Were payroll fees and gross receipts tax reimbursements paid through an actor loan-out company subject to the film credit's $5 million performing-artist cap?

Plain-English summary

Evolutionary Pictures could not claim another $1,280,166.52 of New Mexico film credit for payroll processing and gross receipts tax reimbursement tied to out-of-state actors. Those amounts fell under the specific $5 million cap for performing-artist services, which the production had already exhausted.

Evolutionary produced the movie Transcendence in New Mexico. It paid at least $20 million to EPPSLO, a super loan-out and payroll company with an Albuquerque office, for out-of-state actors and received the maximum $5 million credit on those artist-service payments.

Evolutionary also paid EPPSLO a $255,166.52 processing fee and reimbursed $1,025,000 of gross receipts tax arising from the actor wages. It argued those additional amounts were ordinary direct production expenditures eligible for the general 25% credit rather than the capped artist category.

“For” artist services was broader than payment “to” artists

The applicable 2013 statute capped direct production expenditures for the services of performing artists. The AHO emphasized that the Legislature used “for,” not “to.”

The processing fee and tax reimbursement were not paid to the actors themselves, but both existed only because Evolutionary chose to pay the actors through EPPSLO. They were ancillary to and part of the cost of acquiring the performing artists' services.

The same costs could not switch categories for a better cap

Evolutionary alternatively argued that the fees were not direct production expenditures for purposes of the $5 million limitation but were direct production expenditures under the general 25% rule.

The AHO rejected that inconsistent treatment. The 2013 statutory definition applied throughout the Film Production Tax Credit Act. The specific artist-services provision used that same defined term and imposed a narrower cap on the part attributable to performers.

The costs were credit-eligible in kind, but only within the artist-services cap. Because Evolutionary had already received the full $5 million, no additional credit remained for the associated EPPSLO charges.

Result: protest DENIED. The Department's partial approval of $13,593,192.32 remained, and the additional $1,280,166.52 claim was denied.

The findings consistently identify the loan-out company as EPPSLO, Inc. Conclusion D says “EPPLO,” an apparent internal typo; this page follows the findings and preserves the original wording below.

What this means for you

Film production companies

Classify ancillary payroll-company charges by the services they enable. Processing fees, taxes, and reimbursements may follow the cap applicable to the underlying talent rather than a general production-expense percentage.

Productions using loan-out companies

Model the artist cap using the complete cost structure, not only wages paid through the loan-out. Identify which amounts would not exist but for the performer arrangement.

Taxpayers interpreting credit statutes

Expect narrow construction and close attention to statutory prepositions, defined terms, and specific-versus-general provisions. A cost cannot be excluded from a defined category solely for the limiting provision while included for the beneficial one.

Common questions

Q: What movie did Evolutionary produce?
A: Transcendence.

Q: How much had it paid for out-of-state actor services?
A: At least $20 million through EPPSLO.

Q: What additional costs were disputed?
A: A $255,166.52 payroll-processing fee and $1,025,000 gross receipts tax reimbursement.

Q: Why did the $5 million cap apply?
A: The amounts were expenditures “for” performing-artist services even though they were paid to the loan-out company rather than directly to actors.

Q: Were the costs completely ineligible for film credit?
A: No. They qualified only within the artist-services category, whose $5 million cap was already exhausted.

Citations and references

Statutes:

• NMSA 1978, §§ 7-2F-1 and 7-2F-1.1 — Film Production Tax Credit and specific $5 million cap for performing-artist services under the pre-2015 law
• NMSA 1978, § 7-2F-2(C) — 2013 definition of direct production expenditures

Cases cited:

• Team Specialty Products v. New Mexico Taxation and Revenue Department, 2005-NMCA-020 — tax credits narrowly construed as legislative grants
• Security Escrow Corp. v. State Taxation and Revenue Department, 1988-NMCA-068 — reasonable construction even when tax benefits are read narrowly
• Regents of the University of New Mexico v. New Mexico Federation of Teachers, 1998-NMSC-020 — plain meaning and harmonious statutory reading

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Evolutionary Pictures LLC
• Decision PDF: D&O 16-01

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
EVOLUTIONARY PICTURES LLC No. 16-01
TO DENIAL OF FILM PRODUCTION TAX CREDIT
ISSUED UNDER LETTER ID NO. L1511552976

DECISION AND ORDER

A protest hearing occurred on the above captioned matter on August 6, 2015 before Brian

VanDenzen, Esq., Interim Chief Hearing Officer, in Santa Fe. At the hearing, Attorney R. Tracy

Sprouls appeared representing Evolutionary Pictures, LLC (“Taxpayer”). Staff Attorney Peter

Breen appeared representing the State of New Mexico Taxation and Revenue Department

(“Department”). Protest Auditor Tom Dillon appeared as a witness for the Department. Taxpayer

submitted a position statement into the record. The Department presented a published case.

