Does it matter under Maryland law whether a state tax on savings and loan associations is meant to regulate them or just to raise revenue?

Plain-English summary

A state senator asked the Attorney General whether Maryland's franchise tax on savings and loan associations, imposed by Article 81, §128B, was purely a regulatory fee or also a revenue-raising tax, and, if it was purely regulatory, whether that mattered for its validity as applied to federally chartered institutions or for the fact that it brought in more money than needed to cover regulatory costs. He also asked whether a $100,000 exclusion from the related net-earnings franchise tax under Article 81, §128 would keep applying after January 1, 1986.

The Attorney General concluded that the regulatory-versus-revenue distinction Maryland courts had developed only mattered when judging whether a local government's tax exceeded its delegated authority, since local governments only have the taxing power the state gives them; the State's own sovereign taxing power did not depend on that label. So the franchise tax's validity was unaffected by whether it was characterized as regulatory or revenue-raising, by its application to federally chartered savings and loans, or by how much revenue it generated. On the second question, the opinion concluded that a 1983 law had phased in a new computation method for the related net-earnings tax over three years, and that the old $100,000 exclusion would no longer apply to any tax year ending on or after January 1, 1986.

Currency note

This opinion was issued in 1985. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

Does it matter whether a Maryland state tax is "regulatory" or "revenue-raising" for the tax to be valid?
Not for a state tax, according to this opinion. The Attorney General concluded that Maryland's sovereign power to tax does not depend on how the tax is labeled, and that the regulatory-versus-revenue distinction is only relevant when testing whether a local government (which only has taxing power the State delegates to it) has stayed within its authority.

Could Maryland's franchise tax on savings and loan associations validly apply to institutions with a federal charter?
Yes. The opinion concluded that because the distinction between regulatory and revenue measures doesn't limit the State's own taxing power, the franchise tax's application to federally chartered savings and loan associations, and the amount of revenue it generated, did not affect its validity under state law.

Did the $100,000 exclusion from the savings and loan net-earnings tax survive past 1985?
No, according to this opinion. It concluded that a 1983 law phasing in a new computation method meant the $100,000 exclusion would no longer be effective for any taxable year ending on or after January 1, 1986, though it would still partly apply during the three-year phase-in period.

Background and statutory framework

Maryland courts had long distinguished between taxes imposed for regulatory purposes and those imposed primarily to raise revenue, but the opinion traced a line of Court of Appeals decisions, including Jones v. Gordy, 169 Md. 173, 179-80 (1935) (quoting State v. Applegarth, 81 Md. 293, 300 (1895)), and Brown v. State, 177 Md. 321, 329 (1939), holding that this distinction mattered for judging a political subdivision's delegated taxing authority but not for the State's own sovereign taxing power, which exists independent of any express constitutional grant under Oursler v. Tawes, 178 Md. 471, 482 (1940). By contrast, local governments derive their taxing authority entirely from the State, per McRobie v. Mayor and Commissioners of Westernport, 260 Md. 464, 466 (1971), so a local regulatory tax must bear "some definite relation" to its regulatory purpose under Maryland Theatrical Corp. v. Brennan, 180 Md. 377, 380-81 (1942). The opinion noted that a prior Court of Appeals case, American National Building and Loan Association v. Mayor and City Council of Baltimore, 245 Md. 23 (1965), had characterized the state savings and loan franchise tax as regulatory only to decide whether it preempted a separate local tax, not to question the state tax's own validity, and it distinguished the federal Commerce Clause "user fee" analysis in Commonwealth Edison Co. v. Montana, 453 U.S. 609, 622 n. 12 (1981), and the unresolved state-law argument in American Trucking Associations, Inc. v. Goldstein, 301 Md. 372 (1984), as addressing different questions.

On the net-earnings tax, Article 81, §128 previously excluded the first $100,000 of a savings institution's net earnings from the taxable base under subsection (c). Chapter 358, Laws of Maryland 1983, as later clarified by Chapter 282, Laws of Maryland 1984, added new subsection (c-1), phasing in over three years a shift to the broader "net earnings" definition in Article 81, §128A, which contained no such exclusion, so that for any taxable year ending on or after January 1, 1986, the tax would be computed solely under §128A's definition without the $100,000 exclusion.

