Comptroller of the Treasury v. Jason Pharmaceuticals, Inc., Case No. 1952, September
Term, 2016, filed February 27, 2018.

                                       HEADNOTE


TAX -- INTEREST ON TAX REFUND CLAIM -- ERROR “ATTRIBUTABLE TO
THE STATE”
Where the erroneous overpayment was completely within the knowledge and control of
the taxpayer, and no law, regulation, or policy of the State led to the taxpayer’s error, the
Comptroller may not pay interest in addition to the refund.
Circuit Court for Anne Arundel County
Case No. C-02-CV-16-000895                             REPORTED

                                          IN THE COURT OF SPECIAL APPEALS

                                                    OF MARYLAND

                                                         No. 1952

                                                  September Term, 2016

                                        ______________________________________


                                          COMPTROLLER OF THE TREASURY,

                                                            v.

                                           JASON PHARMACEUTICALS, INC.

                                        ______________________________________

                                             Nazarian,
                                             Arthur,
                                             Zarnoch, Robert A.
                                                (Senior Judge, Specially Assigned),

                                                         JJ.
                                        ______________________________________

                                                  Opinion by Zarnoch, J.
                                        ______________________________________


                                             Filed: March 1, 2018
       This appeal arises from a decision of the Tax Court requiring the Comptroller to pay

interest on two refunds of sales taxes for which the taxpayer was exempt under Maryland

law. The Comptroller petitioned the Circuit Court for Anne Arundel County for review of

the Tax Court’s decision, and the circuit court upheld the Tax Court. The issue before us

is whether there was substantial evidence in the record before the tax court to support its

conclusion that the taxpayer’s error in paying the tax was “attributable to the State,” and

therefore, that the Comptroller was required to pay interest on the refund claim.

                 BACKGROUND AND PROCEDURAL HISTORY

       Jason Pharmaceuticals, Inc. (“JPI”) is a Maryland corporation, with its headquarters

in Owings Mills, in Baltimore County. It is a subsidiary of Medifast, which is a weight-

loss and weight-management program. JPI sells and distributes weight-management and

other health-related products, and it prints paper materials and sells them to customers at

Medifast’s weight-loss centers. JPI operates a printing shop on Maryland’s Eastern Shore,

where it leases four large printing machines from Xerox Corporation (“Xerox”). JPI paid

sales tax with each lease payment to Xerox from November 2007 through January 2013.

       In August 2011, JPI and Medifast hired Gabriel Massuda (“Massuda”) as its Tax

Director. Massuda observed the printers at the Eastern Shore printing facility soon after,

and he began looking into whether the printers could meet the criteria for a sales tax

exemption on personal property used in manufacturing.

       On May 10, 2012, after Massuda determined that JPI’s printing activities might

meet the exemption, he filed a refund claim with the Comptroller’s Office, seeking a refund

of $332,365 in sales tax overpayments for the preceding four years -- from 2008 to April
10, 2012. Even after JPI filed its first refund claim, however, it continued to pay sales tax

to Xerox, because Massuda had not been able to confirm whether JPI’s production

activities met the threshold set by the statute to qualify for an exemption. Thereafter, on

September 4, 2012, JPI filed another refund claim seeking $22,863 for the period of March

10, 2012 through August 1, 2012. Again, JPI continued paying sales tax to Xerox after

filing its claim while Massuda continued to evaluate JPI’s records.

       An auditor in the Comptroller’s Business Tax Audits Section was assigned both

refund claims. Between July 2012 and May 2013, the auditor reviewed JPI’s tax returns,

general ledger, invoices, and samples of materials printed on the printers, and visited the

Eastern Shore printing facility. In January 2013, after Massuda became confident that JPI

had the records to back up its claim that the printing machines met the criteria for the

exemption, but prior to the auditor concluding his field audit, JPI finally stopped paying

sales tax to Xerox on the printers.

       The auditor concluded his audit and the Refund Supervisor at the Comptroller’s

Office issued a denial letter for both refund claims on May 15, 2013. The letter stated the

following:

               The . . . application for a refund of sales and use tax has been
               denied due to the fact that the use of the . . . equipment and
               materials does not satisfy the State’s determination of “used
               directly and predominantly in a production activity” because
               most of the materials being produced are not for resale.

The letter further informed JPI of its right to request an informal hearing with the

Comptroller.



                                              2
       On May 23, 2013, JPI requested an informal hearing with the Comptroller, which

was held before a hearing officer. The hearing officer reversed the auditor’s decision on

both refund claims, finding that JPI’s use of the printers met the criteria for the exemption

and that JPI was entitled to a refund of the sales tax. On September 17, 2013 JPI received

a check for the first refund claim in the amount of $314,655.83 for the first four years of

sales tax, and on October 11, 2013, a check for the second claim in the amount of $22,863

for the period of March 2012 to August 2012. No interest was paid on the sales tax refunds.

Later, the hearing officer issued two Notices of Final Determination which concluded that,

although the Comptroller had approved the refund claims, JPI was not entitled to recover

interest from the State.

