Editors Note: This article appeared in The Law Clerk, a publication
of the Maryland State Bar Association, in May, 2005. Opinions and comments expressed
in this article are of the author, Michael J. Jacobs, an attorney from Easton, Maryland
(MD Eastern Shore), and do not represent those of Boatinglaw.com nor any of it's affiliates.
Mr. Jacobs can be contacted at (410) 820-7600. This article was edited for content
and grammar on July 17, 2010.
At Boatinglaw.com, we believe that many of
the concerns with the process noted by Mr. Jacobs can be minimized with careful advanced
planning, and by knowing when to recommend settlement as an alternative to litigation.
We do not recommend that anyone testify on behalf of themselves in boat tax cases --
particularly attorneys with boats -- unless they are represented by knowledgeable counsel.
Casenote: DNR.cases.5.11.05 - MSBA 2004/05 Law Clerk
DNR Notice
Schwartz v. DNR, Court of Appeals No. 94, Septemebr Term 2004, March 14, 2005 (Judge Raker
with dissent by Judge Wilner)
Kushell v. DNR, Court of Appeals No. 94, Septemebr Term 2004, March 14, 2005 (Judge Raker)
Table of Contents
A client walks in the door, fuming at the assessment of the five percent Maryland vessel excise
tax on his or her vessel pursuant to Natural Resources (DNR) Art. § 8-716 et seq.The
vessel was purchased in Maryland to be moved to permanent moorings at the client's home in another
state. As such, it was not supposed to be subject to that tax.
However, as often occurs, the vessel had a number of serious operational problems, serious enough to
prevent it from leaving Maryland until repaired. Your client expected the dealer to remedy the
problems. The dealer did so, but it took some time to get the work done.
While the work was in progress, on 3 or 4 occasions, the Maryland Department of Natural Resources
(DNR) made brief observations of the vessel while it was moored in Maryland waters undergoing
repairs. Those observations took about 10 to 12 minutes in toto. In fact, that was the total
duration of the observations in the Schwartz case. Those observations will have been made by
persons who likely have no meaningful expertise about the vessel involved. The DNR observer likely
did not try to determine why the vessel was moored there.
Based on those events, the DNR determined that the vessel excise tax was due because those passing
glimpses indicated that Maryland must be the state of principal use for the vessel, or more
realistically, the DNR wished to force your client to prove otherwise. Accordingly, the DNR issued
a notice of assessment imposing the tax with interest and penalties.
From that point on, immediately upon the issuance of that notice, there has been a lien on the vessel
for the tax, interest, and penalties. A lien which has 'the full force and effect of a lien of judgment,
DNR Art. § 8-716.1(f)(2). Was your client planning to refinance the vessel? Make sure that he or
she discloses that judgment lien.
Did you believe that pursuant to fundamental due process requirements articulated by the Supreme Court in
Sniadach v. Family Finance Corp., 395 U.S. 337, 89 S.Ct. 1820, 23 L.Ed. 2d 349 (1969), and by the
Court of Appeals in Barry Properties, Inc. v. The Fick Brothers Roofing Company, 277 Md. 15, 353
A.2d 222 (1976), there could be no such judgment lien without notice and the opportunity for a hearing
prior to imposition of such a lien? Unfortunately, in the three plus decades since Sniadach,
the 'ripple effect' of the multitude of cases flowing from Sniadach and its progeny has yet to reach
this Maryland law.
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After reviewing the facts, you see that you should be able to help the client by denying liability within 30
days of the issuance of the notice and requesting a hearing before an Administrative Law Judge (ALJ). You note
that if the vessel was held for maintenance or repair for 30 consecutive days or more, that time cannot be
included in the calculation to determine the principal state of use. DNR Art. § 8-716(a)(3) & 8-701(n).
And that, of course, was the only reason that your client's vessel was even in Maryland waters at the time the
DNR wandered by. Further, you see the obvious bases for solid constitutional challenges to various aspects of
that tax.
At first glance, this should be fairly cut and dried process. Yet, once you start the process of
contesting liability for that tax, you have entered the twilight zone. That process may well take
up to three years before you reach any reasoned resolution, if, in fact, if you ever do reach a reasoned
resolution. In the meantime, the judgment lien for the tax will remain in effect, with interest accruing.
How does the process work? With the filing of the appeal, an ALJ will, in due course, conduct a hearing
pursuant to the Administrative Procedures Act, State Government Art. § 10-201 et seq. The DNR
will establish conclusively that the vessel was in Maryland waters for the several minutes it took to make
its passing observations of the vessel. It will call as its experts, persons who will likely have little
experience with or knowledge of such vessels.
