ATT v. Comptroller

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REPORTED IN THE COURT OF SPECIAL APPEALS OF MARYLAND No. 1883 September Term, 2005 AT&T COM MUNICATIONS OF MARYLAND, INC. v. COMPTROLLER OF THE TREASURY Salmon, Eyler, De borah S ., Meredith, JJ. Opinion by Meredith, J. Filed: September 13, 2007 C050000945 AT&T Communications of Maryland, Inc., appeals the decision of the Circuit Court for Baltimore City that af firmed a decisio n of the Marylan d Tax Court. The tax c ourt, in turn, had affirmed a decision of the Comptroller of the Treasury, appellee, to assess AT&T $5,160,899.45, plus interest, fo r unpaid sales tax based upon sales of 900 telecommunication service s. The tax court held that AT& T is liable for the tax because AT&T failed to collect the tax from the consumers and remit it to the State.1 We hold that AT&T is liable for the sales tax because AT&T was (a) not merely a common carrier of the 900 service, and (b) was a jo intly-respo nsible a gent of the out- of-state vendo rs. Acco rdingly, w e affirm the dec ision of the circu it court. Facts and Procedural History The Maryland s ales tax is an e xcise tax im posed on a retail sale or a use, in the state, of ... a taxable servic e. Marylan d Code (2002, 20 04 Rep l. Vol.), Tax-G eneral Artic le ( TG ), § 11-10 2. In 1992, the Maryland General Assembly amended the sales and use tax statute, TG §§ 11-101 - 11-712, to impose a sales tax on several telecommunication service s. The definition of tax able services was am ended to include 90 0 ; 976 ; 915 and other 900 -type telecom munication services .... TG § 11-101(m)(5). The area cod e 900 is assig ned by th e Fede ral Com munic ations C omm ission, and reflects the type of call being made (one to purchase information or services), rather than the 1 AT&T presents the following issues for our review: I. Whether the Legislature may impose a sales tax on a telecommunications common carrier on account of sales made by an out-of-state vendor over the common carrier s telecommunication system. II. Whethe r the Tax C ourt erred in imposing sales tax liability on AT&T as an agent of an out-of-state vendor when AT&T met none of the statu tory criteria fo r suc h an agen cy. III. Whether the Tax Court erred in imposing sales tax liability on AT&T as a retail vendor when AT&T neither sold nor delivered the service identified by the Tax Court as the taxable service. geograp hic location of the recipient of the call. Telephone calls made to numbers with the area code 900 allow consumers to purchase information or services over the telephone for a fee. To complete a 900 number transaction, the caller dials the ten-digit telephone number beginning with 900 and is connected to an information or content provider who then provides the desired information, such as psychic readings, sports scores, weather inform ation, d ate lines , etc. There are four m ain participants in a 900 number transaction: (1) the information or content provider, (2) the local exchange carrier, (3) the long-distance carrier, and (4) the purchasing caller. The content provider develops the information or services and determines the amount to charge the caller. The content provider then contracts with either a longdistance carrier (e.g., AT&T ) or a local exchange c arrier (e.g., Verizon) for the telecommunication services needed to provide the 900 number service. AT&T is a longdistance telephone carrier licensed to transmit 900 number and long distance telephone calls. AT&T entered into contracts w ith various content providers wh o were AT &T s customers located outside M aryland. The contracts stated: acting as Customer s agent AT&T will perform the following services .... Pursuant to such contracts, AT&T: (a) assigned 900 numbers to the content providers; (b) reviewed the content providers advertisem ents and preambles that the callers would receive over the phone, as well as message content; (c) transported the message over part of its network ; (d) provide d dispute resolution services; and (e) provided billing and collection services for a majority of the content providers. Some of the above function s performed by A T&T w ere required by federal 2 statutes and regulations, some were required by the local exchange carriers, and some were require d by AT &T s own p olicies. The 900 number calls that we re alleged to b e taxable he re originated in Maryland, and the calls we re charged to a service a ddress in Maryland. On May 17, 2001, the Maryland Comptroller of the Tre asury comp leted an aud it, and assessed AT&T with sales and use tax in the amount of $5,160,899.45, plus interest, for 900 telecommunication services conducted over AT&T s network from January 1, 1992, thro ugh Feb