       Soon after, JPI appealed the Comptroller’s final determination on the issue of

interest to the Maryland Tax Court (“Tax Court”), and on August 19, 2015 the court held

a hearing. The Tax Court issued its final determination and memorandum opinion on

February 18, 2016, requiring the Comptroller to pay interest on the refunds, which we

review in detail below. The Comptroller filed a petition for judicial review with the Circuit

Court for Anne Arundel County. Following arguments from both parties on November 14,

2016, the circuit court affirmed the Tax Court’s decision. The Comptroller appealed to

this Court.

                                      DISCUSSION

       The issue before us on appeal is whether there was substantial evidence in the record

before the Tax Court to support its conclusion that JPI is entitled to interest on its refund

of sales tax. Whether JPI’s use of the printers met the criteria for exemption involved


                                             3
measuring what proportion of its printed materials were for sale or resale1 based on sample

materials and JPI’s own records. There is no dispute that JPI’s use of the printers met the

exemption and that it was entitled to a refund of the sales tax it paid during the relevant

time periods. The paramount question at stake is whether JPI’s error in paying the tax was

“attributable to the State.” For the reasons discussed below, we hold that no substantial

evidence in the record before the Tax Court supported its conclusion that JPI’s error in

paying the tax was attributable to the State, and therefore, we reverse.

       We review decisions of administrative agencies directly, looking “through” the

circuit court’s decision. Kor-Ko Ltd. v. Md. Dep’t of the Env’t, 451 Md. 401, 409 (2017)

(quoting People’s Counsel for Baltimore Cnty. v. Surina, 400 Md. 662, 681 (2007); see

also Comptroller of Treasury v. Sci. Apps. Int’l Corp., 405 Md. 185, 192 (2008) (Citation

omitted) [hereinafter SAIC]. Because the Tax Court is “an adjudicatory administrative

agency,” “decisions of the Tax Court receive the same judicial review as other

administrative agencies. Gore Ent. Holdings, 437 Md. at 503 (citing Frey, 422 Md. at

136)). “When the Tax Court interprets Maryland tax law, we accord that agency a degree

of deference as the agency that administers and interprets those statutes.” Comptroller of

the Treasury v. Wynne, 431 Md. 147, 160 (2013) (citing Comptroller v. Blanton, 390 Md.

at 533–35 (2006)).




1
       To allay any confusion, we refer simply to printed materials that are “for sale” and
not “for resale” in the context of JPI’s request for a sales tax exemption.


                                             4
       The Court of Appeals in Kor-Ko Ltd. provided three areas of inquiry for appellate

courts in reviewing administrative agency decisions: (1) whether “the findings of fact made

by the agency are supported by substantial evidence in the record made before the agency;”

(2) whether the agency “commit[ed] any substantial error of . . . substantive law in . . .

formulating its decision;” and (3) whether the agency act[ed] arbitrarily or capriciously in

applying the law to the facts.”2 Kor-Ko Ltd., 451 Md. at 411-12 (quoting Md. Bd. of Pub.

Works v. K. Hovnanian’s Four Seasons at Kent Island, LLC, 425 Md. 482, 514 n. 15

(2012)). We treat an administrative agency’s decision as “prima facie correct” and “review

the evidence in the light most favorable to the agency.” SAIC, 405 Md. at 192-93 (Citation

omitted). Additionally, the Court in SAIC reiterated the standard that “[w]hen we review

an agency decision that is a mixed question of law and fact, we apply ‘the substantial

evidence test, that is, the same standard of review it would apply to an agency factual

finding.’” 405 Md. at 193 (quoting Longshore v. State, 399 Md. 486, 522 n. 8 (2007))

(Internal quotation marks omitted).


II.    The Sales Tax Exemption and Exception to the Comptroller’s Duty to Pay
       Interest

       Pursuant to § 11-102(a)(1)-(2) of the Tax-General Article (“TGA”), Md. Code

(Repl. Vol. 2016), “[e]xcept as otherwise provided in [Title 11], a tax is imposed on . . . a


2
       This standard of review applies when we review a “proto-typical quasi-judicial
agency decision.” Kor-Ko Ltd., 451 Md. at 423 n. 9 (2017). An agency’s action is “quasi-
judicial” when “the act or decision is reached on individual, as opposed to general,
grounds” and “there is a deliberative fact-finding process with testimony and the weighing
of evidence.” Id. at 409 (quoting K. Hovnanian’s Four Seasons at Kent Island, LLC, 425
Md. at 515).

                                             5
retail sale in the State; and . . . a use, in the State, of tangible personal property or a taxable

service.” One exception to the requirement to pay sales tax is in § 11-210(b):

               The sales and use tax does not apply to a sale of: (1) tangible
               personal property used directly and predominantly in a
               production activity at any stage of operation on the
               production activity site from the handling of raw material or
               components to the movement of the finished product, if the
               tangible personal property is not installed so that it becomes
               real property . . . .

TGA § 11-210(b) (Emphasis added). The Code of Maryland Regulations (“COMAR”)

defines “production activity” as -- “[a]ssembling, manufacturing, processing, or refining

tangible personal property for sale or resale.”3          COMAR 03.06.01.32-2(B)(1)(a)(i).

Personal property items are “used directly and predominantly in a production activity” if:

               (a) [the] [u]se of the property is integral and essential to the
               production activity, occurs where the production activity is
               carried on, and occurs during the production activity; and

               (b) [p]roperty used both in production activities and
               administrative, managerial, sales, or any other operational or
               nonoperational activities is used more than 50 percent of the
               time directly in production activities.

