Were dairy-cow hoof-trimming receipts exempt as livestock handling or deductible as cultivation of agricultural products?

Plain-English summary

Enchantment Custom Hoof Care's dairy-cow hoof trimming was a taxable New Mexico service. Maintaining cattle health and milk production did not make the receipts exempt livestock handling or deductible cultivation of agricultural products.

The business sold hoof-trimming services to local dairies in 2005 and 2006. It filed no gross receipts tax returns for those years.

The Department assessed:

• 2005: $7,594.87 tax and $3,038.88 interest.
• 2006: $8,564.42 tax and $2,181.16 interest.

No penalty was assessed. The Department also abated 180 days of interest because it did not assess within 180 days after the audit.

The livestock exemptions did not apply

Section 7-9-18 exempted receipts from selling livestock and specified agricultural products. Enchantment sold services, not cattle or another listed product.

Section 7-9-19 exempted feeding or pasturing livestock and treated penning and handling livestock “prior to sale” as feeding. The decision assumed hoof trimming could be handling but held that the statutory sale connection mattered.

“Prior to sale” meant handling in anticipation of or preparation for a sale expected within a close period. Enchantment trimmed hooves so dairy cows would remain healthy and continue producing milk, not to prepare them for an expected sale.

Hoof trimming was not cultivation

Enchantment also invoked the deduction for threshing, cleaning, growing, cultivating, or harvesting agricultural products. It compared hoof trimming to a withdrawn Department ruling that had treated pruning pecan trees as cultivation supporting nut production.

The decision used the ordinary definition of “cultivate”—preparing and using soil to grow plants. Without statutory or regulatory language broadening that term, animal hoof care did not qualify, even if it supported milk production.

The audit letter did not bar assessment

An August 29, 2008 limited-scope audit resolution said the Department would take no further action, but assessments followed in February 2009.

The letter was not a formal ruling signed as the regulation required. It also came after the 2005 and 2006 liabilities arose, so Enchantment could not have relied on it when the taxes became due. The hearing officer also lacked power to grant equitable estoppel.

Because Enchantment was a nonfiler, the Department had seven years from the end of the year in which each tax was due to assess. The 2009 assessments were timely.

Interest and hearing delay

Interest was mandatory on unpaid tax, although the Department had already granted the statutory 180-day audit-delay abatement.

The Department waited more than four years after the 2009 protest to request a hearing. The law governing that protest had no strict hearing deadline, and the decision found no administrative dismissal remedy for the delay.

Result: protest DENIED. The original assessments totaled $16,159.29 tax and $5,220.04 interest, or $21,379.33 combined.

What this means for you

Livestock service providers

Work performed on livestock is not automatically exempt. The cited handling exemption required a close connection to an anticipated sale, which routine health and production care lacked.

Agricultural businesses claiming a deduction

Courts and hearing officers construe deductions narrowly. Similar economic purposes—such as maintaining production—do not substitute for the statute's listed activity.

Taxpayers receiving an audit closure letter

Confirm whether the document is a formal ruling and whether the governing statute makes it final. This decision did not treat a limited-scope “no further action” notice as barring a later timely assessment.

Common questions

Q: Did the decision say hoof trimming was not “handling”?
A: It assumed the service could be handling but found it was not handling livestock prior to an expected sale.

Q: Why wasn't supporting milk production enough for the cultivation deduction?
A: The ordinary meaning of cultivation involved soil and plants, and the statute did not clearly extend it to animal care.

Q: Did the Department assess negligence penalty?
A: No. The assessments included tax and interest only.

Q: What relief did Enchantment receive for Department delay?
A: The Department abated 180 days of interest for the audit-to-assessment delay, but the later hearing delay did not cancel the assessment.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-9-5 and 7-9-3.5 — taxable-receipts presumption and gross receipts
• NMSA 1978, §§ 7-9-18 and 7-9-19 — livestock-sale and feeding, pasturing, or presale-handling exemptions
• NMSA 1978, § 7-9-59(B) — agricultural-service deduction
• NMSA 1978, § 7-1-67(A) — mandatory interest and 180-day audit rule
• NMSA 1978, §§ 7-1-60, 7-1-11.2, and 7-1-18(C) — statutory estoppel, audit notice, and nonfiler assessment period
• Regulations 3.2.1.18(A), 3.2.107.8(A), and 3.1.2.8 NMAC — New Mexico services, livestock handling, and formal rulings

