Can a hospital take New Mexico's gross receipts tax deduction for selling tangible personal property to the government when it sells medical supplies and equipment to Medicare patients, given that the state already allows that deduction for Medicaid patients?

Plain-English summary

Two hospitals that sold medical supplies and equipment to Medicare patients could claim New Mexico's gross receipts tax deduction for selling tangible personal property to the government — the same deduction the state already allowed for identical sales to Medicaid patients. The two 1995 assessments that had denied the deduction were abated in full; two older assessments came out differently. Protest GRANTED IN PART and DENIED IN PART.

Guadalupe Medical Center (Carlsbad) and Lea Regional Hospital (Hobbs), both owned by HCA, sold medical supplies and equipment to patients covered by Medicare. New Mexico's Section 7-9-54 lets a business deduct receipts from selling tangible personal property to the federal or state government. The hospitals treated their Medicare supply sales as government sales and claimed the deduction; the Department had granted them refunds on that basis in the 1980s and had allowed the deduction in 1990–91 audits. In 1995, after noticing an internal ruling issued to a different taxpayer (Ruling 405-92-1), the Department re-audited and denied the deduction, issuing large new assessments.

Medicare is a government entitlement program, not private insurance

The Department argued Medicare works like private health insurance — patients pay premiums, co-pays, and deductibles — so supply sales paid for by Medicare are not sales "to the government." The hearing officer rejected that. Medicare is a federal entitlement program: a beneficiary has no contractual right to a fixed set of benefits, and Congress can alter or repeal them at will (Flemming v. Nestor). Premiums paid under Medicare Part B cover only about 25% of the program's cost, with general federal revenues paying the rest. And the U.S. Supreme Court has held that hospitals themselves receive federal "benefits" under Medicare, not just the patients (Fischer v. United States). Because the Department already treats supply sales paid by Medicaid as deductible sales to the government — even though Medicare and Medicaid differ in how they are funded — Medicare supply sales are equally deductible under Section 7-9-54.

The four assessments were resolved separately

• The two 1995 assessments (No. 1937855 against Guadalupe; No. 1937840 against Lea Regional), which denied the Medicare deduction, were granted and abated in full, including interest. The Department had already conceded the penalties were improper.
• Assessment No. 1296576 (Guadalupe, mailed July 1990) was moot: Section 7-1-19 bars the Department from collecting any assessment more than ten years after it is made, and that period had run.
• Assessment No. 1570900 (Lea Regional) involved a separate charge that the hospital had claimed the same deduction twice. Lea Regional presented no evidence at the hearing, so it failed to overcome the presumption that an assessment is correct (Section 7-1-17(C)), and that protest was denied.

The hearing officer did not lose jurisdiction by taking longer than 30 days

The hospitals argued that because the hearing officer did not issue his decision within the thirty days set by Section 7-1-24(H), he lost jurisdiction and they automatically won. The hearing officer disagreed. Unlike the professional-licensing cases the hospitals cited, New Mexico law specifically holds that the tardiness of public officers is not a defense to enforcing a public right (Rancher's Tufco), and Section 7-1-24 does not make that rule inapplicable. He also noted that even if he had lost jurisdiction, the hospitals would not win — the assessments and protests would simply remain unresolved, forcing a costly new hearing.

Result: protest GRANTED IN PART (both 1995 assessments abated in full) and DENIED IN PART (the double-deduction assessment against Lea Regional denied; the 1990 Guadalupe assessment moot).

What this means for you

Sales the government pays for directly can qualify as deductible government sales

New Mexico's Section 7-9-54 deduction covers receipts from selling tangible personal property to the United States or the state. When a government program pays the seller directly for supplies furnished to a covered person, those receipts can be sales "to the government" — this decision extended that treatment from Medicaid to Medicare supply sales. (Note this decision addresses supplies and equipment; receipts from medical services are governed by different rules, including the separate Section 7-9-77.1 deduction enacted in 1998.)

A program's funding method does not automatically make it "insurance"

The Department's private-insurance analogy failed because Medicare is a government entitlement whose benefits Congress controls, even though beneficiaries pay some premiums and co-pays. If the Department tries to recharacterize a government payer as an insurer to defeat a deduction, the program's legal structure — entitlement vs. contract — matters more than the presence of premiums.

The Department can change its position, but the ten-year collection clock still runs

The Department reversed a long-standing position here, which it may do. But Section 7-1-19 bars collection of an assessment more than ten years after it is made, and that limit made one old assessment unenforceable regardless of the merits.

Show up and put on evidence — an assessment is presumed correct

Lea Regional lost on the double-deduction assessment purely because it offered no evidence at the hearing. An assessment is presumed correct, and the taxpayer carries the burden to rebut it; staying silent forfeits the protest.

A slow decision usually will not hand you a win

Missing an internal deadline for issuing a decision generally does not strip a hearing officer of jurisdiction or resolve the protest in the taxpayer's favor, because the tardiness of public officials is not a defense to enforcing the state's tax laws.

Common questions

Q: What was the core tax question?
A: Whether a hospital's receipts from selling medical supplies and equipment to Medicare patients qualify for the Section 7-9-54 deduction for tangible personal property sold to the government.

Q: Why did the hospitals win?
A: Because the Department already allows that deduction for identical supply sales to Medicaid patients, and Medicare — like Medicaid — is a government entitlement program rather than private insurance. The hearing officer found no principled basis to treat the two programs differently for this deduction.

Q: Did the hospitals win everything?
A: No. They won on the two 1995 assessments that denied the Medicare deduction (abated in full, including interest and the conceded penalties). But one old Guadalupe assessment was moot under the ten-year collection limit, and a separate double-deduction assessment against Lea Regional was denied because the hospital presented no evidence.

Q: Does this mean Medicare medical services are also deductible?
A: This decision is about supplies and equipment, not services. During the audit periods the hospitals paid gross receipts tax on their Medicare service receipts, and the Legislature later created a distinct deduction for medical services to Medicare beneficiaries in 1998 (Section 7-9-77.1).