COMAR 09.06.01.32-2(B)(2) (Emphasis added). Accordingly, under the circumstances

of the present case, JPI could meet the criteria for the exemption if JPI used the printers

“more than 50 percent of the time” to manufacture printed materials that were “for sale or

resale.” See TGA § 11-210(b); COMAR 03.06.01.32-2(B)(1)(a)(i) and (2).




3
         The term “production activity” is also defined under TGA § 11-101(f)(1) as
“assembling, manufacturing, processing, or refining tangible personal property for resale
. . . .”

                                                6
       When a taxpayer “erroneously pays to the State a greater amount of tax, fee, charge,

interest, or penalty than is properly and legally payable,” the taxpayer may file a claim for

refund “with the tax collector who collects the tax.” TGA § 13-901(a)(1). Further, the

taxpayer may be entitled to interest on the amount of the refund under certain

circumstances, as provided in § 13-603(a):

               Except as otherwise provided in this section, if a claim for
               refund under § 13-901(a)(1) or (2) or (d)(1)(i) or (2) of this title
               is approved, the tax collector shall pay interest on the refund
               from the 45th day after the claim is filed in the manner required
               in Subtitle 9 of this title to the date on which the refund is paid.

TGA § 13-603(a).

       A significant exception to the State agency’s obligation to pay interest is that “[a]

tax collector may not pay interest on a refund if the claim for refund is: . . . based on . . . an

error or mistake of the claimant not attributable to the State or a unit of the State

government . . . .” TGA § 13-603(b)(2)(i) (Emphasis added). JPI paid sales tax on the

printers when it claimed it was not due, but argued before the Tax Court that it was entitled

to interest on the refund because the error was “attributable to the State.”

III.   The Circuit Court Erred in Upholding the Tax Court’s Decision to Require the
       Comptroller to Pay Interest to JPI.

       The Tax Court provided the following findings of fact:

               [JPI] was aware of the exception but determined that equipment
               was not used directly and predominantly in a production
               activity. However, [JPI] knew or should have known whether
               the machines were used directly and predominantly in the
               manufacturing of the brochures. The [Comptroller] was not in




                                                7
              a position to make any determination until after a field audit.[4]
              [. . . ]

              There was no convincing evidence that the various exhibits
              introduced during the informal hearing were any different than
              what was provided to [the auditor] during the course of the sales
              tax audit. Apparently, after reviewing the same documentation
              and information, the Hearing Officer decided that the printing
              equipment did qualify as a production activity within the
              meaning of COMAR 03.06.01-32-2C, and was therefore, not
              subject to sales tax.

In issuing its final determination, the Tax Court’s rationale was as follows:

              The auditor determined, after numerous material and papers
              were reviewed, that the leased equipment was not used directly
              or indirectly in a production activity. This determination by the
              field auditor supports [JPI’s] position that its error or mistake
              in paying the tax was reasonable. Moreover, it is important to
              note that the Hearing Officer who granted the refund also
              reviewed the same material considered by the field auditor.
              The Court agrees with [JPI] that based on its understanding of
              the law, the Petitioner properly paid the tax in order to avoid
              penalty and not run afoul of the [State’s] regulation.

              The fact that the field auditor and his supervisor agreed with
              [JPI], that the tax was due, supports [JPI’s] view that the
              mistake of [JPI] in paying the tax was attributable to the State.
              [JPI] exercised reasonable judgment and should not be
              penalized when the auditors of the State wrongly concluded
              that the tax was due. [ . . . ]

              The Court of Appeals in Comptroller v. SAIC, 405 Md. 185
              (2008) adopted the Tax Court’s standard [articulated in DeBois
              Textiles Int’l v. Comptroller, Income Tax No. 1630 (Md. Tax
              Aug. 23, 1985)] for determining “what makes an error or
              mistake ‘attributable to the State’” . . . :


4
       Initially, the Tax Court’s findings of fact appeared to acknowledge that the error in
paying the sales tax was attributable only to JPI. Based on the different findings of the
auditor and the hearing examiner, however, the Tax Court found the error to be
“attributable to the State.”

                                             8
                     “The Tax Court stated that ‘[a]n error is
                     attributable to the State when a taxpayer using
                     reasonable judgment under the circumstances is
                     led by the laws, regulations, or policies
                     expressed by the State to the mistaken
                     conclusion that the tax is owed.’”

                                           * * *

              In the present case, the Respondent denied the claims after it
              had been provided with significant documentation and
              examples of the products produced at the Petitioner’s printing
              facility. [ . . . ] Just as in SAIC case, it is illogical that a
              taxpayer could be said to have made an error not attributable
              to the State where the State took the position that the taxpayer
              was not entitled to a refund after spending months considering
              the taxpayer’s claim for refund.

              The Court finds that the Petitioner used reasonable judgment
              under the circumstances, and was led by the laws, regulations
              or policies expressed by the State to the mistaken conclusion
              that the tax was owed.

