Were Medicaid room-and-board payments excluded from Star Hospice's gross receipts when it passed the funds to nursing homes that actually provided the room and board?

Plain-English summary

Medicaid room-and-board payments received by Star Hospice were taxable gross receipts because Star was not the nursing homes' disclosed agent. The contracts expressly treated the parties as independent contractors and denied either one authority to bind the other.

Star provided licensed hospice nursing care to patients living in New Mexico nursing homes. The nursing facilities continued providing room and board.

For Medicaid patients, a nursing home billed Star at the Medicaid room-and-board rate. Star billed Medicaid, received 95% of that rate, placed the payment in a reimbursement account, and transferred funds to the home within five business days. Under its negotiated contracts, Star paid the home 100% of the rate and kept none of the Medicaid payment.

Receiving and passing through funds still created receipts

Patients or their payers received a combined bill through Star rather than separate bills from Star and the nursing home. Star received payment for all services and used part of those receipts to satisfy its contractual duty to the facilities.

The gross-receipts definition included amounts received for a taxpayer's own account and then spent to meet its own responsibilities. The fact that Star was licensed only for hospice clinical services, not room and board, did not change the payment structure.

The contracts expressly rejected agency

Section 7-9-3.5(A)(3)(f) excluded amounts received solely for another in a disclosed agency capacity. Regulation 3.2.1.19(C)(1), as interpreted in MPC Ltd., required the agent to bind the principal to an obligation enforceable by an informed third-party beneficiary.

Star's agreements instead said that both parties were independent contractors, that neither was the other's agent, and that neither could enter contracts or assume obligations for the other. The transaction records also did not show Star acting as agent for the homes, patients, or Medicaid.

Apparent or implied authority therefore was insufficient. Star lacked the disclosed contractual authority required to remove the receipts from gross receipts.

Medicaid billing rules did not rewrite the contracts

Regulation 8.325.4.18 required a cooperative hospice-facility agreement and directed Medicaid to pay the hospice an additional amount for nursing-facility room and board.

The AHO recognized the complexity but found that the regulation did not require Star to sign agreements disavowing agency. Star could negotiate its contractual terms and could have structured an agency relationship but did not.

Star's agreement to pay facilities 100% while receiving only 95% from Medicaid also indicated that it was satisfying its own contractual obligation, rather than merely transmitting the exact amount as an agent.

Nonfiling supported penalty and interest

Apart from the disputed Medicaid receipts, Star had $269,788.84 of other taxable receipts during the audit period. It had filed no CRS returns for the periods at issue.

The AHO treated nonfiling as negligence under Regulation 3.1.11.10. Civil penalty therefore remained, and interest was mandatory from the original due dates until principal was paid.

Result: protest DENIED. As of hearing, Star owed $80,040.94 tax, $16,023.65 penalty, and $13,047.51 interest, totaling $109,112.10.

What this means for you

Hospices and health-care intermediaries

Money received for a service supplied by another entity can still be taxable when the recipient contracts in its own name and uses the funds to satisfy its own obligations.

Businesses using pass-through accounts

Segregating funds and quickly remitting them does not by itself establish disclosed agency. The contracts and third-party enforcement rights control.

Parties drafting reimbursement agreements

Independent-contractor and no-agency clauses can determine tax treatment. If the business intends an agency structure, define authority to bind the principal and disclose the principal to the third party.

CRS nonfilers

Even a genuine dispute over one receipt category does not excuse failing to report undisputed taxable receipts. File returns and separately claim exclusions or deductions with supporting records.

Common questions

Q: Did Star keep the Medicaid room-and-board money?
A: No. It transferred the funds to nursing homes, but it also promised contractually to pay 100% of the rate after receiving only 95% from Medicaid.

Q: Why were the receipts taxable if nursing homes provided the room and board?
A: Star received the combined payment and used it to meet its own contractual reimbursement duties.

Q: What defeated the disclosed-agency argument?
A: The contracts expressly rejected agency and did not let Star bind the nursing homes to third parties.

Q: Did Medicaid rules automatically make Star an agent?
A: No. They governed billing and payment but did not require the no-agency contract terms Star chose.