Q: The decision came out more than 30 days after the hearing — didn't that void it?
A: No. The hearing officer held that missing the thirty-day deadline in Section 7-1-24(H) did not cost him jurisdiction, because the tardiness of public officers is not a defense to enforcing the tax laws (Rancher's Tufco), and losing jurisdiction would not have resolved the protests in the hospitals' favor anyway.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-9-54(A) — deduction for receipts from selling tangible personal property to the United States, New Mexico, and their agencies
• NMSA 1978, § 7-9-77.1 — 1998 deduction for receipts from medical services provided to Medicare beneficiaries (noted in the decision; not at issue)
• NMSA 1978, § 7-1-19 — bars collection of an assessment more than ten years after it is made
• NMSA 1978, § 7-1-17(B)(2) — an assessment becomes effective when the notice is mailed or delivered
• NMSA 1978, § 7-1-17(C) — a Department assessment is presumed correct
• NMSA 1978, § 7-1-24(H) — hearing officer to inform the protestant of the decision within thirty days of the hearing
• NMSA 1978, § 7-1-24(D) — Department to set a formal hearing promptly
• NMSA 1978, § 7-1-69 — negligence penalty (conceded improper here)
• Regulation 3 NMAC 3.2.212.18 — pharmacist sales of drugs to welfare patients paid by the state are deductible under § 7-9-54
• Regulation 3 NMAC 1.7.9 — tender of payment to stop the accrual of interest

Cases cited:

• Flemming v. Nestor, 363 U.S. 603, 80 S. Ct. 1367 (1960)
• Richardson v. Belcher, 404 U.S. 78, 92 S. Ct. 254 (1971)
• Fischer v. United States, 529 U.S. 667, 120 S. Ct. 1780 (2000)
• Foster v. Board of Dentistry, 103 N.M. 776, 714 P.2d 580 (1986)
• Lopez v. New Mexico Board of Medical Examiners, 107 N.M. 145, 754 P.2d 522 (1988)
• Rancher's Tufco Limestone Project Joint Venture v. Revenue Division, 100 N.M. 632, 674 P.2d 522 (Ct. App. 1983)
• State ex rel. Department of Human Services v. Davis, 99 N.M. 138, 654 P.2d 1038 (1982)

Federal law referenced: Title XVIII of the Social Security Act, 42 U.S.C. § 1395 et seq. (Medicare); 42 U.S.C. § 1396 et seq. (Medicaid); 42 U.S.C. § 1304 (Congress's reserved right to amend the Social Security Act); 18 U.S.C. § 666.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Guadalupe Medical Center & Lea Regional Hospital
• Decision PDF: D&O 01-19

Original ruling text

BEFORE THE HEARING OFFICER
OF THE TAXATION AND REVENUE DEPARTMENT
OF THE STATE OF NEW MEXICO

IN THE MATTER OF THE CONSOLIDATED PROTESTS OF
GUADALUPE MEDICAL CENTER,
ID. NO. 01-835119-00-0, PROTEST TO
ASSESSMENT NOS. 1937855 AND 1296576, AND No. 01-19
LEA REGIONAL HOSPITAL,
ID. NO. 01-873138-00-4, PROTEST TO
ASSESSMENT NOS. 1937840 AND 1570900

DECISION AND ORDER

This matter came on for formal hearing on July 12, 2000 before Gerald B. Richardson,

Hearing Officer. Guadalupe Medical Center and Lea Regional Hospital, hereinafter,

“Hospitals”, were represented by Paul M. Fish, Esquire of Modrall, Sperling, Roehl, Harris &

Sisk, P.A. The Taxation and Revenue Department, hereinafter, “Department”, was represented

by Javier López, Special Assistant Attorney General. At the close of the evidentiary hearing it

was determined that the parties would submit their arguments in the form of briefs, along with

proposed findings of fact and conclusions of law. The Hospitals submitted their Reply Brief and

Proposed Findings of Fact and Conclusions of Law on October 20, 2000, and the matter was

considered submitted for decision at that time. On November 20, 2000, the Hearing Officer

wrote to counsel for the parties, requesting an additional 45 days beyond the 30 days specified by

§ 7-1-24(H) NMSA 1978 to complete his decision in this matter, due to the number of complex

matters pending before him. On November 21, 2000, Hospitals’ counsel wrote to the Hearing

Officer refusing the Hearing Officer’s request for an extension of time to complete the decision.

There followed additional correspondence between the Hearing Officer and counsel in which the

issue of the Hearing Officer’s jurisdiction to issue this decision was raised and the Hearing

Officer determined that he retained jurisdiction to issue this decision.

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Based on the evidence and arguments presented, IT IS DECIDED AND ORDERED AS

FOLLOWS:

FINDINGS OF FACT

1. Guadalupe Medical Center operates a hospital located in Carlsbad, New Mexico.

2. Lea Regional Hospital operates a hospital located in Hobbs, New Mexico

3. Hospitals are both owned by HCA-The Healthcare Company, formerly known as

Hospital Corporation of America.

4. During all relevant periods, Hospitals provided medical services to patients who were

covered under the Federal Medicare program (“Medicare”) and the Medicaid program managed

by the State of New Mexico.

5. During all relevant periods, Hospitals provided tangible personal property in the form

of medical supplies and equipment to patients who were covered under Medicare.

6. During all relevant periods, Hospitals reported and paid gross receipts tax to the

Department on their receipts from providing medical services to patients who were covered

under Medicare.

7. During all relevant periods, Hospitals included in their reported gross receipts the

receipts they received from providing tangible personal property in the form of medical supplies

and equipment to patients who were covered under Medicare. The Hospitals then claimed a

deduction, pursuant to § 7-1-54 NMSA 1978, for the amounts they received for providing the

medical supplies and equipment to Medicare patients.

8. On March 14, 1987, Guadalupe Medical Center filed a claim for refund in the amount

of $199,158.73 with the Department for the January, 1985 through June, 1987 reporting periods.

One of the grounds for the claim for refund was that Guadalupe Medical Center amended its

monthly gross receipts tax returns to claim a deduction for its receipts from the sale of tangible

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personal property to patients covered by the Medicare and Medicaid programs. Guadalupe

Medical Center claimed eligibility for a deduction under § 7-9-54 NMSA 1978 for sales of

tangible personal property to the government.

9. In December, 1986, Lea Regional Hospital filed a similar refund claim with the

Department, claiming eligibility for the same deduction.