       The Tax Court’s decision in this case relied principally on the holding in SAIC in

which the Court held that the Comptroller’s final determination letter provided substantial

evidence that the error was “attributable to the State” -- the second prong of the exception

to the Comptroller’s obligation to pay interest on tax refunds. See TGA § 12-603(b)(2)(i).

Based on SAIC and the DeBois standard, the Tax Court reversed the Comptroller’s decision

to deny interest on the two refund claims and required that interest be paid.



       A.     The DeBois Standard and the Holding of SAIC on Error that is
              “Attributable to the State”

       The DeBois standard arose out of a Tax Court decision in which the taxpayer, a

domestic international sales corporation (DISC), was entitled to apportion part of its


                                             9
income outside of the State of Maryland, but erroneously paid tax on 100 percent of its

income. See id. At the time DeBois paid the tax, the state of the law in Maryland on

whether DISCs were permitted to apportion income outside of the State was uncertain.

Once our courts settled the issue, DeBois filed an amended return requesting a refund.

After initially denying the request, the Comptroller settled with DeBois, agreeing to pay a

partial refund of $44,728.36, but refused to pay interest. Interpreting the meaning of

“attributable to the State” in a predecessor to TGA § 13-603(b)(2),5 the Tax Court

articulated what we refer to as the DeBois standard: “[A]n error is attributable to the State

when a taxpayer using reasonable judgment under the circumstances is led by the laws,

regulations, or policies expressed by the State to the mistaken conclusion that tax is owed.”

SAIC, 405 Md. at 201 (quoting DeBois, 1985 WL 6117, at *1). The Tax Court in DeBois

then applied that standard in its decision:

              In the instant case, Petitioner’s error consisted of its belief that
              DISCs filing Maryland income tax returns must report and pay
              tax on 100% of their income. This false impression was a
              reasonable interpretation of the State law and policy because
              the issue of whether or not DISCs could apportion part of their
              income outside the State had not been decided by the courts at
              the time Petitioner filed its returns and paid the tax. During
              that time the Comptroller insisted that DISCs report 100% of
              their income on their Maryland returns and any DISC which
              failed to comply was appropriately assessed. It was not until
              1983 that this Court rendered a decision which held that DISCs
              are entitled to apportion part of their income outside the
              State. Thus Petitioner’s mistake was attributable to the State
              and Section 310(c) mandates that interest be paid on the
              resultant refund.



5
       See Md. Code, Article 81, § 310(c) (1957, 1980 Repl. Vol.).

                                              10
SAIC, 405 Md. at 201-02 (quoting DeBois, 1985 WL 6117, at *1).

       Because the Tax Court found that DeBois was “led by the laws, regulations, or

policies expressed by the State to the mistaken conclusion that tax was owed,” the error in

paying the tax on all of its income, and the basis of the refund claim, was “attributable to

the State.” See id. at 202 (citing DeBois, 1985 WL 6117, at *1). A critical finding in

DeBois was that, at the time DeBois paid the tax, the State’s policy and its application of

the law on the issue was erroneous. Before the new Tax Court ruling that settled the issue,

therefore, it was reasonable for DeBois to assume that the State would continue to apply

the same erroneous policy to DeBois, despite its own knowledge of its status as a DISC.

       The Court of Appeals in SAIC reviewed a decision of the Tax Court in which it had

applied the DeBois standard. SAIC, 405 Md. at 202. Similar to DeBois, the Tax Court

focused its findings of fact on what prompted SAIC’s erroneous payment of the tax. In

1995, SAIC -- a research and engineering firm incorporated in Delaware and headquartered

in California -- purchased 100 percent of shares of stock in National Solutions, Inc. (NSI).

SAIC reincorporated NSI in Delaware and left its principal headquarters in Virginia. NSI

provided internet domain registration services worldwide and held valuable rights to act as

the exclusive registrar for internet domain names with “.com” and other common endings.

After selling almost a quarter of its NSI shares in 1997, SAIC sold another 9,000,000 of its

NSI shares in 1999, which resulted in a $715,850,753 capital gain.

       In 2000, SAIC reported the capital gain on its Maryland income tax return for the

1999 tax period and paid $4,274,519 in taxes to the State. In 2003, SAIC amended its 1999

return, seeking a total refund of the taxes paid on the capital gain, asserting that the stock


                                             11
“lacked a sufficient nexus to Maryland for the gain to be taxable under the United States

Constitution and Maryland law.”6 Id. at 189. The Comptroller denied the claim for refund

on December 18, 2003 in a final determination letter stating, in part, “The State of

Maryland does not allow a subtraction for the exclusion of capital gain from the sale of

NSI shares so we are unable to allow the requested adjustment.”

       The Court of Appeals in Hercules provided that “Maryland may not tax income

earned outside its borders, even on a proportional basis, unless there is a ‘rational

relationship between the income attributed to the State and the intrastate values of the

enterprise.’” Hercules, 351 Md. at 112 (quoting Container Corp. of Am. v. Franchise Tax

Bd., 463 U.S. 159, 166 (1983)). The Court in Hercules provided that the necessary nexus

“usually is satisfied by demonstrating the existence of unitary business, part of which is

carried on in the taxing state to demonstrate the existence of a unitary business.” Hercules,

351 Md. at 109. The U.S. Supreme Court, in Allied Signal, Inc. v. Dir., Div. of Taxation,

held that an investment in a subsidiary does not render it part of a “unitary business” where

it served only as an “investment,” as opposed to an “operational,” function. 504 U.S. 768,

784 (1992). In a decision on SAIC’s refund claim only, the Tax Court determined, based

on the Supreme Court’s guidance in Allied-Signal, that “there was no nexus linking the

gain realized through the sale of NSI stock to any of [SAIC’s] activities in Maryland.”




