Quotron Systems Inc. v. Comptroller of the Treasury

411 A.2d 439, 287 Md. 178

Opinions

Davidson, J.,

delivered the opinion of the Court. Murphy, C. J., dissents and filed a dissenting opinion at page 189 infra.

This case involves an application of the Maryland Use Tax. Md. Code (1957, 1975 Repl. Vol.), Art. 81, §§ 372-401. Maryland Code (1957, 1975 Repl. Vol., 1979 Cum. Supp.), Art. 81, § 373 (a) provides in pertinent part:

"An excise tax is hereby levied and imposed on the use ... of tangible personal property and certain services purchased within or without this State.. ..”

Maryland Code (1957, 1975 Repl. Vol., 1979 Cum. Supp.), Art. 81, § 372 (d) provides in pertinent part:

" 'Use’ means the exercise ... of any right or power over tangible personal property purchased either within or without this State....”

Maryland Code (1957, 1975 Repl. Vol.), Art. 81, § 372 (f) provides in pertinent part:

" 'Purchase’ means the acquisition for a price ... of ... tangible personal property.... A transaction shall be deemed to be a purchase if the acquisition ... was effected by:

(1) The transfer... of title or possession... of the tangible personal property.

(2) A lease, rental or grant of a license to use ... the tangible personal property.”

The question here is whether a company which provides information services, and which makes available to its subscribers computer hardware upon which to receive those services, is subject to a Maryland use tax on that part of its monthly charges which is attributable to the use of that hardware.

The appellant, Quotron Systems, Inc. (Quotron), provides to its subscribers a variety of financial information services, including displays of the New York and American stock exchange tickers, prices and sales of selected securities, and headlines or news stories from various wire services. It sends this information over leased telephone and telegraph lines from its computer in New York. Subscribers receive the information on hardware consisting of a computer, keyboards and display screens which Quotron provides to its subscribers. The cost of the hardware is approximately 20 percent of the costs incurred by Quotron in providing the information services. In Maryland, a subscriber cannot receive Quotron’s financial information services without utilizing Quotron’s hardware, nor can it utilize Quotron’s hardware without subscribing to the information services. While it is possible for a subscriber which has been provided with Quotron’s hardware to utilize that hardware to "access” its own data base, there is no evidence to show that any Maryland subscriber has so utilized Quotron’s hardware.

All of the hardware provided is owned, installed, maintained, repaired, relocated, and insured by Quotron. Although Quotron installs the hardware at locations designated by the subscriber, the computer is kept locked, usually in a locked room, and the subscriber is not permitted any access to it.

Quotron’s monthly charges are comprised of three elements. Each subscriber pays a uniform "basic service charge.” In addition, there is a separately stated charge for each type of information service the subscriber elects to receive.¹ Finally, there is a separately stated charge for each additional keyboard or display screen needed for the most effective utilization of the information services.² These three charges must equal at least a minimum amount. While the contract between Quotron and its subscribers provides that Quotron "shall have no liability ... for interruptions of the service,” Quotron in fact provides a credit for any such interruptions.

Between 1973 and 1977, Quotron paid a use tax on the cost of the hardware at the time it was installed on the subscribers’ premises. It did not pay a use tax on any part of its monthly charges.

On 15 August 1977, the appellee, the Comptroller of the Treasury (Comptroller), assessed Quotron for a use tax, interest, and penalty on all monthly charges collected between 1 July 1973 and 1 June 1977. On 9 December 1977, a hearing examiner found that although Quotron was engaged in the business of providing information services, its transfer of hardware constituted a lease, and therefore Quotron’s monthly charges represented rentals of tangible personal property which were taxable under Art. 81, § 372 (f) (2). On 26 October 1978, the Maryland Tax Court found that the charges did not constitute rentals from leases of hardware. It determined that because the transfer of hardware was necessary yet nevertheless incidental to the provision of Quotron’s information services, such a transfer did not constitute a lease. Quotron’s monthly charges, therefore, represented charges for services which, in the absence of an express applicable statutory exemption, were taxable under Art. 81, § 373. On 1 February 1979, the Baltimore City Court affirmed. On 12 February 1979, Quotron appealed to the Court of Special Appeals. We issued a writ of certiorari before consideration by that Court. We shall reverse.