ruary 28, 200 1 (the audit period). AT&T applied for a revision of the assessment, arguing that it wa s not a vendor responsible for collecting and remittin g the tax un der the statute , and that the o ut-of-state information providers were the responsible vendors. On July 12, 2001, a hearing was held before the Comptroller. The Comptroller denied AT&T s application for revision, and affirmed the assessment, determining that AT&T was a co-vendor of 900 telecommunication services along with the information providers, and, therefore, liable for remitting sales tax. AT&T appealed the Comptroller s decision to the Maryland T ax Cou rt. On March 17 and 18, 2004, a hearing was held before the tax court. On January 3, 2005, the tax court issued an order affirming the assessment and finding AT&T liable for the tax on the 900 servic e. AT& T petitioned for judicial rev iew of tha t decision in th e Circuit Court for Baltim ore City. On September 30, 2005, the circuit court filed a memorandum opinion and order affirming the tax court. On October 19, 2005, AT&T noted an appeal from the circu it court s order. Standard of Review 3 Despite its name, the Marylan d Tax C ourt is an ad ministrative ag ency and no t a judicial body. Harford County v. S aks Fifth Avenu e Distrib ution C o., 399 M d. 73, 88 n.4 (2007). Accord ingly, a decision o f the tax co urt is accord ed grea t defere nce. Bennett v. S tate Dept. of Assessments And Taxation, 171 Md. App. 197, 204 (2006). We review the tax court s decision in a light most favorable to the agency, and will affirm the decision if it is not erroneou s as a matte r of law and is supported by substantial evidence appearing in the record . Id. (citation s omitte d). See Comptroller of the Treasury v. Blanton, Jr., 390 Md. 528, 535 (2006) ( Unless the Tax Court s decision was erroneous as a matter of law, or its conclusion was n ot supported by substantial eviden ce, we must affirm the decision. ). An administrative agency s factual findings are binding upon a reviewing court, so long as they are supported by substantial evidence in the record. United Parcel Serv., Inc. v. People's Counsel, 336 Md. 569, 577 (1994). A reviewing court may not engage in judicial fact-finding. Marsheck v. Board of Trustees of Fire & Police Employees' Retirement System of City of Baltimore, 358 M d. 393, 402 (2000); Motor Vehicle Administration v. Karwacki, 340 Md. 271, 283 (1995); Anderson v. Dep't of Pu blic Safety, 330 Md. 187 , 212 (1993). In this context, substantial evidence has been defined as such relevant ev idence as a reasonab le mind might acc ept as adeq uate to support a conclusion [.] Bulluck v. P elham W oods Ap ts., 283 Md. 505, 512 (1978) (quoting Snowden v. Mayor of Baltimore, 224 Md. 443 , 448 (1961)). Although we do not yield to the agency's legal conclusions, a degree of deference is nevertheless accorded to the expertise of administrative agencies, even with regard to some legal issues. Maryland Aviation Administration v. Noland, 386 Md. 556 , 571-72 (2005). In 4 Noland, the Court of Appeals stated that the reviewing court must review the agency s decision in the light mo st favorab le to it and that the agency s decision is prima facie correct and presum ed valid . Id. at 571; see also Catonsville Nursing v. Loveman, 349 Md. 560, 569 (1998); CBS v. Comptroller, 319 M d. 687, 698 (1990); Ramsay, Scarlett & Co., v. Comptroller, 302 Md. 825 , 834-835 (1985 ). 5 Discussion I. AT&T is not merely a common carrier for the 900 service AT&T argues that it m erely acted as a common carrier for the 900 number service because it only provided transport se rvices for th e out-of-state content pro viders, and it d id not sell any information or services to Maryland consumers. AT&T maintains that, as such a common c arrier, it does not ha ve the nec essary ties to M aryland to be taxed for providing the 900 service. We a gree, however, with the tax court s determination that AT& T is jointly liable with the out-of-state vendors for the sales tax, because, in this case, AT&T s function exceeded that of a common carrier with regard to the 900 service.2 The sales and use tax statute provides that a vendor is obligated to collect the tax from the buyer, and the buyer is obligated either to pay the tax to the vendor, or directly to the 2 Even if A T&T were cor rect in its argum ent that it acted a s a comm on carrier in the 900 service transactions, the appellant nevertheless has a physical presence in, and sufficient ties with, Maryland to be subject to state tax. As the tax court correctly stated, AT&T has many connections, including payroll and property, with the State, creating a sufficient nexus to allow Maryland to collect a sales tax. M oreover, the Suprem e Court