Did third-party lenders' financing of car dealerships' software licenses relieve the software seller of New Mexico gross receipts tax?

Plain-English summary

Third-party lenders' financing of software-license purchases did not pay or replace Market Scan's own gross receipts tax obligation. The AHO upheld $5,684.59 tax, $1,136.91 penalty, and $817.67 interest for 2007 through September 2011.

Market Scan sold software licenses in New Mexico, mainly to automobile dealerships, and admitted those sales were taxable. Customers always made a down payment. Some paid Market Scan in monthly installments, while most sought a loan from one of Market Scan's recommended lenders.

Market Scan contracted separately with those lenders and accepted a reduced lump sum as payment in full when a customer obtained financing. The lenders were free to reject customers, and financed customers then made monthly payments to the lenders.

Financing did not shift the seller's tax

Market Scan argued that the lenders were responsible for gross receipts tax on the financed license contracts and had in fact paid it. But it supplied no evidence showing payment on Market Scan's behalf.

One lender's general payment history for a single customer included a “sales tax” amount, but Market Scan did not explain the document or connect it to payment of its own New Mexico liability. It also identified no specific exemption or deduction for its license receipts.

Market Scan proposed lower tax amounts but began its calculations in 2008 even though the assessment included 2007 and some submitted contracts reflected renewed existing accounts. The record therefore did not show that the Department's assessed amounts were wrong.

Equitable recoupment did not apply

Section 7-1-28(F) allowed abatement when another person paid tax on behalf of the taxpayer on the same transaction and the equitable-recoupment requirements were met.

The AHO found two separate taxable events: Market Scan's sale of a software license and the lender's loan to the customer. Each business was responsible for tax on its own event. Market Scan also failed to show inconsistent tax theories or a strict identity of interest with lenders that could freely decline financing and did not share customer financial information with it.

Penalty and interest remained mandatory

Because Market Scan did not overcome the assessment, the AHO treated the negligence penalty as mandatory under Section 7-1-69. Interest was also mandatory because the tax was not paid when due.

Result: protest DENIED. The full assessment remained.

What this means for you

Software and subscription sellers

Customer financing changes how you receive payment, not necessarily who made the taxable sale. Identify your own gross receipts from the license transaction separately from a lender's loan activity.

Businesses using preferred lenders

A referral or lender agreement does not show that the lender assumed your tax. If another party truly pays tax on your behalf, retain documents that identify the taxpayer, transaction, amount, and legal basis.

Accountants and tax professionals

Equitable recoupment requires more than economically related transactions. Test for one taxable event, inconsistent tax theories, and strict identity of interest, and reconcile any alternative calculation to every assessed period.

Common questions

Q: Were the software licenses taxable?
A: Yes. Market Scan admitted that its New Mexico software-license sales were subject to gross receipts tax.

Q: Did lenders become the sellers of the software?
A: No. Market Scan contracted directly with customers; lenders separately financed some customers' purchases.

Q: Was there proof that lenders paid Market Scan's tax?
A: No. The record contained no explained evidence of payment on Market Scan's behalf.

Q: Why were there two taxable events?
A: One was the software-license sale, and the other was the financing loan. The seller and lender were responsible for their own transactions.

Q: What assessment was upheld?
A: $5,684.59 tax, $1,136.91 penalty, and $817.67 interest.

Citations and references

Statutes:

• NMSA 1978, §§ 7-9-3.5 and 7-9-5 — licensed property receipts and taxability presumption
• NMSA 1978, § 7-1-28(F) — equitable recoupment
• NMSA 1978, §§ 7-1-3 and 7-1-17 — tax definition and assessment presumption
• NMSA 1978, §§ 7-1-67 and 7-1-69 — interest and negligence penalty

Cases cited:

• Teco Investments, Inc. v. Taxation and Revenue Department, 1998-NMCA-055 — equitable-recoupment elements
• City of Carlsbad v. Grace, 1998-NMCA-144 — purpose of equitable recoupment
• Security Escrow Corp. v. State Taxation and Revenue Department, 1988-NMCA-068 — strict proof of deductions
• Marbob Energy Corp. v. New Mexico Oil Conservation Commission, 2009-NMSC-013 — mandatory meaning of “shall”

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Market Scan Information Systems, Inc.
• Decision PDF: D&O 16-44

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
MARKET SCAN INFORMATION SYSTEMS, INC., No. 16-44
TO ASSESSMENT ISSUED UNDER
LETTER ID NO. L0859259712

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on July 29, 2016 before Hearing

Officer Dee Dee Hoxie. The Taxation and Revenue Department (Department) was represented by Ms.