10. The Department granted both claims for refund filed by the Hospitals.

11. In 1990, the Department audited Guadalupe Medical Center. Among other things, the

Department examined the deductions claimed by Guadalupe Medical Center for reimbursements

received from Medicare and Medicaid for sales of tangible personal property. Although the

Department’s audit resulted in the issuance of an assessment, the assessment was based upon the

Department’s contention that Guadalupe Medical Center had made a computational error in the

manner it calculated the amount of gross receipts tax payable to the Department. The

Department did not deny the deduction claimed by Guadalupe Medical Center for its receipts

from sales of tangible personal property to patients covered by Medicare and Medicaid.

12. As a result of the Department’s 1990 audit of Guadalupe Medical Center, on July 20,

1990, the Department mailed Assessment No. 1296576 to Guadalupe Medical Center, assessing

$278,796.43 in gross receipts tax, $2,586.97 in compensating tax, $48,138.34 in penalty and

$80,582.73 in interest for the January 1987 through December 1989 reporting periods.

13. On August 17, 1990, Guadalupe Medical Center wrote to the Department, requesting

an extension of time in which to file a protest to Assessment No. 1296576.

14. On August 24, 1990, the Department granted Guadalupe Medical Center an extension

of time until September 20, 1990 to file a protest to Assessment No. 1296576.

15. On September 20, 1990, Guadalupe Medical Center filed a protest to Assessment No.

1296576.

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16. In 1991, the Department audited Lea Regional Hospital. Among other things, the

Department’s audit examined deductions claimed by Lea Regional Hospital for reimbursements

received from Medicare and Medicaid for sales of tangible personal property. Although an

assessment was issued as a result of the audit, the assessment was based upon the Department’s

contention that Lea Regional Hospital had twice claimed the same deduction for reimbursements

received from Medicare and Medicaid for sales of tangible personal property on the same

transaction. The Department’s audit allowed the deduction to be claimed only once.

17. As a result of the Department’s 1991 audit of Lea Regional Hospital, on August 26,

1992, the Department mailed Assessment No. 1570900 to Lea Regional Hospital, assessing

$227,640.57 in gross receipts tax, $1,710.41 in compensating tax, $23,015.55 in penalty and

$43,451.44 in interest for the January, 1989 through December, 1991 reporting periods.

18. On September 4, 1992, Lea Regional Hospital wrote to the Department requesting an

extension of time to file a protest to the assessment.

19. The Department granted Lea Regional Hospital an extension of time, until October

25, 1992, to file a protest to Assessment No. 1570900.

20. On October 22, 1992, Lea Regional Hospital filed a written protest to Assessment No.

1570900.

21. At the formal hearing of this matter, Lea Regional Hospital chose not to present any

evidence or arguments to dispute the accuracy or correctness of Assessment No. 1570900.

22. In 1995, the Department again audited the Hospitals. In those audits, the Department

changed its prior position and it denied the deductions which had been claimed by the Hospitals

for reimbursements for tangible personal property sold to patients covered by the Medicare

program. The assessments which resulted from the 1995 audits were based entirely upon the

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denial of the deduction related to the Medicare payments for tangible personal property, plus

penalty and interest.

23. The Department’s change of position with respect to whether amounts the Hospitals

received from Medicare for tangible personal property provided to Medicare patients was based

upon Ruling 405-92-1 which was issued by the Department to a taxpayer other than the

Hospitals.

24. The Department’s earlier position that amounts hospitals received from Medicare for

tangible personal property provided to Medicare patients was deductible for gross receipts tax

purposes as a sale of tangible personal property sold to the government was a position taken as

early as 1977, as reflected in a letter from Fred O’Cheskey, Commissioner of Revenue of the

Department’s predecessor, the New Mexico Bureau of Revenue.

25. On June 15, 1995, the Department mailed Assessment No. 1937855 to Guadalupe

Medical Center, assessing $1,004,923.13 in gross receipts tax, $98,005.15 in penalty and

$397,424.06 in interest for the reporting periods of March, 1989 through March, 1995.

26. On June 23, 1995, Guadalupe Medical Center wrote to the Department requesting an

extension of time to protest the assessment.

27. On July 13, 1995, the Department granted an extension of time until September 13,

1995 to file a protest.

28. On September 8, 1995, Guadalupe Medical Center filed a written protest to

Assessment No. 1937855.

29. On August 8, 1995, the Department mailed Assessment No. 1937840 to Lea Regional

Hospital, assessing $762,101.18 in gross receipts tax, $53,791.49 in penalty and $146,771.16 in

interest for the reporting periods October, 1990 through March, 1995.

5

30. On August 30, 1995, Lea Regional Hospital wrote to the Department requesting an

extension of time to protest the assessment.

31. The Department granted Lea Regional Hospital an extension of time until November

6, 1995.

32. On September 11, 1995, Lea Regional Hospital filed a protest to Assessment No.

1937840.

33. On June 8, 1999, Guadalupe Medical Center tendered payment in the amount of

$276,955 to the Department pursuant to Regulation 3 NMAC 1.7.9. The amount tendered was to

be applied exclusively to the gross receipts tax portion of Assessment No. 1937855 and was paid

to stop the accrual of interest on that portion of the gross receipts tax assessed.

34. On June 8, 1999, Lea Regional Hospital tendered payment in the amount of $124,566

to the Department pursuant to Regulation 3 NMAC 1.7.9. The amount tendered was to be

applied exclusively to the gross receipts tax portion of Assessment No. 1937840 and was paid to

stop the accrual of interest on that portion of the gross receipts tax assessed.

35. The payments represented that portion of Assessment Nos. 1937855 and 1937840

which were attributable to the gross receipts tax which had been assessed by the Department on

reimbursements for tangible personal property received by the Hospitals under Medicare Part B.

36. The Medicare program is administered by the Health Care Financing Administration

(“HCFA”), an agency of the Federal government.

37. The Medicare program has two parts, Part A and Part B.

38. Medicare Part A is a program which provides hospitalization benefits, including

medical services and supplies related to hospitalization, to individuals who qualify for Part A

coverage.

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39. Participation in Medicare Part A by individuals is not voluntary and is funded in part

by FICA taxes withheld from an individual’s wages.

40. Medicare Part B is a program which supplements the benefits available under

Medicare Part A. Medicare Part B provides medical coverage benefits for medical services and

supplies which would not be covered under Medicare Part A because they are unrelated to

hospitalization.

