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State Surcharge Is Included in Cap for Ag Transfer Tax: Paul Attempts to Explain Tax Law Again

Updated: Jul 7, 2020

Puddle in front of a farm (Photo by Edwin Remsberg).

This post should not be construed as legal or tax advice

Recently, the Maryland Court of Appeals (the highest state court) found that the statutory cap on the ag land transfer tax includes the state’s surcharge. For those unfamiliar with the ag land transfer tax, the tax is imposed on qualifying land transfers. Revenues generated from the state ag land transfer tax are divided among the 23 counties and Baltimore City to support county land preservation programs. The state’s surcharge on this transfer tax was enacted in 2008 and is utilized to support state-administered rural land preservation programs, such as Maryland Agricultural Land Preservation Foundation and the Rural Legacy Program.

Counties can also develop their own ag land transfer taxes to provide additional support for preservation programs. The combined county and state ag land transfer taxes are capped at 5 percent plus the rate applied to improved residential property under the county transfer tax. For example, if the county has a transfer tax of 2 percent applied to improved residential property, then the combined tax rate would be capped at 7 percent (5 percent plus 2 percent).


Private property sign (Photo from Montgomery County Conservation District).

In Montgomery County v. Phillips, the Phillips family farm was condemned by the Montgomery County Board of Education in order to build an elementary school. Just compensation was set at $4,138,200 for the agricultural portion of the land. The agricultural transfer tax to be collected for the State by Montgomery County was 4 percent, or $165,528. The state surcharge on that tax was 25 percent of $165,528, or $41,382. Montgomery County had its own ag land transfer tax, 2 percent of the total just compensation ($4,142,500) or $82,850. In total, the Phillips family was taxed $289,760 in ag land transfer taxes or 7 percent of the value of the ag land portion of the land.

The statute authorizing the ag land transfer tax caps the maximum tax at 6 percent of the combined state and county ag land taxes. The Phillips family requested a refund of $41,468. Montgomery County and the Phillips family appealed the denied request for a refund.


The Phillips family argued that the language of the ag land transfer statute caps the total tax rate at 6 percent in Montgomery County. The total tax rate would include the state ag land transfer tax, county ag land transfer tax, and the state’s surcharge.

Montgomery County argued that the state’s surcharge is a separate charge from the county and state ag land transfer taxes. Put differently, the surcharge is not included in the statutory cap.

Tax Court Ruling

On appeal from the county, the Maryland Tax Court ruled that the state surcharge was to be collected in addition to the state and county ag land transfer taxes. The Tax Court denied the Phillips family’s request for a refund.

District Court Ruling

Brown cows on a field (Photo by Edwin Remsberg).

The Phillips family appealed to the Montgomery County Circuit Court. The Circuit Court reversed the Tax Court’s decision and ordered the county to refund the excess transfer tax plus interest to the Phillips family.

Court of Appeals Decision

The county appealed to the Court of Special Appeals, which in turn referred the case to the Court of Appeals. On appeal, the Court of Appeals was required to interpret the statutory language which created the ag transfer tax to determine if the state surcharge should be included.

According to the court, the Maryland Code sets a transfer tax ceiling for a county at 5 percent plus the rate applied to improved residential property under the county transfer tax (Md. Code Ann., Tax-Prop §13-407(a)(2)). Montgomery County’s transfer tax on improved residential property was 1 percent, which made the ceiling on the ag transfer tax 6 percent.

The Court of Appeals agreed with the circuit court that the total rate of tax included the state surcharge. The court agreed with the Phillips family that the General Assembly had intended for the definition of the tax to include the surcharge. The court also found that the legislative history creating the surcharge in 2008 reflected the view that the surcharge should be included in the total tax. The court upheld the circuit court’s ruling, ordering the county to refund the Phillips family $41,468 plus interest.

Two justices dissenting in this decisionfound that the statutory language and legislative history did not support the view of the majority. The dissenting judges viewed the legislative history to support the argument that the surcharge was intended to provide the State with greater revenue but not at the county’s expense. According to the dissent, the majority’s view hurt the counties by reducing the county’s share of tax revenue. The dissent would have reversed the verdict of the circuit court and affirmed the tax court’s ruling.

Why Care?

Blue tractor next to greenhouse (Photo by Edwin Remsberg).

This ruling will impact how Maryland counties are administering their own ag land transfer tax programs. Since the surcharge is now included in the cap, this means many counties tax rates are potentially too high and will need to be lowered. This also potentially means fewer dollars in farmland preservation programs in the counties.

One simple solution would be for a county to raise the transfer tax on improved residential property. The issue with this would be, no one likes a tax hike and this could mean upset residential property owners forced to pay a percent or two higher transfer tax.

Although Maryland’s highest court has ruled on the issue, this does not stop the General Assembly from passing legislation to reverses the court’s decision. If the dissent is correct and the majority has misinterpreted both the surcharge and the statutory cap, then the General Assembly can always fix the law to reflect the dissent’s view. We will have to see how this plays out and how counties react to the ruling. There may be less money to utilize for county preservation programs, but at this point the ruling is too new to know how everyone will react.


Md. Code Ann., Tax-Prop §§ 13-301 to 13-308 (West 2015).

Montgomery County v. Phillips, — A.3d –, 2015 WL 6108025 (Md. 2015).

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