Elena Morgan, Staff Attorney, and Ms. Diana Martwick. Mr. Tom Dillon, Auditor, also appeared on

behalf of the Department. Mr. John Sarna, accountant, and Mr. Todd Tickner, CPA, appeared for the

hearing on behalf of Market Scan Information Systems, Inc. (Taxpayer). 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 March 4, 2013, the Department assessed the Taxpayer for gross receipts tax, penalty, and

interest for the periods from January 31, 2007 through September 30, 2011. The assessment

was for $5,684.59 tax, $1,136.91 penalty, and $817.67 interest.

2. On April 24, 2013, the Taxpayer filed a formal protest letter.

3. On September 29, 2015, the Department filed a Request for Hearing asking that the

Taxpayer’s protest be scheduled for a formal administrative hearing.

4. On September 30, 2015, the Hearings Office issued a notice of telephonic scheduling

hearing. The hearing date was not required to be set within ninety days of the protest because

the protest was filed before the statute was amended.

5. On November 20, 2015, a telephonic scheduling hearing was conducted. The scheduling

order and notice was issued on November 23, 2015.

6. On March 8, 2016, the Taxpayer filed a request for continuance of the hearing.

7. On March 30, 2016, the Hearings Office sent amended notices of hearing and granted the

request for continuance.

8. The Taxpayer sells licenses to use software in New Mexico, mainly to car dealerships.

9. The Taxpayer admits that its sales in New Mexico are subject to gross receipts tax.

10. The Taxpayer contracts directly with its customers when it sells the software licenses.

11. The Taxpayer’s customers frequently need to use financing options to pay for the software

licenses.

12. In all cases, the Taxpayer’s customers must make an initial down payment.

13. In some cases, the Taxpayer contracts with customers to make monthly payments directly to

the Taxpayer.

14. In most cases, the Taxpayer contracts with customers to make a lump sum total payment and

refers its customers to its preferred lenders for financing.

15. The Taxpayer has a separate agreement with the lenders that it recommends to customers.

The Taxpayer accepts a reduced amount as paid-in-full from its recommended lenders when

the customers get a loan with those lenders.

16. The Taxpayer did not have the authority to bind the lenders in any transaction, and the

lenders were free to decline to finance the Taxpayer’s customers.

17. The customers who acquired loans made monthly payments to their lenders.

DISCUSSION

The issue to be decided is whether the Taxpayer is liable for the assessment. The Taxpayer

argues that the lenders were responsible for the gross receipts taxes on its contracts with its

Market Scan Information Systems, Inc.
Letter ID No. L0859259712
page 2 of 7
customers. The Taxpayer argues that the lenders in fact paid the gross receipts taxes. The Taxpayer

admits that with respect to two of its customers, there were no lenders involved and that the Taxpayer

is liable for the gross receipts taxes on those two customers. The Taxpayer argued that the amount of

gross receipts for all of its customers was incorrect and proposed alternative amounts of gross

receipts taxes due. The Taxpayer calculated gross receipts taxes at the earliest from 2008, even

though several of the contracts it provided indicated that the customer had an existing account when

the contract was renewed. The assessment included amounts from 2007. There was no evidence that

the amounts assessed were incorrect if all of the tax periods in question were included.

The Department argued that the Taxpayer was required to pay gross receipts taxes on all of

its sales to its customers. The Department argued that the financing institutions were paying their

own gross receipts taxes, if they paid any, and were not paying the Taxpayer’s gross receipts taxes.

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 entitled to an abatement.

The burden is on the Taxpayer to prove that it is entitled to an 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, and the right

must be clearly established by the taxpayer.” Sec. Escrow Corp. v. State Taxation and Revenue

Market Scan Information Systems, Inc.
Letter ID No. L0859259712
page 3 of 7
Dep’t., 1988-NMCA-068, ¶ 8, 107 N.M. 540 (emphasis added). 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.

Gross receipts tax.

“[I]t is presumed that all receipts of a person engaging in business are subject to the gross

receipts tax.” NMSA 1978, § 7-9-5 (2002). Gross receipts include any money that is obtained “from

leasing or licensing property employed in New Mexico”. NMSA 1978, § 7-9-3.5 (2007). The

Taxpayer admits that its sales of the software licenses were subject to the gross receipts tax. There

are a number of exemptions and deductions that may apply to gross receipts. See NMSA § 7-9-12

through § 7-9-78.1. The Taxpayer presented no evidence and no argument regarding any specific

exemption or deduction.