Q: Why were penalty and interest upheld?
A: Star was a CRS non-filer, which the AHO found negligent, and interest was mandatory on unpaid tax.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-9-3.5(A)(3)(f) — exclusion for amounts received solely on behalf of another in a disclosed agency capacity
• NMSA 1978, §§ 7-9-3.3, 7-9-4, and 7-9-5 — engaging in business, gross receipts tax, and taxable-receipts presumption
• NMSA 1978, §§ 7-1-67 and 7-1-69 — mandatory interest and civil negligence penalty
• Regulation 3.2.1.19(C)(1) NMAC — disclosed-agency requirements
• Regulation 8.325.4.18 NMAC — Medicaid hospice and nursing-facility room-and-board arrangement
• Regulation 3.1.11.10 NMAC — negligence definitions

Cases cited:

• MPC Ltd. v. New Mexico Taxation and Revenue Department, 2003-NMCA-021 — disclosed-agency requirements and receipts used to satisfy a taxpayer's own obligations
• Brim Healthcare, Inc. v. State, 1995-NMCA-055 — independent-contractor language and claimed agency reimbursements
• Carlsberg Management Co. v. State, 1993-NMCA-121 — contractual control and agency analysis before the disclosed-agency amendment
• Wing Pawn Shop v. Taxation and Revenue Department, 1991-NMCA-024 — strict proof of exclusions and deductions

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Star Hospice, Inc.
• Decision PDF: D&O 15-29

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
STAR HOSPICE, INC. No. 15-29
TO ASSESSMENT ISSUED UNDER
LETTER ID NO. L0276790224

DECISION AND ORDER

A protest hearing occurred on the above captioned matter on June 23, 2015 before Brian

VanDenzen, Esq., Chief Hearing Officer, in Santa Fe. At the hearing, Bobbi Kay Nelson, CPA,

and James Ortiz of REDW, LLC appeared representing Star Hospice, Inc. (“Taxpayer”). Mr.

Ravi Shakamuri, president of Taxpayer, appeared and testified. Staff Attorney Melinda Wolinsky

appeared representing the State of New Mexico Taxation and Revenue Department

(“Department”). Protest Auditor Milagros Bernardo appeared as a witness for the Department.

Taxpayer Exhibits #1-3 were admitted into the record. Department Exhibits A-E were admitted

into the record. All exhibits are more thoroughly described in the Administrative Exhibit

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

AS FOLLOWS:

FINDINGS OF FACT

1. On December 22, 2014, the Department assessed Taxpayer for $80,040.94 in tax,

$16,023.65 in penalty, and $11,843.65 in interest for a total tax assessment of $107,908.20 for

the CRS reporting periods from January 31, 2008 through December 31, 2013. [Letter id. no.

L0276790224].

2. On January 29, 2015, Taxpayer protested the assessment.
3. On February 9, 2015, the Department acknowledged receipt of Taxpayer’s

protest.

4. On March 5, 2015, the Department requested a hearing in this matter with the

Hearings Bureau1.

5. On March 17, 2015, the Hearings Bureau set this matter for a hearing on April 16,

2015 before Hearing Officer Monica Ontiveros.

6. On March 23, 2015, Taxpayer’s representative Bobbi Kay Nelson moved to

continue the April 16, 2015 hearing. The Department did not object to Taxpayer’s request

7. On March 25, 2015, the Hearings Bureau continued the April 16, 2015 hearing

date and sent notice of administrative hearing, rescheduling the hearing for April 21, 2015 before

Hearing Officer Monica Ontiveros.

8. On April 21, 2015, a brief hearing occurred before Hearing Officer Monica

Ontiveros in Santa Fe. Taxpayer Ex. #1 was admitted into the record. On the record, after

discussing the issues and noting the necessity of a fact witness, and without objection from the

Department, Hearing Officer Ontiveros continued that hearing.

9. On April 22, 2015, the Hearings Bureau issued an Amended Notice of Hearing

and Order of Continuance, setting a new hearing date of May 14, 2015.

10. On May 13, 2015, Taxpayer again moved to continue the hearing because

Taxpayer’s witness had transportation difficulties and would not be able to make the May 15,

2015 hearing. The Department did not oppose the request.

11. On May 14, 2015, the Hearings Bureau issued an order continuing the May 14,

2015 hearing date and setting this matter for hearing on May 28, 2015.

1
On July 1, 2015, pursuant to enacted Senate Bill 356, the Hearings Bureau became the Administrative Hearings
Office (“AHO”). Since most of the events, except issuance of this decision, occurred before that date, the Hearings
Bureau will be referenced in the findings of fact even though the decision is issued under AHO’s caption.

In the Matter of the Protest of Star Hospice, Inc., page 2 of 17

12. On May 18, 2015, the Department moved to continue the May 28, 2015 hearing

because of a conflicting CLE training at the time. Taxpayer did not oppose.