Citations

Statutes:

• Article 81, §128B of the Maryland Code (franchise tax on savings and loan associations)
• Article 81, §128 of the Maryland Code (franchise tax on net earnings of savings banks and savings and loan associations)
• Article 81, §128A of the Maryland Code (definition of "net earnings" for financial institution franchise tax)
• Article 81, §128(c) of the Maryland Code (former $100,000 taxable base exclusion)
• Article 81, §128(c-1) of the Maryland Code (phased-in computation change)
• Chapter 358, Laws of Maryland 1983 (enacted the phase-in of the new computation method)
• Chapter 282, Laws of Maryland 1984 (clarified the phase-in language)

Cases:

• Maryland Theatrical Corp. v. Brennan, 180 Md. 377, 380-81 (1942)
• Oursler v. Tawes, 178 Md. 471, 482 (1940)
• McRobie v. Mayor and Commissioners of Westernport, 260 Md. 464, 466 (1971)
• American National Building and Loan Association v. Mayor and City Council of Baltimore, 245 Md. 23 (1965)
• Jones v. Gordy, 169 Md. 173, 179-80 (1935)
• State v. Applegarth, 81 Md. 293, 300 (1895)
• Brown v. State, 177 Md. 321, 329 (1939)
• Commonwealth Edison Co. v. Montana, 453 U.S. 609, 622 n. 12 (1981)
• American Trucking Associations, Inc. v. Goldstein, 301 Md. 372 (1984)

Source

• Landing page: https://oag.maryland.gov/resources-info/Pages/attorney-general%E2%80%99s-opinions.aspx
• Original PDF: https://oag.maryland.gov/resources-info/Documents/pdfs/Opinions/1985/Volume70_1985.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain, the linked PDF is authoritative.

TAXATION

Financial Institutions—Franchise Tax on Savings and Loan Associations—Distinction Between Regulatory and Revenue Raising Taxes Irrelevant to Validity of State Tax, as Distinct from Local Tax.

February 4, 1985

The Honorable Laurence Levitan
Senate of Maryland

You have requested our opinion on whether the franchise tax imposed on savings and loan associations by Article 81, §128B of the Maryland Code is solely a regulatory measure or, also, a revenue measure. If the franchise tax is solely regulatory, you ask further (1) whether the tax may validly be applied to federally chartered savings and loan associations, and (2) whether the tax's validity is affected by the fact that it generates more revenue than is needed to meet the costs of regulating savings and loan associations.

In addition, you have requested our opinion on whether the franchise tax imposed on the net earnings of savings banks and savings and loan associations by Article 81, §128 of the Maryland Code will continue after January 1, 1986 to be subject to the $100,000 statutory exclusion from the taxable base of the subject institutions.

For the reasons given below, we have concluded as follows:

(1) The distinction between regulatory and revenue raising taxes is irrelevant to a determination under State law of the validity of a tax imposed by the State itself, as distinct from a tax imposed by a political subdivision of the State. Consequently, the validity of the franchise tax imposed by Article 81, §128B is not affected by the tax's application to federally chartered institutions nor by the amount of revenue it generates.

(2) The $100,000 taxable base exclusion established by Article 81, §128 will not be effective for any taxable year ending on or after January 1, 1986.

I
Distinction Between Regulatory and Revenue Raising Taxes

Maryland courts have, of course, drawn certain distinctions between taxes imposed for regulatory purposes and those imposed primarily to raise revenue. Nonetheless, the basic power of the State, as distinct from its political subdivisions, to impose taxes of either description is unquestioned. Maryland Theatrical Corp. v. Brennan, 180 Md. 377, 380-81 (1942). Indeed, the State's taxing power exists even in the absence of an express constitutional authorization for it. "[T]he power of taxation is inherent in a sovereign state, because the right to tax underlies its own Constitution, and is not granted by it." Oursler v. Tawes, 178 Md. 471, 482 (1940).

