State Dept. of Assessments and Taxation v. Consumer Programs, Inc.

• Decision Date: 01 September 1991
• Docket Number: 108,Nos. 107,s. 107
• Citation: 626 A.2d 360,331 Md. 68
• Parties: STATE DEPARTMENT OF ASSESSMENTS AND TAXATION v. CONSUMER PROGRAMS, INCORPORATED. STATE DEPARTMENT OF ASSESSMENTS AND TAXATION v. M.C.N., INC. ,
• Court: Maryland Court of Appeals

Page 68

331 Md. 68

626 A.2d 360

STATE DEPARTMENT OF ASSESSMENTS AND TAXATION v. CONSUMER PROGRAMS, INCORPORATED.

STATE DEPARTMENT OF ASSESSMENTS AND TAXATION v. M.C.N., INC.

Nos. 107, 108, Sept. Term, 1991.

Court of Appeals of Maryland.

June 24, 1993.

David M. Lyon, Asst. Atty. Gen. (J. Joseph Curran, Jr., Atty. Gen., both on brief), Baltimore, for appellants.

Ronald B. Rubin (Terry A. Bauman, Shea & Gould, all on brief), Washington, DC, for appellee in No. 107.

No argument on behalf of appellee in No. 108.

Philip M. Moilanen, Stanton, Bullen, Nelson, Moilanen & Klaasen, P.C., Jackson, MI, Peter Driscoll, Columbia, for Photo Marketing Ass'n Intern.

Argued before MURPHY, C.J., and ELDRIDGE, RODOWSKY, McAULIFFE, CHASANOW, KARWACKI and ROBERT M. BELL, JJ.

ELDRIDGE, Judge.

Consumer Programs, Inc. ("CPI"), and MCN, Inc., are "one hour" photo-finishing businesses. CPI is a national corporation with eleven separate locations in Maryland. CPI locates its operations in shopping malls. MCN, a family-owned business, has only one location. MCN is situated in a retail commercial area, although not in a mall. In its personal property tax return for 1987, CPI requested that its photo processing equipment and raw materials be granted the manufacturer's exemption from personal property tax. MCN requested the manufacturer's exemption in its 1986 and 1987 returns. The two taxpayers claimed that the machinery and raw materials used to convert exposed film into negatives, prints, enlargements and slides are exempt from personal property tax pursuant to Maryland Code (1986), §§ 7-225 and 7-226 of the Tax-Property Article. Section 7-225(a) of the Tax-Property Article provides in pertinent part as follows:

"(a) General exemption--... if used in manufacturing, the following personal property, however operated and whether or not in use, is not subject to property tax:

(1) tools;

(2) implements;

(3) machinery; or

(4) manufacturing apparatus or engines."

Section 7-226(a) of the Tax-Property Article provides in pertinent part as follows:

"(a) General exemption.--... raw materials and manufactured products in the possession of a manufacturer are not subject to property tax."

Each taxpayer's request was initially denied by the State Department of Assessments and Taxation. Each taxpayer appealed the denial to the Maryland Tax Court, which conducted trials on the merits of each case on the same day. The Tax Court on June 27, 1990, issued its Memorandum of Grounds for Decision in the CPI case, and adopted that opinion in the MCN case. In its Memorandum, the Tax Court affirmed the denial of exempt status as to each taxpayer. The Tax Court, noting that the statute does not define "manufacturing" or "manufacturer," took the position that there are two primary factors to be considered in making the determination: (1) the scale and character of the operation, and (2) whether the operation fits the common understanding of the word "manufacturing." The Tax Court went on to hold that the photo-finishing operations did not meet the first factor because of the small scale and retail character of the locations. The court held that the photo-finishing operations met the second factor, in that the ordinary person would observe the substantial transformation which the raw materials undergo to form the finished product, and would consider the process to be manufacturing. The Tax Court concluded, however, that both factors must be present for the exemption to apply and that, therefore, the exemption must be denied.

Each taxpayer sought judicial review of the Tax Court's decision in the Circuit Court for Montgomery County. The circuit court issued an order and opinion in the CPI case on May 28, 1991, reversing the Tax Court, and on the same day adopted that order and opinion in the MCN case. The circuit court held that "the determinative factor in deciding whether a taxpayer's operations consist of manufacturing appears to be whether a product has gone through a substantial transformation in form and uses from its original state." Pointing out that the Tax Court had found that the process involved sufficient transformation of the product in the case at bar and had granted the manufacturer's exemption to other photo-finishing businesses in the past, the circuit court held that the manufacturer's exemption should apply to the taxpayers here. The circuit court concluded:

"For the Tax Court to completely disregard their prior holdings ... as well as the directives of the Court of Appeals in applying the substantial transformation test, and deny CPI's requested exemption based solely on their size and location is clearly erroneous. Accordingly, this Court shall pass an Order reversing the decision of the Maryland Tax Court in this matter."

The State Department of Assessments and Taxation appealed both cases to the Court of Special Appeals. This Court then issued writs of certiorari prior to arguments in the intermediate appellate court. Since the two cases present the same issue, we shall address them together in one opinion.