13. On May 19, 2015, the Hearings Bureau issued the “Final Continuance Order,

Notice of Reassignment, and Amended Notice of Administrative Hearing,” continuing the May

28, 2015 hearing, reassigning this matter from Hearing Officer Ontiveros to the undersigned

hearing officer, and rescheduling the matter for hearing on June 23, 2015.

14. Taxpayer was a non-filer of CRS returns during the periods at issue in the audit

period. [06-23-15 CD 1:27:45-1:28:33].

15. During the relevant tax periods, under contract agreement with the nursing home

facilities, Taxpayer provided hospice nursing care services in nursing homes in New Mexico.

16. Taxpayer is a licensed hospice nursing service provider in New Mexico only

authorized to provide clinical services in a residential setting related to the hospice diagnosis.

Hospice services focus on providing comfort, quality of life, and pain management to the

patients. [06-23-15 CD 0:43:19-30; 0:52:56-0:55:45].

17. Taxpayer is not a licensed nursing home provider and does not provide room and

board services or curative services. [06-23-15 CD 0:42:00-0:43:48; 0:53:56-0:54:30].

18. Pertinent to this case is Taxpayer’s receipts received from Medicaid for the

patients’ room and board at the nursing home facilities, which is the only amount in dispute in

this protest. [06-23-15 CD 1:11:00-49].

19. Once a nursing home patient whom was medically eligible for hospice services

selected Taxpayer to provide those hospice services, Taxpayer provided the hospice services

while the nursing home facility continued to provide room and board to Taxpayer’s hospice

patients. [06-23-15 CD 0:18:44-0:40:02].

In the Matter of the Protest of Star Hospice, Inc., page 3 of 17

20. Taxpayer received payment from Medicare (or directly from the patient or other

private insurance) for the hospice care services it provided. These receipts are not in dispute. [06-

23-15 CD 0:18:44-0:40:02; 1:31:00-31].

21. Generally, the nature of the transactions at issue is as follow: the nursing home

facility billed Taxpayer for the room and board it provided to Taxpayer’s hospice patients. Under

the respective contracts and applicable regulations, Taxpayer billed Medicaid for the nursing

home room and board at the permissible Medicaid room and board rate. Medicaid paid Taxpayer

95% of the permissible room and board rate. Upon receipt of payment for the patient, Taxpayer

in turn reimbursed the nursing facility at 100% of the Medicaid room and board rate. [Taxpayer

Ex. #’s 2-3; Department Ex. A-C; 06-23-15 CD 0:18:44-0:40:02, 1:29:25-1:30:45; 1:31:31-51].

22. Upon receipt of the room and board payment from Medicaid, Taxpayer placed the

money in a specific reimbursement account and transferred that money to the relevant nursing

home within five-business days without keeping or retaining any percentage of the money.

[Taxpayer Ex. 2-3; 06-23-15 CD 1:36:30-01:37:48].

23. Taxpayer had ability to negotiate in its contract whether to provide the nursing

homes the exact 95% amount of room and board that Medicaid paid to Taxpayer or pay an

additional amount up to 100% of the Medicaid room and board rate. Consistent with industry

practice, voluntarily under the contract Taxpayer agreed to pay 100% of the room and board rate

to the nursing homes even though Medicaid had only paid at 95% of that rate. [Taxpayer Ex. 2-3;

06-23-15 CD 0:56:40-1:03:34].

24. In particular, Taxpayer contracted with three nursing homes for the provisioning

of hospice care services to residents of those homes: Good Samaritan Society, Hobbs Center,

LLC, and Heartland Care of Hobbs.

In the Matter of the Protest of Star Hospice, Inc., page 4 of 17

25. Taxpayer contracted with the Good Samaritan Society at a nursing facility in

Lovington to provide hospice care nursing services to eligible residents at the facility.

[Department Ex. A].

26. Under the contract between Taxpayer and Good Samaritan Society, for Medicaid

patients, Good Samaritan billed the patient’s room and board to Taxpayer at 100% of applicable

Medicaid room rate. [Department Ex. A12].

27. Under the contract between Taxpayer and Good Samaritan Society, the parties

agreed that each party was an independent contractor. [Department Ex. A17].

28. Under the contract between Taxpayer and Good Samaritan Society, the parties

acknowledged and agreed that neither party was an agent of the other party and that neither party

had the authority to bind the other party to an oral or written agreement with any third party.