41. Participation in Medicare Part B is optional for an individual and, in most cases,

requires the payment of a premium. Approximately 15% of Medicare patients are eligible under

the Medicaid program, however, for coverage under both the Medicare program and the

Medicaid program. In such cases, the Medicaid program pays the Medicare Part B premium, any

applicable Medicare Part A premium and any co-payments or deductibles that the patient would

normally be responsible to pay.

42. The United States Department of the Treasury maintains two trust funds for the

Medicare program, the Part A or Hospital Insurance trust fund and the Part B or Supplemental

Medical Insurance trust fund. The Treasury Department receives FICA taxes and Self-

Employment taxes and purchases bonds in an equivalent amount of the taxes collected and

places those bonds in the Health Insurance trust fund. The Treasury Department receives Part B

premiums from individuals and Medicaid payments and purchases bonds in an equivalent

amount of the premiums collected and places those bonds in the Supplemental Medical

Insurance trust fund.

43. The premiums the Treasury Department collects under Medicare Part B represent

approximately 25% of the bonds in the Supplemental Medical Insurance trust fund. The

remaining 75% are purchased with general revenues of the Federal government.

7

44. A hospital patient covered under Medicare Part A who receives hospitalization

benefits covered under Part A may not elect to pay the hospital bill and receive the

reimbursement directly from Medicare. Medicare payments under Part A are only paid directly

to the hospital.

45. Under the Medicare program, there must be a contractual relationship between a

hospital and the Medicare program in order for the hospital to be eligible to receive payment for

medical services and related supplies provided to Medicare patients. The hospital is also limited

in the amounts it may charge for various medical services and supplies under the Medicare

program. Even if the hospital might charge a non-Medicare covered patient more for a medical

service or supply, the hospital is limited in the amount it may charge under the Medicare

program and the hospital is prohibited from asking the Medicare covered patient to make up the

difference, except for the amount of any deductible or co-payment amount established under the

Medicare program.

46. The HFCA contracts with private carriers and intermediaries to review claims, review

coverage and process claims for claims by medical providers made under Medicare Part A and

Part B. In processing and paying such claims, the carriers and intermediaries act on behalf of the

HFCA and they must follow the policies and procedures established by the HFCA .

47. Although carriers and intermediaries write checks in payment of claims to providers

under Medicare Part A and Part B, the funds upon which those checks are drawn are funds

provided by the Federal government which are deposited on a daily basis into special accounts

set up to hold only those funds.

48. The Medicaid program is an entitlement program which provides health benefits for

qualifying individuals. Once an individual is determined to be eligible for the program, the

individual is entitled to receive the benefits of the program.

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49. In New Mexico, the Medicaid program is a medical assistance program for low

income individuals and individuals who are elderly or disabled.

50. The Medicaid program is administered by the individual states pursuant to

agreements with the Federal government. Each state has a separate agreement with the Federal

government which spells out how they will administer the Medicaid program in their state,

including the criteria for qualification, the services that are available for eligible individuals, the

percentage of costs to be borne by the state and Federal governments, etc.

51. The Federal government provides part of the money to fund the Medicaid program.

The amount provided varies from state to state. On average, the Federal government provides

55% of the funding for the Medicaid program and states provide the remaining 45% of the

funding. In New Mexico, the Federal government contributes 73.32% of the program cost and

the state government contributes 26.68% of the program cost.

52. New Mexico contracts with a private company to process and pay Medicaid claims.

Payments for Medicaid claims are paid directly to the providers and not to the individual

receiving Medicaid services.

53. The Department allows medical providers to claim the deduction for receipts from the

sale of tangible personal property sold to the government with respect to the gross receipts of

medical providers for tangible personal property sold to patients covered by the Medicaid

program.

54. The Department has a regulation which allows pharmacists to claim a deduction

under § 7-9-54 for sales of tangible personal property to a government when the pharmacist sells

prescription drugs to welfare patients if the New Mexico Health and Environment Department or

Human Services Department makes payment for the prescription drugs.

9

55. Under the Medicaid program, there are no co-payments or deductibles for which the

patient is responsible. The Medicaid recipient pays nothing for covered medical services or

supplies. The provider bills the state and receives full payment from the state Medicaid program.

56. In 1986, the Hospitals received an opinion from Ernst & Whinney, a national

accounting firm, which advised them that if it is the practice in their industry to separately state

the charges for tangible personal property provided to patients covered by Medicare and

Medicaid, and the Hospitals receive payment for those items from Medicare and Medicaid, that

those receipts are deductible from gross receipts tax as sales of tangible personal property to the

government pursuant to § 7-9-54 NMSA 1978.

57. The Hospitals relied upon the advice given them by Ernst & Whinney when they

made their 1986 and 1987 claims for refund of gross receipts tax they had reported and paid on

tangible personal property provided to patients covered by Medicare and in claiming a deduction

from gross receipts tax for tangible personal property provided to patients covered by Medicare.

58. The Department has conceded that the assessment of penalties in Assessment Nos.

1937855 and 1937840 against the Hospitals was improper.

DISCUSSION

The primary issue to be determined herein is whether the Hospitals are eligible to claim

the deduction provided at § 7-9-54(A) NMSA 1978 for their receipts from selling tangible

personal property, such as medical supplies and equipment, to patients who are covered by the

Medicare program. Section 7-9-54 provides a deduction for sales of tangible personal property1

to the United States, the State of New Mexico and their subdivisions, agencies, departments or

1
In 1998, the legislature enacted a deduction for receipts from providing medical services to Medicare beneficiaries
which was phased in over three years to now provide a complete deduction for receipts for such medical services.
See, § 7-9-77.1. During the audit periods covered by the assessments at issue herein, Hospitals reported and paid
gross receipts tax on their receipts from providing medical services to Medicare beneficiaries and such taxes are not
at issue herein.

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instrumentalities. The Department had previously granted refunds to the Hospitals of the gross

receipts tax that they had reported and paid on such sales, and the Department’s 1990 and 1991

audits of the Hospitals had also allowed such deductions, but the Department’s audits had

concluded that the Hospitals had claimed the deductions twice for the same receipts and

assessments were issued to disallow the second claim of deduction. In the process of reviewing

the protests to those assessments, the Department’s protest officer noted that an earlier ruling by

the Department, Ruling No. 405-92-1, had concluded that such sales of tangible personal

property to Medicare beneficiaries were not deductible. The Hospitals were then re-audited and

new assessments were issued in 1995 denying the deductions.