The decisions of the Maryland Tax Court, an administrative agency of the executive branch of the State government, ^{1 1} are subject to judicial review pursuant to Code (1988, 1992 Cum.Supp.), § 13-532 of the Tax-General Article. In an action for judicial review, the Tax Court's factual conclusions will be upheld if supported by substantial evidence in light of the record as a whole, CBS, Inc. v. Comptroller of Treasury, 319 Md. 687, 575 A.2d 324 (1990). A reviewing court will reverse a decision of the Tax Court, however, if the agency erroneously determines or erroneously applies the law. See, e.g., Roach v. Comptroller, 327 Md. 438, 610 A.2d 754 (1992); Friends School v. Supervisor, 314 Md. 194, 550 A.2d 657 (1988); Supervisor of Assessments v. Asbury Methodist Home, Inc., 313 Md. 614, 626-628, 547 A.2d 190, 196 (1988); Supervisor v. Chase Assoc., 306 Md. 568, 574, 510 A.2d 568, 571 (1986); Ramsay, Scarlett & Co. v. Comptroller, 302 Md. 825, 834, 490 A.2d 1296, 1301 (1985); Macke Co. v. Comptroller, 302 Md. 18, 485 A.2d 254 (1984). We shall conclude in this case that the Tax Court erred as a matter of law in construing and applying the statute.

As previously mentioned, §§ 7-225 and 7-226 of the Tax-Property Article do not define "manufacturing." In construing and applying these statutory provisions, this Court has been guided by the legislative purpose and history of the exemption, which is to encourage the location, development and growth of industry in Maryland. See, e.g., Macke Co. v. St. Dep't of Assess. & T., 264 Md. 121, 285 A.2d 593 (1972); Pan Am. Sulphur Co. v. State Dep't of Assess. & T., 251 Md. 620, 629, 248 A.2d 354, 359 (1968); H.M. Rowe Co. v. Tax Commission, 149 Md. 251, 257, 131 A. 509, 511 (1925); County Commissioners of Carroll County v. B.F. Shriver Co., 146 Md. 412, 413, 126 A. 71, 71 (1924). In defining the words "manufacture" or "manufacturing," the Court has also been guided by the normal, non-technical, meaning of the words. See Mayor and City Council of Baltimore v. Hanover Shirt Co., 168 Md. 174, 177 A. 160 (1935); H.M. Rowe Co. v. Tax Comm'n, supra; Commissioners of Carroll County v. B.F. Shriver Co., supra; Elec. Light Co. v. Frederick City, 84 Md 599, 36 A. 362 (1897); Carlin v. West Assurance Co., 57 Md. 515 (1882).

Webster's Third New International Dictionary 1378 (1981) sets forth several definitions of the verb "to manufacture," including "to make (as raw material) into a product suitable for use," "to make from raw materials by hand or by machinery," and "to produce according to an organized plan and with division of labor." In addition, Webster's defines a "manufacturer" as "one who changes the form of a commodity or who creates a new commodity." Black's Law Dictionary 1117 (West, 4th rev. ed., 1968) contains the following entry for the verb 'manufacture': "From Latin words manus and factura, literally, put together by hand. Now it means the process of making products by hand or machinery." ²

In accordance with these definitions, this Court has stated that "the determinative factor appears to be whether a product has gone through a substantial transformation in form and uses from its original state." Perdue v. St. Dep't of Assess. & T., 264 Md. 228, 237, 286 A.2d 165, 170 (1972), citing, inter alia, Arnreich v. State, 150 Md. 91, 100-101, 132 A. 430, 434 (1926) (defining "manufacturing" for purposes of a licensing statute as "the application to material of labor or skill whereby the original article is changed to a new, different and useful article ..."). See also Perdue Foods v. St. Dep't of A. & T., 264 Md. 672, 288 A.2d 170 (1972) (holding that a chicken processing plant was engaged in manufacturing, because it transformed live chickens into saleable consumer food items); H.M. Rowe Co. v. Tax Commission, supra, 149 Md. 251, 131 A. 509 (holding that merely assembling pre-printed sheets into binders did not convert the sheets into a different form, adapted for different uses; thus, the process was not considered manufacturing); Commissioners of Carroll County v. B.F. Shriver Co., supra, 146 Md. 412, 126 A. 71 (holding that transforming corn still in the husk and on the cob into ready- to-cook canned corn constituted manufacturing). See generally Annotation, What constitutes manufacturing and who is a manufacturer under tax laws? 17 A.L.R.3d 7, § 3 (1968, 1992 Supp.).

The Court acknowledged in Perdue v. St. Dep't of Assess. & T., supra, 264 Md. at 236, 286 A.2d at 169, that in some cases it may be "difficult to state with complete precision whether an activity is manufacturing" using the "substantial transformation" test alone. When application of this test has not resolved the matter, the Court has looked at secondary factors to determine if an activity otherwise has the "earmarks of ... manufacturing." Mayor and City Council of Baltimore v. Hanover Shirt Co., supra, 168 Md....