6
       See Hercules v. Comptroller, 351 Md. 101, 109 (1998), holding that “to levy a tax
upon [an entity’s] capital gain from the sale of stock, there must be some nexus linking this
income to activities within the state.”

                                             12
SAIC v. Comptroller of the Treasury, No. 04-IN-OO-0632, 2006 WL 2507134 (Md. Tax,

May 11, 2006).

       In the Tax Court’s subsequent decision on the issue of whether interest had to be

paid on the refund, the court found that at the time of SAIC’s erroneous payment of the

tax, the Comptroller had maintained a policy that was inconsistent with the law. As

evidence that the Comptroller had applied an erroneous policy when SAIC paid the tax,

the Tax Court pointed to the Comptroller’s final determination letter, in which the reason

asserted for the denial was that “[t]he State of Maryland does not allow a subtraction for

the exclusion of capital gain.”

       The Court of Appeals affirmed the Tax Court’s decision to reverse the

Comptroller’s denial of interest on SAIC’s refund claim. SAIC, 405 Md. at 206. The Court

set out the proper interpretation of the exception in TGA § 13-603(b):

              For this exception to apply to a refund claim, the claim must
              satisfy two elements: 1) it must be an error or mistake of the
              claimant, and 2) it must not be attributable to the State or a unit
              of the State government. If a claim does not meet one of those
              two elements, i.e., it is not an error of the claimant or it is an
              error attributable to the State, interest on the refund must be
              paid.

Id. at 199. On appeal, the Comptroller had argued that “an error or mistake cannot be

‘attributable’ to the State unless it was caused by an assessment or other direct action taken

by the State during the claimant’s original tax filing process.” Id. at 203. The Court pointed

out, however, that the holdings of Fairchild and Davidson demonstrate that “if the State

requires a taxpayer to pay some amount by assessment, and the taxpayer faces penalties




                                              13
for non-compliance, the taxpayer cannot be said to have made a mistake when it pays the

required amount.” Id. at 204. The Court continued,

              If the only scenario in which a taxpayer action is attributable
              to the State is when the State actively requires the taxpayer to
              pay a certain amount of taxes, . . . § 13-603(b) would,
              effectively, allow interest on the refund only where no taxpayer
              mistake was made. This interpretation renders the phrase
              “attributable to the State” surplusage, and we therefore reject
              it.

Id.

       Regarding the DeBois standard, the Court looked to dictionary definitions of

“attributable” as guidance and held the following:

              The commonsense understanding of the phrase “attributable to
              the State” as used in § 13-603(b) means that the mistake or
              error can be said to be caused by the State. The Tax Court’s
              DeBois standard is an articulation of the factual circumstances
              that signify that an error or mistake could be “set down or
              th[ought] of as belonging to, produced by, or resulting from;
              assign[ed] or ascrib[ed] to” the State. The interpretation of
              “attributable” used by the Tax Court is in keeping with an
              “ordinary, popular understanding of the English language.”
              [Bowen v. Cty. of Annapolis, 402 Md. 587, 613 (2007)].

Id. at 203.

       The Court of Appeals held that the Tax Court had relied on substantial evidence

that, at the time SAIC paid the tax, the Comptroller applied an erroneous policy -- i.e., “the

Comptroller’s stated position” on whether the State “allow[s] a subtraction for the

exclusion of capital gain.” See id. at 205-06. Recognizing that Hercules was decided one

year prior to SAIC’s erroneous payment of the tax, the Court noted that SAIC’s sale of NSI

stock differed from the taxpayer’s circumstances in Hercules and, therefore, the Tax Court



                                             14
was in a better position to determine whether Hercules would have given notice to SAIC

that the law did not require it to pay the tax. The Court added that “[t]he Comptroller never

pointed to, and upon an independent examination we do not find, any evidence to contradict

the Tax Court’s inference” that the Comptroller applied the erroneous policy stated in the

denial letter when SAIC paid the tax. Id. at 206.


       B.     No Substantive Evidence in the Record that JPI was “Led by” a Law,
              Regulation or Policy to Pay the Tax

       The Tax Court’s decision to reverse the Comptroller’s denial of interest to JPI, as

well as JPI’s argument before the Tax Court and before this Court, is based on the holding

in SAIC affirming the DeBois standard as a correct interpretation of the phrase “attributable

to the State.” See TGA § 13-603(b)(2)(i). In addition to affirming this standard, the SAIC

Court held that the Comptroller’s final determination letter denying the refund, which

stated a position inconsistent with the law, provided substantial evidence that the

Comptroller applied this erroneous policy at the time SAIC paid the tax.

