Were a private vehicle-repossession contractor's receipts from federally chartered credit unions immune from New Mexico gross receipts tax?

Plain-English summary

West Rock's vehicle-repossession receipts from federally chartered credit unions were subject to New Mexico gross receipts tax. The credit unions themselves had federal tax immunity, but that protection did not extend to a separate independent contractor.

West Rock, doing business as Mile High Recovery, repossessed vehicles for financial institutions. During the audit period it earned $613,953.20 from repossession services performed for federal credit unions in New Mexico.

The credit unions authorized each repossession, sometimes called West Rock their agent for collection, and indemnified it against certain claims. West Rock received a flat $300-$350 per successful recovery and nothing if it failed. It had no interest in the loans or vehicle titles and did not participate in the credit unions' later negotiations, auctions, or disposition decisions.

Tax immunity protected the credit unions, not every contractor they hired

Federal credit unions were federal instrumentalities protected from direct state taxation by the Supremacy Clause and 12 U.S.C. § 1768. The Department did not dispute that rule.

The decisive question was the legal incidence of the tax—who state law made liable. New Mexico imposed gross receipts tax on the person engaging in business. Here, that person was West Rock.

The credit unions might bear an economic cost if West Rock raised prices to cover tax, but federal immunity did not prohibit a tax merely because it increased the government's or instrumentality's expenses. A private contractor's earnings could be taxed when the legal liability remained with the contractor.

West Rock did not “stand in the shoes” of the credit unions

An independent entity could receive constitutional immunity only if it was so intimately connected with a government function that taxing it directly interfered with the government itself.

West Rock was a privately owned, for-profit New Mexico corporation. It served other banks and lenders as well as federal credit unions, and the credit unions had no ownership or day-to-day control of the company.

Repossession authorization and indemnity created a limited commercial relationship. Credit unions could choose to employ their own recovery staff or hire outside contractors, so taxing West Rock did not prevent them from performing the function.

The decision compared West Rock with federal laboratory contractors that performed even broader management functions but still lacked immunity under United States v. New Mexico.

Section 1768 did not mention third parties

The federal statute exempted federal credit unions, their property, funds, and income. Nothing in its text extended immunity to agents or independent contractors.

The hearing officer declined to infer a broader 1934-era protection. Federal tax immunity for a third party required a clear congressional expression identifying protected contracts or programs.

Result: protest denied. West Rock owed $135,376.31 in gross receipts tax and $106,712.91 in related interest as of the hearing. It had also conceded $549.02 in withholding tax and $207.62 in withholding interest. Combined, those stated amounts totaled $242,845.86, with interest continuing until principal was paid.

What this means for you

Contractors serving federal entities or instrumentalities

Your customer's immunity does not automatically pass through. Determine who state law makes legally liable and whether Congress expressly protects the contractor or program.

Businesses invoicing tax-exempt customers

A customer's refusal to pay a separately stated tax does not change the seller's own liability. Price the contract with that risk in mind.

Repossession and recovery companies

Agency language, authorization, and indemnity did not make this contractor part of the credit union. The broader ownership, control, and operational relationship mattered.

Common questions

Q: Are federal credit unions exempt from direct New Mexico gross receipts tax?
A: Yes. The decision recognized their federal-instrumentality immunity.

Q: Why could West Rock still be taxed?
A: It was the independent business earning the receipts, so the legal incidence fell on West Rock rather than the credit unions.

Q: Did calling West Rock an agent change the result?
A: No. The authorizations were limited to particular repossessions and did not integrate West Rock into the credit unions' structure.

Q: Did Section 1768 protect contractors?
A: No. The decision found no express language extending the statute to third parties.

Q: How much remained due?
A: $242,845.86 in the gross receipts and conceded withholding amounts stated as of the hearing, with continuing interest.

