Could a later federal contract amendment toll New Mexico's refund deadline when it retroactively changed where research hardware was first used?

Plain-English summary

BAE Systems IESI, Inc. could not recover $276,182.99 of gross receipts tax paid for October 1998 through November 2000 because its March 2005 refund claim came after the statutory deadlines. A later Air Force contract amendment that created the overpayment did not support estoppel or equitable tolling.

Lockheed Martin Corporation Sanders entered a research-and-development contract to produce hardware and software known as an Improved Space Architecture Concept Testbed. The work was performed in New Hampshire, but the original contract called for first use by the Air Force Research Laboratory in New Mexico.

Under the law described in the decision, that New Mexico first use made the progress payments taxable, and Sanders paid gross receipts tax beginning in October 1998.

BAE purchased Sanders in November 2000. In August 2003, the Air Force amended the contract so first use would occur in New Hampshire instead.

The later amendment created an overpayment but did not reset time

BAE successfully claimed $230,347.92 for December 2000 through August 2003, and the Department paid that refund in December 2004.

It filed the separate $276,182.99 claim for October 1998 through November 2000 on March 2, 2005. Section 7-1-26(D) produced these expiration dates:

• October–November 1998 payments: December 31, 2001.
• December 1998–November 1999 payments: December 31, 2002.
• December 1999–November 2000 payments: December 31, 2003.

BAE did not dispute that the claim was untimely.

The Department had not misled the taxpayer

BAE argued that it paid according to Department regulations addressing out-of-state research services whose product was first used in New Mexico.

The hearing officer found those regulations correctly stated the law and correctly applied to the original contract. The overpayment arose only because the Air Force later changed the place of initial use. That private federal-contract amendment was not action or misconduct by the Department and was not taken in reliance on Department guidance.

Statutory or equitable estoppel therefore did not apply.

Tax refund periods were not equitably tolled

The decision reviewed federal and state cases strictly enforcing tax refund deadlines even when the event creating the refund occurred after the claim period or unavoidable circumstances delayed filing.

Courts and administrative agencies could not create a general equitable exception that the Legislature had not enacted. The hearing officer had no authority to modify the clear deadline based on individual unfairness.

Result: protest DENIED. The $276,182.99 refund claim remained barred.

What this means for you

Government contractors with retroactive contract changes

Track tax-payment dates separately from later price, delivery, or performance amendments. A later event creating an overpayment may not reopen an expired refund period.

Businesses with contingent refund positions

Consider protective claims before the deadline when a pending contract dispute, federal determination, or other event could change tax treatment.

Taxpayers invoking estoppel or tolling

Show conduct by the taxing authority that caused the late filing and identify statutory authority. A third party's later decision did not meet either requirement here.

Common questions

Q: Why was the tax originally proper?
A: The contract then called for the research product's first use in New Mexico.

Q: What changed in 2003?
A: The Air Force amended the contract to make first use occur in New Hampshire.

Q: Did BAE receive any refund?
A: Yes. The Department refunded $230,347.92 for later reporting periods whose claim was timely.

Q: Why was the $276,182.99 claim denied?
A: Every applicable three-year deadline had expired before the March 2005 filing.

Q: Could equitable tolling begin when the contract was amended?
A: No. The decision held that tax refund deadlines could not be generally extended on equitable grounds.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-1-26(D) — refund claim limitation period
• NMSA 1978, § 7-1-17 — Department assessments referenced in the refund rule
• NMSA 1978, § 7-1-60 — statutory estoppel based on regulation or taxpayer ruling
• Regulations 3.2.1.18 and 3.2.1.14 NMAC — research-and-development receipts and initial use

Cases cited:

• Taxation and Revenue Department v. Bien Mur Indian Market, 108 N.M. 228, 770 P.2d 873 (1989)
• Kilmer v. Goodwin, 2004-NMCA-122, 136 N.M. 440, 99 P.3d 690
• United States v. Brockamp, 519 U.S. 347 (1997)
• DaimlerChrysler Corp. v. Commonwealth, 885 A.2d 117 (Pa. Commw. Ct. 2005)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: BAE Systems IESI, Inc. (Successor to Lockheed Martin Corporation Sanders)
• Decision PDF: D&O 07-06

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
BAE SYSTEMS IESI, Inc. (Successor to Lockheed Martin 07-06
Corporation Sanders); NM ID NO. 02-278265-00-6
TO DENIAL OF CLAIM FOR REFUND OF
TAXES PAID FOR REPORTING PERIODS
OCTOBER 1998 THROUGH NOVEMBER 2000

