Can an affiliated hotel-management company use a percentage of each hotel's revenue to allocate its costs and still deduct the fees as services provided on a nonprofit or cost basis?

Plain-English summary

Total Management Systems' fees from affiliated hotels qualified for New Mexico's gross receipts deduction for administrative and management services provided on a nonprofit or cost basis. Its percentage-based allocation was a reasonable way to distribute costs; it did not turn the charges into profit-based management fees.

The Sundaram family owned Total Management and the affiliated entities that owned several hotels. Total Management supplied human resources, sales and marketing, revenue management, accounting and budgeting, tax-return work, information technology, and operational oversight. It paid gross receipts tax on services for non-affiliated hotels; only fees from family-owned affiliates were disputed.

Section 7-9-69 did not prescribe one accounting formula

Section 7-9-69(A) allowed a deduction for receipts from administrative, managerial, accounting, and customer services performed for an affiliate “upon a nonprofit or cost basis.” The parties did not dispute the affiliate relationships or that Total Management provided the listed kinds of services. They disputed whether its fee method met the cost-or-nonprofit requirement.

For 2011 and 2012, Total Management divided actual costs among three affiliated hotels. Beginning in 2013, it projected total expenses and each hotel's revenue, assigned each hotel a percentage fee representing its share of the management company's costs, and monitored and adjusted the percentages to reduce the chance of earning a profit.

The decision found no statute, regulation, or ruling that required a particular method of calculating cost. Using total ordinary and necessary expenses and measuring income against those expenses was reasonable. Total Management also did not have to track every employee's time or every service cost separately for each hotel when its entire operation was devoted to serving the affiliates.

Percentage-of-revenue charges were still cost allocations

The affiliated hotels' percentages changed from year to year and sometimes moved downward. The AHO credited testimony that leaving percentages fixed as hotel revenues grew would have created an unwanted profit. The percentages therefore allocated each hotel's share of Total Management's cost rather than compensating it for performance.

Total Management made a profit in 2011 and 2013 but sustained losses in the other assessed years. Across 2011 through 2016, expenses exceeded revenue by $88,596. Shareholders made more than $77,000 of capital contributions and the company incurred debt to fund losses; shareholders never received a distribution.

The AHO held that the statute clearly expressed the deduction and that Total Management proved its affiliate services were supplied on a nonprofit or cost basis. Its earlier reporting mistake—treating deductible receipts as exempt and omitting them from reported gross receipts—did not change the underlying tax result.

The protested assessment was abated, but fees were denied

The September 2017 notice totaled $276,963.88. It included $205,593.83 of gross receipts tax, $41,118.83 of gross receipts penalty, and $25,385.69 of gross receipts interest, plus $3,720.43 of withholding tax, $744.11 of withholding penalty, and $400.99 of withholding interest for January 2009 through June 2016. No tax was assessed specifically for 2009 or 2010.

Total Management did not protest the withholding components. The final order nevertheless says broadly that “the Assessment be ABATED” after granting the gross receipts protest. The decision does not explain how that wording interacts with its finding that the withholding portion was unprotested, so this page does not infer an outcome beyond the order's text.

The AHO denied administrative costs and fees because the Department's position, although unsuccessful, was a reasonable application of the law to the facts.

Result: protest GRANTED and the order stated that the assessment was ABATED. Administrative costs and fees were denied.

What this means for you

Document the nonprofit or cost objective

An affiliate-service company should identify its full service costs, set charges designed to recover those costs, monitor actual results, and adjust the allocation when revenue changes would otherwise create profit.

A revenue percentage is not automatically a performance fee

Here, revenue percentages were simply the mechanism for dividing total costs among affiliates. The evidence showed that the percentages were adjusted to prevent profit.

Exact time billing was not required on these facts

The statute did not require lawyer-style or accountant-style time tracking for every affiliate. The AHO accepted total-cost accounting because the company's entire operation served the affiliated hotels and its expenses were reasonable.

Report deductions correctly even when no tax is due

Total Management had incorrectly classified deductible receipts as exempt and failed to report the deductible gross receipts. The accounting treatment did not create liability here, but accurate reporting remains important.

Common questions

Q: What services qualified for the deduction?
A: Human resources, sales and marketing, revenue management, accounting and budget management, tax work, technology, operations, and other administrative and customer services for affiliated hotels.

Q: Did every year have to show zero profit?
A: The decision accepted the cumulative evidence presented here. Total Management had profits in two years but an $88,596 cumulative loss for 2011-2016, and the Department did not oppose the cumulative approach.

Q: Were fees from non-affiliated hotels deductible?
A: They were not at issue. Total Management paid gross receipts tax on fees for non-affiliated hotels.

Q: Did the AHO require formal contracts with each affiliate?
A: No. The affiliated hotels did not have formal management contracts because of common family ownership, and that did not prevent the deduction on the facts decided.

Q: Did Total Management recover its administrative costs and attorney fees?
A: No. The Department's position was reasonable even though the taxpayer prevailed.