Citations and references

Constitution, statutes, and regulations:

• U.S. Constitution, Article VI, Clause 2 — Supremacy Clause
• 12 U.S.C. § 1768 — federal credit union tax immunity
• NMSA 1978, §§ 7-1-17(C), 7-9-4, and 7-9-5 — assessment and taxable-receipts presumptions
• Regulations 3.2.4.8 and 3.2.4.10 NMAC — seller liability and federal credit unions
• NMSA 1978, § 7-1-67 — continuing interest

Cases cited:

• United States v. New Mexico, 455 U.S. 720 (1982)
• United States v. Michigan, 851 F.2d 803 (6th Cir. 1988)
• United States v. Kabeiseman, 970 F.2d 739 (10th Cir. 1992)
• Kern-Limerick v. Scurlock, 347 U.S. 110 (1954)
• Rockford Life Insurance Co. v. Illinois Department of Revenue, 482 U.S. 182 (1987)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: West Rock Inc. d/b/a Mile High Recovery
• Decision PDF: D&O 13-10

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
WEST ROCK INC. d/b/a MILE HIGH RECOVERY No. 13-10
TO ASSESSMENT ISSUED UNDER
LETTER ID NO. L0843328896

DECISION AND ORDER

An oral argument in the above captioned protest occurred on March 28, 2013

before Brian VanDenzen, Esq., Tax Hearing Officer, in Santa Fe. Attorney Joe Lennihan

appeared for West Rock Inc. d/b/a Mile High Recovery (“Taxpayer”). Staff Attorney Ida

M. Luján appeared representing the State of New Mexico Taxation and Revenue

Department (“Department”). Protest Auditor Andrick Tsabetsaye of the Department also

appeared. The parties stipulated to the admission of Exhibits 1-15, as more thoroughly

described in the Administrative Protest Hearing Exhibit Log. In addition to the exhibits,

the parties submitted comprehensive stipulation of facts in this matter rather than conduct

an evidentiary hearing. Based on the evidence and arguments presented, IT IS DECIDED

AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. On November 30, 2006, the Department selected Taxpayer for a field

audit for a period from January 1, 2001 through October 31, 2006. [Stipulated Fact

(“SF”) #1 and Stipulated Ex. #1].

2. The Department detected during the audit that Taxpayer understated its tax

liability in tax years 2001 through 2004 by more than 25%. [SF #2 and Stipulated Ex.

1.6].

3. As a result of the audit, on December 3, 2008, the Department assessed

Taxpayer under letter identification number L0843328896 for $168,352.47 in gross

receipts tax and $100,756.82 in gross receipts tax interest for a then-total gross receipts

assessment of $269,109.29. [SF #4 and Stipulated Ex. #2].

4. The Department also assessed Taxpayer $1750.82 in withholding tax, and

$516.02 in withholding tax interest for the Combined Reporting System periods from

January 31, 2001 through October 31, 2006. However, Taxpayer does not protest its

liability for withholding tax. [SF #3, Stipulated Ex. #2].

5. On December 16, 2008, Taxpayer requested a 60-day extension to protest

the assessment. [SF #5, Stipulated Ex. #3].

6. On January 15, 2009, the Department granted Taxpayer a 60-day

extension to protest the assessment. [SF #5, Stipulated Ex. #4].

7. On March 2, 2009, Taxpayer protested the Department’s assessment.

[Stipulated Ex. #5].

8. The Department acknowledged receipt of Taxpayer’s protest on March 6,

2009.

9. Taxpayer has conceded liability for the assessed withholding tax of

$549.02 and accrued interest of $207.62 as of March 28, 2013. [SF #10 & #14].

10. During the pendency of this protest, the Department abated $32,976.16 in

gross receipts tax and $19,721.34 in related interest. The parties also resolved the

In the Matter of the Protest of West Rock, Inc., page 2 of 18
disclosed agency issue identified in the parties’ August 24, 2013 Joint Prehearing

Statement. [SF #10].

11. The parties stipulated that of the remaining portion of the gross receipts

assessment, Taxpayer only protests the portion of Taxpayer’s gross receipts attributable

to the services it performed for federally-chartered credit unions (“FCU” or “FCUs”)

within New Mexico. Over the audit period, Taxpayer had a total of $613,953.20 in gross

receipts from its transactions with FCUs. [SF #14 & #15].

12. On March 17, 1995, Taxpayer incorporated in New Mexico as a for-profit

corporation, and remained so incorporated at all relevant times. [SF #8 & #9].

13. Taxpayer engaged in the business of providing intrastate and interstate

automobile repossession/recovery services to financial institutions, other lenders, and

dealers possessing a perfected security interest in the recovered automobiles, recreational

vehicles, trailers, boats, all terrain vehicles, and motorcycles (collectively referenced

herein as “vehicles”). [SF #11].