Cases cited:

• Till v. Jones, 1972-NMCA-046 — livestock handling not connected to an expected sale
• Wing Pawn Shop v. Taxation and Revenue Department, 1991-NMCA-024 — strict construction and post-transaction agency statements
• AA Oilfield Service v. New Mexico State Corporation Commission, 1994-NMSC-085 — administrative agency could not grant equitable estoppel

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Enchantment Custom Hoof Care
• Decision PDF: D&O 14-21

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
ENCHANTMENT CUSTOM HOOF CARE, No. 14-21
TO ASSESSMENTS ISSUED UNDER
ID NOS. L0382000512 and L1455742336

DECISION AND ORDER

A formal hearing on the above-referenced protest was held March 18, 2014, before Dee

Dee Hoxie, Hearing Officer. The Taxation and Revenue Department (Department) was

represented by Ms. Elena Morgan, Staff Attorney. Ms. Milagros Bernardo, Auditor, also appeared

on behalf of the Department. Enchantment Custom Hoof Care (Taxpayer) appeared by and

through its owners Mr. Martin VanBeek and Ms. Carol VanBeek with its attorney, Mr. Max

Best. Mr. Martin VanBeek and Ms. Milagros Bernardo testified at the hearing. The Hearing

Officer took notice of all documents in the administrative file. Based on the evidence and

arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. On February 26, 2009, the Department assessed the Taxpayer for gross receipts tax and

interest for the tax period ending on December 31, 2005. The assessment was for

$7,594.87 tax and $3,038.88 interest. No penalty was assessed.

2. On February 26, 2009, the Department assessed the Taxpayer for gross receipts tax and

interest for the tax period ending on December 31, 2006. The assessment was for

$8,564.42 tax and $2,181.16 interest.

3. On March 9, 2009, the Taxpayer filed a protest to the assessments.
4. On March 19, 2009, the Department sent the Taxpayer a letter acknowledging the receipt

of the protest.

5. On November 4, 2013, the Department requested that the Taxpayer’s protest be set for

hearing.

6. On November 7, 2013, the Hearings Bureau sent notice of hearing to the parties.

7. On January 14, 2014, the Hearings Bureau sent amended notice of hearing to the parties.

8. The Taxpayer was engaged in business in New Mexico during the tax years of 2005 and

9. The Taxpayer was selling its services to local dairies.

10. The Taxpayer was trimming the hooves of dairy cattle.

11. Hoof trimming is necessary to maintain a dairy cow’s health and milk production.

12. In 2008, the Department audited the Taxpayer for the 2005 and 2006 tax years.

13. On August 29, 2008, the Department issued a Notice of Limited Scope Audit Resolution

to the Taxpayer. The notice indicated that no further action would be taken by the

Department.

13. In February 2009, the Taxpayer was, nevertheless, assessed for the 2005 and 2006 tax

years.

14. The Department did not assess penalty. The Department also abated 180 days of interest

because the assessment was not made within 180 days of the audit.

15. The Taxpayer believes that it should not have been assessed and that its receipts were

exempt or deductible. The Taxpayer also argues that the Department was negligent in

referring the case for hearing.

16. The Taxpayer filed a Memorandum and Brief in Support of Taxpayer’s Protest on

February 28, 2014.

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Letter ID No. L0382000512 and L1455742336
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DISCUSSION

The issue to be decided is whether the Taxpayer is liable for gross receipts tax and

interest for the tax periods ending in December 2005 and December 2006.

Burden of Proof.

Assessments by the Department are presumed to be correct. See NMSA 1978, § 7-1-17.

Tax includes, by definition, the amount of tax principal imposed and, unless the context

otherwise requires, “the amount of any interest or civil penalty relating thereto.” NMSA 1978, §

7-1-3. See also El Centro Villa Nursing Ctr. v. Taxation and Revenue Department, 1989-NMCA-

070, 108 N.M. 795. Therefore, the assessment issued to the Taxpayer is presumed to be correct,

and it is the Taxpayer’s burden to present evidence and legal argument to show that it is not

liable for the tax and is entitled to an abatement of interest.

Gross Receipts Tax.

Services performed within the State of New Mexico are subject to the gross receipts tax.

See 3.2.1.18 (A) NMAC (2003). The Taxpayer admitted that it was performing services in New

Mexico. There is a presumption that all receipts from engaging in business are subject to the

gross receipts tax. See NMSA 1978, § 7-9-5 (2002). The Taxpayer argued that its services were

exempt or deductible from the gross receipts tax under Sections 7-9-18, 7-9-19, and 7-9-59.