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

FOLLOWS:

FINDINGS OF FACT

1. On January 26, 2015, through letter id. no. L1511552976, the Department

partially approved Taxpayer’s claim for Film Production Tax Credit for $13,593,192.32 and

denied the remaining portion of TP’s claim for that credit.

2. On April 14, 2015, Taxpayer protested the Department’s partial denial of the Film

Production Tax Credit, arguing it was legally entitled to an additional claim of $1,280,166.52

under that credit.

3. On April 22, 2015, the Department’s protest office acknowledged receipt of the

protest.

4. On May 20, 2015, the Department filed a request for hearing in this matter with

the Hearings Bureau1.

5. On May 26, 2015, the Hearings Bureau sent Notice of Telephonic Scheduling

Conference, scheduling this matter for a scheduling hearing on June 19, 2015.

6. On June 19, 2015, a Scheduling Conference Hearing occurred in this matter

where the issues involved in the protest were discussed, the necessity of discovery and/or

motions practice were discussed, and a merits hearing date was selected. The parties did not

object that conducting the scheduling hearing satisfied the requirement that a hearing be set

within 90-days of protest.

7. On June 22, 2015, the Hearings Bureau issued a Notice of Administrative Hearing

in this matter, setting the merits hearing for August 6, 2015.

8. On July 17, 2015, Attorney Sprouls entered his appearance on behalf of Taxpayer.

9. Taxpayer is a movie production company that made the movie “Transcendence”

in New Mexico.

10. Taxpayer purchased the acting services for out-of-state actors from the super

loan-out company and payroll processing company named EPPSLO, Inc. (“EPPSLO”).

11. EPPSLO had an office location in Albuquerque during the filming of the movie.

12. Taxpayer paid EPPSLO at least twenty million dollars for the services of the out-

of-state actors, and received the maximum five-million dollar Film Production Tax Credit Act

for those payments for performing artists’ services.

1
On July 1, 2015, pursuant to enacted Senate Bill 356, the Hearings Bureau became the Administrative Hearings
Office (“AHO”) independent of the Taxation and Revenue Department. See NMSA 1978, Section 7-1B (2015). The
Hearings Bureau will be used for events that occurred before July 1, 2015, even though the hearing occurred before
the Administrative Hearings Office and this decision is issued captioned under the Administrative Hearings Office.

In the Matter of the Protest of Evolutionary Pictures, LLC, page 2 of 10

13. In addition to paying for the performing artists’ wages to EPPSLO, Taxpayer paid

EPPSLO a payroll processing fee of $255,166.52 and reimbursed $1,025,000.00 in gross receipts

taxes stemming from EPPSLO’s receipt of the performing artists’ wages from Taxpayer.

14. On February 3, 2014, Taxpayer filed an application for $14,071,215.00 in Film

Production Tax Credit.

15. As discussed in finding of fact #1, the Department partially denied and partially

granted Taxpayer’s claim for the Film Production Tax Credit.

16. The Department denied $1,280,166.52 in claimed credit for Taxpayer’s

reimbursement of gross receipts tax and payroll processing fees to EPPSLO because Taxpayer

had already maximized the credit for payment for the services of performing artists under Film

Production Tax Credit Act.

DISCUSSION

The issue in this case is whether Taxpayer’s payment to the super loan-out company

EPPSLO are direct production expenditures subject to the general 25% cap or are direct

production expenditures for the service of performing artists subject to a more specific five-

million dollar cap under the Film Production Tax Credit. Since Taxpayer had already exhausted

the five-million dollar cap for direct production expenditures for the service of performing

artists, Taxpayer would not be entitled to any additional credit if the payments constituted direct

production expenditures for the service of performing artists versus general direct production

expenditures under the Film Production Tax Credit.

Burden of Proof.