14. During the relevant period, Taxpayer was duly authorized under New

Mexico law by the State Corporation Commission (now known as the Public Regulation

Commission) and the Regulation and Licensed Department to repossess vehicles. [SF #12

& #13, Stipulated Ex. #9 & #10].

15. The parties made numerous stipulations of fact [SF #25-31, 33-35] that

provide historical background, structural background, and a policy background on FCUs

and how FCUs differ from banks. Those stipulations of fact are helpful in providing

context and are adopted as findings. [SF #25-31, 33-35].

In the Matter of the Protest of West Rock, Inc., page 3 of 18

16. When a consumer loan for the purchase of a vehicle is originated through

a FCU, the FCU imposes a lien on the vehicle, recorded on the vehicle’s title. [SF #16].

17. Rather than maintain its own vehicle recovery staff, when a borrower

defaults on vehicle loan, FCUs generally contract with private recovery businesses to

repossess the vehicle. [SF #17].

18. During the relevant period, Taxpayer performed vehicle repossession

services for FCUs as an independent contractor. [SF #11, SF #15].

19. Taxpayer only repossess vehicles upon receipt of a written authorization

from FCUs. The written authorization sometimes identifies Taxpayer as an agent of the

FCU for the purpose of collecting or repossessing the collateral covered by a contract in

default. The written authorizations customarily includes a hold harmless agreement and

indemnifies Taxpayer against claims that may be brought against Taxpayer including but

not limited to claims for court costs, reasonable attorney fees, and other expenses of

litigation. [SF #18].

20. Taxpayer is not a party to FCUs’ loans with FCUs’ customers, does not

have an interest in the title of the recovered vehicles, and does not claim a lien or any

other interest in any of the recovered FCUs vehicles. [SF #19].

21. FCUs pay Taxpayer a flat rate between $300 and $350 per tow for vehicle

recovery/repossession. Taxpayer receives no payments if Taxpayer fails to recover an

assigned vehicle. [SF #21].

22. Taxpayer performs two types of vehicle repossession: voluntary and

involuntary. In voluntary repossession, the FCU and its borrowers agree between

themselves that the FCU through Taxpayer may proceed to recover a particular vehicle at

In the Matter of the Protest of West Rock, Inc., page 4 of 18
a particular time and place. In involuntary repossession, no arrangement is made and

Taxpayer recovers the vehicles by any lawful means. [SF #20].

23. Upon successful vehicle repossession, Taxpayer turns over the vehicle to

FCUs. Without any substantive participation from Taxpayer, FCUs may engage in post-

repossession negotiations on the vehicle, place the vehicle up for auction through a third

party auctioneer to recover deficiencies on the defaulted loan, or otherwise dispose of the

vehicle. [SF #22].

24. The parties stipulated that upon their information and belief, FCUs located

in New Mexico have no uniform practice regarding payment of New Mexico gross

receipts tax on the purchase of services. [SF #36].

25. FCUs that Taxpayer performed repossession services for during the

relevant period refused to pay invoiced gross receipts taxes, requested that gross receipts

taxes not be invoiced to them, or provided Taxpayer with “sales tax exemption”

certificates issued to the FCUs by the National Credit Union Administration (“NCUA”).

[SF #23, Stipulated Ex. #11 & #12].

26. Taxpayer did not invoice and did not collect gross receipts tax from FCUs

for Taxpayer’s vehicle repossession services during the relevant period. [SF #24].

27. Taxpayer did not remit gross receipts tax to the Department for its receipts

from the FCUs during the relevant period. [SF #24].

28. As of the date of hearing, Taxpayer owed $135,376.31 in assessed gross

receipts tax plus $106,712.91 in interest as calculated on March 28, 2013, for a total

outstanding liability of $242,845.86. [SF #10].

In the Matter of the Protest of West Rock, Inc., page 5 of 18
DISCUSSION

The issue to be decided is whether Taxpayer is liable for New Mexico gross

receipts tax on its receipts from performing vehicle recovery/repossession services as a

contractor for FCUs in New Mexico. In this case, Taxpayer is an independent contractor

performing services for FCUs. Taxpayer is not a FCU or an employee of a FCU. The

Department does not dispute that consistent with the Supremacy Clause and 12 U.S.C. §

1768 it cannot impose New Mexico gross receipts tax directly on the receipts of FCUs1.