Citations and references

Statutes and regulation:

• NMSA 1978, § 7-9-69(A) — deduction for affiliate administrative, managerial, accounting, customer, and shared-facility services on a nonprofit or cost basis
• NMSA 1978, §§ 7-9-3, 7-9-3.3, 7-9-3.5(A)(1), 7-9-4, and 7-9-5 — service and business definitions, gross receipts tax, and presumed taxability
• NMSA 1978, §§ 7-1-17(C) and 7-1-3(X) — assessment presumption, penalty, and interest
• NMSA 1978, § 7-1-29.1 — administrative costs and fees
• Regulation 3.1.6.13 NMAC — presumption for assessed penalty and interest

Cases:

• TPL, Inc. v. New Mexico Taxation and Revenue Department, 2003-NMSC-007 — strict construction and proof of a tax deduction
• Regents of the University of New Mexico v. New Mexico Federation of Teachers, 1998-NMSC-020 — plain meaning and statutory construction
• Wood v. State Educational Retirement Board, 2011-NMCA-020 — applying clear statutory language without adding words

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Total Management Sys Inc
• Decision PDF: D&O 19-20

Original ruling text

1 STATE OF NEW MEXICO
2 ADMINISTRATIVE HEARINGS OFFICE
3 TAX ADMINISTRATION ACT

4 IN THE MATTER OF THE PROTEST OF
5 TOTAL MANAGEMENT SYS INC.
6 TO ASSESSMENT ISSUED UNDER
7 LETTER ID NO. L0485786416

8 v. AHO No. 18.01-019A
9 D&O 19-20

10 NEW MEXICO TAXATION AND REVENUE DEPARTMENT

11 DECISION AND ORDER

12 On May 13, 2019, Hearing Officer Chris Romero, Esq., conducted a hearing on the

13 merits of the tax protest of Total Management Systems Inc. (“Taxpayer”) pursuant to the Tax

14 Administration Act and the Administrative Hearings Office Act. Mr. Benjamin C. Roybal, Esq.

15 appeared on behalf of Taxpayer, accompanied by witnesses, Mr. Prakash Sundaram, Ms.

16 Krithika Sundaram, Mr. Donald Miller, CPA, and Mr. Bruce Malott, CPA. Mr. Miller and Mr.

17 Malott testified as Taxpayer’s designated expert witnesses.

18 Mr. Marek Grabowski, Esq. appeared on behalf of the opposing party in the protest, the

19 Taxation and Revenue Department (“Department”), accompanied by Ms. Mary Griego, protest

20 auditor, and Mr. Ron Scott, CPA, who appeared as witnesses for the Department. Mr. Scott

21 appeared as the Department’s designated expert witness.

22 Taxpayer Exhibits 1 – 7 and Department Exhibits A, G, H and L were admitted into the

23 evidentiary record without objection.

24 The issue in the protest is whether Taxpayer is entitled to an abatement of assessed gross

25 receipts tax, and associated penalty and interest by virtue of the deduction provided by NMSA

26 1978, Section 7-9-69 (2015) which permits a business to deduct from its gross receipts those

27 amounts deriving from providing administrative, managerial, accounting and customer services

In the Matter of the Protest of Total Management Systems Inc.
Page 1 of 21
1 for an affiliate on a nonprofit or cost basis. As explained in further detail, the Hearing Officer

2 determined that the Taxpayer’s methodology for calculating the costs of its services is reasonable,

3 and that the receipts from affiliated hotels compensate Taxpayer upon a nonprofit or cost basis.

4 Receipts from services to non-affiliated hotels are not at issue. IT IS DECIDED AND

5 ORDERED AS FOLLOWS:

6 FINDINGS OF FACT

7 1. On September 22, 2017, the Department issued a Notice of Assessment of Taxes

8 and Demand for Payment (“Assessment”) under Letter ID No. L0485786416 which assessed the

9 sum of $276,963.88 comprised of $205,593.83 in gross receipts tax, $41,118.83 in gross receipts

10 tax penalty, $25,385.69 in gross receipts tax interest, $3,720.43 in withholding tax, $744.11 in

11 withholding tax penalty, and $400.99 in withholding tax interest for the periods from January 31,

12 2009 through June 30, 2016. [Administrative File; Taxpayer Ex. 2]

13 2. The Assessment arose from an audit covering the same periods of time subject of

14 the Assessment, although there were no amounts assessed specifically for tax years 2009 and

15 2010. [Direct Examination of Ms. Griego; Taxpayer Ex. 1]

16 3. On December 15, 2017, Taxpayer filed a protest with the Department’s protest

17 office. The file stamp on the protest indicates that it was received on December 18, 2017.

18 [Administrative File]

19 4. The Department acknowledged Taxpayer’s protest on December 19, 2017 under

20 Letter ID No. L0928117552. [Administrative File]

21 5. On January 24, 2018, the Department submitted a Hearing Request to the

22 Administrative Hearings Office in which it requested a scheduling hearing to address scheduling

23 pertinent to Taxpayer’s protest. [Administrative File]

In the Matter of the Protest of Total Management Systems Inc.
Page 2 of 21
1 6. On January 24, 2018, the Administrative Hearings Office entered a Notice of

2 Telephonic Scheduling Hearing which set a scheduling hearing for February 9, 2018.

3 [Administrative File]

4 7. On January 30, 2018, Taxpayer’s counsel of record filed an Unopposed Motion to

5 Continue. [Administrative File]

6 8. On February 6, 2017, the Administrative Hearings Office entered an Amended

7 Notice of Telephonic Scheduling Hearing which reset the date for an initial scheduling hearing

8 for February 27, 2018. [Administrative File]

9 9. An initial telephonic scheduling hearing was held on February 27, 2018 and

10 occurred within 90 days of Taxpayer’s protest. [Administrative File]

11 10. On February 27, 2018, the Administrative Hearings Office entered a Notice of

12 Second Telephonic Scheduling Hearing that set a hearing for May 4, 2018. [Administrative File]

13 11. On May 4, 2018, the Administrative Hearings Office entered a Notice of Third

