If an out-of-state company ships goods to New Mexico buyers with title passing at its out-of-state warehouse, are those sales still subject to New Mexico gross receipts tax?
Apply this to your situation
This page answers the general question as of 2000. Ezel answers yours, under current New Mexico tax law, with citations.
Plain-English summary
A national computer seller could not escape New Mexico gross receipts tax by writing its contracts so that title passed at its out-of-state warehouse — because it bore the risk of loss on goods until they were delivered in New Mexico, the sales occurred in New Mexico and were taxable. Apple won only a narrow point on one customer's tax certificate. Protest GRANTED IN PART and DENIED IN PART.
Apple Computer, headquartered in California with its tax department in Texas, sold computers and accessories to New Mexico customers during a 1993–1995 audit period, shipping everything from warehouses in Illinois, California, and Colorado. A 1995 audit disallowed deductions Apple had claimed and produced a $212,307.14 assessment; after adjustments, about $140,896.61 of gross receipts tax (plus interest and penalty) remained in dispute. Long after protesting, Apple raised a new, bigger argument: that the sales were not New Mexico sales at all.
The main issue: where did the sale occur?
Gross receipts tax applies to "selling property in New Mexico" (Sections 7-9-4 and 7-9-3(F)). Apple argued that under the Uniform Commercial Code its contracts passed title to buyers at the out-of-state shipping point (F.O.B. origin), so the sales happened outside New Mexico. The hearing officer held that title is not the only factor. Following Pittsburgh & Midway Coal Mining Co. and Proficient Food, New Mexico courts also look to where the risk of loss passes when deciding where a sale occurs for tax purposes, and the Department's regulation under Section 7-9-55 (Regulation 3 NMAC 2.55.12.2) points to delivery or the transfer of title or risk of loss.
Apple's own contracts and conduct showed it bore the risk of loss until the goods arrived. Apple was obligated to — and routinely did — replace product lost or damaged in transit, immediately, through a whole division of employees, without waiting to recover from the carrier; it carried no transit insurance and its own witness said Apple "self-insured." So Apple had not completed its performance, and there was no consummated sale, until conforming goods were delivered in New Mexico. That made the sales New Mexico sales subject to gross receipts tax. The hearing officer stressed substance over form: parties cannot rewrite a contract's title term to move a sale to a state with no connection to the transaction and thereby avoid tax (Sonic Industries).
The Commerce Clause was satisfied
Because the sales were New Mexico sales, the hearing officer applied the four-part test of Complete Auto Transit v. Brady (nexus, fair apportionment, non-discrimination, fair relation to state services). The tax met the fair-apportionment and internal-consistency requirements and did not discriminate against interstate commerce, so imposing it was constitutional.
Apple's one win: the CLI Computers certificate
The remaining fight was over nontaxable transaction certificates (NTTCs). Under the 1992 version of Section 7-9-43(A), a seller had to show possession of NTTCs at the commencement of the audit or within 60 days of the Department's notice. For customer CLI Computers, Apple obtained a faxed NTTC on the second day of the four-day audit — close enough to "commencement." The only question was whether Apple actually handed it to the auditors. The evidence was inconclusive after years had passed, but the hearing officer found it more likely than not that Apple delivered it (Apple demonstrably received it during the audit, and a busy auditor could have missed it). Apple was therefore entitled to the deduction for its $97,786.19 of sales to CLI Computers.
Result: protest GRANTED IN PART and DENIED IN PART — the Department was ordered to abate only the gross receipts tax, penalty, and interest on Apple's sales to CLI Computers; the rest of the assessment stood.
What this means for you
Title terms alone will not move a sale out of New Mexico
Writing "title passes F.O.B. our out-of-state warehouse" does not, by itself, make a sale to a New Mexico customer a non-New-Mexico sale. New Mexico looks past the title term to where the risk of loss passes and where the seller finishes performing. If you deliver into New Mexico and stand behind the goods until they arrive, expect the sale to be taxable here.
Who bears the risk of loss is the key fact — and your conduct proves it
If you replace lost or damaged goods yourself, self-insure, and treat the deal as incomplete until delivery, you bear the risk of loss until the goods reach the buyer. Courts weigh your actual course of conduct, not just contract labels, and inconsistent internal accounting (recognizing revenue at shipment) will not control.
Substance over form: you can't paper your way out of the tax
New Mexico applies the tax to the economic substance of a transaction. Structuring contracts to pass title in a state unconnected to the sale, to avoid tax, will not work.
Have your NTTCs ready at the start of an audit
Under the law in effect here, you needed the certificates in hand at the commencement of the audit or within 60 days of notice. Apple salvaged one customer's deduction only because it obtained and (the hearing officer found) presented the certificate during the audit. Keep your NTTCs organized and produce them up front — and keep proof that you did.
Common questions
Q: Our contracts pass title at our out-of-state dock. Does that keep New Mexico from taxing the sale?
A: Not by itself. New Mexico decides where a sale occurs by looking at more than title — including where the risk of loss passes. If you bear the risk until the goods are delivered in New Mexico, the sale is a New Mexico sale subject to gross receipts tax.
Q: What does "risk of loss" have to do with sales tax?
A: It helps locate the sale. Here, because Apple had to replace goods lost or damaged in transit and did so at its own expense, it bore the risk of loss until delivery — meaning the sale was completed in New Mexico, not at the out-of-state shipping point.
Q: Doesn't taxing an interstate shipment violate the Commerce Clause?
A: No, provided the tax meets the Complete Auto Transit test. Here the sales occurred in New Mexico, the tax was fairly apportioned and internally consistent, and it did not discriminate against interstate commerce, so it was constitutional.
Q: How did Apple win on the CLI Computers sales?
A: The dispute there was only whether Apple had timely presented CLI's nontaxable transaction certificate to the auditors. The hearing officer found it more likely than not that Apple had, so Apple got the deduction for those sales — the one part of the assessment that was abated.
Citations and references
Statutes and regulations:
- NMSA 1978, § 7-9-4 — imposes the gross receipts tax on persons engaging in business in New Mexico
- NMSA 1978, § 7-9-3(F) — defines "gross receipts" to include money received from selling property in New Mexico
- NMSA 1978, § 7-9-43(A) (1992 version) — a seller must demonstrate possession of NTTCs at the commencement of an audit or within 60 days of the Department's notice, or the deductions are disallowed
- NMSA 1978, § 7-9-55 — deduction for certain receipts from transactions in interstate commerce
- NMSA 1978, § 7-9-67(A) — refund deduction allowing an accrual-basis taxpayer to recover tax on a sale later refunded
- Regulation 3 NMAC 2.55.12.2 — looks to delivery in New Mexico or the transfer of title or risk of loss in applying the Section 7-9-55 deduction
- U.S. Const. art. I, § 8 — the Commerce Clause
Cases cited:
- Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977) — a state tax on interstate commerce must satisfy the four-part test (nexus, fair apportionment, non-discrimination, fair relation to state services)
- Goldberg v. Sweet, 488 U.S. 253 (1989) — the fair-apportionment requirement ensures each state taxes only its fair share of an interstate transaction
- Pittsburgh & Midway Coal Mining Co. v. Revenue Division, Taxation and Revenue Department, 99 N.M. 545, 660 P.2d 1027 (Ct. App. 1983) — risk of loss is a factor in determining where a sale occurs
- Proficient Food Co. v. New Mexico Taxation and Revenue Department, 107 N.M. 392, 758 P.2d 806 (Ct. App. 1988) — location of a sale considers title and risk of loss together
- Sonic Industries v. Taxation and Revenue Department (N.M. Ct. App. 2000) — courts look to the substance of a transaction; parties cannot avoid tax by stepping across the state line to sign the agreement
Source
- Listing: New Mexico Decisions & Orders
- Decision post: Apple Computer, Inc.