Taxpayer argues that when working as an independent contractor repossessing vehicles

for the FCUs, Taxpayer necessarily “stands in the shoes” of the FCUs so as to make

Taxpayer integral to the operation of an essential FCU function. Therefore, Taxpayer

avers that its receipts from the FCUs are immune from state taxation. In the alternative,

Taxpayer argues that 12 U.S.C. § 1768 provides third parties working with FCUs state

tax immunity.

There is a statutory presumption that any assessment of tax made by the

Department is correct. See NMSA 1978, § 7-1-17(C) (2007); See also MPC Ltd. v. New

Mexico Taxation & Revenue Department, 2003 NMCA 21, ¶ 13, 133 N.M. 217, 62 P.3d

308. There is also a presumption that all receipts of a person engaging in business in New

Mexico are subject to gross receipts tax. See NMSA 1978, Section 7-9-5 (2002); See also

Grogan v. New Mexico Taxation and Revenue Department, 2003-NMCA-033, ¶ 11, 133

N.M. 354, 62 P.3d 1236, cert. denied, 133 N.M. 413, 63 P.3d 516 (2003). Accordingly, it

is Taxpayer’s burden to present evidence and legal argument to show that it is entitled to

1
Consistent with the requirements of 12 U.S.C. §1768, under Regulation 3.2.4.10 NMAC (4/30/01), FCUs are
exempt from a tax upon their gross receipts.

In the Matter of the Protest of West Rock, Inc., page 6 of 18
an abatement, in full or in part, of the assessment issued against it. See Archuleta v.

O'Cheskey, 84 N.M. 428, 431, 504 P.2d 638, 641 (NM Ct. App. 1972).

Under the Supremacy Clause of the United States Constitution, Art. VI. Cl. 2, no

State may impose a tax directly upon the United States. See United States v. New Mexico,

455 US 720, 733, 102 S. Ct. 1373, 1382 (1982). The United States’ state tax immunity

under the Supremacy Clause extends to federal instrumentalities. See McCulloch v.

Maryland, 4 Wheat. 316, 17 U.S. 316, 4 L. Ed. 579 (1819). A FCU is a federal

instrumentality entitled to the Supremacy Clause’s state tax immunity. See United States v.

Michigan, 851 F.2d 803, 807 (6th Cir. Mich. 1988). Moreover, under 12 U.S.C. § 1768, the

property, the “franchises, capital, reserves, surpluses, and other funds, and [the] income”

of federally chartered credit unions are “exempt from all taxation” by any State or local

government. Therefore, under the Supremacy Clause and 12 U.S.C. § 1768, no State can

levy a tax directly on a FCU. See Michigan at 807.

Of particular importance to the resolution of this protest is United States v. New

Mexico, 455 US 720, 102 S. Ct. 1373 (1982). In New Mexico, the United States Supreme

Court discussed the historical origins of the Supremacy Clause tax immunity doctrine, the

narrowing evolution of that doctrine, and the limits of the applicability of that doctrine to

third parties doing business with the federal government2. New Mexico dealt with the State

of New Mexico’s attempts to impose gross receipts tax on three independent contractors

working with the federal government’s Department of Energy laboratories in New Mexico.

See id. at 722-725, 1376-1378.

2
The findings in New Mexico vis-à-vis the federal government are equally applicable to the Federal
Instrumentality—the FCUs—at issue in this protest

In the Matter of the Protest of West Rock, Inc., page 7 of 18
The Supreme Court in New Mexico noted that the “limits on the immunity doctrine

are…as significant as the rule itself.” id. at 734, 1382. The Supreme Court found that the

immunity doctrine does not protect the federal government from a tax that “has an effect on

the United States” or instances where the federal government bears the entire economic

burden of a tax. id., citing Alabama v. King & Boozer, 314 U.S. 1, 9-13, (1941). Nor,

according to the Supreme Court in New Mexico, does the immunity doctrine protect the

“earnings of a contractor providing services to the [Federal] Government.” id. at 734, 1383,

citing James v. Dravo Contracting Co., 302 U.S. 134, 150 (1937). The Supreme Court also

found that that Supremacy Clause immunity doctrine “cannot be conferred simply because

the tax is paid with government funds.” id. 735, 1383, citing United States v. Boyd, 378 U.S.

39, 41 (1964).

