Could a New Mexico construction contractor exclude client reimbursements for materials and services as amounts received through a disclosed agency?
Apply this to your situation
This page answers the general question as of 2009. Ezel answers yours, under current New Mexico tax law, with citations.
Plain-English summary
New Mexico Healthy Home Builders, Inc. was not entitled to a $30,407.70 gross receipts tax refund for amounts its client reimbursed for construction materials, supplies, and third-party services. The contractor did not prove that it incurred those costs as a disclosed agent for the Shady Brook project owners.
The company remodeled cabins into condominiums for resale in 2006. It bought project materials and services in its own name, paid invoices that included gross receipts tax, and later billed Robert Pottroff for the costs, employee labor, a 20% service fee, and gross receipts tax. Those invoices were paid in full.
Disclosed agency required authority to bind the project owners
Regulation 3.2.1.19(C) NMAC generally included reimbursed expenditures in gross receipts unless the taxpayer incurred them as an agent for a principal while acting in a disclosed agency capacity.
The decision said that this required power to bind the principal in a contract with a third party so the third party could enforce the contractual obligation against the principal.
That proof was missing:
- Vendors billed the contractor or its president and looked to them for payment.
- There were no contracts showing that the contractor could bind the project owners to pay the vendors.
- Some vendors would not have known the client or even the project receiving the items.
- The president's ownership interest in an LLC connected to the project did not give the corporation authority to bind the owners.
- An unsigned statement that the company was the client's agent did not show that vendors had notice of authority to bind the project owners.
A supplier's ability to place a mechanic's lien after materials became part of the real estate was not the same as a disclosed agency relationship. The supplier could still pursue the contractor, and the lien did not make the owner directly liable on the contractor's purchase agreement.
The reimbursements were therefore receipts from the contractor's own business and remained taxable.
The two taxable receipts were not an unlawful double tax
The contractor argued that tax had effectively been paid twice: once when it bought the materials and again when its client reimbursed it.
The hearing officer rejected that argument because the transactions involved different taxpayers and receipts. The vendor owed gross receipts tax on its sale to the contractor. The contractor separately owed tax on the receipts it collected from the project client.
The decision also noted the statutory way to avoid tax at both stages when qualifying goods or services are bought for resale. The contractor could provide nontaxable transaction certificates to vendors under the cited deductions. Because it had not used that mechanism for these purchases, it remained subject to the presumption of taxability.
Result: protest DENIED. The Department's denial of the $30,407.70 refund stood.
What this means for you
Construction contractors
Calling a client payment a “reimbursement” does not remove it from gross receipts. If suppliers contract with and bill your company, later repayment by the client is generally your receipt unless the disclosed-agency requirements are proved.
Businesses claiming disclosed agency
Document more than permission to buy for a project. The decision looked for authority to bind the principal directly to the third-party contract and notice allowing the third party to enforce that obligation against the principal.
Contractors buying for resale
Use the applicable nontaxable transaction certificates when the statutory resale deductions apply. Paying tax to a vendor and then collecting taxable receipts from a client did not itself create a refund right.
Common questions
Q: Why wasn't the contractor a disclosed agent for Shady Brook?
A: The contractor bought in its own name and did not prove authority to bind the project owners to its vendor contracts.
Q: Did an unsigned statement calling the contractor an agent establish the exemption?
A: No. It did not establish that vendors knew of the agency or could enforce the purchase obligations directly against the project owners.
Q: Did a possible mechanic's lien make the owner liable as principal?
A: No. The decision distinguished a lien remedy from contractual authority to bind the owner at the time of purchase.
Q: Why wasn't taxing both stages illegal double taxation?
A: The vendor's sale to the contractor and the contractor's receipts from its client were separate transactions involving different taxpayers.
Q: How could the contractor have avoided tax on qualifying resale purchases?
A: The decision pointed to nontaxable transaction certificates and the deductions for qualifying property and services purchased for resale.