14 Telephonic Scheduling Hearing that set a hearing for July 6, 2018. [Administrative File]

15 12. On July 6, 2018, the Administrative Hearings Office entered a Notice of Fourth

16 Telephonic Scheduling Hearing that set a hearing for September 7, 2018. [Administrative File]

17 13. On September 7, 2018, the Administrative Hearings Office entered a Scheduling

18 Order and Notice of Administrative Hearing which in addition to establishing other deadlines, set

19 a hearing on the merits of Taxpayer’s protest for May 13, 2019. [Administrative File]

20 14. On February 27, 2019, the Department filed a Certificate of Service indicating

21 that it had served its First Set of Requests for Admission, Interrogatories and Requests for

22 Production on counsel for Taxpayer. [Administrative File]

In the Matter of the Protest of Total Management Systems Inc.
Page 3 of 21
1 15. On March 26, 2019, Taxpayer filed a Certificate of Service indicating that it had

2 served its Amended First Set of Interrogatories and Amended First Requests for Admissions on

3 counsel for the Department. [Administrative File]

4 16. On April 2, 2019, the Department filed a Certificate of Service indicating that it

5 had served its responses to Taxpayer’s Amended First Requests for Admission and Amended

6 First set of Interrogatories on counsel for Taxpayer. [Administrative File]

7 17. On April 3, 2019, Taxpayer filed a Certificate of Service indicating that it had

8 served Taxpayer’s Response to the Department’s First Set of Requests for Admission,

9 Interrogatories and Requests for Production on counsel for the Department. [Administrative File]

10 18. On April 22, 2019, Taxpayer filed a Certificate of Service indicating that it had

11 served its Prehearing Statement on counsel for the Department. [Administrative File]

12 19. On April 23, 2019, the Department filed Taxation and Revenue Department’s

13 Prehearing Statement. [Administrative File]

14 20. On May 6, 2019, Taxpayer filed Protestant’s Amended Prehearings Statement

15 accompanied by separate Certificate of Service indicating that it was also served on counsel for

16 the Department. [Administrative File]

17 21. Taxpayer is a corporation owned by the Sundaram family which was established

18 to provide management and administrative services to several hotels also owned by the

19 Sundaram family. It is owned by Mr. Prakash Sundaram, his parents, and his sister. [Direct

20 Examination of P. Sundaram]

21 22. Mr. Sundaram is the President and CEO of Taxpayer. He has served in those

22 capacities since 2013, although he has been associated with Taxpayer since its inception in 1993.

23 [Direct Examination of P. Sundaram]

In the Matter of the Protest of Total Management Systems Inc.
Page 4 of 21
1 23. From 1993 until 2013, Mr. Sundaram served as Taxpayer’s vice-president and

2 senior vice-president, and eventually succeeded his father as President and CEO. Mr.

3 Sundaram’s father is still active in family business matters, but no longer serves as Taxpayer’s

4 President or CEO. [Direct Examination of P. Sundaram]

5 24. Mr. Sundaram’s father is founder of Taxpayer and serves as chairman of

6 Taxpayer’s board of directors. [Direct Examination of P. Sundaram]

7 25. Taxpayer was originally established to allocate management fees to other legal

8 entities, owned by the Sundaram family, which also owned and operated various hotel properties,

9 and to provide the entity through which family members would be compensated as employees of

10 Taxpayer for their work for the family’s various hotels. [Direct Examination of P. Sundaram]

11 26. Taxpayer employs six individuals, including Mr. Sundaram and five members of

12 his family. [Cross Examination of P. Sundaram]

13 27. In his capacity as President and CEO of Taxpayer, his responsibilities include

14 overseeing daily operations, reviewing profit and loss statements, conducting management

15 meetings, and evaluating customer service information for all the hotels which Taxpayer

16 manages. [Cross Examination of P. Sundaram]

17 28. During the audit period, Mr. Sundaram also spent substantial amounts of time

18 traveling among the various hotels, some of which were under construction at the time. He relied

19 on a vehicle that was owned by Eagle Investors, the entity that owned the real property of one of

20 the affiliated hotels. Eagle Investors is also owned by Mr. Sundaram’s family. [Cross

21 Examination of P. Sundaram]

22 29. Mr. Sundaram, in addition to his work for Taxpayer, is also engaged in a variety

23 of other business activities, including general construction through Sundaram Builders, Inc. He

In the Matter of the Protest of Total Management Systems Inc.
Page 5 of 21
1 holds a GB98 contractor’s license which allows him to act as a general contractor for a variety of

2 projects, including projects for both affiliated and nonaffiliated hotels serviced by Taxpayer.

3 [Cross Examination of P. Sundaram]

4 30. Mr. Sundaram’s mother is secretary treasurer of the Taxpayer corporation who

5 also performs some bookkeeping functions. [Direct Examination of P. Sundaram]

6 31. Mr. Sundaram’s spouse, Ms. Krithika Sundaram, is senior vice-president of

7 finance for Taxpayer responsible for accounting and bookkeeping functions for all hotels, as well

8 as overseeing human resources and payroll. [Direct Examination of P. Sundaram; Direct

9 Examination of K. Sundaram]

10 32. Mr. Sundaram’s sister is senior vice-president for sales, marketing, and revenue

11 management for Taxpayer, which includes setting and adjusting daily room rates for the hotels.