Under the modern approach adopted by the United States Supreme Court in New

Mexico, constitutional immunity to a state tax only applies to a private taxpayer when that

person “stand[s] in the Government’s shoes.” id. at 736, 1383 (internal citations omitted).

As the Supreme Court expounded,

a state tax is impermissible when the taxed entity is "so intimately
connected with the exercise of a power or the performance of a duty"
by the Government that taxation of it would be "'a direct interference
with the functions of government itself.'" New Mexico at 736, 1383
(internal citations omitted).

Because the three independent contractors working under contract with the Federal

labs “could not be termed constituent parts of the Federal Government” that would entitle

them to constitutional immunity from taxation, id. at 740, 1386, the Supreme Court

ultimately upheld the imposition of New Mexico’s gross receipts tax on the three private

subcontractors. id. at 744, 1388. See also James v. Dravo Contracting Co., 302 U.S. 134,

In the Matter of the Protest of West Rock, Inc., page 8 of 18
161 (1937) (upholding West Virginia’s gross receipts tax on an independent contractor of

the federal government because tax did “not interfere an any substantial way with the

performance of federal functions”).

Two other points in New Mexico are relevant to the resolution of this protest. First,

the Supreme Court stated that the case Kern-Limerick v. Scurlock, 347 U.S. 110 (1954)

“stands only for the proposition that the State may not impose a tax the legal incidence of

which falls on the Federal Government.” id. at 742, 1387 (internal citations omitted).

Second, the Supreme Court did not disagree with the federal government’s concession that

the legal incidence of New Mexico’s gross receipts tax fell on the contractors rather than the

federal government. See id. at 738, 1385. Those two points apply to this protest: as will be

discussed in more detail below, the legal incidence of New Mexico’s gross receipts tax in

this case does not fall on the FCUs but on Taxpayer, who is engaged in vehicle repossession

services in New Mexico. See NMSA 1978, Section 7-9-4 (2010). Therefore, since the legal

incidence of New Mexico’s gross receipts tax does not fall on the FCUs, Kern-Limerick

does not control the outcome of this protest.

To the extent that Kern-Limerick has impact on the resolution of this protest, it

comes from the Supreme Court’s distinguishing between Alabama v. King & Boozer, 314

U.S. 1, 9-13, (1941), where a tax was found permissible against a government contractor,

and the facts in front of it in Kern-Limerick. In finding the tax in front of it unsustainable

under Supremacy Clause tax immunity, the Kern-Limerick Supreme Court found that “King

& Boozer is not controlling for, though the Government also bore the economic burden of

the state tax in that case, the legal incidence of that tax was held to fall on the independent

contractor and not upon the United States.” Kern-Limerick at 122.

In the Matter of the Protest of West Rock, Inc., page 9 of 18
In United States v. Kabeiseman, 970 F.2d 739, 741 (10th Cir. Wyo. 1992), the

United States Court of Appeals for the Tenth Circuit provided a good summary of the

modern view on the Supremacy Clause state tax immunity doctrine:

In sum, then, under current intergovernmental tax immunity doctrine
the States can never tax the United States directly but can tax any
private parties with whom it does business, even though the financial
burden falls on the United States, as long as the tax does not
discriminate against the United States or those with whom it deals.

The legal incidence of the tax was also an important consideration in the 10th Circuit’s

Kabeiseman decision. In Kabeiseman, the 10th Circuit had to consider the State of

Wyoming’s imposition of a sales tax on diesel fuel and a license tax on gasoline used upon a

private contractor under contract with the United States to operate a federally owned fuel

facility. See id. at 740. Because the 10th Circuit found that the legal incidence of the sales tax

fell on the purchaser of diesel fuel—the federal government—rather than the private

contractor, it invalidated Wyoming’s imposition of the diesel tax under the Supremacy

Clause. See Kabeiseman at 742-743. See also United States v. Lohman, 74 F.3d 863 (8th Cir.

1995) (8th Circuit Court of Appeals found that if the legal incident of a tax fell on the federal

government, then the Supremacy Clause prohibited that tax). However, citing New Mexico,

the 10th Circuit upheld the imposition of the use tax on the gasoline because the legal

incidence of tax fell on the first user to withdraw the gasoline—the private contractor—

rather than the owner of the gasoline, the federal government. See Kabeiseman at 743-744.

The legal incidence of tax in the context of Supremacy Clause tax immunity was

also discussed in United States v. California Bd. of Equalization, 650 F.2d 1127 (9th Cir.