has explicitly approved excise tax collection responsibilities for telephone companies when the call, a s in the p resent c ase, orig inates in the taxin g state. See Goldberg v. Sweet, 488 U.S. 252, 263, 109 S. Ct. 582 (1989) (telephone company can be required to collect excise tax determined as a percentage of amount billed to consumer, where tax is imposed on calls origin ating from the taxing sta te or billed to an address in th e taxing state) . As in Goldberg, the 900 numbe r calls here originated in the taxing state, and the calls were charge d to serv ice add resses in the taxin g state. The Comptroller further contends that, even if AT&T is a common carrier, no language in the statute states or imp lies that common carriers that de liver a service are exempt from c ollecting sales tax. The Com ptroller argues that, because the legislature knew that telephone companies are common carriers that deliver the 900 service, no additional language is necessary to bring them within the ambit of the statute. Because we agree with the tax court s finding that AT&T s services in these transactions went beyond the scope o f a comm on carrier, w e need no t decide w hether the C omptroller is c orrect in this alternative a rgumen t. 6 Comptroller. TG § 11-40 1(a). See Comptroller of Treasury v. American Cyanamid Co., 240 Md. 491, 494 (1965) (the sales tax is intended to be paid by the ultimate consumer, and collected from the consumer by the vendor). A vendor is defined in the statute as a person who: (1)(i) engages in the busine ss of an ou t-of-state ven dor, as defin ed in § 11-701[(b)3 ] of this title; 3 TG § 1 1-701(b) p rovides: (1) "Engage in the business of an out-of-state vendor" means to sell or deliver tangible personal property or a taxable service for use in the State. (2) "Engage in the business of an out-of-state vendor" includes: (i) permanently or temporarily maintaining, occupying, or using any office, sales or sample room, or distribution, storage, warehouse, or other place for the sale of tangible personal p roperty or a taxa ble serv ice d irect ly or in directly th roug h an agen t or su bsid iary; (ii) havin g an a gent, canvasser, representative, salesman, or solicitor operating in the State for the purp ose of d eliverin g, selling, or taking orders for ta ngible pers onal prop erty or a taxable service; or (iii) entering the State on a regular basis to provide service or repair for tang ible p erso nal p rope rty. (Emphasis add ed.) 7 (ii) engages in the business of a retail vendor, as defined in § 11-701[(c)4 ] of this title; or (iii) holds a special license issued under § 11-707 of this title. (2) "Vendor" incl udes, fo r an ou t-of-sta te vend or, a salesman, representative, peddler, or canvasser whom the Comp troller, for the efficient admin istration o f this title, elects to treat as an agent jointly responsible with the dealer, distributor, employer, or supervisor: (i) under whom the agent operates; or (ii) from whom the agent obtains the tangible personal property or taxable service for sale. TG § 11-1 01(o)(1) and (2) (emp hasis added). AT&T itself cannot be an out-of-state vendor of the 900 service because AT&T has locations in and does business in Maryland. The Comptroller argues, however, that, pursuant to TG § 11-1 01(o)(2), AT& T is jointly respon sible with the out-of-state vendors for collecting and remitting the sales tax as a representative of the out-of-state vendor, which the Comptroller can elect to treat as an agent of the out-of -state vendor. AT&T contends, howe ver, that it cannot be jointly responsible for the tax as an agent of the vendor because AT&T is merely a common carrier that provided only transport services (for the information) over its telecommunication lines for the out-of-state vendors. AT&T 4 TG § 1 1-701(c) p rovides: (1) "Engag e in the busin ess of a retail v endor" m eans to sell or deliver tangible personal property or a taxable service in the State. (2) "Engage in the business of a retail vendor" includes liquidating a business that sells tangible personal property or a taxable service, when the liquidator holds out to the public that the bu siness is conducted by the liquidator. (Emp hasis ad ded.) 8 maintains that, because it is a common carrier for the out-of-state vendors, the vendors do not have a substantial n exus with Maryland to make the 900 num ber transactio ns taxable events. We agree that if an out-of-state ven dor s only connec tion to the state is via a common carrier, the sale i s not su fficien tly tied to the state to b e taxed . National Bellas Hess v. Department of Revenue, 386 U.S. 753 , 758, 87 S . Ct. 1389, 1392 (1967) ( But the Court has never held that a State may impose the duty of use tax collection and payment upon a seller whose only connection with customers in the State is by common carrier or the United States mail. ). A state tax will withstand scrutiny under the Commerce Clause of the United States Constitution, however, if the tax is [1] applied to an activity with a substantial ne xus with the taxing State, [2] is fairly appo rtioned, [3] d oes not disc riminate aga inst interstate commerce, and [4] is fairly related to the services provided by the State. Goldberg, 488 U.S. at 257-258 (quoting Complete Auto Transit, Inc. v. Brady, 430 U.S . 