Here, the Comptroller concedes³ that under Art. 81, § 373, the State has no right to collect a use tax on services. He contends that Quotron provides both a service and hardware. He maintains that when Quotron places the hardware in the subscribers’ offices, it has either transferred possession of or leased tangible personal property to its subscribers, and is therefore subject to a use tax on the value of that property. He maintains that the value of the hardware consists of all of the monthly charges other than those for optional information services.

Quotron, however, contends that it provides only information services. It points out that it is necessary to place its hardware in its subscribers’ offices in order to provide those services. It insists that the provision of the hardware is necessary yet nevertheless incidental to the provision of the services and, therefore, that Quotron itself, and not the subscribers, is using the hardware. It concludes that under these circumstances, no part of its monthly charges to subscribers is taxable, but rather that it, not the subscribers, must pay a use tax on the cost of the hardware.

In Comptroller of the Treasury v. Chesapeake & Potomac Telephone Co., 241 Md. 345, 216 A.2d 717 (1966), this Court considered the question whether the C & P Telephone Company, which furnished both teletypewriter equipment and services to its subscribers, was providing a telecommunication service or renting tangible personal property. There, the Comptroller claimed that the monthly charge collected by C & P represented rentals for the lease of the equipment which was tangible personal property. C & P contended that it provided only communication services.

The record showed that the sole function of the equipment was to transmit and receive communications and that it had no utility in and of itself. The equipment was located on the premises of the subscribers who provided operators to send and receive messages by depressing the appropriate keys on the equipment. Although the equipment could be used at the subscribers’ discretion, it could be used only to send and receive messages between specified locations. C & P could not intentionally interrupt the transmission of a message.

Although the subscribers exercised some control over the equipment, C & P retained ownership of it. In addition, C & P owned the channels of communication consisting of the connecting wires, cables, and lines which it furnished to its subscribers. It determined when and where to install, maintain, repair, replace, and relocate both the instruments and the connecting wires, cables, and lines. Only C & P could install or maintain the equipment and the communication channels.

The record further showed that the contract between the parties did not provide for the rental of equipment. While language in bills indicated that some of the charges were for "Rental Teletypewriter Facilities,” there was testimony to show that this language was merely a colloquialism "often used to describe situations that are not rentals at all.” The contract expressly characterized C & P’s activities as a service, and provided that if there was an unintentional, substantial interruption of that service, the subscribers were to be given a credit. Based upon these facts, this Court found that C & P retained control of the equipment, and that the dominant purpose of the contract was to provide a service. It determined, therefore, that C & P provided a service and not a mere rental of equipment, and held that the charges received from the rendition of such communication services were not taxable because of an exemption expressed in Art. 81, § 326 (n).⁴

In reaching this conclusion, this Court first determined that, although C & P provided both teletypewriter equipment and services, it was necessary to characterize those activities as a single, overall function which was either a rental of equipment or the provision of services. Having characterized the overall function as .a service, the Court next considered whether that function was subject to a sales tax. Thus this case establishes that in order to determine whether a sales tax can be imposed when a company provides both a service and related equipment, a two-step analysis must be employed. First, the overall function must be characterized by the examination of various factors as either a rental or transfer of possession, or a service. Secondly, it must be determined whether that function is subject to a sales tax. In other jurisdictions in which the same or similar questions have been considered, the same analysis has been employed. Askew v. Bell, 248 So. 2d 501, 501 (Fla. Dist. Ct. App. 1971); Spagat v. Mahin, 50 Ill. 2d 183, 189, 277 N.E.2d 834, 837-38 (1971); J. H. Walters & Co. v. Department of Revenue, 44 Ill. 2d 95, 101-102, 254 N.E.2d 485, 490 (1969); Community Telecasting Serv. v. Johnson, 220 A.2d 500, 503 (Me. 1966); Dun & Bradstreet v. City of New York, 276 N.Y. 198, 205, 11 N.E.2d 728, 731 (1937). See also Undercofler v. Grantham Transfer Co., 114 Ga. App. 868, 869-70, 152 S.E.2d 900, 902-903 (1966); Machinery Moving Inc. v. Porterfíeld, 26 Ohio St. 2d 99, 102, 269 N.E.2d 418, 419 (1971).