Citations and references
Statutes and regulation:
- NMSA 1978, § 7-1-26 (2007) — refund claims
- NMSA 1978, § 7-9-4 (1990) — imposition of gross receipts tax
- NMSA 1978, § 7-9-5 (2002) — presumption that receipts are taxable
- NMSA 1978, § 7-9-3(F) and § 7-9-3.5 — gross receipts definition
- NMSA 1978, § 7-9-47 — tangible personal property purchased for resale
- NMSA 1978, § 7-9-48 — services purchased for resale
- Regulation 3.2.1.19(C) NMAC — reimbursed expenditures and disclosed agency
Cases cited:
- Wing Pawn Shop v. Taxation and Revenue Department, 111 N.M. 735, 809 P.2d 649 (Ct. App. 1991)
- Security Escrow Corp. v. Taxation and Revenue Department, 107 N.M. 540, 760 P.2d 1306 (Ct. App. 1988)
- House of Carpets, Inc. v. Bureau of Revenue, 87 N.M. 747, 507 P.2d 1078 (Ct. App. 1973)
- New Mexico Sheriffs & Police Association v. Bureau of Revenue, 85 N.M. 565, 514 P.2d 616 (Ct. App. 1973)
Source
- Listing: New Mexico Decisions & Orders
- Decision post: New Mexico Healthy Home Builders Inc.
- Decision PDF: D&O 09-04
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
NEW MEXICO HEALTHY HOME BUILDERS, INC.
TO DENIAL OF REFUND ISSUED UNDER LETTER
ID NO. L0343320704 No. 09-04
DECISION AND ORDER
A formal hearing on the above-referenced protest was held on August 18, 2009, before
Sally Galanter, Hearing Officer. New Mexico Healthy Homebuilders was represented by Mark
Casias, its President (“Taxpayer”). The Taxation and Revenue Department (“Department”) was
represented by Tonya Noonan Herring, Special Assistant Attorney General. Based on the
evidence and arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:
FINDINGS OF FACT
- Taxpayer is a corporation organized in New Mexico, operates its business in Taos, New
Mexico and is engaged in the business of residential and commercial construction and remodeling
of existing residential structures. Taxpayer Exhibit 1.
- Taxpayer’s president, Mark Casias, is certified with the State of New Mexico Regulation
and Licensing Department, Construction Industries Division as a qualified party and Taxpayer is
certified with the State of New Mexico Regulation and Licensing Division, Construction
Industries Division as a contractor. Taxpayer Exhibit 2.
- Taxpayer contracted in 2006 to complete a remodel of existing cabins into condominiums
for resale with the project being known as the Shady Brook project.
- Taxpayer purchased materials for the Shady Brook project paying the gross receipts taxes
on the materials. All supplies ordered by Taxpayer for the Shady Brook project were billed
Decision and Order
Tax Hearing regarding the Denial of Refund
issued under letter L0343320704
to New Mexico Healthy Homebuilders, Inc
Page 1 of 11
directly to Taxpayer or to the President of Taxpayer, Mark Casias. Vendors looked to Taxpayer
and/or the president of Taxpayer for payment. Department Exhibits D, E and F.
- Billing for material, supplies and equipment purchased by Taxpayer for the Shady Brook
project indicated that the material, supplies and equipment were to be delivered to Shady Brook .
-
Some of the bills did not indicate a destination or a project designation.
-
All invoices and receipts for materials noted Taxpayer or its president as the responsible
party for payment. The billing included in the record is representative of the billings that were
submitted to Taxpayer from its vendors for the Shady Brook project. Department Exhibits D, E
and F.
- The vendors who sold supplies, equipment and services to Taxpayer included in their
billing New Mexico gross receipts tax as part of the amounts charged to Taxpayer. Department
Exhibits D, E, and F.
- Some supplies and materials included in the billing information were purchased by
Taxpayer’s representative, President Mark Casias, for a separate project.
- Mr. Casias testified that such were not included in the billing charged to the Shady
Brook project.
- Taxpayer invoiced Robert Pottroff referencing the Shady Brook Remodel Project for
supplies, materials, equipment, services and labor for work completed on the project.
- Taxpayer, in its billing added a twenty percent service fee to the cost of labor of
employees, services and materials purchased from vendors.
- The invoice sent to Mr. Pottroff for the Shady Brook project by Taxpayer which is
included in the record is representative of the invoices that was submitted to Mr. Pottroff from
Taxpayer for the Shady Brook project. Department Exhibit G.