274, 279, 9 7 S. Ct. 1076, 1 079 (1 977)). In Goldberg, the Supreme Court stated, 488 U.S. at 263: We believe that only two States have a nexus substantial enough to tax a consumer s pu rchase of a n interstate telep hone call. T he first is a State ... which taxes the orig ination or term ination of a n interstate telep hone call charged to a service address within that State. The second is a State which taxes the origination or termination of an interstate telephone call billed or pa id within that State. See, e.g., Ark. Code An n. § 26-52-301(3) (S upp. 1987); Wash. Rev. C ode § 82.04.065 (2) (1987). As noted previously, Maryland satisfies these standards with respect to the 900 calls that are the subject o f the Com ptroller s asses sment. In Nation al Bella s Hess , 386 U.S. at 754, the Supreme Court ruled that an out-of- state seller s use of parcel common carriers to deliver goods to in-state customers did not provide 9 a sufficient nexus to allow the state to assert its sales tax on the transaction. The Supreme Court reaffirmed this bright line exemption from state taxation in Quill Cor p v. North Dakota , 504 U.S. 298 , 112 S. Ct. 1904 (1992), holding that an out-of-state mail order house, with neither outlets nor sales representatives in South Dakota, was not required to collect and pay the state s use tax for goods delivered in South Dakota. Courts have long held that, under many circumstances, telephone (and telegraph) companies are com mon c arriers o f mess ages. Freschen v. Western Union Telegraph Co., 189 N.Y.S. 649, 651 -52 (N.Y . City Ct. 1921) ; Hockett v . State, 5 N.E. 178, 182-83 (Ind. 18 86). In the commu nications conte xt, a comm on carrier is o ne that ma kes a pub lic offering to provide [comm unications f acilities] whe reby all members of the public who choose to employ such facilities may communicate or transm it intellige nce of their ow n desig n and c hoosin g .... F.C.C. v. Midwest Video Corp., 440 U.S . 689, 701 (1 979) (quo tation and c itation omitted). AT&T asserts that it is a comm on carrier w ith regard to the 900 number calls because it made a public offering to provide communications facilities by filing a tariff with the Federal Comm unications Commission. Un der the tariff, AT& T agreed to provid e transport (telecommunication) services over its 900 lines to any 900 number information provider willing to pay for such service. As the tax court found in the case sub judice, however, AT&T s role exceeded that of a common carrier. AT&T provided much more to the information providers than the mere transport of the information over its telecommunication lines. At the March 18, 2004, hearing, the tax court summarized AT&T s substantial involvement in the 900 number transactions: 10 Number one, AT& T contacted an info rmation provider and entered into an agreement w ith that provider and assigned a 900 telephone n umber. AT&T reviewed advertisements that were placed, or I guess, prior to them being placed by the inform ation provid er to the pub lic letting them know that a service was available. AT&T reviewed preambles that were required to be put into the message that the con sumer rec eived ove r the phone, and AT&T reviewed content tha t was to be part of this m essage, at leas t in part, to categ orize it. Those functio ns we re in resp onse to federa l statutes a nd regu lations[ ,] in response to requireme nts by [local ex change c arriers] and in response to AT& T polic ies of th eir own . AT&T in addition to that, provided transport of the message over part of the n etwork that wa s require d. AT&T provided billing for a majority of the information providers. The percentage varied over time and, in add ition to that, captured information as to the length of the call, married that w ith the information from the information provider as to what they charged[,] and either then sent that to the [local exchang e carrier] to cre ate the bill for th e consum er, sent the bill themselves or provided it to a third party biller to get the money collected, and AT&T provided dispute resolution. Some of these requirements, again, were part of their own policies or part of r equirem ents fro m fed eral statu te or reg ulations .