- Decision PDF: D&O 00-37
Original ruling text
BEFORE THE HEARING OFFICER
OF THE TAXATION AND REVENUE DEPARTMENT
OF THE STATE OF NEW MEXICO
IN THE MATTER OF THE PROTEST OF
APPLE COMPUTER, INC. No. 00-37
ID NO. 02-006556-006, PROTEST TO
ASSESSMENT NO. 2037018
DECISION AND ORDER
This matter came on for formal hearing on June 12, 2000 before Gerald B. Richardson,
Hearing Officer. Apple Computer, Inc., hereinafter, “Apple”, was represented by Mary E.
McDonald, Esq. of Sutin, Thayer & Browne, P.C. The Taxation and Revenue Department,
hereinafter, “Department”, was represented by Mónica M. Ontiveros, Special Assistant Attorney
General. At the close of the hearing, the parties were requested to submit briefs and proposed
findings of fact and conclusions of law in support of their respective positions in this matter. The
final submission was made on August 28, 2000 and the matter was considered submitted for
decision at that time. The parties have allowed this decision maker additional time, until
December 8, 2000, to render his decision in this matter.
FINDINGS OF FACT
-
Apple is in the business of manufacturing and selling computers and related equipment.
-
Apple is headquartered in Cupertino, California, but its business and tax departments are
located in Austin, Texas. During the audit period Apple had four employees in New Mexico.
- Apple was audited by the Department for the period January, 1993 through July, 1995
(the “audit period”). The Department auditors, David Hecht and Janice McGee, conducted the
audit at Apple’s offices in Austin, Texas from October 24-27, 1995.
1
- As a result of the Department’s audit, on June 10, 1996 the Department mailed to Apple
Notice of Assessment Number 2037018 (“the Assessment”), assessing $147,145.89 in gross
receipts tax, $7,246.31 in compensating tax, $15,439.24 in penalty and $42,475.70 in interest for
a total of $212,307.14 computed through June 25, 1996.
- By letter dated June 21, 1996, Apple timely protested the gross receipts tax, interest and
penalty portion of the Assessment.
-
Apple did not protest the compensating tax portion of the Assessment.
-
Apple paid the assessed compensating tax before May 25, 2000, leaving $724.65 in
penalty and $6,817.16 in interest due on account of the compensating tax assessment.
- Subsequent to the audit and issuance of the Assessment, and based upon further
documentation provided by Apple, the Department made some further adjustments to the
assessment. The amount of gross receipts tax principal in dispute is $140,896.61, plus related
interest and penalty.
- During the audit period, Apple sold computers, printers, keyboards and computer
accessories with associated software included in the price of the hardware to customers located
in New Mexico. With respect to each sale, Apple reported its receipts from the sale to the
Department as gross receipts and either paid tax on its receipts or claimed a deduction for its
receipts from the sale.
- The assessment of gross receipts tax resulted from the Department’s disallowance of
deductions which had been claimed by Apple when it filed its monthly gross receipts tax returns.
- The Department denied the claimed deductions based upon the failure of Apple to
demonstrate that it possessed a proper form of nontaxable transaction certificate (“NTTC”) to
support its claim of deduction. In some cases, Apple possessed a pre-1992 form of NTTC from
2
its customer, but was unable to demonstrate that it had the new form of NTTC (“1992 series
NTTCs”) the Department required to support a claim of deduction for transactions after July 1,
1992.
- By letter dated April 13, 1995, the Department notified Apple that it had been selected
for an audit. The Department also informed Apple that its auditors would review any deductions
taken when reporting gross receipts tax and that its auditors would be reviewing the NTTCs or
other evidence in support of the deductions. Apple was advised that it would be to its advantage
to acquire any missing documents and to have its documentation in support of its claimed
deductions available for the Department’s auditors at the start of the audit.
- For 1993, Apple reported to the Department receipts of $10,718,763 and deducted
$8,494,203 and the Department disallowed $306,600.29 in deductions. For 1994, Apple reported
to the Department receipts of $13,149,460 and deducted $11,137,900 and the Department
disallowed $731,464.58 in deductions. For the period January through July, 1995, Apple
reported to the Department receipts of $10,578,049 and deducted $9,323,829 and the Department
disallowed $590,052.77 in deductions.
- Apple did not report or pay gross receipts taxes or sales taxes to any other state on any of
its receipts from its sales to customers in New Mexico during the audit period.
- During the audit period, Apple shipped all products sold to its New Mexico customers
from its warehouses located in Illinois, California, and Colorado. None of the products sold to
Apple’s New Mexico customers originated in New Mexico.
- All products were shipped to Apple’s New Mexico customers by United Parcel Service,
Federal Express or Skyway Freight Services, with the vast majority of the shipments handled by
Skyway Freight Services (“Skyway”).
3
- During the audit period Apple had a number of contracts with Skyway (Department
Exhibit 14). Some of these contracts provided contract shipping rates for shipments from Apple
to its customers from Apple’s warehouses in California, Illinois and Colorado. Other contracts
provided for Skyway to provide various warehousing, packing and transportation services at
Apple’s warehouse facilities.
- Skyway was regulated by the Interstate Commerce Commission as a common carrier and
delivered freight from Apple to Apple’s customers as a carrier for hire.
- Apple assigns customer numbers to its customers and classifies its customers according
to “marketing channels.”
- The Department’s Exhibit 20 is a computer printout listing all Apple sales that were
shipped to a New Mexico address during the audit period (“Apple’s N.M. audit printout”). The
list is organized by marketing channel and by customer name and number.
- In the audit workpapers (Department’s Exhibit 1), the Department lists disallowed
deductions by customer name and by Apple’s customer numbers.
- The marketing channel for dealers is identified as “DEA” and the marketing channel for
educational institutions is identified by “EDU” in Apple’s N.M. audit printout.
- CLI Computers and Apple entered into an Authorized Apple Dealer Sales Agreement
effective December 10, 1992 and an Apple Authorized Service Provider Agreement effective
July 8, 1993, each providing that title to products would pass to CLI at Apple’s shipping
location.
- CLI Computers is listed as a dealer and identified by customer number 9143 in Apple’s
N.M. audit printout.
4
- Apple assigned customer number 246158 to “DFS CLI Computers”. The “DFS” prefix
means that sales listed under this number were financed through DFS.
- Sales listed under CLI Computers customer number 9143 and DFS-CLI Computers
customer number 246158 were all sales to CLI Computers.
-
Apple’s sales to CLI Computers during the audit period totaled $97,786.19.
-
ITT is a finance company.
-
Sales that are listed in Apple’s N.M. audit printout and in the audit workpapers to a
customer whose name is preceded by “ITT” or “DFS” are sales to the named company which
were financed by ITT or DFS.
- Random Access, Inc., and Apple entered into an Authorized Apple Dealer Sales
Agreement effective June 18, 1993. The Agreement provides that title to product passes to
Random Access at Apple’s shipping location.
- Entex Information Services, Inc. (“Entex”) and Apple entered into an Authorized Apple
Dealer Sales Agreement effective February 16, 1994 and an Apple Authorized Service Provider
Agreement effective July 29, 1994. Both agreements provide that title to product passes to Entex
at Apple’s shipping location.
- Tandy Name Brand Retail Group and Apple entered into an Apple Retail Distribution
Agreement effective October 1, 1993. The agreement provides that all purchases are F.O.B.
Apple’s shipping location.
- Tandy Specialty Retail Group and Apple entered into an Authorized Apple Retailer Sales
Agreement effective May 31, 1995, providing that title to product would pass to Tandy at
Apple’s shipping location.