The Department argues that the Hospitals are not entitled to claim the deduction at issue

because Medicare operates like and should be treated like an insurance program and there is no

deduction or exemption from gross receipts tax for tangible personal property sold to patients

covered by private health insurance. The Department thus relies upon the fact that in general,

those individuals covered by Medicare have been required to make some payment or

contribution towards their Medicare coverage, just as beneficiaries of private health insurance

must pay premiums, and Medicare beneficiaries are subject to co-pays and deductibles when

they receive coverage benefits just as beneficiaries of private insurance are subject to co-pays

and deductibles under the terms of their private insurance.

Medicare is a Federal program which is authorized under Title XVIII of the Social

Security Act, 42 U.S.C. § 1395 et seq. Medicare coverage depends, in general, upon eligibility

for Social Security coverage. Social Security coverage generally requires a minimum number of

“covered” quarters of employment which would be subject to the payment of FICA tax2, or self-

2
The Federal Insurance Contributions Act imposes a tax on employees and employers who must withhold and remit
the tax, made up of the Old Age, Survivors and Disability Tax (OASDI tax) more commonly known as “Social

11
employment subject to the payment of Self-Employment tax3, both of which taxes are imposed

under the Internal Revenue Code. These taxes are appropriated into the Federal Health

Insurance Trust Fund carried on the books of the United States Treasury and which is

administered by a Board of Trustees pursuant to 42 U.S.C. § 1395i of the Social Security Act.

Medicare has two separate coverage programs. Medicare Part A covers eligible

individuals for specified inpatient hospitalization benefits, including bed and board, treatment,

drugs, nursing services, supplies, appliances and equipment as are ordinarily furnished for care

and treatment of inpatients. 42 U.S.C § 1395x. Generally, participation in Medicare Part A is

not voluntary and eligibility for coverage is extended to individuals age 65 and over who qualify

for monthly Social Security benefits or Railroad Retirement benefits. Certain other individuals

are also eligible, such as those who have been eligible for Social Security disability benefits for

at least 24 months4 , persons with end-stage renal disease who require dialysis or a kidney

transplant5, and individuals age 65 and over who are not otherwise eligible for Medicare Part A

but who pay a designated premium.6

Medicare Part B is a voluntary program that pays medical expenses not covered under the

Part A hospital insurance program because they are unrelated to hospitalization. To be eligible

to enroll in Medicare Part B, an individual must be entitled to Medicare Part A coverage or be 65

years or older and be a citizen or lawfully admitted alien who has continuously resided in the

United States for the preceding five years. 42 U.S.C. § 1395o. To be eligible to receive Part B

benefits, a premium must be paid for each month of coverage. Approximately 15% of Medicare

Security Tax” and the Hospital Insurance Tax (HI tax), more commonly known as “Medicare Tax”. 26 U.S.C. §
3101.
3
Self-Employment Tax is also made up of OASDI tax and HI tax, which is imposed on the income of individuals
from self-employment. 26 U.S.C. § 1401.
4
42 U.S.C. § 426(b)
5
42 U.S.C. § 426-1
6
42 U.S.C. § 1395i-2(a)

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patients are dually eligible for both Medicare and Medicaid. For those individuals, Medicaid

pays the premium for Part B Medicare coverage.

The Department distinguishes its tax treatment of the receipts of medical providers from

providing tangible personal property to patients covered by the Medicaid program and allows

such providers to claim the deduction at issue herein. For example, Department Regulation 3

NMAC 3.2.212.18 provides that the receipts of a pharmacist from selling drugs to welfare

patients where the Human Services Department pays the pharmacist for the drugs are deductible

from gross receipts tax pursuant to § 7-9-54 NMSA 1978 as the sale of tangible personal

property to the State of New Mexico. Although this regulation only specifically covers drugs,

the Department agrees that it treats all receipts for sales of tangible personal property to persons

covered by Medicaid, where the payment for that property is made directly to the seller by the

State under the Medicaid program, as receipts from the sale of tangible personal property to the

State of New Mexico and are thus eligible for the deduction found at § 7-9-54. As explained by

the Department’s witness, Debbie Martinez, the Department considers the Medicaid program to

be a government entitlement program, rather than being analogous to a private insurance

program, because Medicaid beneficiaries are not required to pay anything in order to qualify for

coverage and medical benefits under the program.

Because of the differential tax treatment the Department accords to the receipts of health

care providers from selling tangible personal property to patients covered under Medicare and

Medicaid, a brief explanation of the Medicaid program follows. Medicaid is a medical

assistance program provided for under Federal law whereby the Federal government provides

grants to states to provide necessary medical services to families with dependent children and the

aged, blind or disabled individuals whose income and resources are insufficient to meet the cost

of such medical services. 42 U.S.C. § 1396. Under the Medicaid program, each state designs its

13
own Medicaid program, but it must meet certain requirements to receive Federal approval. For

example, the program must be available throughout the state, provide for financial participation

by the state, provide an opportunity for hearing to individuals whose claims are denied, provide

for the designation of a single state agency to administer the state plan, and provide for

reasonably prompt rendition of services to eligible individuals. 42 U.S.C. § 1396a(a).

Under the New Mexico Medicaid program, the Federal government picks up 73.32% of

the costs and the state picks up 26.68% of the costs of the program. The New Mexico Human

Services Department administers the New Mexico Medicaid program. Although it is difficult to

qualify for Medicaid benefits under the New Mexico plan, once an individual is found to be

eligible, that individual can receive all medically necessary services at no cost to the individual.

The Human Services Department contracts with a private contractor, Consultek, to process

Medicaid claims. Consultek reviews and processes all claims and issues a state warrant directly

to the medical provider.