12 [Direct Examination of P. Sundaram]

13 33. Mr. Sundaram’s brother-in-law is senior vice-president for information

14 technology and operations for Taxpayer who oversees technology aspects of the hotels as well as

15 daily operations. [Direct Examination of P. Sundaram]

16 34. Taxpayer compensates Mr. Sundaram and each of his family members as salaried

17 employees with healthcare and retirement benefits. [Direct Examination of P. Sundaram]

18 35. Taxpayer manages a total of eight hotels at the present time, with a ninth hotel

19 under construction as of the date of the hearing. Six of the eight hotels are family owned

20 affiliates. Taxpayer pays gross receipts tax on fees generated from services provided to non-

21 affiliated hotels. [Direct Examination of P. Sundaram; Cross Examination of P. Sundaram;

22 Direct Examination of D. Miller]

In the Matter of the Protest of Total Management Systems Inc.
Page 6 of 21
1 36. Non-affiliate hotels are defined as those hotels in which Mr. Sundaram has an

2 ownership interest, but which do not include his other family members as owners. [Re-Direct

3 examination of P. Sundaram]

4 37. Taxpayer provides a variety of services to affiliate and non-affiliate hotels

5 including: (1) human resources for more than 200 employees; (2) sales and marketing; (3)

6 revenue management; (4) accounting and budget management; and (5) tax returns. [Direct

7 Examination of P. Sundaram]

8 38. Taxpayer’s services are typical among third-party management companies

9 similarly engaging in the business of providing hotel management services. [Direct Examination

10 of P. Sundaram]

11 39. Hotels, whether affiliated or not, pay a fee for Taxpayer’s management services.

12 [Direct Examination of P. Sundaram]

13 40. Taxpayer does not have formal contracts with its affiliated hotels, primarily

14 because those hotels, or the entities that own them, have owners in common with Taxpayer, in

15 that they are all owned by the Sundaram family. [Direct Examination of P. Sundaram]

16 41. Taxpayer calculates its fees to cover costs without making a profit so that it can

17 avail itself of the deduction provided by NMSA 1978, Section 7-9-69 which states that

18 “[r]eceipts of a business entity for administrative, managerial, accounting and customer services

19 performed by it for an affiliate upon a nonprofit or cost basis and receipts of a business entity

20 from an affiliate for the joint use or sharing of office machines and facilities upon a nonprofit or

21 cost basis may be deducted from gross receipts.” [Direct Examination of P. Sundaram]

In the Matter of the Protest of Total Management Systems Inc.
Page 7 of 21
1 42. Taxpayer did not protest the portion of the assessment regarding withholding tax

2 and associated penalty and interest. [Direct Examination of P. Sundaram; Direct Examination of

3 K. Sundaram]

4 43. Taxpayer protested the assessment with regard for gross receipts tax and

5 associated penalty and interest based on the plain language of Section 7-9-69 and the advice of

6 its certified public accountants. [Direct Examination of P. Sundaram]

7 44. In tax years 2009 until 2012, Taxpayer charged a flat fee for services determined

8 by the actual costs incurred for providing services divided by the number of affiliated hotels

9 served. However, tax years 2009 and 2010 are not under protest because although they were part

10 of the audit, they were not assessed. [Direct Examination of P. Sundaram]

11 45. In 2011, Taxpayer’s revenue exceeded its expenses and it reported a profit. In

12 2012, its expenses exceeded its revenue and it reported a loss. The fee in both years was

13 determined by dividing Taxpayer’s business expenses by the number of hotels, which in this case

14 was three. [Direct Examination of K. Sundaram; Taxpayer Ex. 4]

15 46. Beginning in tax year 2013, Taxpayer modified its fee formula to reflect a

16 percentage of each hotel’s revenue. The sum of the fees from affiliated hotels were intended to

17 compensate Taxpayer for its services at a cost or nonprofit basis. The modification was intended

18 to conform with and accommodate the requirements of the financial institutions with which

19 Taxpayer or its affiliated entities conducted business. [Direct Examination of P. Sundaram]

20 47. Taxpayer initiated a method of setting its fee for management services by:

21 a. determining the sum of its expenses, including but not necessarily limited to

22 salaries, retirement, healthcare, office space, taxes, licensing and fees,

23 depreciation, utilities, equipment and supplies, the sum representing the total

In the Matter of the Protest of Total Management Systems Inc.
Page 8 of 21
1 cost of providing services which Taxpayer expected to recover from its

2 affiliated hotels;

3 b. projecting the revenue generated by each affiliate hotel for the upcoming year

4 based on prior performance and evaluation of other forecasting tools;

5 c. reducing the projection to a percentage per hotel which then represents its

6 share of Taxpayer’s costs;

7 d. expenses and income are then monitored and adjusted as necessary to reduce

8 the chance that the fee per hotel could exceed costs, generating a profit for

9 Taxpayer in the given year.

10 [Direct Examination of P. Sundaram; Direct Examination of D. Miller]

11 48. In 2013, Taxpayer had three hotels. The fee charged to each hotel ranged from 6

12 to 8 percent of each hotel’s revenue. Taxpayer’s revenue in that year exceeded its expenses and it

13 consequently reported a profit. [Direct Examination of K. Sundaram; Taxpayer Ex. 4]

14 49. In 2014, Taxpayer had three hotels. The fee charged to each hotel ranged from 8

15 to 10 percent of each hotel’s revenue. Taxpayer’s expenses exceeded its revenue and it reported a

16 loss. [Direct Examination of K. Sundaram; Taxpayer Ex. 4]

17 50. In 2015, Taxpayer had six hotels. The fee charged to each hotel ranged from 6 to

18 9 percent of each hotel’s revenue. Taxpayer’s expenses exceeded its revenue and it reported a