[Department Ex. A17].

29. Taxpayer contracted with the Hobbs Center, LLC for the Hobbs Health Care

Center nursing home facility in Hobbs, NM to provide hospice care nursing services to eligible

residents at the facility. [Department Ex. B].

30. For Medicaid medical assistance patients, Hobbs Center, LLC, billed Taxpayer

and Taxpayer agreed to reimburse Hobbs Center, LLC, “for not less than 95% but no more than

100% of the Medicaid Nursing Facility Room and Board Services rate…” [Department Ex. B9].

31. Under the contract between Taxpayer and Hobbs Center, LLC, the parties agreed

that Taxpayer was an independent contractor. [Department Ex. B11].

32. Under the contract between Taxpayer and Hobbs Center, LLC, the parties agreed

that Taxpayer was not “agent, employee, or partner” of the nursing home facility. [Department

Ex. B11].

In the Matter of the Protest of Star Hospice, Inc., page 5 of 17

33. Taxpayer contracted with the Heartland Care of Hobbs nursing home facility in

Hobbs, NM to provide hospice care nursing services to eligible residents at the facility.

[Department Ex. C].

34. Under the contract between Taxpayer and Heartland Care of Hobbs, the parties

agreed that both parties were independent contractors. [Department Ex. C6].

35. Under the contract between Taxpayer and Heartland Care of Hobbs, the parties

agreed that “[n]either party is or is to be considered as, the agent of the other party for any

purpose whatsoever. Neither party has authority to enter into contract or assume any obligations

for the other party or make any warranties or representations on behalf of the other party.”

[Department Ex. C6].

36. Excluding the Medicaid receipts at issue in the protest, Taxpayer still had

$269,788.84 in total receipts during the audit period subject to gross receipts tax. [Department

Ex. E].

37. As of the date of hearing, Taxpayer owed $80,040.94 in tax, $16,023.65 in

penalty, and $13,047.51 in interest for an outstanding total balance of $109,112.10. [Department

Ex. D].

DISCUSSION

The question in this protest is two-fold. First, does Taxpayer receive payment from

Medicaid for room and board services provided by nursing home for reimbursement to the

nursing home, in a disclosed agency capacity? Secondly, assuming that Taxpayer was not a

disclosed agent for purposes of receiving Medicaid payments for reimbursement, does that fact

that the Medicaid regulations require Taxpayer to bill for the room and board services provided

In the Matter of the Protest of Star Hospice, Inc., page 6 of 17
by the nursing homes establish an agency relationship whereby those receipts are not subject to

gross receipts tax?

Presumption of Correctness.

Under NMSA 1978, Section 7-1-17(C) (2007), the assessment of tax issued in this case is

presumed correct. Unless otherwise specified, for the purposes of the Tax Administration Act,

“tax” is defined to include interest and civil penalty. See NMSA 1978, §7-1-3 (X) (2013). Under

Regulation 3.1.6.13 NMAC, the presumption of correctness under Section 7-1-17 (C)

extends to the Department’s assessment of penalty and interest. See Chevron U.S.A., Inc. v. State

ex rel. Dep't of Taxation & Revenue, 2006-NMCA-50, ¶16, 139 N.M. 498, 503 (agency regulations

interpreting a statute are presumed proper and are to be given substantial weight). Taxpayer has the

burden to overcome the assessment. See Archuleta v. O'Cheskey, 1972-NMCA-165, ¶11, 84 N.M.

428, 431. However, once a taxpayer rebuts the presumption of correctness, the burden shifts to the

Department to show the correctness of the assessed tax. See MPC Ltd. v. N.M. Taxation & Revenue

Dep't, 2003 NMCA 21, ¶13, 133 N.M. 217.

Moreover, “[w]here 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.” Wing Pawn Shop v. Taxation and Revenue Department, 1991-NMCA-024, ¶16, 111

N.M. 735 (internal citation omitted); See also TPL, Inc. v. N.M. Taxation & Revenue Dep't, 2003-

NMSC-7, ¶9, 133 N.M. 447.

In the Matter of the Protest of Star Hospice, Inc., page 7 of 17
Gross Receipts Tax and the Disclosed Agency Relationship Exception.

For the privilege of engaging in business, New Mexico imposes a gross receipts tax on the

receipts of any person engaged in business. See NMSA 1978, § 7-9-4 (2002). The term “gross

receipts” is broadly defined to mean

the total amount of money or the value of other consideration received from
selling property in New Mexico, from leasing or licensing property employed in
New Mexico, from granting a right to use a franchise employed in New Mexico,
from selling services performed outside New Mexico, the product of which is
initially used in New Mexico, or from performing services in New Mexico.

