value to be taxed—an interpretation that was affirmed by the Maryland Tax Court. Mr. Andrecs argues for an alternative construction of the homestead tax credit statute under which he could effectively escape tax on the renovations for many years into the future. This would result in Mr. Andrecs' property being taxed at a much lower rate than similarly-situated and similarly-valued properties—in conflict with the constitutional uniformity principle.

We hold that the interpretation endorsed by the Maryland Tax Court accords better with the statutory language and legislative intent and better respects the uniformity principle.

IBackground

This case requires us to construe a statute—the homestead tax credit statute. As in any exercise in statutory construction, the language of the statute must be considered in context.² This is especially important in the interpretation of statutes that do not have a lineage of prior judicial construction. We start with a constitutional principle governing all property taxes in the State. We then proceed to a brief primer on the statutes governing real property taxation in Maryland, with particular attention to the homestead tax credit statute and the key amendments to that statute pertinent to this case. We then turn to the particular facts of this case.

A. The Constitutional Mandate for Uniformity in Taxation of Real Property

Article 15 of the Maryland Declaration of Rights establishes a uniformity requirement with respect to the taxation of real and personal property.³ It requires that property assessments and taxes be “uniform” within each class or sub-class of property as those classes are defined by the Legislature. This uniformity provision requires that all property taxes within a particular class or sub-class be assessed based on an equivalent proportion of the property's actual value. State v. Cumberland & Penn. R.R. Co., 40 Md. 22, 49–51 (1874) (“the Legislature is required to cause all public taxation for the support of Government to be fair and equal in proportion to the value of the property assessed”). It is a violation of the uniformity requirement for the Legislature to tax property within the same class or sub-class at different proportions of market value. See Sears, Roebuck v. State Tax Comm., 214 Md. 550, 136 A.2d 567 (1957).

These two principles of the uniformity requirement—(1) that property taxes be based on actual value and (2) that they be assessed based on an equivalent proportion of value within each class or sub-class of property—have been a part of Maryland constitutional law since the Declaration of Rights was adopted in 1776.⁴ See Susquehanna Power Co. v. State Tax Comm'n, 159 Md. 334, 343, 151 A. 29 (1930) (amendments of the language of Article 15 did not affect the principle that taxes should be uniformly assessed based on the actual value of real property).

This Court has recognized that “perfect uniformity in assessments [is] impossible” and suggested that temporary inequalities in assessments do not violate Article 15, so long as the inequalities are ultimately reconciled. See Rogan v. Calvert County Comm'rs, 194 Md. 299, 311, 71 A.2d 47 (1950). Referring to this Court's Rogan decision, the Attorney General has advised the Governor and General Assembly that a lack of uniformity in assessments among properties within the same class might not conflict with Article 15's uniformity requirement if the disparity is temporary and does not persist for more than five years. 72 Opinions of the Attorney General 350 (1987).

B. The Uniformity Requirement and Real Property Taxes

Unless otherwise exempted by statute, all property located in the State is subject to assessment and property tax and is taxable to the owner of the property. Maryland Code, Tax–Property Article (“TP”), § 6–101(a)(1). Generally, to determine the amount of property tax due, the assessment of the property is multiplied by the applicable rate. TP § 6–401.

Tax Rate

Property is divided into classes and subclasses. Real property is one class of property and is divided into 11 subclasses.

TP § 8–101(b). Consistent with the uniformity requirement of Article 15, a single tax rate applies to a subclass. The State and each county (including Baltimore City) set the property tax rates for property within their respective jurisdictions. See TP §§ 6–201, 6–202.

Property Valuation

Calculation of a property assessment begins with a determination of the property's value. Real property is valued separately for the land and improvements to the land. TP § 8–104(a). The value of real property is determined by a physical inspection of the property by the State Department of Assessments and Taxation (“SDAT”) once every three years. TP § 8–104(b). The “date of finality”—when assessments become final for the next tax year—is January 1 of the year immediately before the first tax year to which the new valuation applies. TP §§ 1–101(i), 8–104(b)(2).

In any year of a three-year cycle, however, real property must be revalued if, among other things, “substantially completed improvements are made which add at least $100,000 in value to the property.”⁵ TP § 8–104(c)(1)(iii). Another event that can trigger a mid-cycle revaluation of property is “a change in use or character” of the property. TP § 8–104(c)(1)(ii).

Phase-in of the Valuation

The assessment of real property is the value to which the property tax rate may be applied. TP § 1–101(b). Except for a few exceptions not relevant here, the assessment of real property is its “phased-in value.” TP § 8–103(c)(1).

Instead of immediately taxing the property at its full value calculated during each physical inspection, the increase in value between one physical inspection and the next is phased in over three years. TP § 8–103(c)(1). Thus, the phased-in value for the first year increases by one-third of the amount by which the value increased over that yielded by the prior physical inspection of the real property; the assessment for the second year increases by two-thirds of the amount by which the value increased over the prior physical inspection; and the assessment for the third year includes the full amount by which the value increased over the prior physical inspection. TP § 8–103(a)(3). If the physical inspection did not reveal an increase in value, the assessment for all three years is the value determined in the most recent valuation. Id.

Tax Computation

In sum, once the real property is inspected and valued, the increase in value from the most recent inspection is phased-in over three years. For each tax year, the amount of tax due is calculated by multiplying the phased-in value for that year by the tax rate applicable to the particular subclass of real property. The next step is to determine whether any tax credits apply.

C. The Homestead Tax Credit

During the 1970s, the country experienced significant inflation generally, and in real property values in particular. This resulted in substantial increases in the market value of real property and corresponding increases in real property taxes. A number of proposals were considered by the General Assembly to provide tax relief to homeowners from the effect of inflation on residential property values and tax assessments. See 62 Opinions of the Attorney

General

54 (1977) (analyzing various proposals for residential property tax reform). Ultimately, the Legislature enacted a provision now known as the homestead tax credit. Chapter 959, Laws of Maryland 1977, now codified, as extended and amended, in TP § 9–105.

Under the homestead tax credit statute, even though a residential property increases in value, the value used for purposes of computing property taxes is effectively capped at a certain percentage...