In direct contrast, the political subdivisions of the State have only those taxing powers that the State has granted to them, for they derive all of their authority from the State. See McRobie v. Mayor and Commissioners of Westernport, 260 Md. 464, 466 (1971) (quoting 1 Dillon, Municipal Corporations, §237 (5th ed. 1911)). Consequently, a local measure is invalid if it exceeds the local government's delegated authority. In this regard, one recognized restraint upon a local government's authority to tax for regulatory purposes, as distinct from revenue raising purposes, is the requirement that the amount of revenue generated by such a regulatory tax "be reasonable and have some definite relation to the purpose" of the measure. Maryland Theatrical Corp. v. Brennan, 180 Md. 377, 381 (1942).

But it is in regard to the validity of local taxes only that this distinction between regulatory and revenue raising measures is important.1 Thus, for example, the Court of Appeals has considered the nature of the State's franchise tax on savings and loan associations; but it did so to determine the validity of a similar local tax. American National Building and Loan Association v. Mayor and City Council of Baltimore, 245 Md. 23 (1965). The Court concluded that "the Savings and Loan Act of 1961 imposing a State franchise tax was regulatory and did not preempt the power of the City to impose a privilege tax for revenue purposes". 245 Md. at 33. Nothing in that conclusion, however, indicates that the Court regarded the nature of the State tax as having a bearing on the validity of the State tax itself.

Indeed, in cases in which the question was before it, the Court of Appeals has indicated that quite the contrary is true. For example, an "Emergency Gross Receipts Tax" imposed on retail merchants by Chapter 188, Laws of Maryland 1935, was challenged largely on the ground that it was excessive in amount. Jones v. Gordy, 169 Md. 173, 179-80 (1935). In rejecting that contention, the Court of Appeals noted that the statute was a revenue, not a regulatory, measure. But the Court further pointed out:

"[A]s the tax is an imposition of the sovereign power of the State directly, there is no question of construing a delegation of power to be limited to a reasonable exercise.... 'We are now dealing with a statute passed by the legislature for the benefit of the state, and we are not called upon to draw nice distinctions between the power to license for regulation, and the power to license with a view to revenue, as is sometimes required in construing charters of municipal corporations for the purpose of determining whether or not such corporation had the power to exact certain license fees.'" Jones v. Gordy, 169 Md. 173, 180 (1935) (quoting State v. Applegarth, 81 Md. 293, 300 (1895)).2

See also Brown v. State, 177 Md. 321, 329 (1939) ("It is an Act of Assembly that is being considered, not a municipal ordinance under delegated and limited power.").3

To be sure, the distinction between regulatory measures and revenue raising measures is relevant in deciding questions of statutory construction or of the validity of a local enactment. See, e.g., Maryland Theatrical Corp. v. Brennan, 180 Md. 377, 381 (1942). It is not, however, of equal moment in the determination of the validity of a State tax.4

Consequently, in our view, the validity of the franchise tax imposed by Article 81, §128B is not governed by characterization of its purpose as regulatory or revenue raising.

II
The Tax on Net Earnings

Article 81, §128 provides for a franchise tax on the net earnings of savings banks and savings and loan associations. Under §128(c), that tax formerly was computed as a percentage of the institution's net earnings above $100,000. That is, the first $100,000 of net earnings was excluded from the taxable base for purposes of this tax.

Chapter 358, Laws of Maryland 1983, however, amended §128, altering the computation method for the tax. Under new §128(c-1), that change is made through a phased-in adoption of the definition of "net earnings" contained in Article 81, §128A (franchise tax on financial institutions). Over three years, the tax rate is to be gradually decreased "on the net earnings under this section [§128]", while gradually increased "on the net earnings defined under §128A"; ultimately, for any taxable year ending on or after January 1, 1986, the tax is computed solely "on the net earnings defined under §128A".5

Article 81, §128A defines "net earnings" as "the net income of a financial institution for its annual accounting period", including interest, dividends, and profit from sales or exchanges of bonds. Article 81, §128A(a)(6). That definition does not allow for any exclusion from a financial institution's taxable base. Thus, for taxable years ending on or after January 1, 1986, the franchise tax imposed by §128 is to be computed, in accordance with §128A, solely on the basis of total net earnings.

