ANNAPOLIS, Md. — The Supreme Court of Maryland has ruled that major components of Potomac Edison’s electric transmission and distribution system qualify for a state sales and use tax exemption, delivering the utility a partial victory in a dispute involving more than $3.24 million in taxes, interest and penalties.
The decision, filed July 17, 2026, upheld a finding that Potomac Edison’s conductors, substations and transformers are used to “process” electricity by changing voltage levels as power travels from out-of-state generating facilities to customers in Maryland.
Electricity leaves generating facilities at about 18,000 volts before transformers increase it to as much as 500,000 or 765,000 volts for long-distance transmission. The voltage is then reduced through substations and transformers until it reaches levels suitable for homes, businesses and industrial customers.
The court determined that this process qualifies as a “production activity” under Maryland tax law and that the equipment is used directly and predominantly for that purpose.
The ruling does not cover every item in Potomac Edison’s system. Clamps, bolts, brackets and other support structures were found to serve only a physical support function and do not qualify for the exemption. Electric meters also were excluded.
The dispute stems from a Maryland Comptroller audit covering purchases made between Aug. 1, 2003, and July 31, 2007.
In April 2011, the Comptroller assessed Potomac Edison:
- $1,757,862.18 in unpaid sales and use taxes
- $1,309,958.90 in interest
- $175,786.22 in penalties
The total assessment was $3,243,607.30. Potomac Edison paid the approximately $1.76 million tax portion, but did not pay the assessed interest or penalty while continuing to challenge whether the equipment was taxable.
Potomac Edison also sought refunds for taxes it previously paid on other transmission and distribution equipment during the audit period.
The Supreme Court upheld the equipment exemption but rejected an Appellate Court ruling that treated the company’s entire refund request as timely under a 30-day deadline associated with the Comptroller’s assessment.
The justices instead ruled that Maryland’s general four-year limitations period applies to taxes Potomac Edison paid before the assessment. Under that interpretation, the refund request was timely only for payments made between April 1 and July 31, 2007, unless the company prevails on additional arguments concerning an alleged deadline extension.
The case was returned to the Appellate Court of Maryland to determine whether Potomac Edison and the Comptroller mutually agreed to extend their filing deadlines or whether the state should be prevented from asserting the limitations defense because of prior representations.
The Supreme Court also ruled that Potomac Edison is entitled to interest on any refund ultimately approved and found to be timely.
The majority concluded that the payments were attributable to the state because the Comptroller maintained that taxes were owed and Potomac Edison could have faced additional interest and penalties had it refused to pay.
The court did not calculate how much Potomac Edison will ultimately recover. The opinion states that the final financial effect cannot be determined until the Appellate Court resolves the remaining statute-of-limitations questions.
Justice Jonathan Biran Gould wrote the majority opinion.
Justice Angela M. Eaves Killough dissented, arguing that Potomac Edison transports electricity generated elsewhere rather than producing it. Killough maintained that Maryland law exempts electricity generation but treats transmission and distribution as taxable services.
The judgment was affirmed in part and reversed in part, with court costs split equally between the Comptroller and Potomac Edison.
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