19 loss. [Direct Examination of K. Sundaram; Taxpayer Ex. 4]

20 51. In 2016, Taxpayer had six hotels. The fee charged to each hotel ranged from 5 to

21 6 percent of each hotel’s revenue. Taxpayer’s expenses exceeded its revenue and it reported a

22 loss. [Direct Examination of K. Sundaram; Taxpayer Ex. 4]

In the Matter of the Protest of Total Management Systems Inc.
Page 9 of 21
1 52. The cumulative result from 2011 through 2016 was a loss in which the cumulative

2 expenses exceeded the cumulative revenue over the course of the audit period. The total loss

3 over that duration of time was $88,596.00. [Direct Examination of K. Sundaram; Direct

4 Examination of D. Miller; Taxpayer Ex. 4; Taxpayer Ex. 5; Taxpayer Ex. 6]

5 53. Since 1993, Taxpayer has generated a loss, and has never been intentionally

6 profitable for a sustained duration of time. [Direct Examination of P. Sundaram]

7 54. Taxpayer has conducted its business in this manner since 1993 based on the

8 advice of its certified public accountant, Mr. Howard Britt, CPA 1, regarding strategies for

9 reducing its potential tax liabilities by satisfying the elements of establishing entitlement to the

10 deduction under Section 7-9-69. [Cross Examination of P. Sundaram]

11 55. In 1993, Mr. Sundaram was among the individuals involved in establishing

12 Taxpayer, and had specific recollection of reading Section 7-9-69, and concluding that it clearly

13 established entitlement to a deduction that Taxpayer could utilize consistent with the advice from

14 Mr. Britt. [Cross Examination of P. Sundaram]

15 56. Mr. Britt advised based on Section 7-9-69 that Taxpayer should come as close as

16 possible to breaking even but always err on the side of sustaining a loss. [Cross Examination of

17 P. Sundaram]

18 57. Neither Mr. Sundaram nor anyone else associated with establishing Taxpayer ever

19 concluded it would be useful or necessary to seek a ruling from the Department in reference to

20 the application of the deduction provided by Section 7-9-69, finding that the statute spoke for

21 itself. [Cross Examination of P. Sundaram]

1
Mr. Sundaram testified that Mr. Britt was deceased. The Hearing Officer took administrative notice of an obituary
confirming that he died in 2014. See https://www.dignitymemorial.com/obituaries/mesa-az/howard-britt-6133062.

In the Matter of the Protest of Total Management Systems Inc.
Page 10 of 21
1 58. Mr. Britt provided accounting services from 1993 until the late 1990s, including

2 filing CRS returns. [Cross Examination of P. Sundaram]

3 59. Taxpayer thereafter retained the services of Mr. Bill Hinkle, CPA, who worked

4 with Taxpayer until his retirement in approximately 2005. Mr. Hinkle’s advice regarding the

5 applicability of Section 7-9-69 was consistent with the previous advice of Mr. Britt. [Cross

6 Examination of P. Sundaram]

7 60. Taxpayer thereafter retained the services of Mr. Steven Parrish, CPA, whose

8 advice was consistent with the previous advice from Mr. Britt and Mr. Hinkle. Mr. Sundaram

9 could not recall the dates in which Taxpayer worked with Mr. Parrish but it was between that

10 period of time between Mr. Hinkle and Mr. Donald Miller, CPA, who succeeded him. [Cross

11 Examination of P. Sundaram]

12 61. Mr. Donald Miller, CPA presently serves as Taxpayer’s accountant and has

13 served in that capacity since 2011. He has prepared Taxpayer’s federal and state income tax

14 returns and has assisted Taxpayer in matters arising from the Department’s audit. [Direct

15 Examination of D. Miller]

16 62. Mr. Miller’s advice is consistent with all previous advice provided to Taxpayer in

17 that Taxpayer is entitled to deduction under Section 7-9-69 since it provided services to affiliated

18 hotels upon a nonprofit or cost basis. [Direct Examination of D. Miller]

19 63. Whether Taxpayer provided services upon a cost or nonprofit basis is determined

20 by basic accounting. The law does not require or suggest any specific formula for determining

21 whether Taxpayer is providing services upon a cost or nonprofit basis. [Direct Examination of D.

22 Miller]

In the Matter of the Protest of Total Management Systems Inc.
Page 11 of 21
1 64. Establishing a fee for services utilizing a percentage-based method does not

2 necessarily establish a performance-based fee. Instead, the percentage-based method merely

3 distributes a share of Taxpayer’s costs among the affiliated hotels. [Direct Examination of D.

4 Miller]

5 65. Had Taxpayer not adjusted its percentages, then the growth of each hotel’s

6 revenue over time would have caused Taxpayer’s receipts to eventually exceed its costs. Instead,

7 the percentage charged per hotel has continuously been adjusted since 2013, including

8 downward adjustments, to avoid making a profit. [Direct Examination of D. Miller]

9 66. Mr. Ron L. Scott is a certified public accountant with more than 30 years’

10 experience. Neither Section 7-9-69, nor any regulations or rulings require any specific

11 methodology for determining the cost of providing services. [Cross Examination of R. Scott]

12 67. The starting point of Taxpayer’s methodology is to identify its expenses.

13 Taxpayer’s expenses are ordinary and necessary. They are also typical and reasonable in

14 comparison to other entities engaged in similar business activities. [Direct Examination of D.