       As in SAIC, our decision must be based principally on the plain language of TGA §

13-603(b)(2)(i). The issue in this case is whether JPI’s refund claim was based on an error

or mistake of JPI that was “not attributable to the State.” Neither party disputes that JPI’s

payment of sales tax on the printers to Xerox was a mistake. The Tax Court’s focus,

therefore, was whether JPI’s mistaken belief that the tax was owed when it paid the tax was

“attributable to the State.” See SAIC, 405 Md. at 199 (“If a claim . . . is not an error of the

claimant or it is an error attributable to the State, interest on the refund must be paid”).

Based on the DeBois standard, the erroneous payment of the tax would be “attributable to


                                              15
the State” if JPI, “using reasonable judgment under the circumstances [was] led by the

laws, regulations, or policies expressed by the State to the mistaken conclusion that tax was

owed.” Id. at 201. That standard emphasizes the cause of, or what led to, the taxpayer’s

erroneous payment of the tax.

       Because the DeBois standard is derived from the requirement that the taxpayer’s

error be “attributable to the State,” a foundational question for the Tax Court was what was

the relevant law, regulation, or policy expressed by the State that led to or caused JPI’s

erroneous payment. Only after the law or policy that led to the error is identified does it

become relevant whether the taxpayer used “reasonable judgment under the

circumstances.” See SAIC, 405 Md. at 201. Again, for a taxpayer who mistakenly pays a

tax that was not owed to be entitled to interest in addition to a refund, there must be some

reason to attribute fault to the State for the taxpayer’s error.

       The Tax Court relied on or referred to the following undisputed facts in determining

that JPI’s error in paying the tax through January 2012 was attributable to the State: (1) JPI

paid the tax despite knowing of the exemption; (2) JPI “knew or should have known

whether the machines were used directly and predominantly in the manufacturing of the

brochures”; (3) JPI “paid the tax in order to avoid penalty and not run afoul of the [State’s]

regulation”; (4) “[t]he [Comptroller’s Office] was not in a position to make any

determination until after a field audit,” which occurred after JPI stopped paying sales tax;

(5) the auditor reviewed a considerable amount of documents and information over a period

of many months and determined that JPI’s use of the printers did not meet the exemption;

(6) the auditor continued to maintain his position in his testimony that the use of the printers


                                               16
did not satisfy the criteria for exemption -- i.e., that less than fifty percent of the materials

printed were “for sale or resale”; (7) after the field audit, the Comptroller’s Office denied

the refund claim based on its conclusion that the majority of items were not for sale; (8)

JPI disagreed and requested an informal hearing; (9) “[t]here was no convincing evidence

that the various exhibits introduced during the informal hearing” differed from the

documentation and information the auditor reviewed; and (10) after an informal hearing,

the hearing examiner concluded that a majority of the materials were for sale and that JPI

was entitled to a refund pursuant to the statutory exemption.

       Assuming the Tax Court’s findings of fact were correct and viewing the evidence

in the record in a light most favorable to the Tax Court’s decision, see SAIC, 405 Md. at

192-93, we can find no substantial evidence to support the conclusion that JPI was led by

any law, regulation or policy to its mistaken belief that the tax was due when it paid the

sales tax. Put differently, we cannot identify what law, regulation or policy JPI could have

reasonably relied on in reaching its mistaken belief that the tax was owed. Once JPI was

aware of the exemption, the only uncertainty or mistaken belief we can find in the record

that prompted JPI’s payment of the tax related only to whether JPI could show -- through

its own invoices, samples, or other internal records -- what proportion of the materials

printed during the relevant time period were for sale.            See COMAR 03.06.01.32-

2(B)(1)(a)(i).

       The similarity between this case and SAIC is limited to the fact that, in both cases,

the Comptroller’s Office initially denied the taxpayer’s claim for a refund. In SAIC,

however, the letter referenced by the Tax Court was the Comptroller’s final determination


                                               17
of whether SAIC was entitled to a refund. Here, the Refund Supervisor within the

Comptroller’s Office initially notified JPI that it was going to deny JPI’s refund request,

but that JPI had the opportunity to request an informal hearing. The Comptroller’s Office’s

final determination, however, after the informal hearing, agreed that JPI was entitled to a

refund.

       In SAIC, the relevant law at issue related to the constitutional question of whether

Maryland could require SAIC to pay a tax on a capital gain, even if it had no connection to

the taxpayer’s activities in Maryland. The taxpayer’s uncertainty when it paid the tax

related to the Comptroller’s policy for exempting capital gains and whether the sale of NSI

stock served an “investment” or “operational” function. Id. at 189. There, the Tax Court

found that the Comptroller’s Office had applied an erroneous policy to whether it permitted

an exemption under those circumstances at the time that SAIC paid the tax. The Tax Court

concluded, therefore, that SAIC had used reasonable judgment in erroneously paying the

tax, despite knowing its own circumstances and that the capital gain had no connection to

its activities in Maryland.

       The Court of Appeals held that the Comptroller’s letter, stating an erroneous policy

for applying the relevant law, was sufficient evidence of the Comptroller’s incorrect

position on the issue when SAIC paid the tax. Id. at 205-06. This was particularly salient

evidence of the Comptroller’s policy given the fact that the Comptroller provided no

evidence, and the Court of Appeals could find none in the record, to contradict the court’s

conclusion. See id. at 206. Similarly, in DeBois, our courts clarified the relevant law after




                                             18
DeBois had already paid the tax; therefore, DeBois’s uncertainty regarding whether the tax

was due at the time of payment was “attributable to the State.” Id. at 202.