The Taxpayers argue that Medicare is a government entitlement program run by a

government agency, the Health Care Financing Administration, which cannot be equated with a

private insurance program nor can it be distinguished from Medicaid for purposes of the

deduction at issue. Taxpayers point out that in both the case of Medicare payments and

Medicaid payments, that the funds are drawn on government accounts and paid directly to the

medical provider. Also, both Medicare and Medicaid use third party contractors to process

claims. Although in the case of Medicare, most beneficiaries have been required to pay taxes

and/or premiums in order to qualify for coverage, the terms of coverage, and, indeed, all aspects

of the operation of the program are determined by Congress. Approximately 15% of the persons

covered by Medicare Part B do not pay the premiums entitling them to coverage. Instead, the

premiums are paid for by Medicaid, which in turn, is partially funded by the Federal government

14
and part by the state. Even with respect to those eligible for Medicare Part B coverage, their

premiums only pay for approximately 25% of the cost of such coverage, with the Federal

government picking up the tab for the rest of the costs of the program.

Admittedly, there are many aspects of the Medicare program which resemble private

insurance, but there is one crucial difference. The relationship between an insuror and a

beneficiary under an insurance policy is a contractual relationship where the rights and

obligations of the parties are defined by the terms of the insurance contract. Medicare is a

government benefit program whose terms and benefits can be altered by Congress to adjust to

the changing needs of the public, the changes in medical technology, changes in the cost of

administering the program, etc. The Medicare program was created by Congress in 1965 as an

amendment to the Social Security Act. Pub. L. 89-97, Title 1, the “Health Insurance for the

Aged Act”, also popularly known as the “Medicare Act”. Congress explicitly reserved to itself

the right to alter, amend or repeal any provision of the Social Security Act. 42 U.S.C. § 1304.

The seminal case confirming Congress’ right to amend the Social Security Act to deny benefits

previously earned under the Act is Flemming v. Nestor, 363 U.S. 603, 80 S.Ct. 1367 (1960). In

that case, the Court upheld the denial of benefits to a man who emigrated to the United States in

1913, worked here throughout his life, and became eligible for Social Security benefits in 1955.

In 1954, Congress amended the Social Security Act to deny benefits to persons deported under

certain provisions of the Immigration and Nationality Act. In 1956, Mr. Nestor was deported for

having been a member of the Communist Party from 1933 to 1939 and his Social Security

benefits were then terminated. The Court found that the 1954 amendment to the Social Security

Act did not deny Mr. Nestor of his property in violation of the Due Process Clause of the Fifth

Amendment. The Court’s characterization of the Social Security program and Congress’ right to

15
alter its terms and provisions is instructive. The Court clearly distinguished the rights of a

beneficiary of the Social Security program from those of the holder of an insurance policy.

The Social Security system may be accurately described as
a form of social insurance, enacted pursuant to Congress’ power to
“spend money in aid of the ‘general welfare,’” (citation omitted),
whereby persons gainfully employed, and those who employ them,
are taxed to permit the payment of benefits to the retired and
disabled, and their dependents. Plainly the expectation is that
many members of the present productive work force will in turn
become beneficiaries rather than supporters of the program. But
each worker’s benefits, though flowing from the contributions he
made to the national economy while actively employed, are not
dependent on the degree to which he was called upon to support
the system by taxation. It is apparent that the non-contractual
interest of an employee covered by the Act cannot be soundly
analogized to that of the holder of an annuity, whose right to
benefits is bottomed on his contractual premium payments.

Id., 363 U.S. at 609-610, 80 S.Ct. at 1372 (emphasis added). The Court went on to discuss the

complexity of the demands upon Social Security and Congress’ need for flexibility to change the

program to meet changing needs, stating:

Integrated treatment of the manifold specific problems presented
by the Social Security program demands more than a
generalization. That program was designed to function into the
indefinite future, and its specific provisions rest on predictions as
to expected economic conditions which must inevitably prove less
than wholly accurate, and on judgments and preferences as to the
proper allocation of the Nation’s resources which evolving
economic and social conditions will of necessity in some degree
modify.
To engraft upon the Social Security system a concept of
“accrued property rights” would deprive it of the flexibility and
boldness in adjustment to ever-changing conditions which it
demands.

Id., 363 U.S. at 610, 80 S.Ct. at 1372. See, also, Richardson v. Belcher, 404 U.S. 78, 92 S.Ct.

254 (1971) (the fact that social security benefits are financed in part by taxes on an employee’s

wages does not limit the power of Congress to fix the levels of benefits under the Act of the

conditions upon which they may be paid).

16
An examination of the Medicare program confirms that it is a governmental entitlement

program, more like Medicaid than private insurance. Premiums paid under Medicare Part B only

pay 25% of the costs of that program, with the remainder of the cost being borne by taxpayers in

general. The Medicare program has been altered and amended over time with additional benefits

added as Congress has seen fit to do. For instance, the coverage for those with end-state renal

disease was added in 1978. See, Pub. L. 95-272, § 1(a), 42 U.S.C. § 426-1. At the present time,

Congress is considering whether to add a prescription drug benefit to Medicare in response to the

sky-rocketing cost of prescription drugs and the burden that imposes on the elderly. What that

benefit will look like and how the cost of such coverage will be met, and indeed, the long term

solvency of the Medicare program, are all the subject of current national debate. The fact that

the extent and cost of Medicare coverage are the subject of national political debate simply

confirms that Medicare is a government benefit program which cannot be equated with private

insurance coverage.

Under the Department’s view, if Medicare is to be equated with a private insurance

program and Medicare payments cannot to be treated as receipts from the Federal government

pursuant to § 7-9-54, then it follows that the only beneficiaries of the program are the patients

receiving medical services. The Medicare patient has simply received medical benefits that he

has bought and paid for through his insurance agreement under the Medicare program. In

Fischer v. United States, 120 S. Ct. 1780 (2000), the U.S. Supreme Court recently rejected this

view. That case involved the prosecution of an individual involved in an illegal kickback and

bribery scheme with a hospital that was an authorized Medicare provider under 18 U.S.C. § 666.