In C & P, the Court expressly relied upon two standards, the control of the equipment and the dominant purpose of the contract, in characterizing C & P’s single, overall function as a service. The Court, however, also took into account the relationship between the equipment and the service when it found that the sole function of the equipment was to transmit and receive communications and that it had no utility in and of itself. Courts in other jurisdictions which similarly have examined the relationship between equipment and services in characterizing an overall function, have applied a third standard. J. H. Walters & Co., 44 Ill. 2d at 104-05, 254 N.E.2d at 491; Community Telecasting Serv., 220 A.2d at 503; Dun & Bradstreet, 276 N.Y. at 205, 11 N.E.2d at 731. This standard was expressed by the Supreme Court of Illinois in Snite v. Department of Revenue, 398 Ill. 41, 46, 74 N.E.2d 877, 879-80 (1947), as follows:

"If the article sold has no value to the purchaser except as a result of services rendered by the vendor and the transfer of the article to the purchaser is an actual and necessary part of the service rendered, then the vendor is engaged in the business of rendering service and not in the business of selling at retail. If the article sold is the substance of the transaction and the service rendered is merely incidental to and an inseparable part of the transfer to the purchaser of the article sold, then the vendor is engaged in the business of selling at retail, and the tax which he pays for the privilege of engaging in such business is measured by the price which the purchaser pays for the article and the service incident thereto.”

In our view, this standard, like the standards of the control of the equipment and the dominant purpose of the contract, is applicable when characterizing the overall function of a company which provides both a service and related equipment.

Because Quotron provides both a service and related hardware, the analysis employed in C & P is appropriate here despite the fact that the C &P case involved a sales tax and an alleged rental, whereas this case involves a use tax and either an alleged rental or other type of transfer of possession. The sales and use taxes are complementary so that if a transaction is not subject to the sales tax, it is not subject to the use tax. Comptroller of the Treasury v. Glenn L. Martin Co., 216 Md. 235, 242, 140 A.2d 288, 291, cert. denied, 358 U.S. 820, 79 S. Ct. 34 (1958); Comptroller of Treasury v. Crofton Co., 198 Md. 398, 400, 84 A.2d 86, 87 (1951). See Montgomery County v. Maryland Soft Drink Ass’n, 281 Md. 116, 123, n. 3, 377 A.2d 486, 490, n. 3 (1977). Moreover, control is the critical factor in determining whether any type of transfer of possession, including a lease, has occurred.⁵ Under these circumstances, the principles established by C & P are applicable here.

Applying these principles to the instant case produces a clear result. Here the record shows that although Quotron’s hardware could be used to "access” the subscribers' own data bases, the sole function of the hardware provided to Maryland subscribers was to receive financial information services provided by Quotron. Thus the hardware had no utility in and of itself to Maryland subscribers.

The hardware was placed on the subscribers’ premises at locations designated by them. While the subscribers provided operators to "access” the information by depressing appropriate keys on the keyboards, the computer itself was kept locked and the subscribers had no access to it. Although the hardware could be used at the subscribers’ discretion, it could be used only to receive information services provided by Quotron.

Although the subscribers exercised some control over the hardware furnished by Quotron, Quotron retained ownership of it. In addition, Quotron itself rented the channels of communication which it in turn furnished to its subscribers. Quotron installed, maintained, repaired, replaced, relocated, and insured the hardware at its own expense, except under specified, limited circumstances. Most significantly, Quotron paid a use tax on the value of the hardware at the time it placed it in its Maryland subscribers’ offices.

The record further shows that the contract between Quotron and its subscribers did not provide for the rental of hardware. There was language in the contract and bills to indicate that there were some separately stated charges for keyboards and display units. Unlike the teletypewriter charges referred to in the C &P case, these charges were not characterized as "rentals,” and there was testimony to show that they did not, in fact, reflect the value of that hardware. The contract repeatedly characterized Quotron’s activities as a service, and while it provided that Quotron would not incur any liability for interruptions of service, there was testimony to show that credit was in fact given for such interruptions.