       In this case, however, neither party’s view of the meaning and application of TGA

§ 11-210(b) changed from the time that JPI mistakenly paid the tax throughout the

proceedings before the Tax Court. Nor did JPI express any uncertainty about how the

exemption would apply to the printers it leased from Xerox. The plain language of the

statute and its pertinent regulations were clear. JPI never argued that, when it paid the sales

tax, it believed the Comptroller would apply the requirement that the property be “used

directly and predominantly in a production activity” in an erroneous way. See TGA § 11-

210(b)(1). Once it was aware of the exemption, JPI clearly understood that the law

provided a quantifiable measure for making that determination -- i.e., the printers must

have been “used more than 50 percent of the time directly in production activities.” See

COMAR 03.06.01.32-2(B)(2). JPI knew -- at least, after hiring Massuda -- the criteria it

needed to satisfy to show that the printers were exempt from sales tax. In fact, JPI

apparently convinced the hearing examiner that more than fifty percent of the materials it

printed on the printers were “for sale or resale.” There is no indication in the record that

any law, regulation, or policy of the State led JPI to conclude that the Comptroller would

apply the law any differently at the time it paid the tax.

       More specifically, unlike in SAIC, the letter that notified JPI that its refund was

being denied provided no support for the conclusion that the Comptroller’s Office’s policy

for applying TGA § 11-210(b)(2)(i) was inconsistent with the law when JPI paid the tax.

In SAIC, the significance of the Comptroller’s final determination letter was that the letter


                                              19
provided substantial evidence of the Comptroller’s policy, which was an erroneous

application of the law. See SAIC, 405 Md. at 205-06. In the absence of any evidence to the

contrary, the Tax Court in SAIC concluded the Comptroller had maintained and applied the

same position stated in the letter at the time SAIC paid the tax.

       In this case, the letter at issue was sent by the Refund Supervisor, prior to the

informal hearing and subsequent final determination, and indicated that it had applied a

policy that was consistent with TGA § 11-210(b)(2)(i). The letter stated that JPI’s use of

the printers “[did] not satisfy the state’s determination of ‘used directly and predominately

in a production activity’ because most of the materials being produced are not for resale.”

(Emphasis added). Indeed, the policy provided in the letter to JPI relied on exactly the

same criteria that JPI continues to acknowledge that it was required to satisfy. In other

words, the dispute that was later settled at the informal hearing, prior to the Comptroller’s

final determination, related only to the underlying facts and not how the Comptroller’s

Office applied the law.7

       After requesting an informal hearing, JPI had the opportunity to show the

Comptroller’s Office that more of the printed materials were “for sale or resale” than the



7
       In addition, unlike the record before the Tax Court in SAIC, there was evidence
before the Tax Court in this case that the Comptroller had made public its policy for
applying the sales tax exemption. The Comptroller presented evidence that it had
published “Business Tax Tip No. 9,” which explained what items were exempt. Regarding
items that are “used for both taxable and exempt purposes,” the publication explained that
“the exemption may apply if it is used at least 50 percent of the time, i.e. predominantly,
in a production activity.” In defining “directly and predominantly,” it provided that “[t]he
‘predominantly’ test is met if the property is used more than 50 percent of the time directly
in production activities.”

                                             20
auditor initially counted during his field audit and that its use of the printers met the fifty-

percent threshold. See COMAR 03.06.01.32-2(B)(1)(a)(i). The hearing examiner

apparently agreed that more materials were “for sale” than the auditor previously

determined, that the proportion of printed materials exceeded fifty percent of JPI’s use of

the printers, and, therefore, that the printers were “used directly and predominantly in a

production activity.” See TGA § 11-210(b)(1). Pursuant to TGA § 11-210(b)(1), the

hearing examiner concluded that the printers were exempt from sales tax. Accordingly, the

Comptroller issued a final determination approving the refund, sent refund checks totaling

$332,365.00, and did not appeal the hearing examiner’s determination before the Tax

Court. Particularly where the review of the application included samples representing

31,000,000 pages of printed materials over the course of more than four years of using the

printers, it is unsurprising that an informal hearing may have been necessary for JPI to

clarify to the Comptroller what materials were for sale and should have been counted

towards the fifty percent threshold.

       On the issue of interest, the Tax Court’s decision that JPI’s error in paying the tax

was attributable to the State was based primarily on the fact that the hearing examiner was

not given any documentation that the auditor had not already had the opportunity to review,

and yet, the hearing examiner reached a different conclusion. Additionally, the circuit

court upheld the Tax Court’s decision, finding the fact that the auditor and hearing

examiner reached different conclusions from the same documents to be substantial

evidence that the error was “attributable to the State.” The auditor’s and the hearing

examiner’s differing calculations of the proportion of printed materials that were for sale,


                                              21
however, bore no relationship to any expressed policy maintained by the Comptroller in

applying the exemption in TGA § 11-210(b)(2)(i). That fact certainly did not identify what

law, regulation or policy could have reasonably led JPI to the mistaken belief that sales tax

was owed at the time JPI paid the sales tax to Xerox.