- Taxpayer subsequently billed and received reimbursement payments from Shady Brook
for the costs of the materials, services, taxes paid on the materials, labor by its employees, the
Decision and Order
Tax Hearing regarding the Denial of Refund
issued under letter L0343320704
to New Mexico Healthy Homebuilders, Inc
Page 2 of 11
service fees and gross receipts taxes on all items. All billing as invoiced by Taxpayer to Mr.
Pottroff for the Shady Brook project was paid in full. Department Exhibit G.
- Taxpayer submitted an unsigned statement dated January 10, 2006 from Robert Pottroff
stating that Taxpayer is Skyscapes of Shady Brook, LLC’s agent.
- Taxpayer reported and paid gross receipts tax on its receipts from supplies, materials,
labor and service fees when such amounts were received from Shady Brook as reimbursement for
the costs of supplies, services and materials purchased from third party vendors.
- Taxpayer reported its gross receipts and withholding taxes due monthly during 2006 and
timely paid the tax due. Department Exhibit A.
- On October 11, 2007, amended monthly tax reports were filed noting Taxpayer’s CRS
number but filed in the name of Taxpayer’s President, Mark Casias. Department Exhibit B.
- Based on the filing of amended monthly tax reports Taxpayer applied for refund of a
portion of the taxes paid claiming that original taxable gross receipts amounts included
reimbursement for materials.
- Taxpayer testified that the gross receipts tax had already been paid on the materials that
were reimbursed and therefore Taxpayer was requesting a refund of the overage paid for each of
the twelve payments made in 2006. Taxpayer alternatively requested that the refund be credited
toward taxes owed for other Taxpayer owned entities. Department Exhibit C.
- Taxpayer testified that it was a disclosed agent for Shady Brook based on the vendor’s
ability to sue Shady Brook if the bills were not paid and based on its ownership interest in
Skyscapes of Taos Canyon, LLC. Taxpayer Exhibits 4 and 5.
- There were no contracts between Taxpayer and the owners of the Shady Brook Project
and or Skyscapes of Taos Canyon LLC authorizing Taxpayer to bind the entities and/or owners
for payment of items purchased from Taxpayer’s vendors.
Decision and Order
Tax Hearing regarding the Denial of Refund
issued under letter L0343320704
to New Mexico Healthy Homebuilders, Inc
Page 3 of 11
- Skyscapes of Taos Canyon LLC was initially organized by Robert L. Pottroff and has as
two of its members, Robert L. Pottroff and Taxpayer’s president, Mark Casias. Taxpayer’s
president, one of three members of the LLC, has a 33.33% ownership interest in the LLC.
- In response to the request for refund the Department sent Taxpayer a letter dated April 2,
2008 denying the request based on lack of evidence that Taxpayer was acting as a disclosed agent
for Shady Brook. Department Exhibit H
- On June 26, 2008 Taxpayer, through its Bookkeeper, filed a written protest with the
Department objecting to the denial of refund and requesting a hearing on the matter. Department
Exhibit I.
- On September 8, 2008, Senior Auditor, Janet Sobien, mailed to Taxpayer an
acknowledgement and receipt of the protest regarding the denial of refund and acknowledging
Taxpayer’s request for hearing. Department Exhibit J.
- Taxpayer is requesting a refund in the amount of $30,407.70.
ANALYSIS AND DISCUSSION
The issues to be decided are as follows: whether Taxpayer is entitled to a refund of
gross receipts taxes it paid based on its claim that it was purchasing goods and services as an
agent for its client, the Shady Brook project, and whether the Department receiving gross
receipts taxes for the materials, supplies and services from two different entities amounted to
double taxation.
Burden of Proof. A taxpayer’s request for refund for an alleged overpayment of gross
receipts taxes falls within NMSA 1978, § 7-1-26 (2007). NMSA 1978, §7-9-4 (1990)
imposes an excise tax on the gross receipts of any person engaging in business in New
Mexico. There is a statutory presumption that all receipts of a persons/entity engaging in
Decision and Order
Tax Hearing regarding the Denial of Refund
issued under letter L0343320704
to New Mexico Healthy Homebuilders, Inc
Page 4 of 11
business in New Mexico are subject to the gross receipts tax. NMSA 1978, §7-9-5 (2002).