NMSA 1978, Section 7-9-3.5 (A) (1) (2007) (emphasis added). “Receipts include payments

received for one’s own account and then expended to meet one’s own responsibilities.” MPC

LTD, ¶14. There is no dispute in this case that Taxpayer was performing hospice services in New

Mexico, for which Taxpayer received receipts both for its own account and to satisfy its

responsibilities to the nursing homes.

There is a statutory presumption that all receipts of a person engaged in business are taxable.

See NMSA 1978, § 7-9-5 (2002). “Engaging in business” is defined as “carrying on or causing to

be carried on any activity with the purpose of direct or indirect benefit.” NMSA 1978, § 7-9-3.3

(2003). See also Comer v. State Tax Comm'n, 1937-NMSC-032, ¶37, 41 N.M. 403 (gross

receipts applies to “all activities or acts engaged in (personal, professional and corporate) or

caused to be engaged in with the object of gain, benefit[,] or advantage either direct or

indirect.").

There is no dispute in this case that Taxpayer was engaged in the business of providing

hospice services to nursing home residents. However, as part of its agency argument, Taxpayer

suggested that since it was only performing hospice services (as permitted under its professional

licensure) and not providing room and board services (prohibited under it license), it was not

In the Matter of the Protest of Star Hospice, Inc., page 8 of 17
receiving the room and board related receipts for performance of a service, and thus not subject

to gross receipts tax. It is true that Taxpayer was contracting with the nursing homes to continue

to provide room and board services while it only provided the hospice care services to the

patients, but that does not alter the nature of the patient-Taxpayer transaction. The patients (or

more often the patient’s respective billing entity, whether that be private insurance, Medicaid, or

Medicare) received a single bill for the combination of services provided. In other words, once

the customer-patient was approved for hospice care, the patient’s provider paid one bill to

Taxpayer for all services rendered rather than a separate bill to Taxpayer for hospice services and

another separate bill to the nursing homes for their residency at the nursing home. Even if

Taxpayer only provided a provided a portion of the services and contracted out the remaining

services, Taxpayer received payment for all services rendered and under Section 7-9-5, all of the

receipts paid to Taxpayer under the transaction remained presumed subject to gross receipts tax,

even if some of the receipts were simply used to satisfy Taxpayer’s contractual obligations to the

nursing home for the room and board services.

Turning to Taxpayer’s main argument, Taxpayer claims that the receipts it received from

Medicaid to reimburse the nursing homes for the room and board are not taxable because

Taxpayer was an agent simply reimbursing the nursing homes for room and board. NMSA 1978,

Section 7-9-3.5(A) (3) (f) states that excluded from gross receipts are “amounts received solely

on behalf of another in a disclosed agency capacity.” Under Regulation 3.2.1.19(C) (1) NMAC,

“(a)n agency relationship exists if a person has the power to bind a principal in a contract with a

third party so that the third party can enforce the contractual obligation against the principal.”

Numerous New Mexico cases have addressed, within the context of gross receipts tax,

whether an agency relationship exists and whether such relationship is sufficient to exclude

In the Matter of the Protest of Star Hospice, Inc., page 9 of 17
certain receipts derived from that relationship from the gross receipts tax. In 1971, in the case

Westland Corporation v. Commission of Revenue, 1971-NMCA-083, ¶38, 83 N.M. 29, the New

Mexico Court of Appeals remanded the matter because it did not find cause to impose gross

receipts tax on the receipts of a person whom served as a “friendly agent” for the limited purpose

of “receiving and paying out sums for debts or obligations owing” from another company.

In Carlsberg Mgmt. Co. v. State, 1993-NMCA-121, 116 N.M. 247, a case that Taxpayer

cited for support in this protest, the New Mexico Court of Appeals again considered agency in

the gross receipts tax context. The Carlsberg case involved a property management group that

managed an apartment complex for the property’s owner. See id., ¶3. The rent at the apartment

complex was subsidized by a federal agency. See id. The Carlsberg taxpayer claimed that the

federal agency mandated the form of the agreement in place with Taxpayer. See id. The

agreement in Carlsberg referred to that taxpayer as “agent.” See Carlsberg, ¶4. Under an agency

theory, the Carlsberg taxpayer argued that money it received from the owner’s reimbursing of

the payment of employee wages were not subject to gross receipts tax. See Carlsberg, ¶5-11.