Although the Department did not issue Taxpayer an assessment in this matter, Taxpayer

still has the burden of establishing it was entitled to the claimed credit at issue. The New Mexico

In the Matter of the Protest of Evolutionary Pictures, LLC, page 3 of 10
Court of Appeals has found that tax credits are legislative grants of grace to a taxpayer that must

be narrowly interpreted and construed against a taxpayer. See Team Specialty Prods. v. N.M.

Taxation & Revenue Dep't, 2005-NMCA-020, ¶9, 137 N.M. 50 (internal citations omitted).

Under the rationale of Team Specialty Prods, Taxpayer carries the burden of proving that it is

entitled to the claimed credit. Nevertheless, although a credit must be narrowly interpreted and

construed against a taxpayer, it still should be construed in a reasonable manner consistent with

legislative language. See Sec. Escrow Corp. v. State Taxation & Revenue Dep't, 1988-NMCA-

068, ¶9, 107 N.M. 540 (although construed narrowly against a taxpayer, deductions and

exemptions—similar to credits—are still to be construed in a reasonable manner).

New Mexico Film Production Tax Credit

NMSA 1978, Section 7-2F-1.1 (2013, before 2015 amendment2) establishes the Film

Production Tax Credit Act. That act allows for a tax credit in statutorily specified percentages for

“direct production expenditures made in New Mexico” for eligible film production companies. Id.

Under Section 7-2F-1 (B), the credit is generally capped at 25% of direct production expenditures

unless otherwise specified under that section.

The more specific cap at issue in this case is contained under Section 7-2F-1 (S). Section 7-

2F-1 (S) (emphasis added) states that

[a]s applied to direct production expenditures for the services of performing
artists, the film production tax credit authorized by this section shall not
exceed five-million dollars ($ 5,000,000) for services rendered by all
performing artists in a production for which the film production tax credit is
claimed.

As stated in the introduction, the question in this protest is whether the remaining amount of

payroll processing fees and tax reimbursements Taxpayer paid to EPPSLO for the payment of

2
Taxpayer’s application for the credit occurred on February 3, 2014, before the passage and the effective date of the
2015 amendment to the Film Production Tax Credit. Thus, all references to the Film Production Tax Credit Act in
this statute are to the 2013 version, before the 2015 amendments.

In the Matter of the Protest of Evolutionary Pictures, LLC, page 4 of 10
performing artists’ fees falls under the Section 7-2F-1 (S) cap or are subject to the general 25%

credit for direct production expenditures. In this case, Taxpayer received the maximum five-million

dollar credit for its payment of performing artists fees to EPPSLO, meaning that if the additional

payroll processing fees and tax reimbursements made to EPPSLO constitute expenditures for the

services of the performing artists, Taxpayer cannot obtain any additional amount of credit under the

Section 7-2F-1 (S) cap. The Department argued that all the fees Taxpayer paid to the super loan-out

company, including the payroll processing fees for processing the artist’s payments, are subject to

the already exhausted five-million dollar cap found under Section 7-2F-1 (S), because all of the

payment were “direct production expenditures for the services of performing artists.” Taxpayer

counters that these payroll processing fees and reimbursement of gross receipt tax were not

payments to performing artists, but direct production expenditures subject to the general 25% cap

under the Film Production Tax Credit. Thus, Taxpayer contends that the five-million cap under

Section 7-2F-1 (S) does not apply and it is still entitled to the credit for the $1,280,166.52 payment

to EPPSLO.

This disputed question turns on the language and construction of the Film Production Tax

Credit Act. It is a canon of statutory construction in New Mexico to adhere to the plain wording

of a statute except if there is ambiguity, error, an absurdity, or a conflict among statutory

provisions. See Regents of the Univ. of New Mexico v. New Mexico Fed'n of Teachers, 1998-

NMSC-20, ¶28, 125 N.M. 401. In Wood v. State Educ. Ret. Bd., 2011-NMCA-20, ¶12 (internal

quotations and citations omitted), the New Mexico Court of Appeals stated that

the guiding principle in statutory construction requires that we look
to the wording of the statute and attempt to apply the plain
meaning rule, recognizing that when a statute contains language
which is clear and unambiguous, we must give effect to that
language and refrain from further statutory interpretation.

