Court Opinion

ID: 9636219
Source: CourtListenerOpinion
Date Created: 2023-08-22 14:20:11.723057+00
Date Added: 2024-06-11T18:09:42.972445
License: Public Domain

*181Dissenting Opinion by
WILNER, J.
Maryland Code, § ll-102(a) of the Tax-General Article imposes a tax on “a retail sale in the State” and on “a use, in the State, of tangible personal property or a taxable service.” Section 11-104(a) bases the tax on the “taxable price” of the property or service. Section 11-103 creates a rebuttable presumption that “any sale in the State is subject to the sales and use tax imposed under § 11-102(a)(1) of this subtitle” and places the burden on the person required to pay the sales or use tax of proving that a sale in the State is not subject to the tax.
Two terms used in §§ ll-102(a) and ll-104(a) are critical in this case — “sale” and “taxable price.” Those terms are defined in § 11-101. Section 11-101 (i) defines “sale” as including “a transaction for a consideration whereby ... title or possession of property is transferred or is to be transferred absolutely or conditionally by any means, including by lease ...” (Emphasis added). Section 11-101(0 defines “taxable price,” in pertinent part, as “the value, in money, of the consideration of any kind that is paid, delivered, payable, or deliverable by a buyer to a vendor in the consummation and complete performance of a sale without deduction for any expense or cost....”
Sections 2-102 and 2-103 of the Tax-General Article authorize the Comptroller to administer the sales tax law and to adopt reasonable regulations in the administration of that law. Pursuant to that authority, the Comptroller adopted COMAR 03.06.01.28, dealing with the application of the sales tax to leases of tangible personal property. Under that regulation, the transfer of possession of tangible personal property for a consideration by way of lease is included in the statutory definition of “sale,” each lease payment is considered a separate lease, and thus a separate sale, and the tax applies “to the entire lease payment if property acquired by lease is within this State at any time during that lease payment period.... ” With exceptions not relevant here, the tax applies “to the value in money of the consideration of any kind required to be *182paid to the lessor under the terms of the lease.” COMAR 03.06.01.28E. (Emphasis added).
In 1990, Citicorp entered into a Master Lease with IBM Credit Corporation under which Citicorp leased certain computer equipment from IBM. Through an amendment to the Master Lease made in June 1997, the term of the lease was extended to June 27, 2002. Two provisions of the lease, as amended, are of particular relevance. Section 6.1 provided that the lease was a “net lease,” that Citicorp’s obligation to pay all rent was “absolute and unconditional,” and that its obligation was not subject “to any abatement, reduction, set-off, defense, counterclaim, interruption, deferment or recoupment for any reason whatsoever, and that such payments shall be and continue to be payable in all events.” Section 14.1, however, permitted the Master Lease to be altered, modified, terminated, or discharged by a writing “signed by the party against whom such alteration, modification, termination or discharge is sought.”
The Master Lease was essentially a skeletal lease. See International Business Machines v. State Bd. of Equalization, 26 Cal.3d 923, 163 Cal.Rptr. 782, 609 P.2d 1 (1980). It set forth general terms and conditions applicable to all of the equipment to be leased but did not specify the leased equipment or the term of the lease of such equipment or the rent to be paid for that equipment. All of that was to be done through separate equipment schedules entered into from time to time as various items were leased. Those equipment schedules were regarded as separate, independent leases, though subject to the terms and conditions in the Master Lease. Implicitly, they would become amendments to the Master Lease. Section 1 of the Master Lease described the property subject to the lease as “all of the tangible personal property (collectively the 'Equipment’ and individually an ‘Item’) listed on each equipment schedule (‘Equipment Schedule’) executed, from time to time, pursuant to this Master Lease.” Each such schedule was to “constitute a separate, distinct and independent lease and contractual obligation of Lessee.” In furtherance of that provision, the Master Lease *183provided that the term of each lease of an item was to be as designated on the equipment schedule applying to that item, and, as a result, the lease terms of the various items of equipment subject to the initial Master Lease varied. Under § 2.2(a) of that agreement, the leases for the individual items could be extended, renewed, or terminated as provided in the equipment schedules applicable to those items. The rent for the various leased items was to be as specified in the equipment schedules. See § 3 of the Master Lease. By virtue of the 1997 amendment to the Master Lease, the leases for all of the equipment were extended to June 27, 2002.
It is clear that, subject to an alteration, modification, termination, or discharge made pursuant to § 14.1, Citicorp was liable for the entire amount of rent payable under the Master Lease or the various equipment schedules through June 27, 2002. It is also clear that, under the statutory definitions of “sale” and “taxable price” and the implementing COMAR regulation that each equipment schedule, incorporated into the Master Lease, constituted a taxable retail sale and that a sales tax was imposed and collectible on each rental payment made by Citicorp under the Master Lease. Had the lease continued until its termination date, IBM would have been liable for the tax based on the entire amount of rent payable and paid under the lease. Each month, as it received the rent from Citicorp, it would have been required to remit the tax based on that rental payment to the Comptroller, and, in recognition of that obligation, it did, in fact, make those payments. None of that is in dispute.