5
- Service Merchandise Co., Inc. and Apple entered into an Apple Retail Distribution
Agreement effective June 16, 1993 and Apple Retail Distribution Agreement effective March 21,
-
Both agreements provide that all purchases are F.O.B. Apple’s shipping location.
-
Apple’s standard Education Purchase Agreement provided that all purchases would be
F.O.B. Apple’s shipping location.
- Apple did not produce copies of contracts with Computerworks, Connecting Point,
Farmington Micro Connection or Leasing Solutions, which are listed as dealers on Apple’s N.M.
audit printout and are Apple customers for whom Apple’s claim of deduction were denied by the
Department. Nonetheless, all Apple Dealers would have signed one of Apple’s standard forms
of dealer or retailer agreements.
- Apple’s customers that are listed under the education channel on Apple’s N.M. audit
printout would have signed one of Apple’s standard forms of Apple Education Purchase
Agreement.
- Apple’s standard form of invoice used during the audit period provided that the terms and
conditions in the invoice would govern the sale unless the customer had a current purchase
agreement with Apple, in which case only the terms and conditions in the purchase agreement
would apply.
- Apple’s standard invoice provided that all purchases are F.O.B. Apple’s shipping location
and that title to the products shall pass to the purchaser at Apple’s shipping location.
- Pursuant to either Apple’s standard invoice or whichever of Apple’s standard purchase
agreements in effect with a customer, title to all goods shipped by Apple to a customer in New
Mexico passed outside of New Mexico when Apple placed the goods for shipment with a
common carrier from its warehouses.
6
- All of Apple’s contracts with purchasers, be they based upon Apple’s standard invoice,
the Authorized Apple Dealer Sales Agreement, the Apple Authorized Service Provider
Agreement, the Apple Retail Distribution Agreement, the Authorized Apple Retailer Sales
Agreement or the Standard Apple Corporate Direct Purchase Agreement contain language to the
effect that merchandise prices include Apple’s standard transportation, insurance and routing to
U.S. locations.
- None of Apple’s contracts with purchasers, be they based upon Apple’s standard invoice,
the Authorized Apple Dealer Sales Agreement, the Apple Authorized Service Provider
Agreement, the Apple Retail Distribution Agreement, the Authorized Apple Retailer Sales
Agreement, or the Standard Apple corporate Direct Purchase agreement use the term “risk of
loss” with respect to specifying which party bears the risk of loss for goods in shipment. They
all contain, however, the following language, “When shipping pursuant to Apple’s standard
practices, Apple will place all tracers, file claims and replace product lost or damaged in transit.”
- Pursuant to its agreements with its customers, Apple was obligated to replace goods that
were lost or damaged during shipment to its customers.
- Apple had a division of employees who were responsible for handling claims for lost or
damaged goods. If goods were lost or damaged in transit, Apple’s customer notified Apple
rather than the carrier. Apple filed claims with the carriers itself. With respect to claims filed by
Apple which were made on a timely basis with the carriers, the carriers paid Apple only the
release value of the goods. The release value was a standard amount set by the carriers in the
amount of $5.00 per pound, up to $100 per package. The release value paid by the carriers never
amounted to the cost of the goods or of the invoice cost regardless of who the carrier was.
7
- Apple replaced goods lost or damaged in transit. At the customer’s option, Apple would
enter a credit against the customer’s account.
- Apple replaced lost or damaged goods or credited the customer’s account without regard
to whether or when Apple would recover on its claim against the carrier.
-
Apple self-insured the product while in transit to its customers.
-
During the audit period, Apple shipped $34,446,272 in products to New Mexico
customers and replaced lost goods to New Mexico customers at a cost of only $17,320.
- The replacement cost figures do not include the cost of replacements for damaged goods,
but the damaged goods were returned to Apple and damaged hardware was refurbished.
- Apple considers the $17,320 replacement cost to be a nominal cost for self-insuring over
$34 million in products shipped.
- Apple bore the risk of loss on goods shipped to its customers pursuant to its standard
shipping practices.
- Apple invoiced its customers upon placement of its merchandise with its contract carriers
for shipment to customers.
- Apple recognized the revenue from its sales at the time of shipping and invoicing in
accordance with its understanding of generally accepted accounting principles.
- Apple did not reverse the original invoice to the customer when a customer made a claim
for goods lost or damaged in transit.
- Apple did not reverse its recognition of sales revenue from sales for which a customer
made a claim for goods lost or damaged in transit.
- When Apple replaced goods lost in transit, the customer was not re-invoiced.
8
- When Apple shipped replacements for goods damaged in transit, Apple generated an
invoice to the customer for the replacement. When the customer returned the damaged goods,
the invoice for the replacement was offset. Apple accounted for replacements on an Apple
internal account.
- Each of Apple’s contracts and its standard invoice provided that the validity, construction
and performance of the agreements are to be governed by and construed in accordance with the
law of California.
- During the audit period, Apple treated all sales of merchandise shipped to customers in
New Mexico as New Mexico sales for purposes of reporting and paying New Mexico gross
receipts tax.
- During the audit itself, Apple never contended that its sales of merchandise shipped to
customers in New Mexico were not subject to New Mexico gross receipts tax because they were
not sales occurring in New Mexico.
- As of the date of the formal hearing, Apple continues to report and pay New Mexico
gross receipts tax on sales of merchandise shipped to customers located in New Mexico.
- Apple’s sales of merchandise shipped from California, Illinois or Colorado were not
taxed in those states.
- Apple does not report or pay sales or gross receipts taxes to any other state on sales of
merchandise it ships to customers located in New Mexico.
- The first time the Department was notified that Apple considered its sales of merchandise
during the audit period which were shipped to New Mexico customers from Apple’s out-of-state
warehouses to be out-of-state sales which are not subject to New Mexico gross receipts tax was
when Apple filed its first Amended Protest on December 21, 1998.
9
- On October 24, 1995, the Department’s auditors attempted to serve a “60-day letter” on
the Apple employee, Sherry Watkins, who they dealt with when they arrived to conduct their
audit. Ms. Watkins declined to sign for the 60-day letter, informing the Department’s auditors
that it should be presented to her supervisor, Susan Desgrousillier, who would be there the
following day.
- On October 25, 1995, during the course of the Department’s audit of Apple, Apple’s
representative, Susan Desgrousillier signed for and acknowledged receipt of the Department’s
60-day letter. The 60-day letter was dated October 24, 1995. The 60-day letter informed Apple
that the letter constituted notice, as provided in Section 7-9-43 NMSA 1978, that it be in
possession of New Mexico Nontaxable Transaction Certificates (“NTTC’s”) to support its
claimed deductions. With respect to transactions on or after July 1, 1992, the letter informed
Apple that it must demonstrate the possession of such NTTC’s “today”, or it must demonstrate to
the auditors within 60 days that the required NTTC’s were in Apple’s possession at the time each
transaction for which deduction was claimed was required to be reported.
- Apple did produce for the Department’s auditors a copy of its NTTC from CLI
Computers which covered transactions prior to July 1, 1992.
- On October 25, 1995, CLI Computers issued Apple a fully completed and signed 1992
series NTTC for transactions on or after July 1, 1992.
- Apple received the 1992 series NTTC from CLI Computers on October 25, 1995 by
facsimile transmission from CLI Computers dated October 25, 1995 at 3:38 P.M.
- Apple’s customary practice is to present its tax certificates to the auditor during the
course of a sales tax or gross receipts tax audit.
10
- If the auditor finds exceptions and informs Apple of exceptions, Apple’s customary
practice is to go back to the customer to get the certificate, during the course of the audit, and to
obtain the certificate by fax from the customer.
-
If a certificate is received by fax, Apple customarily gives the certificate to the auditor.
-
During the audit, the auditors were given an Apple ledger listing all sales within the audit
period, by customer.