Exemptions and Deductions.

The burden is on the Taxpayer to prove that it is entitled to the exemption or deduction.

See Public Services Co. v. N.M. Taxation and Revenue Dep’t., 2007-NMCA-050, ¶ 32, 141 N.M.

520. See also Till v. Jones, 1972-NMCA-046, 83 N.M. 743. “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,

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Letter ID No. L0382000512 and L1455742336
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and the right must be clearly established by the taxpayer.” Sec. Escrow Corp. v. State Taxation

and Revenue Dep’t., 1988-NMCA-068, ¶ 8, 107 N.M. 540. See also Wing Pawn Shop v.

Taxation and Revenue Dep’t., 1991-NMCA-024, ¶ 16, 111 N.M. 735. See also Chavez v.

Commissioner of Revenue, 1970-NMCA-116, ¶ 7, 82 N.M. 97.

The Taxpayer argues that its receipts are exempt under Section 7-9-18. Receipts from the

sale of livestock, live poultry, unprocessed agricultural products, hides, and pelts are exempt

from the gross receipts tax. See NMSA 1978, § 7-9-18. Cattle are included in the definition of

livestock. See id. The Taxpayer is not in the business of selling any of these products. The

Taxpayer is selling its services as a hoof trimmer. Therefore, this exemption does not apply to

the Taxpayer.

The Taxpayer argues that its receipts are exempt under Section 7-9-19. Receipts from

feeding or pasturing livestock are exempt from the gross receipts tax. See NMSA 1978, § 7-9-

19. Receipts for “penning and handling livestock prior to sale” and for training livestock are

considered to be receipts from feeding livestock for purposes of the statute. Id.

The Taxpayer argues that it was handling livestock and should, therefore, be exempt from

the gross receipts tax. The Taxpayer argues that the clause “prior to sale” is ambiguous and

should be disregarded. The Taxpayer argues that the clause was also omitted from the regulation

and shows an intent to disregard the requirement.

The Department seems to concede that hoof trimming is handling. The Department

argues that the handling must be connected to a sale. The Department also argues that the

statutory language controls.

Statutes are to be applied as written unless a literal use of the words would lead to an

absurd result. See New Mexico Real Estate Comm’n. v. Barger, 2012-NMCA-081, ¶ 7. If a

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Letter ID No. L0382000512 and L1455742336
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statute is ambiguous or would lead to an absurd result, then it should be construed in accordance

with the legislative intent or spirit and reason for the statute, even though it may require a

substitution or addition of words. See id. See also State ex rel. Helman v. Gallegos, 1994-

NMSC-023, 117 N.M. 346. See also Kewanee Indus., Inc. v. Reese, 1993-NMSC-006, 114 N.M.

784. When statutes and regulations are inconsistent, the statute prevails. See Picket Ranch, LLC

v. Curry, 2006-NMCA-082, ¶ 10, 140 N.M. 49. A regulation cannot overrule a statute. See

Jones v. Employment Servs. Div., 1980-NMSC-120, 95 N.M. 97.

The regulation in this case provides that “[o]nly the receipts from feeding, pasturing,

penning or handling livestock are exempt” and that the same activities performed for “any

animals which are not livestock are subject to the gross receipts tax.” 3.2.107.8 NMAC (A)

(2010). The purpose of the regulation appears to be to emphasize that the exemption applies

only to livestock. See id. However, even if the regulation’s omission of the clause “prior to

sale” were inconsistent with the statute, the statue would, nevertheless, prevail. See Jones, 1980-

NMSC-120. The statute provides that “handling livestock prior to sale” is exempt. See NMSA

1978, § 7-9-19.

Assuming that the clause “prior to sale” is ambiguous, the statute must be construed

according to its purpose. See Kewanee, 1993-NMSC-006. The legislative intent of the gross

receipts tax “is to provide revenue for public purposes by levying a tax on the privilege of

engaging in certain activities within New Mexico[.]” NMSA 1978, § 7-9-2. See also Till, 1972-

NMCA-046. There is also a statutory presumption that services performed in New Mexico are

subject to gross receipts tax. See NMSA 1978, § 7-9-5. See also NMSA 1978, § 7-9-3.5.