In the Matter of the Protest of Evolutionary Pictures, LLC, page 5 of 10
Extra words should not be read into a statute if the statute is plain on its face, especially if it

makes sense as written. See Johnson v. N.M. Oil Conservation Comm'n, 1999-NMSC-21, ¶ 27,

127 N.M. 120; see also Amoco Prod. Co. v. N.M. Taxation & Revenue Dep't, 1994-NMCA-086, ¶8

& ¶14, 118 N.M. 72. Only if the plain language interpretation would lead to an absurd result not

in accord with the legislative intent and purpose is it necessary to look beyond the plain meaning

of the statute. See Bishop v. Evangelical Good Samaritan Soc'y, 2009-NMSC-036, ¶11, 146

N.M. 473. Because this case also involves a tax credit, which has been found to be an act of

legislative grace, the language of the credit statute must be narrowly constructed. See Team

Specialty Prods, 2005-NMCA-020, ¶9.

Applying these principles to the disputed credit, the plain language of Section 7-2F-1 (S)

(emphasis added) indicates that payment “…for the services of performing artists” is subject to

the five-million dollar cap. As the Department argued, rather than indicating payments “to”

performing artists, as Taxpayer’s interpretation would require, the statute used the word “‘for’

the services of performing artists.” To change the reading of the tax credit by either adding or

replacing a word in the statute is not consistent with the rules of construction of a tax credit, as

articulated by Team Specialty Prods, 2005-NMCA-020, ¶9. Thus, Section 7-2F-1 (S) must be

read narrowly consistent with the plain language contained in the statute: the amount of credit for

direct production expenditures for the services of performing artists is capped at five-million

dollars.

While Taxpayer’s payment of payroll processing fees and reimbursement of gross

receipts tax on the artists’ fees were certainly not payments to the artists themselves, they were

part of the payment for the services rendered by the performing artists. All of the payments that

Taxpayer made to the super loan-out company EPPSLO were to pay for the services of the

In the Matter of the Protest of Evolutionary Pictures, LLC, page 6 of 10
performing artists. The administrative payroll processing fees and gross receipts tax liability

reimbursement stemming from payment of the performing artists’ wages would not have been

required but for the fact that Taxpayer made the decision, apparently consistent with industry

practice, to pay the performing artists’ fees through the super loan-out company. In other words,

rather than being independent direct production expenditures, those costs are ancillary to

Taxpayer’s payment “for the services of performing artists” through the super loan-out company.

While these costs do qualify for the Film Production Tax Credit, since these payments are part

and parcel of using the super loan-out company for the payment of performing artists’ service,

they only qualify up to the five-million dollar cap under Section 7-2F-1 (S) for services rendered

by the performing artists.

Taxpayer’s interpretation also espouses an inconsistent reading of the phrase “direct

production expenditures” for one beneficial purpose but not for another detrimental purpose.

Taxpayer argued that even if the payment may have been for the service of the performing artists,

those payments did not qualify as “direct production expenditures” for the purposes of Section 7-

2F-1 (S) and thus were not subject to the five-million dollar cap imposed by that subsection. Yet,

Taxpayer argued that these payments did constitute “direct production expenditures” eligible for the

general 25% cap for the remaining portions of the Film Production Tax Credit Act. While

Taxpayer’s brief cited NMSA 1978, Section 7-2F-1 (T) (1) (2015) for the definition of “direct

production expenditures,” under the 2013 version of the Film Production Tax Credit Act applicable

to Taxpayer’s application for the credit, that definition is actually found under NMSA 1978, Section

7-2F-2 (C) (2013, before 2015 amendment). Generally, this definition between the 2013 amendment

and the 2015 amendment is similar, but the 2013 version does not include example #10 for audit

In the Matter of the Protest of Evolutionary Pictures, LLC, page 7 of 10
costs cited in Taxpayer’s position statement and oral argument. Thus, that portion of Taxpayer’s

argument related to example #10 for audit costs will not be addressed.