Equitable recoupment.

An assessment may be abated when another person paid the amount of the tax “on behalf of

the taxpayer on the same transaction; provided that the requirements of equitable recoupment are

met.” NMSA 1978, § 7-1-28 (F) (2013). The Taxpayer argued that the financing institutions paid

the gross receipts taxes on behalf of the Taxpayer on the transactions in question. However, the

Taxpayer presented no evidence to establish that the financing institutions were in fact paying on

their behalf. The only evidence presented was a general payment history from a lender on one

customer, which indicated that sales tax was included in the payment, but there was no explanation

of the document or its import to the Taxpayer.

Generally, equitable recoupment allows a party to use a claim or defense that would

otherwise be barred by a statute of limitations when the claim arises from the same transaction. See

City of Carlsbad v. Grace, 1998-NMCA-144, ¶ 16, 126 N.M. 95. The purpose of the doctrine of

equitable recoupment is to prevent the unjust enrichment of one party due to another’s mistake and to

Market Scan Information Systems, Inc.
Letter ID No. L0859259712
page 4 of 7
bypass harsh applications of a procedural bar on limitations periods. See id. at ¶ 20-21. In tax

transactions, there are three elements that must be met for equitable recoupment to apply. See Teco

Investments, Inc. v. Taxation and Revenue Dep’t., 1998-NMCA-055, ¶ 8, 125 N.M. 103. There must

be 1) a single taxable event, 2) taxes assessed on that single event on inconsistent theories, and 3) a

strict identity of interest. See id. Separate parties may still have a strict identity of interest. See id. at

¶ 10-11. In this case, there was not just a single taxable event. The first taxable event was the

Taxpayer’s sale of the license to the customer. The second taxable event was the financing

companies’ loans to the customers. The financing companies and the Taxpayer were each

responsible for their own gross receipts taxes on those events. Moreover, there is no evidence that

the taxes assessed on the single transaction involved inconsistent theories or that there was a strict

identity of interest between the Taxpayer and the financing institutions. In fact, the financing

institutions were free to decline to finance the Taxpayer’s customers. The Taxpayer even explained

to its customers in their contracts that the recommended lenders were third-party lenders who did not

share financial information with the Taxpayer. Therefore, the elements of equitable recoupment have

not been met.

Assessment of Penalty.

Penalty “shall be added to the amount assessed” when a tax is not paid on time due to

negligence. See NMSA 1978, § 7-1-69 (2007) (emphasis added). The word “shall” indicates that the

assessment of penalty is mandatory, not discretionary. See Marbob Energy Corp. v. N.M. Oil

Conservation Comm’n., 2009-NMSC-013, ¶ 22, 146 N.M. 24. Penalty was properly assessed.

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

Market Scan Information Systems, Inc.
Letter ID No. L0859259712
page 5 of 7
146 N.M. 24. The assessment of interest is not designed to punish taxpayers, but to compensate the

state for the time value of unpaid revenues. Because the tax was not paid when it was due, interest

was properly assessed.

CONCLUSIONS OF LAW

A. The Taxpayer filed a timely written protest to the Notice of Assessment issued under

Letter ID number L0859259712, and jurisdiction lies over the parties and the subject matter of this

protest.

B. The Taxpayer admitted that its sales were subject to gross receipts taxes. See NMSA

1978, § 7-9-3.5.

C. The Taxpayer failed to prove that the taxes were paid by another on its behalf and

failed to prove equitable recoupment. See NMSA 1978, § 7-1-28.

D. The assessment is presumed to be correct. See NMSA 1978, § 7-1-17.

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

DATED: September 12, 2016.

Dee Dee Hoxie
DEE DEE HOXIE
Hearing Officer
Administrative Hearings Office
Post Office Box 6400
Santa Fe, NM 87502

NOTICE OF RIGHT TO APPEAL

Pursuant to NMSA 1978, § 7-1-25, 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. A copy of the Notice of Appeal should be mailed to John Griego, P. O. Box 6400,
Market Scan Information Systems, Inc.
Letter ID No. L0859259712
page 6 of 7
Santa Fe, New Mexico 87502. Mr. Griego may be contacted at 505-827-0466.

Market Scan Information Systems, Inc.
Letter ID No. L0859259712
page 7 of 7