Handling must occur prior to a sale in order for the exemption to apply. See NMSA 1978, § 7-9-

19. See also Till, 1972-NMCA-046, ¶ 25 (holding that the taxpayer was not exempt from gross

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receipts because the handling of the racehorse was not performed prior to a sale). The fact that a

sale might be possible in the right circumstances does not bring the handling within the

exemption. See Till, 1972-NMCA-046, ¶ 25. The Department’s argument is persuasive.

Handling “prior to sale” means handling that occurs in anticipation of or in preparation for a sale

that is expected to occur within a close period of time. The Taxpayer’s handling of the dairy

cattle in order to trim their hooves so that the cows remain healthy and continue to produce milk

is not handling livestock “prior to sale”. Therefore, the exemption does not apply to the

Taxpayer.

The Taxpayer argues that its receipts are deductible under Section 7-9-59. “Receipts

from threshing, cleaning, growing, cultivating or harvesting agricultural products…may be

deducted from gross receipts.” NMSA 1978, § 7-9-59 (B) (2000).

The Taxpayer argues that trimming hooves of dairy cattle is a kind of cultivation. The

Taxpayer explained that the hoof trimming helped to maintain the health of the cow. The

Taxpayer also explained that the hoof trimming helped to maintain or increase milk production

by the cow. The Taxpayer submitted Ruling 432-85-1 in support of its argument. The Taxpayer

argues that hoof trimming of dairy cattle is similar to the trimming of pecan trees that are the

subject of the Ruling. The Ruling indicated that trimming pecan trees is part of cultivating the

trees and that the nuts produced by the trees are agricultural products since they are intended for

human consumption. The Taxpayer presented an article that indicated that pruning pecan trees is

necessary to their health and helps to enable crop production. The Taxpayer argues that hoof

trimming is necessary to the health of the cow and helps enable the production of milk, which is

an agricultural product intended for human consumption.

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The Department argues that the Taxpayer’s analogy is too much of a stretch. The

Department also presented evidence that Ruling 432-85-1 had been withdrawn, but the reason for

its withdrawal was not known. The Department argues that hoof trimming is not cultivation.

Harvesting is interpreted in the regulations to include shearing of sheep. See 3.2.217.12

NMAC (2001). However, cultivating is not defined in the statute, the regulations, or in the

general definitions of the Tax Code. See NMSA 1978, §§ 7-1-3 and 7-9-59. Absent a statutory

or regulatory definition, a traditional dictionary definition will be used. The primary definition

of cultivate is “to prepare and use (soil) for growing plants”. See Merriam-Webster, n.d. Web.

(2014) at http://www.merriam-webster.com/dictionary/cultivate. Without a statutory or

regulatory authority for broadening the definition of cultivate, hoof trimming does not meet this

definition. Again, the statute allowing the deduction must be narrowly construed in favor of the

taxing authority and must be “clearly and unambiguously expressed in the statute”. See Wing

Pawn Shop, 1991-NMCA-024, ¶ 16 (emphasis added). Consequently, the Taxpayer failed to

prove that it was entitled to this deduction.

Assessment of Interest.

Interest “shall be paid” on taxes that are not paid on or before the date on which the tax is

due. NMSA 1978, § 7-1-67 (A). The word “shall” indicates that the assessment of interest is

mandatory, not discretionary. See State v. Lujan, 1977-NMSC-010, ¶ 4, 90 N.M. 103. The

assessment of interest is not designed to punish taxpayers, but to compensate the state for the

time value of unpaid revenues. Because the gross receipts tax was not paid when it was due,

interest was properly assessed. The Department also abated 180 days of interest for failing to

assess within 180 days of the audit. See NMSA 1978, § 7-1-67 (A) (2013).

Estoppel.

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Letter ID No. L0382000512 and L1455742336
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The Taxpayer argues that the Department was, nevertheless, estopped from assessing

when the Department issued the letter in August 2008 that indicated that no further action would

be taken by the Department. The Taxpayer argues that the letter was, essentially, a ruling

directed to the Taxpayer and that statutory estoppel applies.

The Department argues that the letter is not a ruling as it does not meet the requirements

of a ruling. The Department also argues that even if the letter were a ruling, it was issued in

2008 and could not be reasonably relied upon by the Taxpayer for failing to pay its taxes when

they were due for the 2005 and 2006 tax years.