That statute punishes anyone defrauding organizations which receive benefits in excess of

$10,000 in any given year under a Federal program. The defendant had challenged his

conviction on the grounds that Medicare payments only benefit the patients covered by the

17
program and therefore they cannot be considered “benefits” to the hospitals which are received

“under a Federal program involving a grant, contract, subsidy, loan, guarantee, insurance or other

form of Federal assistance” under 18 U.S.C. § 666(a)(2)(b). While the Court agreed that

Medicare patients were the primary beneficiaries of the Medicare program, it disagreed that the

hospitals did not also receive “benefits” under the Medicare program. It pointed out that the

payments a provider can receive “are not limited to the immediate costs of an individual

treatment procedure”, but can also include costs that are appropriate and helpful in developing

and maintaining the operation of patient care facilities and activities, such as amounts incurred

for educational programs for interns and residents, and amounts available to small, rural

hospitals to ensure that they can continue to maintain their necessary core staff and services so

that Medicare patients can continue to have needed medical services available. Id., 120 S.Ct. at

1784-1785. It is thus manifest that Medicare is a Federal assistance program whose goals and

purposes are far more comprehensive than merely providing medical insurance for beneficiaries

who have paid for such coverage. As such, although its funding mechanisms differ from those of

the Medicaid program, it is more comparable to Medicaid than it is to private insurance. Given

the fact that the Department allows the deduction found at § 7-9-54 to be applied to the receipts

of hospitals from providing tangible personal property to Medicaid-covered patients, the

Hospitals in this case are also entitled to claim that deduction for their receipts from providing

tangible personal property to Medicare-covered patients.

ASSESSMENT NO. 1296576

Assessment No. 1296576 was mailed to Guadalupe Medical Center by the Department on

July 20, 1990. Section 7-1-19 NMSA 1978 prevents the Department from taking any action or

proceeding to collect taxes administered under the provisions of the Tax Administration Act after

ten years have passed from the date of the assessment. An assessment of tax becomes effective

18
when a notice of assessment of taxes is mailed or delivered in person to the taxpayer against

whom the liability for tax is asserted. Section 7-1-17(B) (2). Thus, Assessment No. 1296576

became effective on its mailing date, which will be considered the date of the assessment.

Because the ten year statute of limitations for enforcing the collection of the assessment has run,

the Department is barred from collecting the Assessment and the Hospital’s protest is rendered

moot by operation of § 7-1-19 NMSA 1978.

ASSESSMENT NO. 1570900

At the formal hearing of this matter, Lea Regional Hospital chose not to present any

evidence or arguments to dispute the accuracy or correctness of Assessment No. 1570900.

Section 7-1-17(C) NMSA 1978 provides for a presumption of correctness which attaches to any

assessment of tax by the Department. This means that the Hospitals had the duty to present

evidence or arguments to dispute the correctness of the assessment to overcome this

presumption. Having failed to overcome the presumption of correctness, Lea Regional

Hospital’s protest to Assessment No. 1570900 is denied for lack of evidence.

PENALTY

The Department has conceded that the assessment of penalty in Assessment Nos.

1937855 and 1937840 was improper. Therefore, the Hospital’s protest of the penalty portions of

Assessment Nos. 19378940 and 1937855 is granted.

DID THE HEARING OFFICER LOSE JURISDICTION TO RENDER THIS DECISION?

Section 7-1-24(H) NMSA 1978 contains various provisions governing the hearing of

protests brought pursuant to § 7-1-24. Among other things, it provides that, “[T]he hearing

officer, within thirty days of the hearing, shall inform the protestant in writing of the decision,

….” The hearing of this matter took place on July 12, 2000. The parties requested the

opportunity to present their closing arguments in the form of briefs, and a briefing schedule was

19
agreed upon. The final submission, the Hospitals’ Reply Brief, was filed on October 20, 2000.

On November 20, 2000, the Hearing Officer wrote the parties requesting an additional 45 days to

render his decision due to his work on other complex pending matters. In fact, the Hearing

Officer was working to complete a decision, In the Matter of the Protest of Apple Computer,

Inc., Decision and Order No. 00-37, issued December 8, 2000.7 On November 21, 2000, counsel

for the Hospitals denied the Hearing Officer’s request on the basis that the Department’s counsel

had informed the Hospitals’ counsel that the Department cannot waive the running of interest on

the assessments at issue. On December 7, 2000, counsel for the Hospitals wrote the Hearing

Officer a letter purporting to confirm that the Hearing Officer had lost jurisdiction in the instant

protest, thus resolving the protest in the Hospitals’ favor. On December 14, 2000, the Hearing

Officer wrote to counsel stating that he had not taken any further action to complete his decision

because he had no opinion on the effect of his failure to complete his decision within the time

specified in § 7-1-24(H) and requested that counsel advise of their respective positions and

suggestions as to how the matter should be completed and to submit memoranda of law in

support of their positions no later than December 29, 2000. Counsel for the Hospitals filed a

response on December 29, 2000. The Department submitted no response. On January 5, 2001,

the Hearing Officer wrote counsel, informing them that it had come to his attention that the

Hospitals, who had engaged a court reporter to transcribe the hearing, had failed to comply with

their obligation, pursuant to 3 NMAC 3.1.8.11, to provide the Hearing Officer with an original of

the transcript, and that the Hearing Officer no longer considered that the matter had been

properly submitted for decision so as to commence the time for rendering his decision pursuant

7
The Decisions and Orders issued by the Department’s hearing officers are a matter of public record and are
published on the Department’s web page under “Publications”. The Department’s web page may be accessed at
www.state.nm.us/tax.

20
to § 7-1-24(H). Some correspondence between the parties ensued whereby it was determined

that the court reporter had delivered both the original and a reduced version of the transcript to

the Department’s counsel and counsel had never filed the original with the Hearing Officer. On

January 18, 2001, the Hearing Officer wrote counsel agreeing that providing Department’s

counsel with the original transcript fulfilled the Hospitals’ obligations with respect to providing

the transcript to the Hearing Officer. The Hearing Officer further informed the parties of his

belief that he retained jurisdiction to issue his decision and that the issue would be preserved for

appeal should the Hospitals wish to appeal the decision to be rendered.

Hospitals argue that the Hearing Officer lost jurisdiction to determine the protests, thus

resolving and eliminating the effectiveness of the protested assessments. In support of this

argument Hospitals cite to two decisions construing § 61-1-13 of the Uniform Licensing Act, §§

61-1-1 through 61-1-33 NMSA 1978. In both Foster v. Board of Dentistry, 103 N.M. 776, 714

P.2d 580 (1986) and Lopez v. N.M. Board of Medical Examiners, 107 N.M. 145, 754 P.2d 522

(1988), the New Mexico Supreme Court ruled that the failure of the Boards to render their

decisions in cases in which the Board proposed to either suspend or revoke a person’s license to

practice medicine or dentistry within the 90 days required by § 61-1-13 NMSA 1978 rendered

the decisions void and beyond the jurisdiction of the Board to enter. If those decisions were the

only New Mexico authority on the issue of the failure of a public authority to act in a timely

manner with respect to matters in dispute before the agency or board, I would agree that they

would determine the resolution of the instant matter.