In Carlsberg, the New Mexico Court of Appeals indicated “that a principal’s control over

the agent is the key characteristic of an agency relationship.” See Carlsberg, ¶12. Further, the

New Mexico Court of Appeals noted that it was a factual determination whether there was an

agency relationship between the principal and the agent. See Carlsberg, ¶16. The New Mexico

Court of Appeals began that factual determination by looking at the terms of the agreement in

place. See id. When the contract is unambiguous, the language of the contract determines the

intent of the parties without further interpretation. See Carlsberg, ¶17. The New Mexico Court of

Appeals found in Carlsberg that the contract created an unambiguous agent-principal

relationship. See id.

In the Matter of the Protest of Star Hospice, Inc., page 10 of 17
While the Carlsberg Court of Appeals expressly rejected the Department’s previous

policy and regulation allowing for exemption of gross receipts only when there is a disclosed

agency relationship, see Carlsberg, ¶19, that rejection is now ineffective in light of legislative

action. See MPC LTD., ¶24. At the time the Court of Appeals issued its decision in Carlsberg,

the gross receipts tax definition contained no provision excluding from gross receipts tax receipts

received solely on behalf of another in a disclosed agency capacity. Since that case, the

Legislature has added the disclosed agency capacity language into Section 7-9-3.5 (A) (3) (f).

In 1995, in the case Brim Healthcare, Inc. vs. State, 1995-NMCA-055, 119 N.M. 818, the

New Mexico Court of Appeals again had an opportunity to consider whether an agency

relationship existed suffice to shield taxpayer’s claimed reimbursements from the imposition of

gross receipts tax. In rejecting that taxpayer’s claim of an agency relationship, the Court of

Appeals in Brim, ¶10, found numerous reasons why the facts in that case were distinguishable

from Carlsberg. The most significant distinguishing factor was the lack of an indemnification

clause in the agreement at issue in Brim. See id. But another distinction cited in Brim was that the

contracts at issue expressly noted that the taxpayer was “not an agent… but rather is an

independent contractor.” Ultimately, the Brim Court of Appeals affirmed the hearing officer’s

conclusion that the money was not received as “reimbursement of expenses as an agent.” id. at

18.

In 2003, the Court of Appeals in MPC LTD. again looked at agency relationships in the

gross receipts context. In so doing, the Court of Appeals cautioned that Carlsberg and Brim were

both decided before the Legislature’s adoption of the “disclosed agency” language under Section

7-9-3.5(A) (3) (f), and therefore those cases only had limited instructive value. See MPC LTD.

¶34. Moreover, the Court of Appels in MPC LTD. also considered the Department’s Regulation

In the Matter of the Protest of Star Hospice, Inc., page 11 of 17
3.2.1.19(C)(1) NMAC interpreting Section 7-9-3.5(A) (3) (f). The Court of Appeals in MPC

LTD., ¶36, construed Regulation 3.2.1.19(C)(1) NMAC to mean that:

(1) the agent [taxpayer] has the authority to bind the principal… to an
obligation… created by the agent [taxpayer], and (2) the beneficiary of
that obligation… is informed by contract that he or she has a right to
proceed against the principal… to enforce the obligation.

Additionally, the New Mexico Court of Appeals in MPC LTD noted that Regulation 3.2.1.19 (C)

imposed additional bookkeeping requirements that must be met in order to exclude receipts

received as part of a disclosed agency capacity from gross receipts. See id.

Applying the statute, the regulation, and the current case law discussed in MPC LTD.,

¶36, under the plain language of the contracts Taxpayer voluntarily entered, Taxpayer was not a

disclosed agent of the nursing homes with the authority to bind the nursing homes to an

obligation enforceable as to a third party. Like in Brim and unlike in Carlsberg, the contracts that

Taxpayer entered into with the nursing home expressly disavowed any agency relationship

between the parties. Both the nursing home and Taxpayer were noted as independent contractors.

Additionally, although clearly tracking the financial transactions involving a patient, Medicaid,

the nursing home, and Taxpayer, none of the transaction documented in Taxpayer Ex. #2 and #3

established that Taxpayer was an agent of the nursing homes, the patient, or Medicaid. Given the

clear statutory requirement that only receipts received as part of a disclosed agency relationship

are not gross receipts, an apparent or implied agency relationship is insufficient to shield the

funds in this case from the gross receipts tax. Therefore, Taxpayer did not satisfy the

requirements of Section 7-9-3.5(A) (3) (f) and Regulation 3.2.1.19(C)(1) NMAC, as interpreted

in MPC LTD., ¶36.