In pertinent part, under Section 7-2F-2 (C), “direct production expenditures” means

(1) except as provided in Paragraph (2) of this subsection, means a
transaction that is subject to taxation in New Mexico, including:

(a) payment of wages, fringe benefits or fees for talent, management
or labor to a person who is a New Mexico resident;
…
(c) payment to a personal services business for the services of a
performing artist if: 1) the personal services business pays gross receipts tax
in New Mexico on the portion of those payments qualifying for the tax
credit; and 2) the film production company deducts and remits, or causes to
be deducted and remitted, income tax at the maximum rate in New Mexico
pursuant to Subsection H of Section 7-3A-3 NMSA 1978 on the portion of
those payments qualifying for the tax credit paid to a personal services
business where the performing artist is a full or part owner of that business or
subcontracts with a personal services business where the performing artist is
a full or part owner of that business; and

(d) any of the following provided by a vendor: 1) the story and
scenario to be used for a film; 2) set construction and operations, wardrobe,
accessories and related services; 3) photography, sound synchronization,
lighting and related services; 4) editing and related services; 5) rental of
facilities and equipment; 6) leasing of vehicles, not including the chartering
of aircraft for out-ofstate transportation; however, New Mexico-based
chartered aircraft for in-state transportation directly attributable to the
production shall be considered a direct production expenditure; provided that
only the first one hundred dollars ($ 100) of the daily expense of leasing a
vehicle for passenger transportation on roadways in the state may be claimed
as a direct production expenditure; 7) food or lodging; provided that only the
first one hundred fifty dollars ($ 150) of lodging per individual per day is
eligible to be claimed as a direct production expenditure; 8) commercial
airfare if purchased through a New Mexico-based travel agency or travel
company for travel to and from New Mexico or within New Mexico that is
directly attributable to the production; 9) insurance coverage and bonding if
purchased through a New Mexico-based insurance agent, broker or bonding
agent; and 10) other direct costs of producing a film in accordance with
generally accepted entertainment industry practice…

Under the 2013 version of the statute, there is no conflict between Section 7-2F-2 (C)’s

definition of “direct production expenditures” and Section 7-2F-1 (S) use of that phrase. Section 7-

In the Matter of the Protest of Evolutionary Pictures, LLC, page 8 of 10
2F-1 (S) refers to those “direct production expenditures” related payments for the services of the

performing artists. In other words, Section 7-2F-1 (S) uses the same definition for “direct production

expenditures” found throughout the Film Production Tax Credit Act, but imposes a specific cap for

those “direct production expenditures” attributable to payment of performing artists. Since there is

no inconsistency between the use of those terms, under general principles of statutory construction

and under the Team Specialty Prods, 2005-NMCA-020, ¶9 requirement to read a credit statute

narrowly, Taxpayer’s argument that its payments do not qualify as “direct production expenditures”

for one purpose under Section 7-2F-1 (S) but does qualify as “direct production expenditures” for

another more beneficial purpose under the general credit is not persuasive.

Taxpayer may certainly claim a credit for the fees it paid the super loan-out company, but

only up to the five-million dollar cap contained under Section 7-2F-1 (S) because those fees are part

of the payment “for services of performing artists.” Because Taxpayer’s claim for credit had already

exhausted the five-million dollar cap under Section 7-2F-1 (S) and because the additional disputed

claim for credit is for fees and reimbursements associated with payment for services of the

performing artists, the Department properly denied that portion of Taxpayer’s claim for Film

Production Tax Credit.

CONCLUSIONS OF LAW

A. Taxpayer filed a timely, written protest to the Department’s denial of the claim for

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

B. Holding the June 19, 2015 Scheduling Hearing and setting a merits hearing date at

that time satisfied the 90-day hearing requirement of NMSA 1978, Section 7-1-24.1 (A) (2013).

C. The Film Production Tax Credit is capped at five-million dollars under Section 7-

2F-1 (S) for the payments for the services of performing artists.

In the Matter of the Protest of Evolutionary Pictures, LLC, page 9 of 10
D. Under the language of Section 7-2F-1 (S), Taxpayer’s payment of processing fees

and reimbursement of gross receipts tax for its payment of artists fees through EPPLO, Inc.

constitute payments for the services of performing artists. See Team Specialty Prods. v. N.M.

Taxation & Revenue Dep't, 2005-NMCA-020, ¶9, 137 N.M. 50 (Tax credits are legislative grants

of grace to a taxpayer that must be narrowly interpreted and construed against a taxpayer).

For the foregoing reasons, the Taxpayers’ protest IS DENIED.

DATED: February 8, 2016.

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 Office may being preparing the record proper.

In the Matter of the Protest of Evolutionary Pictures, LLC, page 10 of 10