The Taxpayer has the burden of overcoming the presumption. In Wing Pawn Shop v.
Taxation and Revenue Department, 111 NM 735, 740, 809 P.2d 649, 654 (Ct. App. 1991)
¶29 -32, the court explained,
Where an exemption or deduction from tax is claimed, the statute must be
construed strictly in favor of the taxing authority, the right to the exemption or
deduction must be clearly and unambiguously expressed in the statute, and the right
must be clearly established by the taxpayer…taxation is the rule and the claimant for
an exemption must show that his demand is within the letter as well as the spirit of
the law.
See also Security Escrow Corp., v. Taxation and Revenue Department, 107 NM 540, 543,
760 P.2d 1306, 130 (Ct. App. 1988) §18-20. The evidence submitted by Taxpayer was
insufficient to overcome the statutory presumption.
Tax on Reimbursed Expenses. Section §7-9-4 imposes an excise tax on the gross receipts
of any person engaging in business in New Mexico. NMSA 1978, §7-9-3 (F) defines the
term “gross receipts” to include receipts from selling property in New Mexico, leasing
property employed in New Mexico or selling services performed in New Mexico. The term
“gross receipts” does not include amounts received solely on behalf of another in a disclosed
agency capacity. Regulation 3 NMAC 2.1.19 (C) explains the reimbursement of expenses
that a taxpayer can incur on behalf of a client and not be responsible for gross receipts taxes
on such reimbursement:
19 (C) REIMBURSED EXPENDITURES
19 (C) (1) The receipts of any person received as a reimbursement of
expenditures incurred in connection with the performance of a service or the
sale or lease of property are gross receipts as defined by Section 7-9-3.5
NMSA 1979, unless that person incurs such expense as agent on behalf of a
principal while acting in a disclosed agency capacity. An agency relationship
exists if a person has the power to bind a principal in a contract with a third
Decision and Order
Tax Hearing regarding the Denial of Refund
issued under letter L0343320704
to New Mexico Healthy Homebuilders, Inc
Page 5 of 11
party so that the third party can enforce the contractual obligation against the
principal.
19 (C) (3) If these requirements are not met, the reimbursement of expenses are
included in the agent’s gross receipts.
Example or regulation 19 (C) (6) provides an example to assist in understanding this
issue of an architect located in Santa Fe overseeing a project in Albuquerque who incurs long
distance telephone charges. The architect charges the project owner for the telephone calls
with the architect’s gross receipts including the amounts collected for the calls. The
determination is that no disclosed agency relationship exists which would enable the
telephone company to hold the project owner liable for the long distance telephone charges
incurred by the architect.
Taxpayer’s representative testified that Taxpayer was acting in a disclosed agency
capacity because if Taxpayer did not pay for the supplies and materials than the vendors
would sue the Shady Brook project owners for payment by attaching the materials and
supplies either at the remodeling site or by placing a lien on the real estate. While a vendor
has legal authority to place a mechanic’s lien on real estate when its materials, supplies and
services have been made an integral part of the real estate such authority is not legally
equivalent to the authority to bind a client to pay for materials, supplies and services without
seeking payment from Taxpayer. When a vendor places a mechanic’s lien on real estate, the
vendor still has legal authority to pursue Taxpayer for payment but can additionally place a
mechanic’s lien on the property as its materials, supplies and services are now part of the real
estate. That is not what is meant by disclosed agency but rather is a method to ensure that
material suppliers have recourse when their supplies are not paid for and are made part of real
Decision and Order
Tax Hearing regarding the Denial of Refund
issued under letter L0343320704
to New Mexico Healthy Homebuilders, Inc
Page 6 of 11
estate. The material suppliers have no legal authority to pursue the project owners for
payment up front.
In this case, Taxpayer would be acting in a disclosed agency capacity if it were
authorized to legally bind its client, the Shady Brook project owners, to the terms of any
purchase agreements it entered into to purchase materials or supplies for the project. In that
case, the project owners and not the taxpayer would be liable for the payment of the
materials, supplies and services purchased and also responsible for the gross receipts taxes.