You should be aware that to the extent that the ALJ bases his or her findings on the testimony of those DNR
experts, at the judicial review stage, the qualifications of those experts will be difficult to challenge.
This is so because when you do reach the stage of judicial review, findings based in part on the DNR experts
will, under Maryland law, be entitled to great deference.
Will your client's case depend in part on witnesses you need to subpoena from out of state? Forget it.
No subpoena is available for such witnesses. And even if you submit their affidavits, notwithstanding
that the setting is an administrative hearing with relaxed rules of evidence, the DNR will object due
to the inability to cross-examine the witness. The ALJ can be expected, in turn, to reject or ignore
that affidavit evidence. So your best hope is that your witnesses are in Maryland, or at least willing
to cooperate in providing needed testimony.
ou should be aware that it is your client's burden to prove in the administrative process, that he
or she is not liable for the tax. As a practical matter, the DNR typically only has to prove that the
vessel was in Maryland waters in order to get the tax affirmed through the administrative levels.
Your client, in turn, having had a judgment lien placed on his or her vessel without the opportunity
for a hearing, will be required by the DNR and the ALJ that the tax is not, in fact, due. Unless you
an prove that, the lien will remain in effect.
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You will likely need to review the prior administrative interpretations of the issues involved in your
client's challenge to the tax. However, you will find that there is no index or reporting system which
permits you to accomplish that short of trying to extract that information from the Office of
Administrative Hearings (OAH) in Towson. Those efforts should be premised in part, on a Public Information
Act (PIA) request, so as to establish your legal entitlement to such information.
You still may encounter resistance from OAH to your accessing the public records consisting of prior ALJ
decisions. A better course will likely be to identify a colleague familiar with the decisions, to see if
you can get an assist, to avoid a trip to the OAH in Towson.
Even if you do access the prior ALJ decisions on the issues in your case, you will not get access to the
interpretations of the Secretary of DNR on the multitude of ALJ proposed decisions. Those rulings may well
evidence the policies and practices of the DNR, considerations which may be important to the case. A PIA
request to the DNR may help with that.
How about the case law, the reported decisions illuminating the judicial interpretations of the tax and its
procedures. There are few reported decisions. The two referenced cases are amongst those that do address
the tax.
The underlying reason for the lack of case law is cost-effectiveness concerns in reaching that stage of
the process. The length and lopsided nature of the procedures needed to even reach the courts, weighed
against payment of the tax, create significant obstacles to any meaningful judicial involvement in the
process. That tends to explain why the ripple effect of Sniadach has yet to reach these statutes.
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You likely plan to raise the obvious procedural and constitutional challenges pertinent to these
lopsided proceedings. To do that, you must keep in mind the jurisdictional requirement that your client
must first exhaust his or her administrative remedies [see, e.g., Blumberg v. Prince Georges County,
288 Md. 275, 418 A.2d 1155 (1980)]. As futile as the effort may seem, those challenges need to be raised
early in the administrative processes.
A failure to do so may leave you with the need to ask for a remand once you finally do reach the courts.
Maryland Insurance Commissioner v. Equitable Life Assurance, 339 Md. 596, 664 A.2d 862,
872-877 (1995). You should try to avoid that risk.
In order to exhaust administrative remedies, once the ALJ issues a proposed decision affirming the tax
assessment and the procedures involved, in an abundance of caution, your client should submit exceptions
to the proposed decision to the Secretary of the DNR prior to secretarial action to approve the proposed
decision.
You correctly believe the prospects are nonexistent that the Secretary will say that no tax is due. But
you still need to take that further time-protracted step in order to finally reach the stage of judicial
review.
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In the judicial review process, the standard of review is set forth in State Government Art. 10-222(h).
That standard is discussed, inter alia, in the Kushell and Schwartz decisions.
The decision in Kushell addressees a narrow issue. There, the vessel owner had purchased the
vessel outside Maryland for use outside of Maryland. He had actually used the vessel for some time
in California before moving to Maryland, bringing the vessel with him.
In Kushell, the Court rejected the DNR 12-minute rule of tax liability (see, e.g., Schwartz, supra)
on the basis that the statute did not permit such an assessment where the vessel was purchased outside
of Maryland with the intent to use it in another state. Accordingly, after three years and
considerable legal effort and, presumably, expense, Mr. Kushell's vessel was finally freed of the
judgment lien but with no apparent relief to the vessel owner who had been subjected to the DNR proceedings.
The Kushell briefs did raise some of the constitutional challenges apparent in this lopsided process. However,
given the focus of the Court of Appeals on the inapplicability of the tax to the Kushell vessel, those issues
were left for another day.
