Baltimore Gas & Electric Co. is not entitled to a $6.4 million refund of franchise taxes it paid for 2006 under a rate-stabilization plan that went into effect that year, the Court of Appeals has held.
In the case, the state and utility company were arguing over whether the General Assembly’s rate stabilization plan for competitive electricity supply had the effect of decreasing the amount of BGE’s franchise tax liability as credits were applied to customers’ bills, and increasing its liability as charges were later added.
“The court’s decision does not affect the amount of the tax due from BGE,” said Robert L. Gould, vice president and chief communications officer for BGE. “It only affects the timing of the tax payments.”
Two lower courts agreed with BGE that the temporal shift in liability was an “unintended consequence” of the rate stabilization law, but the Court of Appeals reversed.
“Such a consequence was no doubt ‘unintended’ in the 2006 legislation, as the lower courts found,” Judge Robert N. McDonald wrote last week for the top court. “In our view, it was also not a consequence of that law.”
BGE is the sole distributor of electric power in much of the state, making it subject to the franchise tax.
BGE was also once the sole supplier of electric power in Maryland, but in 1999, the General Assembly opened the sale of electricity up to competition. With deregulation of supply, BGE’s franchise tax would apply only to distribution, on which it still held a monopoly.
A cap on BGE’s rates was set to expire in 2006.
That year, the General Assembly created a rate stabilization plan after BGE announced it would raise rates for electricity supply by up to 72 percent, according to the court’s opinion.
The 2006 plan capped BGE’s initial rate increase on electricity supply at 15 percent, with the intent to slowly increase it over 10 years. Customers would be given credits initially, which would be recovered by charges in later years, according to the court’s opinion.
However, to discourage customers from switching suppliers once the credits turned into charges, the legislation ordered that the credits and charges be included on the distribution portion of a customer’s BGE bill — which would still remain with BGE, regardless of the supplier.
BGE, which was still liable for franchise taxes on the distribution income, argued that its liability should decrease when customers received credits and increase later, when the charges were collected.
The State Department of Assessments and Taxation counseled otherwise, and BGE filed its 2006 form accordingly. A month later, however, it then filed an amended form seeking to exclude $322 million in taxable revenue and claiming $6.4 million in refunds.
When the SDAT denied the refund claim, BGE appealed to the Maryland Tax Court, an administrative agency.
Supply-side credits, charges
The Tax Court sided with the SDAT, saying the credits, though reflected on the distribution portion of customers’ bills, related to charges for electricity supply, which is not subject to the franchise tax, according to the Court of Appeals opinion.
BGE filed a petition for judicial review in Anne Arundel County Circuit Court, which ruled the Tax Court had misinterpreted the laws and that the legislation had the “unintended consequence” of influencing BGE’s tax liability.
The Court of Special Appeals affirmed the circuit court’s decision. The state then appealed to the Court of Appeals.
“The question here is whether the Legislature stumbled into an amendment of BGE’s franchise tax liability while focused on rate stabilization under the public utility law,” McDonald wrote for the Court of Appeals.
Just because the General Assembly included the deferral credits and charges on the distribution portion of the customer’s bill, does not mean it intended to change the state’s franchise tax laws, the opinion said.
“Physical location may be indicative, but not conclusive, of the nature of an item. A grocery store that displays its aging bakery products in the produce section at the front of the store in order to render them, in another sense, “nonbypassable” does not thereby qualify a Boston cream pie as a vegetable — however desired that conclusion might be in some quarters.”
The court reversed the Court of Special Appeals’ decision and remanded the case with instructions to affirm the Tax Court’s decision.
“Obviously, it’s fair to say I don’t agree with the decision of the Court of Appeals,” said BGE’s attorney, Harry D. Shapiro of Saul Ewing LLP in Baltimore. “It was our position that the legislature fashioned this rate stabilization plan with a clear understanding of how the rate stabilization credits and subsequent charges had to apply.”
Shapiro said he was uncertain if or what further action would be taken in the case.
“I’m obviously discussing with my client at this point,” Shapiro said. “No decision has been made. Our options are very limited.”
WHAT THE COURT HELD
State Department of Assessments and Taxation v. Baltimore Gas & Electric Company, CoA No. 14, September Term 2012. Argued October 5, 2012. Decided March 22, 2013. Opinion by McDonald, J.
Did a rate stabilization plan enacted to ensure competition in the state’s electricity supply market affect the franchise tax on Baltimore Gas and Electric’s electricity distribution?
No, the General Assembly did not intend to change BGE’s franchise tax liability with the enactment of the rate stabilization plan.
David M. Lyon, Office of the Attorney General, for appellant; Harry D. Shapiro of Saul Ewing LLP in Baltimore, for appellee.
RecordFax #13-0322-23 (29 pages).