Cal. 1981). In that case, the 9th Circuit Court of Appeals noted that the “legal incidence of a

In the Matter of the Protest of West Rock, Inc., page 10 of 18
tax falls on the party who the legislature intends will pay the tax.” id. at 1130-1131 (internal

citations omitted). Also in that case, id. at 1131, the 9th Circuit Court of Appeals found that

[t]he constitution only prohibits the state from levying a tax on the
United States; it does not prohibit the state from enacting a taxing
scheme whose effect is to increase prices paid by the United States.
Therefore, there is no constitutional violation if the state levies a tax
on a lessor to the United States and the lessor recoups this tax
payment by raising the lease price increasing the economic burden to
the United States.

United States v. Michigan, 851 F.2d 803 (6th Cir. Mich. 1988) is another case that

deals both with FCUs and the role that the legal incidence of tax plays in the Supremacy

Clause analysis. In Michigan, the 6th Circuit Court of Appeals considered whether a

Michigan sales tax unconstitutionally imposed a tax on purchases by FCUs. See id. at 804.

Relying partially on Congress’ desire for tax immunity for FCUs articulated by 12 U.S.C. §

1768, the Michigan 6th Circuit found that FCUs are federal instrumentalities entitled to the

same Supremacy Clause state tax immunity protection as the United States government. id.

at 807. Like a direct tax on the federal government, the 6th Circuit Court of Appeals found

that any direct tax on FCUs as federal instrumentalities is unconstitutional. See id. at 807.

However, the 6th Circuit Court of Appeals found that a “tax is not unconstitutional… if the

legal incidence of the tax falls on a party who deals with the federal government and merely

the economic burden of the tax is passed on to the United States by that party.” id. at 807.

Because the court determined that legal incidence of Michigan’s sales tax fell on the

purchaser—in that case the FCUs—rather than the seller, the 6th Circuit in Michigan

ultimately found that the Supremacy Clause tax immunity protected the FCUs from

Michigan’s sales tax.

In the Matter of the Protest of West Rock, Inc., page 11 of 18
Applying the case-law to the facts of this case, Taxpayer is not entitled to tax

immunity under the Supremacy Clause or under 12 U.S.C. §1768. New Mexico is not

attempting to tax directly the FCUs. The legal incidence of New Mexico gross receipts tax

falls on the person engaged in business, which in this case is Taxpayer. See NMSA 1978,

Section 7-9-4 (2010) (New Mexico gross receipts tax imposed upon a person engaging in

business); see also Regulation 3.2.4.8 NMAC (4/30/01) (a person engaged in business is

solely liable for gross receipts tax and are not collectors on behalf of state); See also Tiffany

Construction Company v. Bureau of Revenue, 96 N.M. 296, 300, 629 P.2d 1225, 1229

(1981). While New Mexico’s imposition of gross receipts directly on Taxpayer might have

the effect of creating an additional economic burden on FCUs, the above-discussed case law

overwhelming holds that the Supremacy Clause does not prohibit a state tax merely because

it increases the costs to the federal government/instrumentality.

In instances like here where the legal incidence of tax is not imposed directly on the

federal government/instrumentality, the only way a third party like Taxpayer can be

protected by Supremacy Clause tax immunity is if Taxpayer “stands in the government

shoes” to the point that taxing Taxpayer would be a direct interference with the functions of

FCUs. New Mexico at 736, 1383 (internal citations omitted). Taxpayer argues in this case

that because Taxpayer has no legal authority to repossess a vehicle on its own absent a

FCUs’ authorization, and was indemnified from legal action while repossessing FCUs’

vehicles, Taxpayer stands in the shoes of the FCU when repossessing FCUs’ vehicles.

While the FCUs indemnified Taxpayer when repossessing vehicles, there is no

evidence that FCUs are unique in that regard or that Taxpayer did not have similar

indemnification agreements when repossessing vehicles for other banks and credit unions.

In the Matter of the Protest of West Rock, Inc., page 12 of 18
Moreover, Taxpayer can only ever repossess any vehicle when authorized by the vehicle’s

lien holder, whether that be a FCU or another bank. In other words, there simply is no

evidence that Taxpayer’s arrangements with FCUs are unique to FCUs’ business structure

or whether those arrangements merely reflect standard practices of all financial institutions

involved in the vehicle repossession business. If those business practices represent industry

standards, then the FCUs’ indemnification of Taxpayer and the FCUs’ granting of authority

to repossess a vehicle do not necessarily establish that Taxpayer was integral to FCUs’

business. If anything, these two facts demonstrate that the FCUs contracted with Taxpayer

for limited and specific purposes, just like the New Mexico contractors.