The decision in Schwartz is of more interest, for both the issues it did address as well as the issues
it sidesteps. The Schwartz decision was handled by Matthew Egeli, also of Annapolis. It has marked
parallels to the hypothetical case posed here. In Schwartz, the Court was considering the more typical
history of vessel use and the tax assessment process.
The vessel had been purchased in Maryland for relocation and use in another state. Accordingly, following DNR
regulations, the purchaser had submitted to the DNR, a completed DNR form B-110. The procedure gives rise to
a procedural exemption so that the dealer is not required to collect the excise tax.
However, after the sale, it became apparent that significant operational and stability concerns required that
the vessel remain in Maryland for some time. Accordingly, the vessel became subject to what might be called
the DNR 12-minute rule of tax liability. A three-year odyssey of administrative and judicial proceedings
ensued, with the predictable administrative determinations taking up much of that time.
Somewhat atypically, the venue considerations allowed the judicial challenge to be filed in the Circuit Court
for Queen Anne's County. That Court had found by a careful an obviously careful analysis, that the law did
not permit the DNR form B-110 exemption, that the dealer should have been required to collect the excise
tax for a vessel sold in Maryland. This was not an issue which had been raised by any of the parties in the
earlier administrative proceedings. On that point, you need to read the circuit court decision in the
Schwartz case in order to understand that analysis. The Court of Appeals' opinion does not provide
any detail on the analysis below by the Circuit Court.
Unexplained in Schwartz is the point that the issue decided by the circuit court had never been raised
in the administrative proceedings below, but the issue of exhaustion of administrative remedies was not
addressed. Maryland Insurance Commissioner v. Equitable Life Assurance, supra. Unexplained in the
decision of the Court of Appeals, was why that requirement was not addressed. As with Kushell, the
Court of Appeals granted by-pass certiorari. That grant of certiorari in the Schwartz
case was apparently to consider the striking down of the long-standing DNR form B-110 exemption by the
Circuit Court. However, as noted in a forceful dissent by Judge Wilner, the decision sidestepped the lack of
a DNR form B-110 exemption. Instead, it then went through a painstaking analysis of the administrative record
to affirm the imposition of the tax.
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What is really going on in these cases? Maryland marinas in the Chesapeake Bay and its tributaries are filled
with literally acres of very expensive vessels. These vessels feed an important industry group involved
in the sale of those vessels for use in Maryland and elsewhere. The DNR form B-110 exemption provides some
administrative support for that industry group.
Maryland also has a viable and important vessel service and repair industry. That industry group services
vessels from outside the state which certainly do not wish to be assessed an excise tax simply because they
chose to use Maryland services and facilities. And certainly, the businesses providing repair and related
services for vessels generate business and tax revenues for the state. It is this industry group that would seem
to be victimized by the DNR 12-minute rule of tax liability. Fortunately for that group, it would appear that
the out-of-state prospective users of that service industry are not aware that the price of using those Maryland
service facilities may, by reason of the DNR 12-minute rule, include the excise tax.
The DNR has an advisory group which seeks, in part, to strike a balance between keeping those industry groups
viable while still permitting the DNR to use its 12-minute rule, to run roughshod over fundamental due process
and related concerns.
In this straining economy replete with state budget problems, it is would seem to be apparent that the courts
will have a strong predisposition to upholding the tax wherever possible and with it, the DNR 12-minute rule.
Witness the dissent in the Kushell decision. As Judge Wilner notes, the issue of cert-related
concern was the exemption which would have been struck down by the circuit court ruling. If the DNR form B-110
exemption were invalid, it is foreseeable that vessel sales and the related servicing of those vessels would
be lost to Maryland.
In his dissent, Judge Wilner states that if there is no exemption, then without regard to the intended ultimate
use of the vessel, the dealers for all vessel sales in Maryland should collect the tax. He notes, as well, that
there may be economic hardship for the boating industry in Maryland, that legislative action may ensue.
The majority opinion sidesteps consideration of that prospective loss of the DNR form B-110 exemption, to hold
that under the facts in that particular record, the DNR had properly assessed the tax. In doing so, it avoids
the risk of hardship to the involved industries and the risks inherent in the legislative process. On that point,
it would seem to be obvious that no vessel owner's challenge to the assessment of the tax would be likely to take
issue with the DNR form B-110 exemption.
Where does that leave you and your client in the client's prospective challenge to the assessment? It suggests a
long and uncertain voyage through waters filled with unrevealed hazards in the form of unstated agendas and
concerns not apparent on the surface of the statute and the regulations. You'll need more than running lights to
detect those submerged obstructions. Make sure that your client understands the course to be plotted.