I believe that those decisions are distinguishable because they involved professional

licensing boards and there is contrary authority which specifically deals with the failure of the

Department to comply with a statutory time requirement intended to ensure the prompt

resolution of protests to assessments of tax, which is what is at issue herein. In Rancher’s Tufco

21
Limestone Project Joint Venture v. Revenue Division, New Mexico Taxation and Revenue

Department, 100 N.M. 632, 674 P.2d 522, cert. denied 100 N.M. 505, 672 P.2d 1136 (1983), the

court rejected the taxpayer’s argument that the Department’s failure to set a formal hearing

“promptly” as required by § 7-1-24(D) NMSA 1978 should result in the abatement of the taxes

assessed. Instead, the court reasoned that:

[T]he general rule is that tardiness of public officers in the
performance of statutory duties is not a defense to an action by the
state to enforce a public right or to protect public interests. State,
ex rel. Dept. of Human Services v. Davis, 99 N.M. 138, 654 P.2d
1038 (1982). The general rule is applicable in these cases unless
Section 7-1-24 makes it inapplicable. Section 7-1-24 does not
make the general rule inapplicable.

100 N.M. at 635, 674 P.2d at 525. Because both Subsections D and H of § 7-1-24 impose time

requirements on the Department to ensure the prompt and timely resolution of protests to

assessments of tax filed under § 7-1-24(A), it makes sense to apply the rule announced in

Rancher’s-Tufco to the instant issue.

It should be further noted that even if it is later determined that the Hearing Officer lost

jurisdiction to render a decision in this matter, that would not result in the Hospitals’ prevailing

on their protests. If the Hearing Officer lacks jurisdiction to issue a decision, then there is no

jurisdiction to take any action with respect to the protested assessments, either denying or

granting the protests. The assessments as well as the pending protests would remain in place and

unresolved. The result would merely be an additional burden upon the Hospitals because a new

evidentiary hearing would be required, costing them additional attorney fees, expert witness fees,

court reporter fees, etc. Surely such a result would benefit neither party and cause additional

delay in resolving the matter.

Rancher’s-Tufco is also instructive on what should be considered if, for some reason, it

is determined that the general rule is inapplicable. In that case, a taxpayer would be required to

22
demonstrate prejudice. Id., 100 N.M. at 635, 674 P.2d at 525. In this case, the Hospitals

asserted prejudice on the basis that interest continues to run on the assessments at issue until they

are paid, and thus, the delay has cost the Hospitals additional money. While the Hospitals could

demonstrate such prejudice if they had not prevailed with respect to assessments 1937855 and

19378408, the effect of this decision will be that the assessments must be abated in their entirety,

including any interest which would have accrued on the taxes assessed. The only other

outstanding assessment is Assessment No. 1570900, against Lea Regional Hospital. This

assessment was based upon the hospital’s claim of a double deduction for the same Medicare

receipts. Apparently, the hospital determined that there was no basis to defend against the

assessment, for it chose to present no evidence to dispute the correctness of the assessment when

given the opportunity to do so at the formal hearing. Given that the assessment was issued in

1992, the hospital had many years to investigate the basis of the assessment and determine if it

had a meritorious defense and to raise any appropriate defenses with the Department. Certainly,

by the time of the formal hearing, when it chose not to present any evidence or argument in

defense of the assessment, the hospital knew that it would not prevail against the assessment and

that it would be prudent to pay the assessment to prevent the further accrual of interest. Thus,

any accrual of interest on the assessment after that time was the result of the hospital’s failure to

pay the assessment for which it knew it was liable and not to any delay in issuing this decision.

8
Although the Hospitals had tendered partial payments to stop the accrual of interest on those assessments, the
payments were calculated to pay only that portion of the assessments related to the assessment of gross receipts tax
on reimbursements under Medicare Part B. Thus, interest would still accrue on the portion of the assessments
attributable to reimbursements under Medicare Part A.

23
CONCLUSIONS OF LAW

1. The Hospitals filed timely, written protests, pursuant to § 7-1-24 NMSA 1978, to

Assessment Nos. 1937855, 1937840, 1296576 and 1570900 and jurisdiction lies over both the

parties and the subject matter of those protests.

2. The Hospitals were not prejudiced by the delay in issuing the decision on their

protests.

3. The Hearing Officer did not lose jurisdiction to issue this decision for failure to issue

this decision within 30 days of the formal hearing as required by § 7-1-24 (H) NMSA 1978.

4. The Department is barred by § 7-1-19 NMSA 1978 from taking any action to enforce

Assessment No. 1296576 and thus, the protest to that assessment is rendered moot.

5. Lea Regional Hospital failed to present any evidence or arguments to dispute

Assessment No. 1570900 and that assessment is presumptively correct pursuant to § 7-1-17(C)

NMSA 1978.

6. The Federal Medicare program is not a private insurance program.

7. Medicare beneficiaries do not have a contractual right to the benefits of a particular

version of the Medicare program and those benefits may be altered by Congress.

8. Medicare is a government entitlement program, with the particulars of those

entitlements subject to the enactments of Congress.

9. The receipts of the Hospitals from providing tangible personal property to patients

covered by Medicare are deductible from gross receipts pursuant to § 7-9-54 NMSA 1978.

10. The Hospitals were not negligent for purposes of the imposition of penalty pursuant

to § 7-1-69 NMSA 1978 for failing to report and pay gross receipts tax on their receipts from the

sale of tangible personal property to patients covered by Medicare.

24
For the foregoing reasons, the Hospitals’ protests to Assessment Nos. 1937855 and

1937840 ARE HEREBY GRANTED and the Department IS HEREBY ORDERED TO ABATE

ASSESSMENT NOS. 1937855 AND 1937840.

IT IS FURTHER ORDERED that the protest of Lea Regional Hospital to Assessment

No. 1570900 IS HEREBY DENIED.

DONE, this 30th day of August, 2001.

25