15 Miller]

16 68. Although possible, it is neither feasible nor obligatory that Taxpayer track and

17 allocate every cost among its affiliated hotels, such as units of time expended by individuals for

18 the benefit of one or more hotels. [Direct Examination of D. Miller]

19 69. Wages paid to Taxpayer’s employees are reasonable based on Mr. Miller’s

20 experience. [Cross Examination of D. Miller]

21 70. To the extent there are fluctuations among Taxpayer’s various costs from year to

22 year, that may be attributable to the method by which the expenses are categorized for income

23 tax purposes and are not indicative of any irregularity. [Direct Examination of D. Miller]

In the Matter of the Protest of Total Management Systems Inc.
Page 12 of 21
1 71. At no time have any of Taxpayer’s shareholders ever received a distribution from

2 Taxpayer. [Direct Examination of D. Miller]

3 72. Taxpayer’s losses during the audit period have been funded by more than

4 $77,000.00 in capital contributions from its shareholders and by incurring debt. [Direct

5 Examination of D. Miller; Taxpayer Ex. 6; Taxpayer Ex. 5]

6 73. Mr. Bruce Malott is as certified public accountant. His perception of Taxpayer’s

7 methodology based on his experience is that it is reasonable. [Direct Examination of B. Malott]

8 74. For a period prior to June of 2015, Taxpayer was not reporting or paying gross

9 receipts tax. Between June of 2015 and June of 2016, Taxpayer commenced reporting gross

10 receipts, but did not claim any deductions. After June of 2016, Taxpayer’s claimed deductions

11 dramatically increased. However, these observations might also be consistent with Taxpayer’s

12 understanding of its reporting obligations during those periods. [Direct and Cross Examination of

13 M. Griego]

14 75. During relevant periods of time, Taxpayer incorrectly treated deductible receipts

15 as exempt instead of deductible. The consequence was that Taxpayer failed to report its

16 deductible gross receipts, although the underlying tax liability was not have been modified.

17 [Cross Examination of D. Miller]

18 DISCUSSION

19 The central issue in the protest is whether Taxpayer is entitled to an abatement of

20 assessed gross receipts tax, and associated penalty and interest by virtue of the deduction

21 provided by NMSA 1978, Section 7-9-69 (2015). In summary, that deduction permits a business

22 to deduct from its gross receipts those amounts deriving from providing administrative,

23 managerial, accounting and customer services for an affiliate on a nonprofit or cost basis.

In the Matter of the Protest of Total Management Systems Inc.
Page 13 of 21
1 Although Taxpayer also provides services to non-affiliated hotels, Taxpayer pays gross receipts

2 tax on those receipts and they are not at issue in this protest.

3 Presumption of Correctness & Burden of Proof.

4 Under NMSA 1978, Section 7-1-17 (C) (2007), the Assessment from which this protest

5 arises is presumed correct and the burden rests on Taxpayer to overcome the presumption. See

6 Archuleta v. O’Cheskey, 1972-NMCA-165, ¶11, 84 N.M. 428, 504 P.2d 638. Unless otherwise

7 specified, for the purposes of the Tax Administration Act, “tax” includes interest and civil

8 penalty. See NMSA 1978, Section 7-1-3 (X) (2013). Under Regulation 3.1.6.13 NMAC, the

9 presumption of correctness under Section 7-1-17 (C) similarly extends to the Department’s

10 assessment of penalty and interest. See Chevron U.S.A., Inc. v. State ex rel. Dep’t of Taxation &

11 Revenue, 2006-NMCA-50, ¶16, 139 N.M. 498, 503, 134 P.3d 785, 791 (agency regulations

12 interpreting a statute are presumed proper and are to be given substantial weight).

13 For that reason, Taxpayer carries the burden to present countervailing evidence or legal

14 argument to show that it is entitled to an abatement of an assessment. See N.M. Taxation &

15 Revenue Dep’t v. Casias Trucking, 2014-NMCA-099, ¶8, 336 P.3d 436. “Unsubstantiated

16 statements that the assessment is incorrect cannot overcome the presumption of correctness.” See

17 MPC Ltd. v. N.M. Taxation & Revenue Dep’t, 2003-NMCA-021, ¶13, 133 N.M. 217, 62 P.3d

18 308; See also Regulation 3.1.6.12 NMAC. If a taxpayer presents sufficient evidence to rebut the

19 presumption, then the burden shifts to the Department to re-establish the correctness of the

20 assessment. See MPC, 2003-NMCA-021, ¶13.

21 If a taxpayer’s claim for relief relies on the application of an exemption or deduction,

22 then “the statute must be construed strictly in favor of the taxing authority, the right to the

23 exemption or deduction must be clearly and unambiguously expressed in the statute, and the

In the Matter of the Protest of Total Management Systems Inc.
Page 14 of 21
1 right must be clearly established by the taxpayer.” See Wing Pawn Shop v. Taxation and Revenue

2 Department, 1991-NMCA-024, ¶16, 111 N.M. 735, 809 P.2d 649 (internal citation omitted); See

3 also TPL, Inc. v. N.M. Taxation & Revenue Dep’t, 2003-NMSC-007, ¶9, 133 N.M. 447, 64 P.3d

4 474.