- As the auditors reviewed NTTC’s presented to them by Apple, the auditors marked “ok”
on the ledger beside the entries for each customer from whom Apple produced a certificate that
was accepted by the auditors.
- When Apple did not have a certificate acceptable to the auditors, the auditors made no
mark on the ledger to indicate whether a certificate had been produced.
- The auditors made no mark indicating that they had accepted an NTTC from CLI
Computer.
- The auditors made copies of some but not all of the certificates they saw but did not
accept.
- Ms. McGee might have made a list of the NTTC’s presented to the auditors but has no
such list now and does not remember if such a list was made at the time of the audit.
-
Ms. McGee could not remember when Apple presented NTTC’s to her or Mr. Hecht.
-
The Department’s protest officer reviewed all of the certificates that had been presented
by Apple to the Department and determined whether to accept any additional certificates.
- If the protest officer had known that the 60-day letter was signed by Apple on October
25, 1995, the protest officer would have accepted Apple’s 1992 series NTTC from CLI
Computers, based on the fact that the NTTC was dated as issued on October 25, 1995.
11
- Apple presented the CLI Computer 1992 NTTC to the Department’s auditors on October
25, 1995.
DISCUSSION
Introduction
In 1995, the Department audited Apple and assessed gross receipts tax on Apple’s
receipts from certain of its New Mexico customers based upon Apple’s failure to possess proper
nontaxable transaction certificates (“NTTC’s”) or other documentation to support the deductions
Apple had claimed when reporting its gross receipts taxes to the Department. Long after the
audit was completed and its protest was filed, Apple amended its protest to dispute that the sales
for which deductions had been claimed were subject to gross receipts tax whatsoever. Thus, at
this juncture, the primary issue to be determined is whether Apple was subject to New Mexico
gross receipts tax upon its receipts from the sale of tangible personal property to customers
located in New Mexico. Gross receipts tax is imposed upon the gross receipts of any person
engaging in business in New Mexico. Section 7-9-4 NMSA 1978. “Gross receipts” is defined in
pertinent part as, “the total amount of money…received from selling property in New
Mexico,….” Section 7-9-3(F) NMSA 1978. Apple argues that under the facts of this case, it did
not sell property in New Mexico because title to the goods it sold to its New Mexico customers
transferred to its customers when it placed the goods with a common carrier at its warehouses in
California, Illinois or Colorado for shipment to its customers, and thus the sale took place outside
of New Mexico and was not subject to tax. In making these arguments, Apple relies upon the
12
provisions of the Uniform Commercial Code (“UCC”) to determine where the sale occurred.1
The Department argues that both the conduct of the parties and the contract terms themselves
demonstrate that regardless of Apple’s shipping practices and the wording of its contracts, Apple
bears the risk of loss with respect to the goods in transit to Apple’s New Mexico customers and
because of this, the legal obligations of the parties are not fixed until the goods are delivered to
Apple’s customers in New Mexico, thus establishing New Mexico as the place where the sale
occurs and rendering it subject to tax. In making its arguments, the Department argues that
while the UCC may apply to determine the rights between the parties, the common law governs
to determine whether a sale has occurred in New Mexico for tax purposes. The issue, as framed,
thus presents highly interesting issues concerning where a sale occurs when the passage of title
and passage of risk of loss occur in different places, as well as issues concerning the interplay of
the UCC and the common law in determining where a sale occurs for taxation purposes.
A description of the transactions between Apple and its customers will be helpful prior
to determining the tax consequences of those transactions. Apple is headquartered in California.
During the audit period it had four employees in New Mexico. Apple sold computers, printers,
keyboards, computer accessories and associated software which was included in the price of the
hardware to customers located in New Mexico. With respect to the majority of the sales at
issue2, Apple had entered into one of its standard forms of agreement with a dealer, retailer or
1
Apple’s agreements with its customers, whether one of its form agreements or its standard invoice, all provide that
California law governs the agreement between the parties. Under California law, contracts for the sale of goods are
governed by the UCC. Both California and New Mexico have adopted Article 2 of the UCC, which deals with sales
of goods, without modification. The UCC is codified in New Mexico in Chapter 55 of the New Mexico Statutes
Annotated, 1978 compilation. Since both state’s enactments of the UCC are substantially identical for purposes of
the issues discussed herein, citations to the UCC will simply refer to the UCC section number without specific
citation to either California’s or New Mexico’s statute.
2
Apple was not able to produce copies of contracts with all of its customers for whom a deduction was taken.
Apple provided convincing testimony, however, that the customers would have signed one of its standard purchase
agreements, or, at the very least, Apple’s standard invoice would have been used which set out the shipping and title
passing terms.
13
educational institution which provided that all purchases would be F.O.B. Apple’s shipping
location or that title to the product would pass at Apple’s shipping location, or would contain
both statements. Apple’s standard invoice for all sales provided that all purchases are F.O.B.
Apple’s shipping location and that title to the products passed to the purchaser at Apple’s
shipping location.
During the audit period, Apple shipped all of its product from warehouses in Illinois,
California or Colorado, using common carriers. The vast majority of its shipping was handled
by Skyway Freight Systems, with whom Apple had contracted to handle deliveries.
None of Apple’s contracts use the term “risk of loss” with respect to which party bore the
risk of loss for goods in transit. All of Apple’s contracts with purchasers contain language to the
effect that merchandise prices include Apple’s standard transportation, insurance and routing to
U.S. locations. They also contain language to the effect that when shipping pursuant to Apple’s
standard practices, Apple will place all tracers, file claims and replace goods lost or damaged in
transit. In spite of the language about insurance, Apple never purchased any insurance for the
goods in transit. Instead, it chose to self-insure itself against the cost of fulfilling its obligation
under the contract to replace lost or damaged goods. Apple had a division of employees who
handled claims for lost or damaged goods. When goods were lost or damaged in transit, Apple’s
customer would notify Apple and it would immediately replace the lost or damaged goods.
Apple placed tracers and filed claims with the carrier on its own behalf and received the release
value of the merchandise from the carriers. The release value was a nominal amount, always less
than the cost of replacing the goods, paid by the carrier to Apple pursuant to the terms of its
contracts with the carrier. Apple replaced the lost or damaged goods for its customers regardless
of whether Apple recovered anything on its claim against the carrier.
14
The Uniform Commercial Code
Apple’s sales transactions will first be examined under the UCC. Before doing so,
however, an examination of the manner in which the adoption of the UCC changed the prior law
of sales and the intention of the drafters of the UCC with respect to how the Code was intended
to be used must be considered to ensure its proper application in the context of this case. Article
2 of the UCC concerns sales of goods. The official commentary to UCC § 2-101 explains the
approach taken by the drafters of the Code with respect to sales of goods and how it departs from
the prior law of sales. It provides:
The arrangement of the present article is in terms of contract for
sale and the various steps of its performance. The legal
consequences are stated as following directly from the contract and
action taken under it without resort to the idea of when property or
title passed or was to pass as being the determining factor. The
purpose is to avoid making practical issues between practical men
turn upon the location of an intangible something, the passing of
which no man can prove by evidence and to substitute for such
abstractions proof of words and actions of a tangible character.
(emphasis added).
This comment is further explained as follows:
Under the Uniform Sales Act and pre-Code case law, such
problems as when risk of loss passes from the seller to the buyer,
liability of the buyer to the seller for the price of the goods, and the
buyer’s remedies were generally all answered by the concept of the
passing of title. Article 2 of the Uniform Commercial Code, on the
other hand, attempts to take care of such situations by specific
provisions defining the rights of the parties in each instance.