The Department can be estopped from taking action against a taxpayer when the party’s

action or inaction was due to a regulation in effect at the time or a ruling addressed to the party

personally in writing by the secretary that was in effect at the time that the liability arose. See

NMSA 1978, § 7-1-60 (1993). Rulings must meet certain criteria, including a signature by the

secretary and by counsel. See 3.1.2.8 NMAC (2000). The August 2008 letter is not a ruling as it

does not meet the criteria required by the regulation. See id. Moreover, the August 2008 letter

was issued after the tax liability for the 2005 and 2006 tax years arose. See Wing Pawn Shop,

1991-NMCA-024, ¶ 25 (holding that even if the department misled a taxpayer into believing

sales were not subject to gross receipts tax, the letter was transmitted after the transactions

occurred and did not support estoppel). Therefore, statutory estoppel does not apply. Hearing

officers are also unable to grant equitable remedies. See AA Oilfield Service v. New Mexico State

Corp. Comm’n, 1994-NMSC-085, ¶ 18, 118 N.M. 273 (holding that an administrative agency

cannot grant the equitable remedy of estoppel because that power is held exclusively by the

judiciary).

Timeliness of Assessment.

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The Taxpayer argues that the Department was not able to assess after the August 2008

indicated that no further action would be taken by the Department. The Department has seven

years from the end of the year in which the tax is due to make an assessment when the taxpayer

failed to file any return. See NMSA 1978, § 7-1-18 (C). The Department is required to give

taxpayers a notice of audit, but is not required to give a notice of resolution of the audit and does

not appear to be statutorily bound to honor any such notice of resolution. See NMSA 1978, § 7-

1-11.2 (2007). See also NMSA 1978, § 7-1-18.

The Taxpayer was a non-filer for the 2005 and 2006 tax years. Final payments for 2005

would have been due in January 2006, and for 2006 would have been due in January 2007. See

NMSA 1978, § 7-9-11. Therefore, the Department had until 2013 and 2014, respectively, to

assess. The assessments were made in 2009. Therefore, the assessments were made timely, and

no other statutory or regulatory authority exists for abating the assessments based on the August

2008 letter.

Timeliness of the hearing.

The Taxpayer argues that the period of time between the protest and the hearing was

unreasonable. The Taxpayer argues that the Department’s action should be dismissed as

presumptively prejudicial. The Department argues that there was not a deadline in which to hold

the hearing. The Taxpayer filed its protest on March 9, 2009. The Department referred the

Taxpayer’s protest to the Hearings Bureau for hearing on November 4, 2013, more than four

years later. The Hearings Bureau promptly set the hearing.

In 2009, there was not a strict statutory deadline or time frame within which a hearing

must be held. See NMSA 1978, § 7-1-24 (2003). Currently, a hearing must be set within ninety

days of the protest. See NMSA 1978, § 7-1-24.1 (2013). However, there is no statutory or

Enchantment Custom Hoof Care
Letter ID No. L0382000512 and L1455742336
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regulatory authority for the Hearing Officer to dismiss a previously filed protest for unreasonable

and unjustified delays. See id. See also 3.1.8.8 and 3.1.8.9 NMAC. See also Ranchers-Tufco

Limestone Project Joint Venture v. Revenue Div., 1983-NMCA-126, ¶ 13, 100 N.M. 632

(holding that public officers’ failure to timely carry out their duties is not a defense to an action

by the state and that the statute does not provide a remedy for failure to set a hearing promptly).

As there was not a statutory or regulatory violation in failing to refer the Taxpayer’s protest for

such an extended period of time, there is no administrative remedy that can be granted.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely written protest to the Notice of Assessment of 2005 and

2006 gross receipts taxes issued under respective Letter ID numbers L0382000512 and

L1455742336, and jurisdiction lies over the parties and the subject matter of this protest.

2. The Taxpayer was properly assessed for gross receipts tax and interest for 2005

and 2006.

3. The Taxpayer’s gross receipts were not exempt under Sections 7-9-18 and 7-9-19.

4. The Taxpayer’s gross receipts were not deductible under Section 7-9-59.

5. The Department was not estopped by statute from assessing the Taxpayer, and its

assessment was timely.

For the foregoing reasons, the Taxpayer's protest is DENIED.

DATED: June 5, 2014.

Dee Dee Hoxie
DEE DEE HOXIE
Hearing Officer
Taxation & Revenue Department
Post Office Box 630
Santa Fe, NM 87504-0630
Enchantment Custom Hoof Care
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