Alternatively, Taxpayer argued that it was legally required to structure the transactions as

was done in this case: once a patient was accepted into hospice, it was required to bill Medicaid

In the Matter of the Protest of Star Hospice, Inc., page 12 of 17
directly for the room and board services even though it was the nursing homes that provided that

service and Taxpayer merely reimbursed the nursing homes for that room and board service. As

support of this argument, Taxpayer cites Regulation 8.325.4.18 NMAC. Regulation 8.325.4.18

NMAC requires that the hospice service provider and the nursing facility enter into a cooperative

agreement that hospice is responsible for hospice care and the nursing facility provides room and

board. Under Regulation 8.325.4.18 NMAC, “[f]or Medicaid recipients living in a [nursing

facility] who elect hospice care, Medicaid pays the hospice an additional per diem amount for the

routine home care and continuous home care days for the [nursing facility] room and board

services.”

Taxpayer’s argument is certainly noteworthy in the sense that Taxpayer believed

regulatory requirements forced it to be the nursing home’s agent for the purposes of billing

Medicaid for the nursing home’s room and board services and then reimbursing the nursing

homes those payments. In other words, Taxpayer believed it was an agent as a matter of

regulatory law2. But nothing under Regulation 8.325.4.18 NMAC actually required Taxpayer to

enter into the contracts that disavowed the agency relationship with the respective nursing

homes. Taxpayer was free to contract itself as an agent of the nursing homes for Medicaid billing

purposes, but chose not to do so. In fact, Taxpayer acknowledged during testimony that it had

some ability to negotiate its terms with the nursing homes and voluntarily entered an agreement

where although it only received 95% of the Medicaid room and board rate from Medicaid, it

agreed to pay the nursing homes 100% of the rate. If Taxpayer was merely an agent of the

nursing homes for billing purposes, then one would expect Taxpayer to convey to the nursing

home the exact amount it received from Medicaid rather than include an additional amount.

2
The Department may want to consider Regulation 8.325.4.18 NMAC in revisiting its own Regulation
3.2.1.19(C)(1) NMAC, a regulation that may not adequately address the full gamut of potential agency relationships
in complex transactions involving medical payments.

In the Matter of the Protest of Star Hospice, Inc., page 13 of 17
Given the strong contractual language rejecting agency in these transactions, at best

Regulation 8.325.4.18 NMAC can be read to create apparent authority for Taxpayer to act as the

nursing home’s agent. As recently discussed in another decision and order issued addressing

agency, Santa Fe Tow and Emergency Lock & Key, No. 15-21 (June 30, 2015), an apparent

authority agency relationship is insufficient to shield a taxpayer from gross receipts tax because

of the clear statutory and regulatory language requiring a disclosed agency relationship. Unless

or until the Legislature changes Section 7-9-3.5(A) (3) (f), the agency relationship must be more

than one of an apparent or implied authority in order to exclude the receipts from gross receipts

tax.

Also in support of its claim that Regulation 8.325.4.18 NMAC created a required agency

relationship, Taxpayer in closing argument cited Department Ruling 405-15-1, believing that the

ruling stands for the proposition that anything required in order for the relevant operation of the

facility are deductible. However, this is a significant overreading of that ruling, which focuses on

a separate, narrow statutory deduction under Section 7-9-54.2 that has no general application

under other provisions of the Gross Receipts and Compensating Tax Act or the question of a

disclosed agency relationship.

In summary, Taxpayer did not establish it was a disclosed agent in this case because it

had no authority to bind the nursing homes to a third party and the third party was not informed

of its right to proceed against the principal to enforce the obligation. MPC LTD., ¶36. Therefore,

under NMSA 1978, Section 7-9-3.5(A) (3) (f) and Regulation 3.2.1.19(C) (1) NMAC, Taxpayer

was not a disclosed agent and the receipts it received for its own accounts and to satisfy its own

obligations under its contracts with the nursing homes were subject to gross receipts tax. See

In the Matter of the Protest of Star Hospice, Inc., page 14 of 17
MPC LTD, ¶14.

Penalty and Interest.

