The Maryland Supreme Court recently ruled in Comptroller of Maryland vs. The Potomac Edison Company (PDF) that the equipment used by a public utility to transmit and distribute electricity is part of the “processing” of electricity and is thus exempt from sales tax under the production activity exemption. The ruling expands the range of assets deployed at electricity generated facilities eligible for exemption under Maryland law and provides guidance for taxpayers engaged in electricity generation and distribution.

Production activity exemption

Under Maryland Code Tax-General Section 11-210, sales and use tax does not apply to a sale of property used directly and predominantly in a “production activity” at any stage of operation on the production activity site, from the handling of raw material to the movement of the finished product. Electricity is included in the definition of tangible personal property under Maryland Code Tax-General Section 11-101. “Production activity” includes the generation of electricity.

The Potomac Edison Company (Potomac Edison), a public utility, generates electricity outside of Maryland to sell to Maryland customers. The electricity is sent to Maryland through a transmission and distribution system made up of conductors, substations, transformers, and other related equipment. In 2006, Potomac Edison claimed the production activity exemption for the transmission and distribution system. Sales tax had been paid on some, but not all, of the components of the system. In 2011, during an audit by the Maryland Comptroller, Potomac Edison requested a refund for the tax paid. In response, the Comptroller ruled that the production activity exemption did not apply to the transmission and distribution system and assessed the amount Potomac Edison did not pay, plus interest and penalties. Potomac Edison challenged the Comptroller’s findings in court.

Court ruling

In 2025, after multiple appeals, the matter was accepted by the Maryland Supreme Court (Court) at the Comptroller’s request. Along with two procedural claims related to timing of appeal, the Court was asked to review the Maryland Tax Court’s determination that the transmission and distribution system was exempt under the production activity exemption.

The Court examined whether the function of the transmission and distribution system constituted an exempt production activity. The Court analyzed whether the acts of “stepping up” and “stepping down” voltage between the electricity manufacturing facility and the end user constitute “processing” as the statute intended. The Court found that, in the plain meaning of the word “processing,” the transmission and distribution system subjects the electricity to actions designed specifically to deliver the product to customers. As such, the system is used for “processing” and is a production activity; thus, all physical property within the system was availed the sales tax exemption.

The Comptroller made three counterarguments.

• • First, the Comptroller argued that because the statute provides a separate exemption for “generating electricity for sale in another production activity,” the legislative intent was to limit the sales tax exemption for electricity production to just that use. The Court disagreed.
  • Second, the Comptroller argued that transmission and distribution activity is not a production activity, but the maintenance of tangible personal property. The Court rejected this argument, noting that the system changes the voltage of electricity generated during transmission to create the salable product at the point of distribution to the end user.
  • Finally, the Comptroller argued that even if the activity is production activity, the exemption should not apply because the equipment is not “directly and predominantly” used for that function. The Court accepted the lower Maryland Tax Court’s analysis disagreeing with the Comptroller, finding that all equipment in the transmission and distribution system was used directly and predominantly in the exempt production activity.

Because Potomac Edison’s transmission and distribution system qualified for the sales tax exemption, the Court granted its request for a refund as well as abated all penalties and interest assessed at the Comptroller audit level.

What does CohnReznick think?

For companies with electricity production assets in Maryland, this ruling provides an opportunity for potential sales tax savings across a broad range of electricity generation infrastructure, including transmission and distribution equipment. This treatment would also extend to renewable energy generation systems.