Indeed, the facts of this case are not markedly different from the facts in New

Mexico. Just like the facts of New Mexico, Taxpayer is a privately owned corporation where

the FCUs have no role in the day-to-day operations or any ownership interest in Taxpayer’s

corporation. See New Mexico at 740, 1386. Taxpayer does vehicle repossession services on

behalf of other banking clients, not just FCUs. Taxpayer is a for-profit corporation engaged

in business in New Mexico, and therefore required to pay New Mexico gross receipts tax on

all other receipts absent a specific exemption or deduction. See NMSA 1978, § 7-9-4 (2010).

As the Supreme Court in New Mexico explained, “[o]nce it is conceded that the

contractors are independent taxable entities, it cannot be disputed that that their gross

income is taxable.” id. at 741, 1386. Quoting from its earlier decision in United States v.

Boyd, 378 U.S. 39, 48 (1964), the Supreme Court concluded that the contractors in New

Mexico were for-profit entities engaged in a commercial transaction and were not

incorporated into the government structure for purpose of claiming immunity from state

taxation. See New Mexico at 739-740, 1385.

In the Matter of the Protest of West Rock, Inc., page 13 of 18
At least two of the three independent contractors in New Mexico played more

integral parts in the operation of the federal government’s laboratories than Taxpayer did in

this protest when repossessing vehicles. In New Mexico, one of the contractors managed

the federal government’s Sandia Laboratories. New Mexico at 723, 1377. Another

contractor provided a “variety of management, maintenance, and related functions” for

Los Alamos National Laboratory. id. at 724, 1377. While the federal government

maintained significant control over the contractors in New Mexico, the management

services the contractors provided nevertheless imply that the contractors played some

continuing role in the day-to-day operations of the laboratories. Yet, despite playing a

day-to-day role in the operations of the laboratories, the Supreme Court in New Mexico,

id. at 740-741, 1386, did not find those contractors integral:

[t]he congruence of professional interests between the contractors
and the Federal Government is not complete; their relationships
with the Government have been created for limited and carefully
defined purposes. Allowing the States to apply use taxes to such
entities does not offend the notion of federal supremacy.

If playing a role in the day-to-day operations of the labs was insufficient to stand in the

shoes of the government, then Taxpayer’s vehicle repossession service, a limited service

with a carefully designed purpose, does not qualify as integral and therefore Taxpayer

does not stand in the FCUs shoes in this circumstance.

Moreover, FCUs have a choice in how to proceed with vehicle repossession

services: FCUs can hire their own employees to perform repossession services or can hire

outside contractors. The fact that FCUs always have a choice in whether to hire a

contractor or hire an internal employee to repossess vehicles strongly suggests that state

taxation is not a “direct interference with the functions…” of FCUs or with the FCUs’

In the Matter of the Protest of West Rock, Inc., page 14 of 18
ability to recover vehicles. See New Mexico at 736, 1383 (internal citations omitted).While

FCUs may prefer to hire outside contractors instead of internal employees for cost

reasons, the Supremacy Clause does not shield the FCUs from the potential increased

economic burden that the imposition of gross receipts tax on the outside contractor might

cause. While FCUs may have directed Taxpayer to not invoice gross receipts tax, under

the above-discussed case law, Taxpayer is free to increase its contract prices in order to

account for Taxpayer gross receipts liabilities.

Taxpayer also argued that in the alternative that if the Supremacy Clause tax

immunity by itself did not preclude Taxpayer’s gross receipts tax liability, then the

protections of 12 U.S.C. §1768 made Taxpayer’s gross receipts from the FCUs immune

from taxation. As part of this argument, Taxpayer argues that the language itself

contained in 12 U.S.C. §1768 affords protection to agents or contractors of FCUs.

Taxpayer also argues that 12 U.S.C. §1768 must be read broadly for legislative intent

because at the time the United States Congress promulgated it in 1934, Supremacy

Clause immunity had a broader application to third parties conducting business with the

federal government/instrumentality.