[ 5 ] Lastly, AT&T ha d a share in the total revenue produced by the operation. They received funds for transport and dispute resolution services 5 AT&T argues that because som e of its roles (e.g., dispute reso lution service s) in providing the 900 service were required by federal regulations like the Telephone Disclosure and Dispute Resolution Act, 15 U.S.C. § 5701, those services should not impact the determination of whether AT&T is a vendor. But, the fact that telecommunication companies like AT&T were legally obligated to provide additional services (i.e., in addition to tra nsport serv ices) in the de livery of 900 s ervices, tend s to show that the federal government views companies like AT&T as more than common carriers, and im poses upo n such telec ommu nication co mpanies r esponsibilities typic ally associa ted with vendo rs or age nts of v endors . 11 that were required. collectio n. And if they did collection, they received funds for In the findings in its memorandum opinion, the tax court further elaborated upon AT&T s role in providing the 900 service: AT&T is involved in almost every step in the entire process. It did not actually write the content but reviewed the content of the message. AT&T also reviewed the advertisements to the public regarding the 900 service as well as the content of the required preambles. It also provided the transport of the message . The transp ort function is the only one m ost like that of a common carrier. AT&T often provided billing and collection activities. It also had a marketing staff to contact potential content providers with the intention of adding to the volume of the 900 service. It should be noted that within AT&T these services generated Fat Sticky Minutes. The Fat part referrin g to the h igher ra te that A T&T charge d for 9 00 min utes. In Bell Atlantic-Maryland, Inc. v. Comptroller, Md. St. Tax Rep. (CCH) ¶ 201-611 (Md. Tax Ct. Jan. 18, 2 000), a simila r issue was before the tax court - w hether the lo cal telephone company was responsible for remitting state sales tax on amounts collected on behalf of content providers for 976 number calls. Bell Atlantic s role was similar to A T&T s role in providing 900 number calls. The tax court described Bell Atlantic s services that went beyond those of a mere common carrier, stating: Bell Atlantic provides for the transmission from the caller through its network to the equipment of the content provider. Bell Atlantic also keeps track of the usage, calculates the bills, sends the bills to the caller and collects the funds for services rendered. B ell Atlantic has some control over the advertising of the content providers, has some control over assuring that the conten t providers inform the public of certain charges, not only in the advertising but in the conten t itself. The tax court in Bell Atlantic adopted the Com ptroller s positio n and held that, becaus e Bell Atlantic had an inte rest in prom oting, and h ad produ cts associated with, the 976 service, the telepho ne com pany w as a ve ndor o bligated to collec t and rem it the sale s tax. 12 We agree with the tax court that, in the present case, the state tax exemption for common carriers would apply if AT &T we re acting solely as a common carrier. But the tax court concluded that the transport function is the only one of AT &T s m any function s (in providing the 900 se rvice) that is like th at of a com mon carrie r. It is clear that A T&T is more than just an information conduit in this situation AT& T, acting in c ooperation with the ou tof-state content providers, performed multiple acts that helped create the service. Because AT&T w as involved in many steps in the 900 service transactions, AT&T s actions in this case went beyond the role of a comm on carrier. 6 II. AT&T is an agent of an out-of-state vendor Furthermore, AT&T s involvement in providing the 900 service not only took AT&T beyond the role of a com mon carrier, but also allowed the Comptroller to elect to consider AT&T a representative and agent of the out-of-state vendors, and created sufficient nexus betwe en the o ut-of-s tate ven dors an d Ma ryland fo r this state to tax the sales. As noted above, TG § 11-701(b) states that engaging in the busines s of an ou t-of-state vendor mean s having an agen t, canvasser, representative, salesman, or solicitor operating in the State for the purpose of delivering, selling, or taking orders for ... a taxable service. AT&T argues it cannot be considered a representative of the vendor because it neither sold 6 AT&T s involvement in providing the service is very different from that of other common carriers such as the postal service, Federal Express, or UPS. AT&T is