Farmland tax calculation includes state surcharge, top court rules

The farmland transfer tax owed to counties upon the sale of agricultural property must be reduced by a state surcharge of 25 percent, a divided Maryland high court has ruled.

Montgomery County had argued in vain that the surcharge was in addition to — and not part of — the transfer-tax calculation and now owes the Phillips family, which had sold a family farm in Germantown, a tax refund of more than $41,000, the Court of Appeals ruled last week.

In its 5-2 decision, the high court said the General Assembly “explicitly and clearly” provided in Section 13-407 of the Tax-Property Article that the transfer tax includes the surcharge. Even without the clear statutory language, the legislature in its debates “expressed an intent” that the state surcharge be part of the transfer tax, the court added.

“The legislative history demonstrates that the state surcharge is to be collected and distributed directly to the state, and makes no mention whatsoever that the state surcharge is somehow exempt from the tax ceiling on the ‘total rate of tax under TP Section 13-407(a)(2),” Judge Shirley M. Watts wrote for the majority. “Absent any indication in the statutory language or the legislative history that the General Assembly did not intend the state surcharge to be a part of the state agricultural land transfer tax, we decline to construe the relevant statutes to reach such a strained result.”

Watts added that the Tax-Property Article, as amended in 2008, ensures that counties continue to receive 75 percent of the transfer tax revenue.

She cited the Maryland Association of Counties’ failure to object to the amendment, Senate Bill 662, as evidence that local jurisdictions did not believe they would be shortchanged at tax time. Watts also said a fiscal and policy note analyzing S.B. 662 made no mention of financial harm to counties.

Diane E. Feuerherd, the Phillips family’s appellate attorney, said the family’s tax recovery “was really spelled out in the language of the statute,” which calls for inclusion of the surcharge in the transfer tax.

“Includes means includes,” added Feuerherd, of Miller, Miller & Canby Chtd. in Rockville.

‘Raised Bloody Hell’

But dissenting Judge Glenn T. Harrell Jr. said the fiscal note and MACo’s silence in 2008 more likely indicate a strong belief that the surcharge was not to be included in the transfer tax calculation.

“It is true certainly that the fiscal and policy note does not mention that it was expected that the change would result in diminution of the county’s revenue share, regardless of the tandem operation of the tax ceiling,” wrote Harrell, a retired judge sitting by special assignment. “My intuition and experience with state and local government over 45 years of practice (the last 24 of which were as a judge) suggests, however, that, had the result in the present case been a foreseeable consequence of the revised scheme, the note would have addressed it and Bloody Hell would have been raised by MACo and any affected constituent jurisdiction. That did not occur.”

Leslie Knapp Jr., MACo’s legal and policy counsel, said late Tuesday afternoon that the association is reviewing the high court’s decision.

Harrell added that Montgomery County certainly would have spoken up in 2008 had it known that the Court of Appeals would rule the surcharge part of the transfer tax and hold that its ruling left counties no worse off financially.

“I may not grasp completely the majority’s reasoning (and for that, I apologize) but, if that were the case, how is it then that the result reached by the majority opinion (in construing the surcharge as part of the tax rate and applying the tax ceiling provision) is that the county is ordered to refund to Phillips $41,468 it had collected from Phillips in accordance with the way the state and county had applied the regulatory scheme since 2008?” wrote Harrell, who was joined in dissent by Judge Clayton Greene Jr. “Clearly, the county is losing revenue it would have received, but for S.B 662 and how the majority interprets the calculation of the tax rates and ceiling.”

Montgomery County spokesman Patrick Lacefield declined to comment on the decision.

Tax court reversed

The case before the court arose when the Montgomery County Board of Education, to make room for an elementary school, condemned the Phillips’ farm and paid the family an agreed upon amount of $4,142,500 in just compensation.

Deducted from that amount was $289,760 in taxes, including $165,528 for the state agricultural land transfer tax plus 25 percent, or $41,382, in the state surcharge, and a further reduction of $82,850 for the county farmland transfer tax. The taxes reduced the Phillips’ net from the sale to $3,852,740.

The family then sued to recover the $41,382 surcharge from the county, saying that by law the surcharge had to be included in the county farmland transfer tax and not in addition to that assessment.

The Maryland Tax Court in August 2013 upheld the county’s denial of the family’s request for the refund, saying the surcharge was collected in addition to the transfer tax.

But six months later, the Montgomery County Circuit Court reversed the tax court and awarded the family their surcharge payment plus interest from the date of payment by the family to the date of return.

The county sought review by the Court of Special Appeals, which certified the case to the high court to determine whether the state surcharge is part of the total rate of tax that applies to the agricultural land transfer tax.

Joining Watts’ majority opinion were Chief Judge Mary Ellen Barbera and Judges Lynne A. Battaglia, Sally D. Adkins and Robert N. McDonald.

The case was Montgomery County, Md. v. Jean K. Phillips et al., Misc. No. 20, September Term 2014.

The Court of Appeals ruled the farmland transfer tax owed to counties upon the sale of agricultural property includes a state surcharge, meaning Montgomery County owes a family a refund of more than $41,000.