In pertinent part, 12 U.S.C. §1768 reads

The Federal credit unions organized hereunder, their property, their
franchises, capital, reserves, surpluses, and other funds, and their
income shall be exempt from all taxation now or hereafter imposed
by the United States or by any State, Territorial, or local taxing
authority; except that any real property and any tangible personal
property of such Federal credit unions shall be subject to Federal,
State, Territorial, and local taxation to the same extent as other
similar property is taxed. Nothing herein contained shall prevent
holdings in any Federal credit union organized hereunder from
being included in the valuation of the personal property of the
owners or holders thereof in assessing taxes imposed by authority

In the Matter of the Protest of West Rock, Inc., page 15 of 18
of the State or political subdivision thereof in which the Federal
credit union is located…

Despite Taxpayer’s argument, nothing in the plain language of 12 U.S.C. §1768 suggests

that it extends to third party contractors or agents of FCUs.

While Taxpayer argues for the broader Supremacy Clause tax immunity

interpretation in effect in 1934, in the context of conferring state tax immunity, Congress’

intent as expressed in statute “should not be expanded or modified in any degree by the

judiciary.” Rockford Life Ins. Co. v. Ill. Dep't of Revenue, 482 U.S. 182, 192 (U.S. 1987),

citing Smith v. Davis, 323 U.S. 111, 119 (U.S. 1944). In order for a court to grant implied

state tax immunity, congress must speak with clarity. See Rockford Life Ins. Co. at 191-

192. As the Supreme Court required in New Mexico, see id. at 737, 1384, if Congress

wished to extend immunity to third party contractors, it needed to do so expressly by

specifying particular contracts or particular programs immune from state taxation. Absent

express language extending immunity to third parties contracting with the FCUs, there is

no basis to do so under 12 U.S.C. §1768.

In summary, because the incidence of New Mexico gross receipts tax falls on the

Taxpayer, because Taxpayer does not stand in the shoes of the FCUs and is not integral

to the operations of the FCUs when repossessing vehicles, and because 12 U.S.C. §1768

does not expressly provide immunity to third party contractors working with FCUs,

Taxpayer’s protest is denied.

CONCLUSIONS OF LAW

A. Taxpayer filed a timely, written protest to the assessment, letter id. no.

L0843328896. Jurisdiction lies over the parties and the subject matter of this protest.

In the Matter of the Protest of West Rock, Inc., page 16 of 18
B. The legal incidence of New Mexico’s gross receipts tax for Taxpayer’s

independent contracting services fell on Taxpayer, not on the FCUs. See NMSA 1978, § 7-

9-4 (2010); see also Regulation 3.2.4.8 NMAC (4/30/01); see also Tiffany Construction

Company v. Bureau of Revenue, 96 N.M. 296, 300, 629 P.2d 1225, 1229 (1981).

C. While FCUs are federal instrumentalities entitled to state tax immunity,

Taxpayer does not stand in the shoes of the FCUs and therefore Taxpayer is not entitled to

state tax immunity. See United States v. New Mexico, 455 US 720, 102 S. Ct. 1373 (1982)

D. Without a clear expression that 12 U.S.C. §1768 extends to third party

contractors, Taxpayer is not immune from state taxation under the statute. See Rockford

Life Ins. Co. v. Ill. Dep't of Revenue, 482 U.S. 182, 192 (U.S. 1987), citing Smith v.

Davis, 323 U.S. 111, 119 (U.S. 1944); See also United States v. New Mexico, 455 US 720,

737, 102 S. Ct. 1373, 1384 (1982).

For the foregoing reasons, the Taxpayer's protest IS DENIED. Taxpayer owes

$135,376.31 in assessed gross receipts tax plus $106,712.91 in interest (calculated as of

March 28, 2013 hearing date). Taxpayer owes $549.02 in withholding tax and accrued

interest of $207.62 (calculated as of March 28, 2013 hearing date). Pursuant to NMSA 1978,

Section 7-1-67 (2007), interest continues to accrue until tax principal is paid.

DATED: April 30, 2013.

Brian VanDenzen, Esq.
Tax Hearing Officer
Taxation & Revenue Department
Post Office Box 630
Santa Fe, NM 87504-0630

In the Matter of the Protest of West Rock, Inc., page 17 of 18
In the Matter of the Protest of West Rock, Inc., page 18 of 18