Without evidence of such authority to bind the Shady Brook owners, Taxpayer could not be
said to be acting in a disclosed agency capacity. If Taxpayer were acting in a disclosed
agency capacity, it would have placed vendors on notice and been legally empowered to bind
the project owners to pay each vendor for the materials, supplies and services. The vendors
could then bill the Shady Brook project owners and collect the monies owed for the supplies,
materials and services. For example, if Taxpayer were acting in a disclosed agency capacity,
it would have the authority to have its suppliers including Cooks Hardware, Randall Lumber,
Robert Medina & Sons, Lowe’s, Home Depot bill the Shady Brook project owners directly
for payment. While the remodeling project was titled “Shady Brook project” the evidence did
not disclose an entity named Shady Brook to which Taxpayer could have been acting in a
disclosed agency capacity.
The evidence established that Taxpayer was not acting in a disclosed agency capacity
on behalf of Shady Brook in 2006. Taxpayer was purchasing materials, supplies and services
in its name and either reselling the items to the project owners or using the purchased items
to perform its own services on the Shady Brook project. Some of the vendors such as Home
Depot, Lowe’s, Walmart, Rio Grande Ace Hardware, and Phillips 66 would have not had
knowledge as to the location or the owner of the property which ultimately their products
Decision and Order
Tax Hearing regarding the Denial of Refund
issued under letter L0343320704
to New Mexico Healthy Homebuilders, Inc
Page 7 of 11
became a part of. Taxpayer’s representative acknowledged that some of the vendors would
not have had knowledge of Taxpayer’s client or the project testifying that it was not common
in the construction business to have contracts with suppliers. Often, materials and supplies
were purchased in large quantities with no notation as to project or client. Those vendors
would not be able to ascertain if all of the materials were attributable to one project or
another. Some of the vendors were knowledgeable of the location for delivery of the
materials, supplies and services but there was no evidence that the vendors actually knew
who the owners of the project were or that they had no legal right to pursue the project
owners directly for payment of the items if such had not been paid by Taxpayer. Therefore,
the payments Taxpayer received as reimbursement for supplies, materials and services from
Shady Brook were not received in a disclosed agency capacity and were gross receipts
subject to tax.
The evidence established that there were no contracts between Taxpayer and its
vendors such that Taxpayer could have bound the Shady Brook project and/or its owners for
payment of Taxpayer’s vendors. There was no evidence admitted during the hearing which
established that the Shady Brook project and/or its owners contracted with Taxpayer
providing Taxpayer authority to bind the Shady Brook project and/or its owners for payments
of Taxpayer’s vendors. Although Taxpayer’s representative and president, Mark Casias is a
member of Skyscapes of Taos Canyon LLC, such did not establish that Taxpayer had the
authority to bind the Shady Brook project and/or its owners for payment of its vendors.
If it were established that Mr. Robert Pottroff were the owner of the Shady Brook
project, that Skyscapes of New Mexico LLC was the owner of the Shady Brook project, that
he as owner or member of the LLC had the authority to designate Taxpayer as an agent such
still would not establish that Taxpayer was a disclosed agent for the Shady Brook project as
Decision and Order
Tax Hearing regarding the Denial of Refund
issued under letter L0343320704
to New Mexico Healthy Homebuilders, Inc
Page 8 of 11
stating that Taxpayer can act on their behalf to complete the construction project such as
ordering materials, renting equipment and hiring subcontractor crews does not established
that the third party vendors who sold items to Taxpayer were put on notice that Taxpayer had
the authority as a disclosed agent to bind the owners of the Shady Brook Project for payment
of those items.
Double Taxation. Taxpayer argues that it has paid the taxes twice on the same material and
that it is inherently wrong for the Department to collect taxes twice for the same material.
Taxpayer argued that by it paying the taxes when the material was purchased from the
vendors and again when it received reimbursement from Shady Brook that it was being
doubly taxed and should be refunded the full amount that it paid resulting from the
reimbursement.
The evidence established that Taxpayer paid for gross receipts taxes when it
purchased the materials and supplies and then collected gross receipts taxes from Mr. Pottroff
on the supplies, materials and services rendered by third parties as well as for the labor it
performed on the project. The evidence also established that upon receiving reimbursement
for the items that Taxpayer paid gross receipts tax on its taxable gross receipts. Therefore,
Mr. Pottroff paid gross receipts on what it was billed and Taxpayer in turn paid gross receipts
taxes the reimbursement it received for those items.