67 Am Jur 2d Sales § 5, fn. 13. Thus, Article 2 is divided into subparts, each addressing
different aspects of the rights of the buyer and seller with respect to each aspect of the
performance of a sales contract. For instance, Part 4, concerns the passage of title. Part 5
concerns aspects of performance such as delivery, risk of loss, payment, etc. Part 6 concerns
breach, acceptance, repudiation, etc. Part 7 concerns the remedies available. In analyzing the
15
rights of parties to the sales agreement and other affected third parties, such as creditors, each
component of the transaction must be analyzed in accordance with the specific provisions of the
Code intended to address that particular situation.
With this background, we can now discuss how the UCC applies with respect to the
passage of title to the goods Apple shipped to its customers in New Mexico. Part 4 of Article 2
of the UCC addresses the passage of title. In pertinent part, it provides:
Each provision of this article with regard to the rights, obligations
and remedies of the seller, the buyer, purchasers or other third
parties applies irrespective of title to the goods except where the
provision refers to such title. Insofar as situations are not covered
by the other provisions of this article and matters concerning title
become material the following rules apply:
(1) title to goods cannot pass under a contract for sale prior
to their identification to the contract, and unless
otherwise explicitly agreed the buyer acquires by their
identification a special property as limited by this act.
Any retention or reservation by the seller of the title
(property) in goods shipped or delivered to the buyer is
limited in effect to a reservation of a security interest.
Subject to these provisions and to the provisions of the
article on secured transactions, title to the goods passes
from the seller to the buyer in any manner and on any
conditions explicitly agreed on by the parties.
(2) Unless otherwise explicitly agreed title passes to the
buyer at the time and place at which the seller
completes his performance with reference to the
physical delivery of the goods, despite any reservation
of a security interest and even though a document of
title is to be delivered at a different time or place; and
in particular and despite any reservation of a security
interest by the bill of lading:
(a) if the contract requires or authorizes the seller
to send the goods to the buyer but does not
require him to deliver them at destination, title
passes to the buyer at the time and place of
shipment; but
16
(b) if the contract requires delivery at destination,
title passes on tender there;
UCC § 2-401 (emphasis added).
Applying this provision, with respect to Apple’s sales which were governed by
agreements with a specific title passing clause or which were governed by Apple’s standard
invoice which has a title passing clause, title passed under Subsection 1 at Apple’s shipping point
(its out of state warehouse) pursuant to the terms of the express agreement of the parties
providing such. With respect to Apple’s sales which were governed by agreements that lacked
the express language regarding passage of title, each of those agreements contained language that
all purchases are F.O.B. Apple’s shipping location. An F.O.B. term is a delivery term.
Specifically, UCC § 2-319 provides in pertinent part:
(1) Unless otherwise agreed the term F.O.B. (which means “free
on board”) at a named place, even though used only in
connection with the stated price, is a delivery term under
which:
(a) when the term is F.O.B. the place of shipment, the
seller must at that place ship the goods in the manner
provided in this article and bear the expense and risk of
putting them into the possession of the carrier;
(emphasis added). Thus, under UCC § 2-401 (2) (a), title, once again passed to Apple’s
customers at Apple’s shipping point, where Apple completed its performance with respect to the
physical delivery of the goods.
Having established that title passed at Apple’s shipping point, its out-of-state warehouses,
with respect to all Apple sales to New Mexico customers with which we are concerned, another
cautionary advisement is necessary with respect to the significance of the application of UCC §
2-401. Not only is the passage of title only part of the sales transaction addressed by Article 2 of
17
the Code, it must also be noted that the drafters of the UCC only intended that the UCC address
the rights of the “private” parties involved in the sales transaction, such as the buyer and the
seller, and such third parties as their creditors or others with an interest in the goods involved and
they did not intend to override governmental or “public” determinations of what amounted to a
“sale”. This is made clear in the official commentary to UCC § 2-401, which provides:
This article deals with the issues between seller and buyer in terms
of step by step performance or non-performance under the contract
for sale and not in terms of whether or not “title” to the goods has
passed. That the rules of this section in no way alter the rights of
either the buyer, seller or third parties declared elsewhere in the
article is made clear by the preamble of this section. This section,
however, in no way intends to indicate which line of interpretation
should be followed in cases where the applicability of “public”
regulation depends upon a “sale” or upon location of “title”
without further definition. The basic policy of this article that
known purpose and reason should govern interpretation cannot
extend beyond the scope of its own provisions. It is therefore
necessary to state what a “sale” is and when title passes under this
article in case the courts deem any public regulation to
incorporate the defined term of the “private” law.
Comment 1, UCC § 2-401 (emphasis added.) Because of this, the fact that UCC § 2-106 defines
a “sale” as consisting of “the passing of title from the seller to the buyer for a price”, it does not
mean that a sale between a buyer and a seller based solely upon the passage of title can also be
considered to be a sale for purposes of locating the transaction to establish which public taxing
agency has jurisdiction to tax such sale. Indeed, even as between the parties themselves, under
the UCC the passage of title is but one aspect to be considered in defining the relative rights of
the parties. See, Morton Booth Co. v. Tiara Furniture, 564, P.2d 210 (Okla. 1977) (title to
goods, for purposes of defining the rights of the parties is of little relative consequence under the
UCC).
18
Location of a sale of goods under New Mexico tax law
We are thus called to examine how New Mexico’s courts have treated the location of a
sale for tax purposes. The parties have brought to my attention four cases involving the sale of
goods where the location of the sale was mentioned by the court in its determination of the
application of the New Mexico gross receipts tax or compensating tax. Of the four, only one
case, Field Enterprises Educational Corporation v. Commissioner of Revenue, 82 N.M. 24,
474 P.2d 510 (Ct. App. 1970), even makes reference to the UCC in determining the place of sale
and that portion of the decision was dicta. The issue in that case was whether a 1% per month
“service fee” on a customer’s unpaid balance for educational books bought from an out-of-state
educational book publisher should be considered to be part of the sales price of the merchandise
for purposes of determining the amount of compensating tax due. It was stipulated that the
books were shipped by the publisher F.O.B. from its out-of-state binderies. The Commissioner
of Revenue had conceded that the sale of the property was consummated out-of-state. The Court
merely cited to UCC §§ 2-319 and 2-401 as being in accord with the Commissioner’s
concession.
Western Electric Co. v. New Mexico Bureau of Revenue, 90 N.M. 164, 561 P.2d 26 (Ct.
App. 1976) was also a compensating tax case in which the place of sale was not an issue
determined by the court. The issue in that case was whether transportation costs incurred in
shipping goods from Western Electric’s out-of-state facilities to Mountain Bell in New Mexico
should be included in the price of the goods for purposes of calculating the amount of
compensating tax to be paid. The Department had a regulation which excluded the
transportation costs if they were paid by the purchaser and the court found that the purchaser was
paying the transportation costs. The goods involved were shipped by the seller F.O.B. its
19
shipping point and were usually transported by a carrier with whom the purchaser had a contract.
Id., 90 N.M. 165. It was never an issue in that case that the sales took place out-of-state. Even if
it had been, given the fact that the goods were transported by the purchaser’s contract carrier, it
would also be fair to assume that not only title, but also risk of loss passed outside of New
Mexico. Given those facts, the Department’s position in this case that risk of loss must be
considered in determining where a sale takes place is in accord with the parties’ assumption in
Western Electric that the sale took place out-of-state.
The other two cases demonstrate that in addition to considering where title passes, New
Mexico’s courts also look to where risk of loss transfers in determining the location of a sale of
goods. In Pittsburgh & Midway Coal Mining Co. v. Revenue Division, Taxation and Revenue
Department, 99 N.M. 545, 660 P.2d 1027 (Ct. App. 1983), the determination of whether the sale
of coal occurred in New Mexico or out-of-state was made in the context of the taxpayer’s
challenge to the assessment of gross receipts tax on its sales of coal under the Commerce Clause.
