Electricity may be invisible, but the sales tax bill for the equipment that moves it is not. The Supreme Court of Maryland handed a significant victory to Potomac Edison, holding that the utility’s conductor, substation, and transformer equipment is used “directly and predominantly in a production activity” and qualifies for Maryland’s sales and use tax exemption. Comptroller of Md. v. The Potomac Edison Co., No. 12, Sept. Term, 2025 (Md. July 17, 2026). The Court also clarified the applicable statute of limitations and entitlement to interest on refunds, two procedural questions that matter to any Maryland taxpayer who has ever written the Comptroller a check and later regretted it.
Background: Maryland exempts from sales and use tax “tangible personal property . . . used directly and predominantly in a production activity.” Md. Code Ann., Tax-Gen. § 11-210(b)(1). Under the applicable regulation, “directly and predominantly” means “more than 50 percent of the time directly in production activities.” COMAR 03.06.01.32-2B(2)(b). “Production activity” includes “processing . . . tangible personal property for resale,” and “tangible personal property” is defined to include electricity. Tax-Gen. §§ 11-101(f)(1)(i), (k)(2)(iii).
Potomac Edison does not generate electricity, a detail the Comptroller thought dispositive and the Court did not. It receives high-voltage electricity from out-of-state power plants and delivers it to Maryland customers through a transmission and distribution system. Along the way, the voltage is “stepped up” to as high as 765,000 volts for efficient long-distance transmission, then “stepped down” through a series of substations and transformers until it reaches the 120 or 240 volts suitable for end-use consumption.
In 2006, Potomac Edison informed the Comptroller that its transmission and distribution equipment qualified for the production activity exemption. The Comptroller disagreed and audited. Due to an accounting irregularity, Potomac Edison paid sales tax on some equipment purchases during the audit period (August 2003 through July 2007) but not others. In April 2011, Potomac Edison filed for a refund of those payments. One week later, the Comptroller issued a notice of assessment for the taxes Potomac Edison had not paid, totaling over $1.7 million in tax, plus over $1.3 million in interest and penalties. The company persevered through the Maryland Tax Court, the Circuit Court, and two trips to the Appellate Court before finally reaching Maryland’s highest court.
The Decision: Writing for a 6-1 majority over a sharply worded dissent, Justice Gould resolved all three issues in the taxpayer’s favor. On the exemption, the Court held that “stepping up” and “stepping down” voltage constitutes “processing” under the plain meaning of the statute: the equipment “subjects the electricity to a series of actions designed for the specific objective of delivering, over long distances, electricity generated out of State to Maryland customers at a voltage suitable for their use.” Potomac Edison, slip op. at 15. The Comptroller argued that the General Assembly meant to limit electricity-related exemptions to generation, not transmission. The Court disagreed, finding that generation and processing serve different statutory functions—one converts raw material into electricity, the other transforms it into a usable product.
On the statute of limitations, the Court held that the general four-year period under Tax-Gen § 13-1104(g) governs voluntary refund claims, not the narrow 30-day window under § 13-508(a), which applies only to refunds of payments made in response to a notice of assessment. The practical effect being that the refund was timely only as to payments made between April 1, 2007, and July 31, 2007, though the Court remanded for the Appellate Court to consider Potomac Edison’s arguments on extension agreements and equitable estoppel. On interest, the Court held Potomac Edison was entitled to interest on its refund because the overpayment was “attributable to the State.” “[W]hen the State takes the position that a tax is owed, the party sitting on the money bears the risk of being wrong.” Id. at 28-29.
The Takeaway: The production activity ruling opens the door to the exemption for utilities and other processors whose equipment transforms a product between the point of manufacture and the point of sale. The Court’s willingness to apply the ordinary dictionary definition of “processing” without importing a “substantial transformation” test should encourage other industries to take a fresh look at whether their equipment qualifies. The limitations holding is equally important. Maryland taxpayers filing voluntary refund claims have four years, not 30 days, to act. And the interest holding puts the Comptroller on notice that when the State is wrong about whether a tax is owed, it pays for the privilege of holding the taxpayer’s money.
This update is one in a series of updates written for the August 2026 edition of The BR State + Local Tax Spotlight.
© 2026 Blank Rome LLP. All rights reserved. Please contact Blank Rome for permission to reprint. Notice: The purpose of this update is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. This update should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.