New Mexico courts have held that there is no prohibition against double taxation. See
New Mexico State Board of Public Accountancy v, Grant, 61 NM 287, 299 P.2d 464 (1956);
Amarillo-Pecos Valley Truck Line, Inc. V. Gallegos, 44 NM 120, 99 P.2d 447 (1940) and
State ex rel. Attorney General v. Tittmann, 42 NM 76, 75 P.2d 702 (1938). See also Ft.
Smith Lumber Co. v. Arkansas, 251 U.S. 532 (1920). Further, New Mexico courts in
construing the New Mexico Gross Receipts and Compensating Tax Act have held that there
Decision and Order
Tax Hearing regarding the Denial of Refund
issued under letter L0343320704
to New Mexico Healthy Homebuilders, Inc
Page 9 of 11
is no double taxation where the two taxes complained of are imposed on the receipts of
different taxpayers. See House of Carpets, Inc. v. Bureau of Revenue, 87 NM 747, 507 P.2d
1078 (Ct. App. 1973) and New Mexico Sheriffs v. Police Association v. Bureau of Revenue,
85 NM 565, 514 P.2d 616 (Ct. App. 1973). In New Mexico Sheriffs the court determined that
“if there were double taxation, such would not necessarily be arbitrary and capricious” and
further that there was no double taxation as the tax was being paid by two different taxpayers
not by one taxpayer paying tax twice on the same items.
When a vendor sells materials, supplies and services to Taxpayer, the vendor is the
entity liable for the gross receipts tax on the sale-the Taxpayer has no obligation to report or
pay tax on the vendor’s receipts. When the Taxpayer charges its clients, here the Shady
Brook project, for the items purchased from the vendors, the Taxpayer is the entity liable for
gross receipts on those transactions – neither the vendor nor the client has any obligation to
report or pay tax on Taxpayer’s receipts. Although the practice is for a seller to pass the cost
of the gross receipts tax to the buyer, it does not change the responsibility for the tax. If the
gross receipts tax is not paid by the buyer on the products he/she purchases, the seller
remains responsible to the state for payment of the tax.
Recognizing the responsibility and problems inherent in the taxing of transactions
when ownership passes, the legislature has provided a number of statutory deductions from
gross receipt tax. As acknowledged by Taxpayer’s representative, for purchases of materials
and supplies for future projects Taxpayer will utilize nontaxable transaction certificates
(NTTC’s) when purchasing tangible personal property for resale. NMSA 1978, §7-9-47.
NMSA 1978, §7-9-48 allows under certain prescribed conditions a deduction for the
sale of services for resale. Taxpayer when purchasing goods and services for resale to client’s
such as the Shady Brook project owners (as opposed to using the items in the performance of
Decision and Order
Tax Hearing regarding the Denial of Refund
issued under letter L0343320704
to New Mexico Healthy Homebuilders, Inc
Page 10 of 11
its own services) is eligible to provide NTTCs to its vendors. Providing the NTTCs to the
vendor would enable the vendors to deduct the receipts from the sale of goods and services to
Taxpayer and eliminate the vendor’s gross receipts on these sales. The legislature has
provided the means for the tax to be assessed one time, namely but using nontaxable
transaction certificates. By not having availed himself of the means for avoiding the tax in
question, Taxpayer is left with the presumption of taxability.
CONCLUSIONS OF LAW
A. Taxpayer filed a timely, written protest to the denial of refund issued under
Letter Id No. L0343320704 and jurisdiction lies over the parties and the subject matter of this
protest.
B. The reimbursement Taxpayer received from Shady Brook for materials, supplies
and services purchased from third parties were not received on behalf of another in a disclosed
agency capacity. The reimbursements were receipts from engaging in business and were subject
to gross receipts tax.
C. The imposition of gross receipts tax on Taxpayer’s reimbursed expenses does
not constitute illegal or unconstitutional double taxation.
For the foregoing reasons, the protest of New Mexico Healthy Home Builders, Inc. IS
DENIED.
Dated: October 14, 2009.
Decision and Order
Tax Hearing regarding the Denial of Refund
issued under letter L0343320704
to New Mexico Healthy Homebuilders, Inc
Page 11 of 11
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