When a taxpayer fails to make timely payment of taxes due to the state, “interest shall be

paid to the state on that amount from the first day following the day on which the tax becomes

due...until it is paid.” NMSA 1978, § 7-1-67 (2007) (italics for emphasis). Under the statute,

regardless of the reason for non-payment of the tax, the Department has no discretion in the

imposition of interest, as the statutory use of the word “shall” makes the imposition of interest

mandatory. See Marbob Energy Corp. v. N.M. Oil Conservation Comm'n, 2009-NMSC-013, ¶22,

146 N.M. 24 (statutory use of the word shall indicates mandatory requirement). The language of

Section 7-1-67 also makes it clear that interest begins to run from the original due date of the tax

until the tax principal is paid in full. The Department has no discretion under Section 7-1-67 and

must assess interest against Taxpayer.

Under NMSA 1978, Section 7-1-69 (2007), when a taxpayer fails to pay taxes due to the

State because of negligence or disregard of rules and regulations, but without intent to evade or

defeat a tax, by its use of the word “shall”, civil penalty must be added to the assessment. As

discussed above, the statute’s use of the word “shall” makes the imposition of penalty mandatory

in all instances where a taxpayer’s actions or inactions meets the legal definition of “negligence.”

Regulation 3.1.11.10 NMAC defines negligence in three separate ways: (A) “failure to

exercise that degree of ordinary business care and prudence which reasonable taxpayers would

exercise under like circumstances;” (B) “inaction by taxpayer where action is required”; or (C)

“inadvertence, indifference, thoughtlessness, carelessness, erroneous belief or inattention.” In this

case, Taxpayer was a non-filer of gross receipts tax, which meets the legal definition of negligence

In the Matter of the Protest of Star Hospice, Inc., page 15 of 17
as defined under Regulation 3.1.11.10 NMAC. The Department’s assessment of tax, penalty, and

interest was appropriate. Taxpayer’s protest is denied.

CONCLUSIONS OF LAW

A. Taxpayer filed a timely, written protest to the assessment. Jurisdiction lies over the

parties and the subject matter of this protest. The hearing was timely set and held in compliance

with NMSA 1978, Section 7-1-24.1 (A) (2013).

B. All of Taxpayer’s receipts were presumed subject to gross receipts tax under

NMSA 1978, Section 7-9-5 (2002)

C. The contract between the nursing homes and Taxpayer provided that Taxpayer was

not an agent of the nursing homes and prohibited Taxpayer from representing to third parties that

Taxpayer was an agent of the nursing homes. Consequently, Taxpayer lacked authority to bind

the nursing homes in contract with a third party and therefore was not a disclosed agent under

NMSA 1978, Section 7-9-3.5(A) (3) (f) and Regulation 3.2.1.19(C) (1) NMAC. See MPC LTD.,

¶36.

D. Since Taxpayer was not a disclosed agent under NMSA 1978, Section 7-9-3.5(A)

(3) (f) and Regulation 3.2.1.19(C) (1) NMAC, all of Taxpayer’s receipts from Medicaid were not

excluded from gross receipts.

E. Taxpayer did not present sufficient evidence to prove it was entitled to an

exemption or a deduction.

F. Under NMSA 1978, Section 7-1-67 (2007), Taxpayers are liable for accrued

interest under the assessment. Interest continues to accrue until the tax principal is satisfied.

G. Under NMSA 1978, Section 7-1-69 (2007), Taxpayers are liable for civil

negligence penalty under the negligence definition found under Regulation 3.1.11.10 (C) NMAC.

In the Matter of the Protest of Star Hospice, Inc., page 16 of 17
For the foregoing reasons, the Taxpayers’ protest IS DENIED. As of the date of hearing,

Taxpayer owed $80,040.94 in tax, $16,023.65 in penalty, and $13,047.51 in interest for an

outstanding total balance of $109,112.10.

DATED: August 11, 2015.

Brian VanDenzen
Interim Chief Hearing Officer
Administrative Hearings Office
P.O. Box 6400
Santa Fe, NM 87502

NOTICE OF RIGHT TO APPEAL

Pursuant to NMSA 1978, Section 7-1-25 (1989), the parties have the right to appeal this

decision by filing a notice of appeal with the New Mexico Court of Appeals within 30 days of the

date shown above. See Rule 12-601 NMRA. If an appeal is not filed within 30 days, this

Decision and Order will become final. Either party filing an appeal shall file a courtesy copy of

the appeal with the Administrative Hearings Office contemporaneous with the Court of Appeals

filing so that the Administrative Hearings Officer may being preparing the record proper.

In the Matter of the Protest of Star Hospice, Inc., page 17 of 17