5 Gross Receipts Tax and the Deduction for Administrative and Accounting Services.

6 The Assessment in this protest arises from the application of the Gross Receipts and

7 Compensating Tax Act, in which New Mexico imposes a gross receipts tax for the privilege of

8 engaging in business, on the receipts of any person engaged in business in New Mexico. See

9 NMSA 1978, Section 7-9-4 (2002).

10 The term “gross receipts” is defined at NMSA 1978, Section 7-9-3.5 (A) (1) (2007), to

11 mean:

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

18 “Engaging in business” is defined as “carrying on or causing to be carried on any activity

19 with the purpose of direct or indirect benefit.” See NMSA 1978, Section 7-9-3.3 (2003). The

20 term “service” is defined to mean “all activities engaged in for other persons for a consideration,

21 which activities involve predominantly the performance of a service as distinguished from

22 selling or leasing property.” See NMSA 1978, Section 7-9-3 (M).

23 There is a statutory presumption that all receipts of a person engaged in such business are

24 taxable. See NMSA 1978, Section 7-9-5 (2002). Yet, despite the general presumption of taxability,

25 a taxpayer may qualify for the benefits of various deductions and exemptions.

In the Matter of the Protest of Total Management Systems Inc.
Page 15 of 21
1 Taxpayer was clearly engaged in the business of providing a variety of services to several

2 hotels owned and operated by the Sundaram family, albeit through various business entities, and it

3 claims entitlement to the deduction provided by Section 7-9-69 (A) which states in relevant part:

4 Receipts of a business entity for administrative, managerial,
5 accounting and customer services performed by it for an affiliate
6 upon a nonprofit or cost basis and receipts of a business entity from
7 an affiliate for the joint use or sharing of office machines and
8 facilities upon a nonprofit or cost basis may be deducted from gross
9 receipts.

10 The parties expressed no dispute regarding the relationship of Taxpayer to its affiliated

11 hotels, or that the types of services it provided were within the categories of administrative,

12 managerial, accounting and customer services. Instead, the critical disagreement arises from

13 whether the services were provided “upon a nonprofit or cost basis,” the method through which

14 Taxpayer calculated the cost of doing business, and perhaps to a lesser extent, the formula through

15 which it divided those costs among its affiliated hotels.

16 It is a canon of statutory construction in New Mexico to adhere to the plain wording of a

17 statute except if there is ambiguity, error, an absurdity, or a conflict among statutory provisions.

18 See Regents of the Univ. of N.M. v. N.M. Fed’n of Teachers, 1998-NMSC-020, ¶28, 125 N.M. 401,

19 962 P.2d 1236. In Wood v. State Educ. Ret. Bd., 2011-NMCA-020, ¶12, 149 N.M. 455, 250 P.3d

20 881 (internal quotations and citations omitted), the New Mexico Court of Appeals stated:

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

26 Extra words should not be read into a statute if the statute is plain on its face, especially if it

27 makes sense as written. See Johnson v. N.M. Oil Conservation Comm’n, 1999-NMSC-021, ¶27,

28 127 N.M. 120, 978 P.2d 327; see also Amoco Prod. Co. v. N.M. Taxation & Revenue Dep’t, 1994-

In the Matter of the Protest of Total Management Systems Inc.
Page 16 of 21
1 NMCA-086, ¶8 & ¶14, 118 N.M. 72, 878 P.2d 1021. Only if the plain language interpretation

2 would lead to an absurd result not in accord with the legislative intent and purpose is it necessary

3 to look beyond the plain meaning of the statute. See Bishop v. Evangelical Good Samaritan

4 Soc’y, 2009-NMSC-036, ¶11, 146 N.M. 473, 212 P.3d 361.

5 Although the Department skillfully argued that Section 7-9-69 could be susceptible to

6 competing interpretations, the Hearing Officer finds the plain language of the statute to be clear

7 and unambiguous. The applicable portion of the statute clearly provides a deduction for the

8 receipts of a business entity for administrative, managerial, accounting and customer services

9 performed by it for an affiliate upon a nonprofit or cost basis. The Hearing Officer shall therefore

10 refrain from further construction and reading extra words into the statute because it is plain on its

11 face and makes sense as written.

12 To the extent there could be any room for disagreement, then the source of that conflict

13 arises from the absence of any statutory or regulatory approved method of computing profits or

14 costs for the purpose of applying the deduction. During all periods relevant to this protest, Taxpayer

15 calculated its costs as the sum of all expenses. It then identified the difference between its revenue

16 and costs to determine whether it produced a profit. In other words, it employed the most basic

17 method simply articulated as “income minus expenses.” Mr. Miller and Mr. Malott credibly testified

18 this methodology was reasonable and the Hearing Officer agreed. In all but two years, Taxpayer’s

19 costs exceeded its receipts, although there was a cumulative loss exceeding $88,000 over the

20 duration of the entire audit period.2

2
Although the Hearing Officer internally contemplated whether the deduction could be cumulatively applied, as
suggested by Taxpayer, or whether it needed to be claimed by individual reporting period, the Department expressed
no opposition to Taxpayer’s cumulative approach.

In the Matter of the Protest of Total Management Systems Inc.
Page 17 of 21
1 Taxpayer’s witnesses credibly and persuasively testified that the entirety of its operation was

2 dedicated to providing administrative, managerial, accounting and customer services to its affiliated

3 hotels, including human resources, sales and marketing, revenue management, accounting,

4 budget management, and tax reporting and payment. Since all costs were expended to provide

5 those services, it was reasonable to rely on the sum of those costs as the starting point for

6 determining whether those services were provided at cost or without profit. In this regard, Mr.

7 Miller and Mr. Malott credibly testified based on their many years of certified public accounting

8 that Taxpayer’s expenses in the relevant periods of time, including their wages and benefits, were

9 reasonable.

10 In fact, the evidence established that Taxpayer employed a more conservative approach to

11 compensating its employees than necessary. Mr. Miller suggested that Taxpayer’s employees might

12 even be underpaid and explained that it could avail itself of a more appealing and costlier retirement

13 program and still keep its costs within what is considered reasonable.