In that case, Pittsburgh and Midway sold coal to out-of-state purchasers from its McKinley
County mine in New Mexico. Pittsburgh and Midway loaded the coal into railroad cars (and on
some occasions, trucks) at the mine. The conveyances were not owned by Pittsburgh and
Midway. Rather, the purchasers made the arrangements for the conveyances to transport the coal
and the purchasers paid for the transportation of the coal themselves. The contracts for the sale
of the coal all provided that title to the coal passed to the purchasers at the mine. The Court of
Appeals found that under these circumstances, the coal was sold in New Mexico, stating:
In each of the contracts with out-of-state buyers, title to the coal
and risk of loss passed from Taxpayer to its customers after the
coal was loaded onto the appropriate train, at the mine. The cars in
which the coal was loaded were owned by the buyer. After the
coal was loaded the transporter was in custody and control of the
20
coal until it reached the buyer’ site of use. The official weight of
the coal was determined at the McKinley mine when it was loaded
into the railroad hopper cars. There is substantial evidence, and
there are sufficient findings, that title of the coal did pass to
Taxpayer’s customers when it was loaded into cars or trucks in
New Mexico. Therefore, the question is whether, under the facts
and circumstances of this case, passage of title in New Mexico is a
matter to be considered as a factor justifying the imposition of the
gross receipts tax.
Id., 99 N.M. at 554 (emphasis added).
In the remaining case, Proficient Food v. New Mexico Taxation and Revenue
Department, 107 N.M. 392, 758 P.2d 806 (Ct. App. 1988), the taxpayer also challenged the
imposition of gross receipts tax on its sales of food and supplies to restaurants in New Mexico on
the basis of the Commerce Clause. The stipulated facts were that the taxpayer was a California
corporation which operated a restaurant supply business with a warehouse in Texas. The
taxpayer had no office or place of business in New Mexico and no employees, agents or
salesmen residing in the state. It sold goods to restaurants in New Mexico. The orders for those
goods were taken over the phone and the sales arrangements were negotiated and administered
outside of New Mexico. The invoicing for those sales was also handled out-of-state. The
Taxpayer, however, delivered the goods to the restaurants in New Mexico from its warehouse in
Texas, using its own trucks.
The taxpayer had argued that it was not engaged in the business of selling in New Mexico
and that its selling activities were concluded when the order was accepted and the goods
identified and placed in transit from its locations in Texas. As part of the court’s decision
upholding the imposition of the gross receipts tax the court affirmed the hearing officer’s
determination that the goods were sold in New Mexico, stating:
21
Although not explicitly stated in the stipulated facts, the hearing
officer determined it was reasonable to infer that the products
delivered to the restaurants in New Mexico were sold in New
Mexico, despite the fact that the invoices were handled by the
corporate offices outside the state. See Pittsburgh & Midway Coal
Mining Co. v. Revenue Div., Taxation & Revenue Dep’t., 99 N.M.
545, 660 P.2d 1027 (Ct. App. 1983) (sale occurred in New Mexico
when title and risk of loss pass to purchaser in New Mexico and
tax may be imposed on those sales). We Agree.
Id., 107 N.M. at 395 (italics in original). It is thus clear from the court’s own characterization of
its ruling in Pittsburgh and Midway that risk of loss is a factor to be considered in determining
where a sale is located. It would also have been obvious to the court that when a seller is
delivering the goods it sells in its own delivery trucks, that the seller is the party bearing the risk
of loss. It should also be noted that although both Pittsburgh and Midway and Proficient Food
involved the sale of goods, and the rights and obligations of the buyer and seller would have
been governed by the UCC, the Court made no reference to the UCC in determining where the
sales occurred for purposes of applying “public” law involving the imposition of New Mexico
tax.
Based upon both Pittsburgh and Midway and Proficient Food, it is clear that in addition
to locating the passing of title, we must also consider where risk of loss passes in determining
where a “sale” occurs for purposes of imposition of gross receipts taxes in New Mexico. The
Department’s regulation under § 7-9-55 NMSA 1978, dealing with the deduction from gross
receipts tax for transactions in interstate commerce is in accordance with this approach.
Regulation 3 NMAC 2.55.12.2 provides as follows:
Receipt of New Mexico sellers from sales of property to
nonresidents of New Mexico who accept delivery of the property
in New Mexico or where transfer of title or risk of loss passes to
the nonresident buyer in New Mexico are not receipts from
22
transactions in interstate commerce and are not deductible under
Section 7-9-55. (emphasis added).
Because Apple has argued that the location of the sale is solely governed by where title transfers
under the UCC, its argument is clearly erroneous.
That Apple has misinterpreted the application of the UCC to this case is clear, even from
the UCC and the cases determined under it. As noted earlier in this decision, the drafters of the
UCC rejected the approach of prior law which had made the transfer of title the prime
determinant of the rights of the parties, with all other issues, such as when risk of loss passes,
when the buyer becomes liable for the price of the goods and the remedies of both buyer and
seller upon breach, following from the passage of title. Instead, the Code provides for specific
provisions dealing with each of those issues, irrespective of the passage of title.
“No longer is the question of title of any importance in
determining whether a buyer or a seller bears the risk of loss. It is
true that the person with title will also (and incidentally) often
bear the risk that the goods may be destroyed or lost; but the seller
may have title and the buyer the risk, or the seller may have the
risk and the buyer the title. In short, title is not a relevant
consideration in deciding whether the risk has shifted to the
buyer.” R. Nordstrom, Handbook of the Law of Sales, 393 (1970).
Martin v. Melland’s Inc., 283 N.W. 2d 76, 79 (N.Dak. 1979). Thus, § 2-509 contains provisions
specifically addressing risk of loss in the absence of breach. The commentary to that section is
illuminating:
The underlying theory of these sections on risk of loss is the
adoption of the contractual approach rather than an arbitrary
shifting of the risk with the “property” in the goods. The scope of
the present section, therefore, is limited strictly to those cases
where there has been no breach by the seller. Where for any
reason his delivery or tender fails to conform to the contract, the
present section does not apply and the situation is governed by the
provisions on effect of breach on risk of loss.
23
Comment 1, UCC § 2-509 (emphasis added). UCC § 2-613 is the section that addresses when
there has been a breach due to a failure to deliver goods or failure to deliver undamaged and
conforming goods. It provides:
Where the contract requires for its performance goods identified
when the contract is made and the goods suffer casualty without
fault of either party before the risk of loss passes to the buyer, or in
a proper case under a “no arrival, no sale” term then:
(a) if the loss is total the contract is avoided; and
(b) if the loss is partial or the goods have so deteriorated as
no longer to conform to the contract, the buyer may
nevertheless demand inspection and at his option either
treat the contract as avoided or accept the goods with
due allowance from the contract price for the
deterioration or the deficiency in quantity but without
further right against the seller.
The official commentary sheds further light on the intended operation of this section. It
provides:
Where under the agreement, including of course usage of trade, the
risk has passed to the buyer before the casualty, the section has no
application. Beyond this, the essential question in determining
whether the rules of this section are to be applied is whether the
seller has or has not undertaken the responsibility for the
continued existence of the goods in proper condition through the
time of agreed or expected delivery.