In October, 1998, IBM and Citicorp decided on a different arrangement — that Citicorp would return the leased equipment, the Master Lease would be terminated, and Citicorp would purchase other equipment from IBM. In order to effect that new arrangement, IBM and Citicorp, acting pursuant to § 14.1 of the lease, terminated the Master Lease effective October 15, 1998. Pursuant to the termination, Citicorp returned the leased equipment. The termination was not cost-free, however. IBM calculated the amount of rent that would have been due for the various categories of leased equipment *184had the lease continued to its normal expiration date, discounted that total amount to arrive at the present value of the gross amount, as of October 15, 1998, and required Citicorp to pay that aggregate discounted amount as a “termination fee.” As the termination fee — $8,067,183—took the place of the rent that would have remained due under the lease, Citicorp, understandably, was relieved of further liability for that rent.
The Comptroller takes the position that the lease, incorporating the equipment schedules, constituted a “sale,” and that the termination fee, being part of the consideration paid by Citicorp under the lease, constituted part of the taxable price and was therefore subject to the tax. The Tax Court thought otherwise and a majority of this Court proposes to affirm that decision. With respect, I dissent.
I recognize that great deference is to be paid to the factual determinations of the Tax Court and that some deference is to be paid to its legal determinations. If the Tax Court, which, despite its name, is an administrative agency and not a court, has misconstrued either a statute or a contract, however, it has made a legal error, and we are not obliged to give any deference at all to that kind of error. Indeed, we would be violating Art. 8 of the Maryland Declaration of Rights and Art. IV of the Maryland Constitution if, under the guise of deference to administrative expertise, we effectively abrogated, through delegation to an Executive Branch agency, our Constitutional responsibility to construe statutes and contracts and interpret the law.
The Majority recognizes that whether the termination fee is part of the taxable price is a question of law, but it holds that that question hinges on two subsidiary issues that it declares to be factual in nature — whether the termination fee was part of a sale and whether the termination agreement was part of the lease. Having declared those predicate issues to be factual ones, the Majority then simply defers to the Tax Court: end of story.
I disagree that those subsidiary issues are factual in nature. They involve either statutory or contract construction, which *185are legal issues. The Tax Court treated the termination agreement as a separate transaction, wholly apart from the lease, and it is only on that premise that it was able to conclude that the termination agreement was not a sale and that the termination fee is therefore not a taxable price. As the Majority points out, the heart of the Tax Court’s decision was its determination that “the clear and unambiguous provisions of the Master Lease and the Lease Termination Agreement and the lack of any transfer of title of the leased property to [Citicorp] establish that the lease termination payment was not made pursuant to a transaction that is a ‘sale’ as defined by § 11 — 101(g).” 1 I regard that as a legal, not a factual, determination — a construction of the lease, the termination agreement, § 11-101 (i), and, though not mentioned, COMAR § 03.06.01.28 — and one that was erroneous.
The termination agreement at issue here was a global one, of the Master Lease itself, rather than of the individual equipment schedules. It was founded on § 14.1 of the Master Lease, and it essentially said as much: “Lessee and IBM Credit Corporation (‘Lessor’) agree that pursuant to the above-referenced lease agreement between the Lessee and Lessor (‘Lease’), Lessee releases all of its interest in the leased equipment indicated above ... and Lessor agrees to discontinue such leases----” (Emphasis added). The “above referenced lease agreement” was Lease Agreement No. 3269100, which identified the then-current Master Lease Term Supplement. The only authority in the Master Lease to modify or terminate it was set forth in § 14.1.
Although parties to a written contract are usually free to modify or terminate the contract by separate agreement, even if the contract purports to prohibit or condition such modifications, this termination clearly was pursuant to the lease. The termination agreement was contained in a separate document, but so were the various equipment schedules and other additions to and modifications of the Master Lease. That the *186parties signed a separate document does not disconnect the transaction from the Master Lease, especially when the document not only references that lease but expressly states that it is “pursuant to” it. Under § 14.1, such a modification/termination was permissible only if IBM agreed to it. IBM could, of course, have agreed without exacting any termination fee, but it was not so generous. It insisted on full payment of the rent due under the Master Lease, which had nearly 48 months more to run, although it discounted the future rent to its current value.
The Tax Court’s error, and that of this Court’s Majority, lies in viewing the termination agreement as a separate transaction, one in which, the Majority notes, “there was no transfer of title or possession of property to the lessee as contemplated by § 11 — 101(g) of the Tax General Article and Section 03.06.01.28 of COMAR.” That, to me, ignores the reality of what occurred. The taxable event was not the termination. There were multiple taxable events, based on both the Master Lease and the equipment schedules. Those equipment schedules — designated as separate leases in the Master Lease — are what caused possession of the property to be transferred from IBM to Citicorp. Once those equipment schedules, which became amendments to the Master Lease, were properly regarded as sales, which everyone agrees they were, the tax became measured by “the value in money of the consideration of any kind required to be paid to the lessor under the terms of the lease.” The termination fee exacted by IBM as a condition to its agreement to the termination under § 14.1, being the discounted value in money of the rent remaining due under the amended Master Lease, constituted consideration required to be paid to the lessor under the terms of the lease. Ergo: it constituted part of the taxable price. See Residential Information Services Limited Partnership v. Rylander, 988 S.W.2d 467 (Tex.App.1999) (termination payment taxable because it was part of entire lease).
I would reverse the judgment of the Circuit Court, which affirmed the decision of the Tax Court, and hold that the termination fee was subject to the sales tax.

. The definition of “sale" now appears in § ll-101(i), not 11 — 101(g).