14 The Department did not necessarily express disagreement with the reasonableness of

15 Taxpayer’s costs, but argued that it should be required to account for the cost of every service to

16 each affiliated hotel, perhaps in similar fashion to the method an attorney or accountant tracks time

17 and costs in providing services to clients. The consensus among all witnesses was that tracking time

18 and costs in that manner was possible, yet Taxpayer persuasively argued that it would not be

19 feasible under the circumstances of this protest, nor was it required by Section 7-9-69. The Hearing

20 Officer agrees. Under the facts of this protest, where the sum of all expenses are incurred for the

21 purpose of providing services to Taxpayer’s affiliates, it is not necessary for Taxpayer to divide and

22 categorize those services or their cost among the hotels in the same manner that an attorney or

23 accountant might bill time or costs to clients, although that would be within its prerogative if it so

In the Matter of the Protest of Total Management Systems Inc.
Page 18 of 21
1 desired. Accordingly, the Hearing Officer agrees that Taxpayer’s method of determining the costs of

2 services is reasonable under the facts of this case.

3 The next issue concerns the method by which Taxpayer thereafter allocated its costs, in the

4 form of its management fee, to the various affiliates that it serviced. The evidence established that

5 each affiliate paid a portion of Taxpayer’s total costs in proportion to the revenue it generated. Mr.

6 Miller credibly testified that this method did not generate a performance-based fee, but was a

7 reasonable method employed to determine the affiliate’s share of Taxpayer’s total costs. He

8 explained quite effectively that Taxpayer’s various fee adjustments were intended to negate any

9 profit, and that leaving the relevant percentage unchanged would surely generate an unwanted

10 profit. Recalling Ms. Sundaram’s testimony regarding the fluctuation of Taxpayer’s fees illuminates

11 Mr. Miller’s proposition. In some years, the percentage of each hotel’s share decreased. Had

12 Taxpayer not been intentionally evading a profit, then one would expect the percentage to remain

13 stagnant, or gradually increase, but that did not happen.

14 The consequence was that over the course of the audit period, Taxpayer sustained a

15 cumulative and intentional loss in which the revenue intended to compensate it for services was

16 purposefully less than the cost of those services.

17 Therefore, construing the statute strictly in favor of the taxing authority, the Hearing

18 Officer finds that the right to a deduction under Section 7-9-69 is clearly and unambiguously

19 expressed, and that Taxpayer has demonstrated its entitlement to a deduction under the facts of this

20 case. Taxpayer shall not, however, be entitled to administrative costs pursuant to NMSA 1978,

21 Section 7-1-29.1 (2015) because even though the Hearing Officer ultimately found in Taxpayer’s

22 favor, the Department’s position, although determined incorrect under the facts presented, was

In the Matter of the Protest of Total Management Systems Inc.
Page 19 of 21
1 based on a reasonable application of the law to the facts of the protest under Section 7-1-29.1 (C)

2 (2).

3 Taxpayer’s protest should be GRANTED.

4 CONCLUSIONS OF LAW

5 A. Taxpayer filed a timely, written protest of the Department’s assessment and

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

7 B. The hearing was timely set and held within 90-days of protest under NMSA 1978,

8 Section 7-1B-8 (2015).

9 C. Taxpayer is entitled to a deduction from gross receipts derived from administrative,

10 managerial, accounting and customer services it performed for its affiliates upon a nonprofit or cost

11 basis. See NMSA 1978, Section 7-9-69 (2015).

12 D. Taxpayer shall not be entitled to costs and fees because the Department’s position

13 was based on a reasonable application of the law to the facts. See NMSA 1978, Section 7-1-29.1

14 (2015).

15 For the foregoing reasons, the Taxpayer’s protest IS GRANTED. IT IS ORDERED that

16 the Assessment be ABATED.

17 DATED: July 29, 2019

18
19 Chris Romero
20 Hearing Officer
21 Administrative Hearings Office
22 P.O. Box 6400
23 Santa Fe, NM 87502
24

In the Matter of the Protest of Total Management Systems Inc.
Page 20 of 21
1 NOTICE OF RIGHT TO APPEAL

2 Pursuant to NMSA 1978, Section 7-1-25 (2015), the parties have the right to appeal this

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

4 date shown above. If an appeal is not timely filed with the Court of Appeals within 30 days, this

5 Decision and Order will become final. Rule of Appellate Procedure 12-601 NMRA articulates

6 the requirements of perfecting an appeal of an administrative decision with the Court of Appeals.

7 Either party filing an appeal shall file a courtesy copy of the appeal with the Administrative

8 Hearings Office contemporaneous with the Court of Appeals filing so that the Administrative

9 Hearings Office may begin preparing the record proper. The parties will each be provided with a

10 copy of the record proper at the time of the filing of the record proper with the Court of Appeals,

11 which occurs within 14 days of the Administrative Hearings Office receipt of the docketing

12 statement from the appealing party. See Rule 12-209 NMRA.

13 CERTIFICATE OF SERVICE

14 On July 29, 2019, a copy of the foregoing Decision and Order was submitted to the parties

15 listed below in the following manner:

16 First Class Mail Interagency Mail
17

18 INTENTIONALLY BLANK
19
20 John Griego
21 Legal Assistant
22 Administrative Hearings Office
23 P.O. Box 6400
24 Santa Fe, NM 87502

In the Matter of the Protest of Total Management Systems Inc.
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