more than just a delivery co nduit for inf ormation b eing sold in th e 900 nu mber call. In th is situation, the product itself cannot be separated from its transport. Callers buy the informatio n or service s from a 9 00 num ber not just fo r the inform ation, but bec ause it is being delivered over the phone. Without the delivery, there is no product. Unlike a product delivered via UPS, for example, it would not be possible for the 900 number consum er to buy th e 900 numbe r serv ice separ ated from its de liver y. 13 nor delivered a taxable service to Maryland consumers. We agree w ith the tax court s finding that the taxable service is not limited to the information provided by the content providers, but is the entire telecommunication service. The tax court stated: The following uncontested definition seems most app ropriate to the Court concerning what a 900 ca ll is: When consum ers place ca lls on their telephones, receive some information in response to those calls and pay for these transactions through their pho ne bills, it is a 900 call. The Court believes that using this definition, it is clear that the Legislature intended to tax the above described telephone service. This is the taxable event that shows up on the in dividu al s pho ne bill. We do not agree with AT&T that the service deemed taxable by the ta x court w as only the sale of information. Rather, w e agree w ith the tax court s statement that: It is clear that the intent of the Legislature was to tax the entire service provided to the consu mer in Marylan d. (Emphasis added.) AT&T, because of its role in providing the 900 service, jointly provided the taxable service, along with the out-of-state vendors, to Maryland consu mers . We do agree with A T&T , howev er, that AT &T did not sell a taxable service to the consumers. A sale is defined in the statute a s a tran saction for con sideratio n whe reby ... a person perform s a service fo r another pe rson. TG § 11-101 (i)(1). Althou gh AT &T de alt directly with the out-of-state content providers, who sold the information/service to the callers, AT&T had no ownership interest in the information being provided and did not have the ability to set the p rice. AT&T further contends that it did not deliver the taxable service to the consumers. Although the statute do es not defin e deliver, we note that The American Heritage 14 Dictionary, 378 (3d College ed. 2002), defines the term as [t]o bring or transport to the proper place or recipient; distribute. AT& T maintains that simply providing transport services for the out-of-state vendors information does not equate to delivery. This contention is premised on the theory that the taxable service consists only of the information being sold to the consumer. As noted above, however, the taxable service is more than just the content of the 900 number call, but comprises the entire telecommunication transaction, as to w hich A T&T was su bstantia lly involve d. The Comptroller further argues that the legislature s intent to impose the tax on telecommunication providers for delivering the 900 serv ice to consumers is clear. Although the legislature k new w hen it was drafting the statute that long -distance carriers like AT&T would have to provide the telecommunications lines to deliver the 900 service, no language in the statute states or implies that such telecommunication providers are exempt from collecting and remitting the sales tax. Moreover, the legislature made no distinction between the transport/delivery of the service and the content. We agree with the Comptroller s observation that the legislature and the tax court relied on ordinary human understanding in determining that telecommunication companies like AT&T, in providing transport and many other service s for the out-of -state ve ndors, delivered the 900 se rvice to the con sumer s. We agree with the tax court that AT&T, as an agent of the out-of-state content providers th at delivered a taxable serv ice in Maryland, is liable for the s ales tax it failed to 15 collect and re mit. 7 Acco rdingly, w e affirm the judg ment o f the circ uit cour t. JUDGMENT OF THE CIRCUIT COURT FOR BALTIMORE CITY AFFIRMED. COSTS TO BE PAID BY THE APPELLANT. 7 The Comptroller argues alternatively that, even if AT&T is not an agent of an out-of-state v endor, it can still be liable for n ot collecting a nd remitting the tax as a retail vendor. T G § 11-7 01(c). Bec ause we agree with the circuit cou rt s finding th at AT& T is an agent o f the out-of -state vendo rs, we nee d not decid e whethe r the Com ptroller is correct in this alternative argument (and do not need to answer AT&T s third question presen ted). 16

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