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on April 19, 2007, before

Margaret B. Alcock, Hearing Officer. The Taxation and Revenue Department (“Department”) was

represented by Peter Breen, Special Assistant Attorney General. BAE Systems IESI, Inc. (the

successor to Lockheed Martin Corporation, Sanders) was represented by Richard Gasparoni, its

Group Tax Manager. Based on the evidence and arguments presented, IT IS DECIDED AND

ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. In 1998, Lockheed Martin Corporation Sanders (“Sanders”), a division of Lockheed

Martin Corporation, entered into a research and development contract with the United States Air

Force to develop certain hardware and accompanying software known as an “Improved Space

Architecture Concept Testbed.”

2. Under the contract, the research and development services were to be performed in

New Hampshire, with the testbed delivered to New Mexico for first use by the Air Force Research

Laboratory in New Mexico.

3. It was originally determined by Sanders and the Air Force contracting officer that

New Mexico gross receipts tax would be due on the progress payments for the project. As a result,
gross receipts taxes were paid on progress payments received during reporting periods beginning in

October 1998.

4. In November 2000, Sanders was purchased by BAE Systems IESI, Inc.

5. On August 28, 2003, Sanders’ contract with the Air Force was amended to provide

that the first use of the testbed would occur in New Hampshire and not in New Mexico.

6. Based on the contract amendment, BAE Systems (as successor in interest to the

Sanders contract) filed a claim for refund of $230,347.92 of gross receipts taxes paid for reporting

periods December 2000 through August 2003.

7. On December 22, 2004, the Department granted the refund claim and issued a check

to BAE Systems in the amount of $230,347.92.

8. On March 2, 2005, BAE Systems filed a claim for refund of $276,182.99 of gross

receipts taxes paid for reporting periods October 1998 through November 2000.

9. On June 15, 2005, the Department denied BAE Systems’ claim because it was not

filed within the three-year statute of limitations set out in NMSA 1978, § 7-1-26.

10. On September 12, 2005, BAE Systems filed a written protest to the denial of its

claim for refund.

DISCUSSION

The issue to be determined is whether the Department properly denied BAE Systems’ (“the

Taxpayer”) March 2, 2005 claim for refund of gross receipts taxes paid for reporting periods October

1998 through November 2000. The basis for the Department’s denial was the expiration of the

limitations period set out in NMSA 1978, § 7-1-26 (D), which provides, in pertinent part:

[N]o credit or refund of any amount may be allowed or made to any person unless as
the result of a claim made by that person as provided in this section:

(1) within three years of the end of the calendar year in which:

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(a) the payment was originally due or the overpayment resulted from
an assessment by the department pursuant to Section 7-1-17 NMSA 1978, whichever
is later;

Based on the statute, the last date for claiming a refund of the gross receipts taxes at issue here was

as follows:

Reporting Periods (tax due on Expiration of 3-year
the 25th of the following month) Limitations Period
October and November 1998 December 31, 2001
December 1998-November 1999 December 31, 2002
December 1999-November 2000 December 31, 2003

ESTOPPEL. The Taxpayer does not dispute that its March 2, 2005 refund claim was

untimely, but argues that the Department should be estopped from denying the refund based on

equitable considerations. As a general rule, courts are reluctant to apply the doctrine of estoppel

against the state. This rule is given even greater weight in cases involving the assessment and

collection of taxes; in such cases, estoppel applies only pursuant to statute or when “right and justice

demand it.” Taxation and Revenue Department v. Bien Mur Indian Market, 108 N.M. 228, 230-231,

770 P.2d 873, 875-876 (1989).

Estoppel Based on Statute. NMSA 1978, § 7-1-60 provides for estoppel against the

Department in two circumstances: when the taxpayer acted in accordance with a Department

regulation or when the taxpayer acted in accordance with a revenue ruling specifically addressed to the

taxpayer. Here, the Taxpayer maintains that its overpayment of gross receipts taxes was made in

accordance with Department Regulations 3.2.1.18 and 3.2.1.14 NMAC, which define taxable gross

receipts to include receipts from research and development services performed outside New Mexico

when the product of those services is initially used in New Mexico. Based on its reliance on these

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regulations, the Taxpayer concludes that § 7-1-60 estops the Department from refunding the

overpayment.