UCC § 2-613, Comment 2 (emphasis added). Thus, under this section, when the seller has
undertaken the responsibility for the delivery of conforming goods, in the event that the goods
are lost or damaged in transit, the buyer has the option to void the contract of sale. Obviously, if
a purchaser exercised his option to void the sale, there would be no “sale” upon which any
consequences, tax or otherwise, could attach, regardless of whether the parties agreed on the
passage of title at some prior point in time. This situation illustrates Apple’s fallacy in relying
24
solely upon where title passes under the UCC to determine whether a sale has occurred, because
it confuses the concept of a sale defined solely by the passage of title under the UCC with an
enforceable and consummated sale. See, also In re Charter Co., 49 B.R. 513 (Bkrtcy. Fla.,
1985) (under UCC, passage of title to sold goods is not dependent on consummation of sale). It
also confirms the wisdom of New Mexico’s courts when they consider the circumstances of the
entire sales transaction, including the passage of risk of loss, in determining when and where a
sale has occurred. Otherwise, parties could, by private contract, alter the form of the contract to
manipulate tax consequences3, without regard to the substance or reality the sale transaction.
Our courts have been careful to consider the substance of a transaction rather than to be bound
by such matters of form in determining tax consequences of private agreements in New Mexico.
See, Sonic Industries v. Taxation and Revenue Department, Vol. 39, No. 44, N.M.S.B.B. 38,
40 November 2, 2000 (Court refused to interpret the Gross Receipts and Compensating Tax in
such a manner that the parties to a sale in New Mexico could avoid tax by simply stepping across
the state line to sign the sales agreement).
The Gross Receipts and Compensating Tax Act itself makes provision to ensure that only
sales which are actually consummated are taxable sales. Obviously, a cash basis taxpayer who
does not receive payment for a sale, has no gross receipts which would need to be reported.
However, in the instance of an accrual basis taxpayer who recognized and reported a sale prior to
receiving payment, or who subsequently refunds the sale price would need a way to recover the
3
Because the UCC gives the parties to a sale the ability to establish by contract the place where title may transfer,
the parties would have the power to establish the passage of title in a jurisdiction which has no relationship
whatsoever to the actual transaction between the parties, and in which neither party has a taxable presence, and
successfully avoid taxation of the transaction in its entirety.
25
tax reported and paid on the transaction. Section 7-9-67(A) provides a deduction from gross
receipts tax for accrual basis taxpayers when a subsequent refund is made.
The passage of risk of loss for Apple’s sales to New Mexico customers
It thus becomes important in this case to determine where the risk of loss passed with
regard to Apple’s sales to its New Mexico customers. Both the contract documents themselves
as well as Apple’s own course4 of conduct make it clear that with respect to such sales, that
Apple bore the risk of loss that its goods may be lost or damaged in shipment. The contracts
provide that Apple will replace product lost or damaged in transit. It was undisputed that Apple
did this routinely, and had an entire division of employees just to handle such claims. Goods
were replaced immediately, without regard to whether the customer had yet returned damaged
goods or whether Apple recovered anything from the carrier who shipped the goods. It is also
clear from Apple’s conduct and its own testimony, that it did not replace lost or damaged goods
as an agent for the purchaser under any sort of insurance claims procedure based upon the
contractual language that the price of the goods included insurance. Despite the contractual
language, there was no evidence that Apple purchased any kind of insurance for the goods in
transit, either in its own name or on behalf of the purchasers. Even to the extent that Apple
recovered the “release value” of the merchandise from the carrier, the amount never represented
the actual value of the loss, and Apple made the claim for and received the payments from the
carrier in its own name and for its own account. No amounts were credited to the customer
4
The Code is quite liberal in allowing evidence as to the parties course of dealing and course of performance in
supplementing or explaining the agreement of the parties. UCC § 2-202(a), Official Comment 2
26
because Apple had already made good on the customer’s claim based upon its own obligation to
replace the goods. In fact, Apple’s own witness, Terry Ryan, testified that Apple “self-insured”.
In other words, Apple made a business decision not to purchase insurance, but instead, to simply
absorb any losses due to lost or damaged merchandise. Mr. Ryan testified that Apple considered
the costs of doing so to be a nominal cost, given the large volume of its sales and the relatively
small amount of costs incurred replacing lost or damaged goods. The fact that Apple chose to
bear this expense is entirely consistent with its own obligation pursuant to its contracts to replace
goods lost or damaged in transit.
Apple attempts to dispute that it bore the risk of loss until conforming goods were
delivered to its New Mexico customers by pointing out its own internal bookkeeping procedures
in handling such claims. Apple recognized its sales revenues at the time of shipping and
invoicing, and it did not reverse the invoice when a customer made a claim. While these actions
are consistent with its position now taken that the sales took place at the time of shipment when
title passed, and no doubt were based upon Apple’s understanding of generally accepted
accounting principles based upon when it believed a sale occurred, they fail to establish, as a
matter of law, when the sale actually occurred. They are also counterbalanced by Apple’s own
actions during the same period of time which consistently treated the same sales as New Mexico
sales when it reported and paid New Mexico gross receipts tax on such sales.
Given the fact that Apple bore the risk of loss on its sales shipped to its New Mexico
customers until Apple performed its contractual obligations to deliver conforming goods to its
New Mexico customers, and given those customer’s right to void the sale until Apple met that
obligation under its contracts, there was no consummated sale until such time as Apple
27
performed its contractual obligations. Because that could not occur until conforming goods were
delivered in New Mexico, the sales at issue were New Mexico sales and as such were subject to
New Mexico’s gross receipts tax.
The Commerce Clause
The next issue to be determined is whether, given that the sales are taxed as New Mexico
sales, the imposition of the tax violates the Commerce Clause of the U.S. Constitution. The
Commerce Clause requires that a state tax on a transaction in interstate commerce pass the four
prong test set forth in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 287 (1977). That test
requires that: (1) a sufficient nexus exists between the activity being taxed and the taxing state;
(2) the tax be fairly apportioned; (3) the tax imposed does not discriminate against interstate
commerce; and (4) the tax is fairly related to services provided by the state. The requirement of
fair apportionment serves to insure that “each state taxes only its fair share of interstate
transactions.” Goldberg v. Sweet, 488 U.S. 253, 261 (1989). The requirement that a tax may not
discriminate against interstate commerce insures that “a state may not tax a transaction or
incident more heavily when it crosses state lines than when it occurs entirely within the state.”
American Trucking Association v. Scheiner, 483 U.S. 266, 280 (1987). A state tax violates the
fair apportionment requirement if it fails the “internal consistency” test first enunciated in
Container Corporation of America v. Franchise tax Board, 463 U.S. 159, 169 (1995). This test
looks to the structure of the tax at issue to determine whether its identical application by every
other state would place interstate commerce at a disadvantage as compared to intrastate
commerce. Apple argues that imposition of New Mexico’s gross receipts tax on the sales at
issue violates the internal consistency test because other states, such as California from which
Apple’s goods were shipped, could also impose a tax on the same sale.
28
In Oklahoma Tax Commission v. Jefferson Lines, Inc., 514 U.S. 175 (1994), the Court
upheld the imposition of Oklahoma’s sales tax on the full price of a ticket for bus travel from
Oklahoma to another state under a Commerce Clause challenge. In finding the tax internally
consistent and fairly apportioned, the Court analogized from its treatment of taxes on the sale of
goods, stating:
A sale of goods is most readily viewed as a discrete event
facilitated by the laws and amenities of the place of sale, and the
transaction itself does not readily reveal the extent to which
completed or anticipated interstate activity affects the value on
which a buyer is taxed. We have therefore consistently approved
taxation of sales without any division of the tax base among
different States, and have instead held such taxes properly
measurable by the gross charge for the purchase, regardless of any
activity outside the taxing jurisdiction that might have preceeded
the sale or might occur in the future. (citation omitted.)
Such has been the rule even when the parties to a sales
contract specifically contemplated interstate movement of the
goods either immediately before, or after, the transfer of
ownership. (citations omitted.) The sale, we held, was “an activity
which… is subject to the state taxing power” so long as taxation
did not “discriminate” against or “obstruct” interstate commerce,
(citation omitted) and we found a sufficient safeguard against the
risk of impermissible multiple taxation of a sale in the fact that it
was consummated in only one State.