       JPI’s error cannot be “attributable to the State” on the sole basis that the hearing

examiner, after an informal hearing, counted more materials as “for sale or resale” than the

auditor did. This is particularly so where JPI’s payment of the sales tax to Xerox occurred

prior to the initial decision to deny the refund claim and the Office’s stated position for

doing so reiterated a proper application of the exemption in TGA § 11-210(b)(1). Both the

auditor and the hearing examiner applied the law the same way – some evidence that more

than fifty percent of the materials printed were for sale. That they both reviewed the same

documents and information provided no evidence that the Comptroller had expressed,

maintained, or applied a policy inconsistent with the law during the period when JPI paid

the sales tax.

       Finally, it is important to clarify the element of “using reasonable judgment under

the circumstances” included in the DeBois standard for attributing the taxpayer’s error to

the State. See SAIC, 405 Md. at 201. The Tax Court relied on the auditor’s initial

determination that JPI’s use of the printers did not meet the exemption as evidence and

provided that “[t]his determination by the field auditor supports [JPI’s] position that its

error or mistake in paying the tax was reasonable.” Further, the Tax Court explained, “[JPI]

exercised reasonable judgment and should not be penalized when the auditors of the State

wrongly concluded that the tax was due.”


                                             22
       The phrase “using reasonable judgment under the circumstances” in the DeBois

standard refers to the taxpayer’s mistaken conclusion based on a law, regulation, or policy.

In reaching its conclusion that the taxpayer’s error was attributable to the State, the Tax

Court in DeBois explained, “[the taxpayer’s] false impression was a reasonable

interpretation of the State law and policy because the issue of whether or not DISCs could

apportion part of their income outside the State had not been decided by the courts at the

time Petitioner filed its returns and paid the tax. The Tax Court in SAIC determined that

SAIC used reasonable judgment in erroneously paying the tax, despite knowing that the

capital gain had no connection to Maryland, because “the Tax Court inferred from the

Comptroller’s letter and subsequent denial of SAIC’s appeal that the State’s laws and

policies at the time SAIC filed the original return required that SAIC pay tax on the sale of

NSI shares.” SAIC, 405 Md. at 205.

       There is no evidence in the record that could support the conclusion that JPI, using

reasonable judgment, misinterpreted, misunderstood, or was uncertain about the law or

how it applied. Even if JPI had claimed that it was initially uncertain about what proportion

of the materials printed had to be for sale to meet the exemption’s criteria, it could not be

said to have used reasonable judgment under the circumstances in reaching a mistaken

understanding of the law. The statute and the regulations regarding the exemption from

sales tax were clear, and JPI never claimed to misunderstand the law, or more importantly,

that the Comptroller maintained a policy in applying the law that was inconsistent with the

exemption statute.




                                             23
       Clearly, it is reasonable to pay any tax the taxpayer believes is owed to the State.

The risk of penalties and other consequences make that decision especially prudent when

the taxpayer is not confident from its review of its own information whether it meets the

criteria for an exemption. The reasonableness of paying a tax, however, is present in every

case in which the taxpayer believed it was owed at the time it was paid and later learns its

belief was mistaken.      The statute, itself, makes clear that the taxpayer’s mistaken

conclusion must be “attributable to the State.” TGA § 13-603(b)(2)(i). Requiring interest

to be paid every time a taxpayer unreasonably misinterprets the law or fails to evaluate its

own circumstances relevant to an exemption would render this second prong of the statute

meaningless. As the Court in SAIC explained, “[t]he commonsense understanding of the

phrase ‘attributable to the State’ as used in § 13-603(b) means that the mistake or error can

be said to be caused by the State.” 405 Md. at 203. To be entitled to interest, therefore, it

is not enough to show that the taxpayer misunderstood the law when the tax was paid. The

State must, in some way, be at fault for the error.

       In this case, JPI’s Tax Director understood the statutory exemption, discovered JPI’s

error soon after being hired, applied for a refund on behalf of JPI, and after clarifying the

total proportion of materials for sale at an informal hearing, recovered more than $337,000

in sales tax that the company had erroneously paid. Where the error of paying the tax was

completely within the knowledge and control of the taxpayer, however, and no law,

regulation, or policy of the State caused the taxpayer’s error, the Comptroller may not pay

interest in addition to the refund.




                                             24
       Upon our review of the record before the Tax Court, we cannot conclude that any

substantial evidence supported the Tax Court’s determination that JPI was “led by the laws,

regulations, or policies expressed by the State to the mistaken conclusion that tax [was]

owed.” See SAIC, 405 Md. at 192. Accordingly, the circuit court erred in affirming the

Tax Court’s decision that JPI was entitled to interest on the refund. We, therefore, reverse.

                                   JUDGMENT REVERSED. CASE TO BE
                                   REMANDED TO THE CIRCUIT COURT FOR
                                   ANNE ARUNDEL COUNTY FOR REMAND TO
                                   THE   MARYLAND    TAX  COURT   FOR
                                   ENTRANCE OF A JUDGMENT AFFIRMING
                                   THE DECISION OF THE COMPTROLLER OF
                                   THE TREASURY. COSTS TO BE PAID BY
                                   APPELLEE.




                                             25