The problem with this argument is that the regulations cited by the Taxpayer conform to the

statutory definition of gross receipts and are a correct statement of the law. The Taxpayer concedes

that at the time it paid the gross receipts taxes at issue, its contract with the Air Force provided for

the product of the Taxpayer’s research and development services to be delivered and initially used in

New Mexico. For this reason, the Taxpayer cannot claim that its original payment of tax was made

in error or that it was misled by the Department’s regulations. The real cause of the Taxpayer’s

overpayment was the federal government’s belated decision to amend the contract to change the

place of initial use of the testbed from New Mexico to New Hampshire. This change was not made

in reliance on any Department regulation, and the estoppel provisions of § 7-1-60 do not apply.

Equitable Estoppel. New Mexico case law provides for estoppel against the state where there

is “a shocking degree of aggravated and overreaching conduct or where right and justice demand it."

Wisznia v. State, Human Servs. Dep't, 1998-NMSC-011, ¶ 17, 125 N.M. 140, 958 P.2d 98. When

estoppel is invoked to avoid application of a statute of limitations, the issue is whether the party to be

estopped has taken some action to prevent the other party from bringing suit within the prescribed

period. Kern v. St. Joseph Hospital, Inc., 102 N.M. 452, 455-456, 697 P.2d 135, 138-139 (1985). In

addition, the party seeking estoppel must demonstrate “affirmative misconduct on the part of the

government.” Kilmer v. Goodwin, 2004-NMCA-122, ¶ 27, 136 N.M. 440, 99 P.3d 690 (quoting

Gallegos v. Pueblo of Tesuque, 2002-NMSC-012, 132 N.M. 207, 46 P.3d 668).

As discussed above, the Taxpayer’s late-filing of its refund claim was not attributable to any

action or misconduct of the Department. The amendment of the federal contract to change the place

of delivery and initial use of the testbed was a matter between the Taxpayer and the Air Force.

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Given these circumstances, there is no basis to estop the Department from enforcing the clear

statutory directive of § 7-1-26, which provides that no refund “of any amount” may be made to any

person unless the claim is filed within three years of the end of the calendar year in which the

payment was made.

EQUITABLE TOLLING. The Taxpayer believes that if estoppel does not apply, the

statute of limitations should be equitably tolled when the event giving rise to a refund occurs after

the limitations period has expired. As the Department points out, however, both federal and state

courts have consistently rejected application of equitable tolling to tax refund cases. In United States

v. Brockamp, 519 U.S. 347 (1997), the United States Supreme Court upheld strict enforcement of the

three-year period for seeking federal tax refunds, even though the taxpayer suffered from a mental

disability that prevented him from filing a timely claim. Writing for a unanimous Court, Justice

Breyer explained their decision as follows:

To read an “equitable tolling” exception into § 6511 could create serious
administrative problems by forcing the IRS to respond to, and perhaps litigate, large
numbers of late claims, accompanied by requests for “equitable tolling” which, upon
close inspection, might turn out to lack sufficient equitable justification.... The
nature and potential magnitude of the administrative problem suggest that Congress
decided to pay the price of occasional unfairness in individual cases (penalizing a
taxpayer whose claim is unavoidably delayed) in order to maintain a more workable
tax enforcement system. At the least it tells us that Congress would likely have
wanted to decide explicitly whether, or just where and when, to expand the statute's
limitations periods, rather than delegate to the courts a generalized power to do so
wherever a court concludes that equity so requires.

519 U.S. at 352-353. Congress responded to Brockamp by amending § 6651 to permit tolling when a

taxpayer is prevented by disability from seeking a tax refund. In Doe v. KPMG, LLP, 398 F.3d 686,

689 (5th Cir. 2005), the Fifth Circuit Court of Appeals found that Congress's decision to set out

specific exceptions to the statute of limitations on refunds—without adding a general equitable

tolling provision—further justified the Supreme Court's reading of the statute in Brockamp,

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concluding that Congress “does not intend courts to invoke equitable tolling to alter the plain text of

the statutes at issue.” In Doe, the court rejected the government’s request for equitable tolling,

finding that the IRS could not rely on general equitable principles to extend the period for issuing

assessments, even when the taxpayers were shown to have “less than clean hands.” Id. at 690.

State courts have been equally strict in enforcing statutes of limitation affecting the

administration of state taxes. In DaimlerChrysler Corp. v. Commonwealth, 885 A.2d 117

(Pa.Cmwlth. 2005) the Pennsylvania court considered a fact pattern similar to the one in this case.