Id., 514 U.S. at 188 (emphasis added). Similarly, in this case, because Apple’s sale could only
be consummated in New Mexico where Apple had completed its performance under the terms of
its sales contract with its New Mexico customers, there is no other state in which the sale could
have taken place. Because there is no risk of impermissible multiple taxation, New Mexico’s tax
meets the internal consistency requirement under the Commerce Clause.
The NTTC issue
29
The final issue to be determined is whether Apple is entitled to claim a deduction for its
sales to CLI Computers5 based upon the 1992 Series NTTC which CLI Computers faxed to
Apple during the course of the New Mexico audit. There is no real dispute that the NTTC is a
proper one and that Apple would be entitled to its claim of deduction for its sales to CLI based
upon its Computers possession of the NTTC if it had been presented to the Department’s
auditors on the date it was faxed to Apple, October 25, 19956. The only dispute is whether the
NTTC was actually presented that day.
The parties dispute is based upon § 7-9-43(A) NMSA 1978 as it was written at the time
of the audit. In pertinent part, it provided as follows:
The provisions of this subsection apply to transactions occurring
on or after July 1, 1992. All nontaxable transaction certificates of
the appropriate series executed by buyers or lessees shall be in the
possession of the seller or lessor for nontaxable transactions at the
time the return is due for receipts from the transactions. If the
seller or lessor does not demonstrate possession of required
nontaxable transaction certificates to the department at the
commencement of an audit or demonstrate within sixty days from
the date that the notice requiring possession of these nontaxable
transaction certificates is given the seller or lessor by the
department that the seller or lessor was in possession of such
certificates at the time receipts from the transactions were required
to be reported, deductions claimed by the seller or lessor that
require delivery of these nontaxable transaction certificates shall
be disallowed. (emphasis added.)
§ 7-9-43(A) NMSA 1978 (1992 Supp.)7
5
Apple’s receipts from CLI Computers during the audit period amounted to $97,786.19.
6
Although the Department’s auditors began their audit of Apple on October 24, 1995, the audit took four days and
Apple actually signed for the Department’s 60 day letter on October 25, 1995. I believe that the presentment of an
NTTC on the second day of an audit under these circumstances is sufficiently close to the time the audit began to
qualify as being presented at the “commencement” of the audit.
7
The prior version of this statute had provided that taxpayers should have the NTTC in their possession at the time
the nontaxable transaction occurs but it provided taxpayers 60 days from notice from the Department to obtain a
NTTC from the buyer which could be presented to the Department at any time prior to the expiration of the 60 days.
§ 7-9-43(A) NMSA 1978 (1991 Supp.). By Laws 1997, Ch. 72, § 1, the Legislature amended § 7-9-43(A) to again
relax the standards for possession of NTTC’s to that of the prior law. The Department has applied the more relaxed
30
Because of the time which had elapsed from the audit of Apple to the hearing in this
matter, the evidence on the crucial issue of whether Apple had presented the CLI NTTC to the
Department’s auditors was less than conclusive for either party. Apple presented a witness who
was not actually employed by Apple at the time of the audit but who is familiar with how Apple
customarily responds to state tax audits based upon her experience at Apple subsequent to the
audit. She testified that if an auditor finds exceptions with respect to resale certificates and
informs Apple of exceptions, Apple’s customary practice is to go back to the customer and
request that the customer fax the certificate to them. Apple’s witness also testified that if a
certificate is received by fax, Apple customarily gives the certificate to the auditor.
The Department presented the testimony of Janice McGee, who was one of the two
auditors present for the Apple audit. She testified that she had not seen the CLI Computers
NTTC at issue. She further testified that Apple had given the auditors a ledger listing all sales
within the audit period, by customer and that when the auditors reviewed NTTC’s presented to
them by Apple, the auditors marked “ok” on the ledger beside the entries for each customer from
whom Apple had produced a certificate that was accepted by the auditors. Ms. McGee could not
remember whether she or the other auditor had made a list of all of the NTTC’s which Apple had
presented to the auditors. She could only testify that she had no such list now. She further
testified that she had made copies of only some of the NTTC’s that Apple presented at the time
of the audit which were not accepted by the auditors. Thus, there were no documents in the form
of copies of rejected NTTC’s or a list of all rejected NTTC’s against which the ledger could be
compared.
standards to all audits commenced after the effective date of the 1997 amendments. Ironically, had Apple been
audited for the same period after the amendments, there would be no dispute over its entitlement to the deduction at
issue.
31
While I have no doubt that Ms. McGee testified truthfully and accurately, she could only
testify to her knowledge as one of the two auditors who conducted the audit. Given the lapse of
time since she conducted the audit, she could not remember all of the details of what happened
during the course of the audit, which is only to be expected. It was also unclear whether all of
the audit backup documentation had been maintained or whether it was complete, such as
making copies of all NTTC’s rejected by the auditors, even at the time of the audit.
On the other hand, Apple’s witness had no first hand knowledge of the conduct of the
audit at issue, but could only testify to Apple’s customary procedures in responding to state
audits. Nonetheless, her testimony was corroborated by the fact that Apple had obtained a
NTTC from CLI Computers during the Department’s audit. Given the fact that Apple
demonstrated that it had received the CLI NTTC while the Department’s auditors were present, I
simply find it more likely than not that Apple’s employees did not leave it on the fax machine
(for the next few days), but instead delivered it to the auditors. Additionally, given the large
volume of transactions the Department’s auditors had to examine, it is certainly at least
conceivable that this NTTC could have been missed. For these reasons, I find that the CLI
Computer NTTC was presented to the Department in a timely manner and that Apple is entitled
to the deduction for its sales to CLI Computers.
CONCLUSIONS OF LAW
- Apple filed a timely, written protest, pursuant to § 7-1-24 NMSA 1978, to Assessment No.
2037018 and that jurisdiction lies over the parties and the subject matter of this protest.
- Title of the goods sold by Apple to its customers located in New Mexico passed at Apple’s
out-of-state shipping location.
32
- For purposes of determining the location of a sale of goods for purposes of the imposition
of the New Mexico gross receipts tax, the place where title passes is not the sole
consideration. The location of the passage of risk of loss must also be taken into
consideration.
- Because Apple was contractually obligated to replace its products which were lost or
damaged in transit to its New Mexico customers, Apple bore the risk of loss on such
products until they were delivered to its customers in New Mexico.
- Where the risk of loss for goods sold transfers from an out-of-state seller to a purchaser in
New Mexico, the sale of the goods occurs in New Mexico regardless of the place where
title transfers.
- A sale occurs in New Mexico when a seller completes all acts necessary to complete its
performance under the sales agreement.
- Because Apple’s sales of goods to its New Mexico customers occurred in New Mexico,
the imposition of New Mexico gross receipts tax on such sales meets the fair
apportionment and internal consistency requirements of the Commerce Clause of the
United States Constitution.
- Apple is entitled to deduct its receipts from its sales to CLI Computers.
33
For the foregoing reasons, Apple’s protest IS HEREBY GRANTED IN PART AND
DENIED IN PART. THE DEPARTMENT IS HEREBY ORDERED TO ABATE
THAT PORTION OF ASSESSMENT NO. 2037018 RELATING TO THE GROSS
RECEIPTS TAX, PENALTY AND INTEREST ASSESSED ON APPLE’S SALES
TO CLI COMPUTERS.
DONE, this 8th day of December, 2000.
34
Get today's answer for your situation
You just read a 2000 ruling on this question. Ezel checks current New Mexico tax law and answers your specific situation, with citations.
Opens in Ezel Pro. Every answer cites the authority it relies on.