Accordingly, in our view, the $100,000 exclusion will no longer be effective for the taxable years ending on or after January 1, 1986. Similarly, during the phase-in period, that part of the tax based on "net earnings under [§128]" would be subject to the exclusion, while that part based on "net earnings defined under §128A" would not be subject to the exclusion.6

III
Conclusion

In summary, it is our opinion that:

(1) The distinction between regulatory and revenue raising measures is irrelevant to a determination under State law of the validity of a State, rather than local, tax. Accordingly, the franchise tax imposed by Article 81, §128B is valid, notwithstanding its application to federally chartered institutions or the amount of revenue it generates.

(2) The $100,000 taxable base exclusion established by Article 81, §128(c) is gradually phased out under Article 81, §128(c-1) and will not be effective for any taxable year ending on or after January 1, 1986.

Stephen H. Sachs, Attorney General
John K. Barry, Assistant Attorney General
C. J. Messerschmidt, Staff Attorney

Avery Aisenstark
Chief Counsel
Opinions and Advice

1 In a Commerce Clause context, a somewhat similar distinction has been drawn by the Supreme Court between general revenue taxes and "user fees" imposed by a state. Because user fees affecting interstate commerce "are purportedly assessed to reimburse the State for costs incurred in providing specific quantifiable services", those fees must not be disproportionate to the service provided. Commonwealth Edison Co. v. Montana, 453 U.S. 609, 622 n. 12 (1981). The franchise tax at issue here, however, is not a user fee; and, as the Supreme Court has held, the states otherwise have considerable latitude in imposing taxes, even when the taxed activity has some connection to interstate commerce. 453 U.S. at 622-23. Thus, in Commonwealth Edison, the Court upheld a severance tax against a challenge alleging that the amount of the tax was not fairly related to the services provided by the state. 453 U.S. at 626.

In a recent Maryland case, American Trucking Associations, Inc. v. Goldstein, 301 Md. 372 (1984), the appellants challenged the constitutionality of a State license fee. Initially, they contended that the fee was a "regulatory" measure and, because the fee generated more revenue than was needed to carry out its regulatory purpose, it was void under State law; however, in argument before the Court of Appeals, the appellants apparently abandoned that argument, and the Court consequently did not address the State law issue. 301 Md. at 375 n. 4. The Court did, however, address the Commerce Clause issue and, in its decision, upheld the constitutionality of the fee in question.

2 Notably, while the statute at issue in Jones v. Gordy was found to be a revenue measure, the statute upheld in the Applegarth case, from which the Court quoted, was found to be a regulatory measure. See Applegarth, 81 Md. at 300 ("[W]e might perhaps content ourselves by declaring this law to be valid on the ground that these license fees [imposed on oyster packers] are imposed for the regulation of the oyster business, with which oyster packers are connected.").

3 We recognize that some language in Brown v. State, 177 Md. 321, 328-29 (1939), suggests that the Court of Appeals regarded the distinction between regulatory and revenue measures as relevant to its determination of the State license requirement's validity. But the Court's citation in that discussion to both Jones v. Gordy and State v. Applegarth leads us to believe that it did not intend to reverse its position from that of those earlier decisions.

4 Moreover, as the Brennan opinion makes clear, a statute may be both regulatory and revenue raising in nature. 180 Md. at 382. The tax embodied in Article 81, §128B appears to be capable of such a characterization. Revenue from the tax is directed into the general fund; late payment results not in loss of a license to do business, but in imposition of an interest penalty. Article 81, §128B(e).

5 Chapter 358, Laws of Maryland 1983, used the phrase "net earnings taxable under §128A". The word "defined" was substituted for "taxable" by Chapter 282, Laws of Maryland 1984.

6 In enacting §128(c-1), the General Assembly did not repeal §128(c). Rather, subsection (c) was amended to retain the former computation method, exclusion, and tax rate, "[e]xcept as provided in subsection (c-1) of this section". We believe the phased-in nature of the change in computation fully accounts for the decision to retain subsection (c).