There, an automobile manufacturer sought a refund of sales taxes paid on the sale of vehicles the

manufacturer was subsequently required to repurchase under the state’s lemon law. Because the

repurchase occurred after the three-year statute for obtaining refunds had expired, the manufacturer

argued that statute should be equitably tolled until the date the right to the refund first accrued. The

court disagreed, noting that statutes of limitation

Are by definition arbitrary, and their operation does not discriminate between the just
and the unjust claim, or the voidable and unavoidable delay. They have come into
the law not through the judicial process but through legislation. They represent a
public policy about the privilege to litigate. Their shelter has never been regarded as
what now is called a “fundamental” right or what used to be called a “natural” right
of the individual. He may, of course, have the protection of the policy while it exists,
but the history of pleas of limitation shows them to be good only by legislative grace
and to be subject to a relatively large degree of legislative control.

Id., FN 10 at 121, quoting from Ciccarelli v. Carey Canadian Mines, Ltd., 757 F.2d 548 (3d

Cir.1985). See also, Neer v. State ex rel. Oklahoma Tax Commission, 982 P.2d 1071 (Okla. 1999)

(denying late-filed income tax refund based on credit for taxes paid to another state, even though the

right to the refund accrued after expiration of Oklahoma’s deadline for claiming refunds); CIG

Exploration, Inc. v. State, Dept. of Revenue, 880 P.2d 601 (Wyo. 1994) (denying late-filed severance

tax refund resulting from government’s order requiring taxpayer to retroactively reduce its natural

gas prices, even though order was entered after expiration of Wyoming’s deadline for claiming

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refunds); American Smelting & Refining Co. v. State Tax Commission, 397 P.2d 67 (Utah 1964)

(denying late-filed corporate income tax refund resulting from IRS adjustment, even though

adjustment was made after expiration of Utah’s deadline for claiming tax refund).

New Mexico courts have also applied a strict construction to statutes governing tax refunds.

In Kilmer v. Goodwin, 2004-NMCA-122, ¶ 16, 136 N.M. 440, 99 P.3d 690, the New Mexico Court

of Appeals noted that the purpose of the deadlines set out in § 7-1-26 “is to avoid stale claims, which

protects the Department's ability to stabilize and predict, with some degree of certainty, the funds it

collects and manages.” In Kilmer, the court rejected the taxpayer’s argument that the Department

had implied authority to grant a refund after the statutory deadline, holding that an administrative

agency may not exercise authority beyond the powers granted to it by the state legislature. Id. at ¶

24. This is consistent with the New Mexico Supreme Court’s decision in State ex rel. Taylor v.

Johnson, 1998-NMSC-015 ¶ 022, 961 P.2d 768, 774-775, where the court made the following

observation concerning the power of administrative agencies:

Generally, the Legislature, not the administrative agency, declares the policy and
establishes primary standards to which the agency must conform. See State ex rel.
State Park & Recreation Comm'n v. New Mexico State Authority, 76 N.M. 1, 13, 411
P.2d 984, 993 (1966). The administrative agency's discretion may not justify
altering, modifying or extending the reach of a law created by the Legislature.

Neither the Department nor its hearing officer has authority to question the wisdom of the laws

passed by the legislature or to modify the application of those laws based on a taxpayer’s individual

circumstances. See, AA Oilfield Service v. New Mexico State Corporation Commission, 118 N.M.

273, 881 P.2d 18 (1994) (an administrative agency's quasi-judicial powers do not include authority to

grant an equitable remedy). Given the clear time limitations set out in § 7-1-26, the Taxpayer’s

refund claim was properly denied.

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CONCLUSIONS OF LAW

A. The Taxpayer filed a timely, written protest to the denial of its claim for refund of gross

receipts taxes, and jurisdiction lies over the parties and the subject matter of this protest.

B. The Taxpayer's claim for refund of gross receipts taxes paid for reporting periods

October 1998-November 2000 is barred by the limitations period set out in NMSA 1978, § 7-1-26.

C. The Department is not estopped from denying the Taxpayer's claim for refund.

D. The Department does not have the authority to override the provisions of New

Mexico’s tax laws to toll the limitations period set out in NMSA 1978, § 7-1-26.

For the foregoing reasons, the Taxpayer’s protest IS DENIED.

DATED April 23, 2007.

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