Finally, the record shows that the service provided by Quotron required the use of hardware which had no utility in and of itself to Maryland subscribers. In fact, it was not possible to obtain the hardware without subscribing to the information services nor was it possible to receive only the services. In addition, the record shows that the cost of the hardware represented only 20 percent of the total costs incurred by Quotron in providing its information services.

Here there is evidence to show that on balance Quotron retained control of the hardware. Moreover, the language of the contract itself establishes that the dominant purpose intended by the parties was to render a service and not to rent hardware. Finally, it is clear that the hardware itself is a necessary yet nevertheless incidental part of Quotron’s overall function which is to provide information services. Thus Quotron’s control of the hardware, the dominant purpose of the contract, and the relationship between the hardware and the service, all support the conclusion that Quotron’s overall function should be characterized as the provision of services, and not as the mere rental or transfer of possession of hardware. The Maryland Tax Court’s finding that Quotron was providing a service was supported by substantial evidence. See Condominium Owners v. Supervisor of Assessments, 283 Md. 29, 32, 388 A.2d 116, 117 (1978).

The only remaining question is whether this service is subject to a use tax. The Maryland Tax Court determined that in the absence of an express, applicable statutory exemption, the service was taxable. In this Court, however, the Comptroller has conceded that the State has no right to collect a use tax on services.⁶ Under this circumstance, we hold that Quotron is not subject to a use tax on any part of its monthly charges to subscribers.⁷ Accordingly, we shall reverse.

Judgment reversed. Costs to be paid by appellee.

Footnotes

1

. Each subscriber receives the "Quotron 800 Quotation Service” for which there is no separately stated charge.

2

. The separately stated charge for keyboards and display screens does not reflect, according to testimony, their value.

3

. This concession was made during oral argument.

4

. Md. Code (1957, 1965 Repl. Vol.), Art. 81, § 326 (n) provided in pertinent part:

"The tax hereby levied shall not apply to the following sales:

(n) Transportation and communication services and newspapers. — Sales of transportation and communication services____”

Md. Code (1957, 1975 Repl. Vol., 1979 Cum. Supp.), Art. 81, § 326 (bb) now provides in pertinent part:

"The tax hereby levied does not apply to the following sales:

(bb) Communication services. — Charges for communication services made by a person whose charges ... are ... subject to the federal excise tax....”

5

. Where a word is used in a statute and not specifically defined, it should be construed as having its ordinary and commonly accepted meaning. Wheeler v. State, 281 Md. 593, 596-97, 380 A.2d 1052, 1054-55, 1977, cert. denied, 435 U.S. 997, 98 S.Ct. 1650 (1978); Allen v. Mutual Fire Ins. Co., 2 Md. 111, 120-21 (1852).

Black’s Law Dictionary 1325 (4th ed. 1951) defines "possession” as:

"The detention and control ... of anything which may be the subject of property, for one’s use and enjoyment____” (Emphasis added.)

Webster’s Third New International Dictionary, Unabridged 1770 (1971) defines "possession” as:

"[T]he act or condition of having in or taking into one’s control....” (Emphasis added.)

See also COMAR .03.06.0173E which provides in pertinent part:

"In order to constitute a taxable transaction, possession of the property must be transferred to the lessee. Possession shall be deemed to have passed to the lessee whenever the property is under his control or direction....”

6

. Given this concession, we need not decide whether Art. 81, § 373, which provides that a use tax is levied on "certain services,” is too vague to permit the State to collect a use tax on services. Neither do we need to decide whether the services which Quotron provides are exempt under applicable law or whether a tax on such services would violate the Commerce Clause of the United States Constitution, Art. I, § 8, cl. 3.

7

. We note that Quotron has conceded that it must pay a use tax on the hardware it uses to provide its financial information services. The question which arose during oral argument of whether this tax should be paid in a lump sum at the time Quotron installed the hardware on its subscribers’ premises, or should be paid in monthly installments, is not before us and need not be decided here. Md. Rules 813 (b) (1) and 885.