Did White Sands military R&D and testing qualify for New Mexico's transformational acquisition program gross receipts deduction after DOD reorganized the named office?

Plain-English summary

Two defense contractors won New Mexico's specialized deduction for research, development, test, and evaluation work performed at White Sands Missile Range under a transformational military acquisition program. The Department could not defeat the deduction merely because the DOD office named in the 2005 statute had later been dissolved and reorganized.

Test & Evaluation Services and Technologies, LLC (TEST) contracted with the U.S. Department of Defense in November 2014 to provide RDT&E services at White Sands. TEST subcontracted some work through EWA TRIAD, LLC to EWA Warrior Services, LLC.

The Department assessed TEST $439,296.72: $344,665.38 of gross receipts tax, $68,933.10 of penalty, and $25,698.24 of interest. EWA Warrior's assessment totaled $28,570.60, but it did not protest $2,992.98 of withholding tax, penalty, and interest. Its disputed gross-receipts portion was $25,577.62: $18,336.23 of tax, $5,620.25 of penalty, and $1,621.14 of interest.

The five statutory elements were met

The 2015 version of Section 7-9-94 deducted receipts from transformational acquisition programs performing RDT&E at a New Mexico major range and test facility base under a DOD contract. Programs existing or physically tested in New Mexico on or before July 1, 2005 were excluded.

Four elements were essentially undisputed:

• the contractors performed research, development, test, and evaluation services;
• the work occurred at White Sands, a New Mexico major range and test facility base;
• the work was performed under a DOD acquisition contract; and
• the contract began in 2014, with none of its tested systems physically tested in New Mexico before July 1, 2005.

The dispute concerned whether the contract was a “transformational acquisition program” authorized by the Office of the Secretary of Defense Force Transformation.

DOD reorganization did not extinguish the deduction

The Office of Force Transformation existed when New Mexico enacted the deduction in 2005, but DOD dissolved it in 2006 and distributed its functions among successor organizations. The Legislature nevertheless extended the deduction in 2006 and again in 2015, ultimately keeping the 2015 version available into 2025 without changing the office name.

The hearing officer found that the Legislature intended to attract force-transformation projects, not limit the incentive to contracts bearing one obsolete office's formal authorization. A literal reading would make the deduction practically impossible after 2006 and contradict the later extensions. The DOD reorganization could not nullify New Mexico tax law.

The successor acquisition chain ran through the Office of the Secretary of Defense for Acquisition, Technology and Logistics, Army acquisition leadership, and PEO STRI. Those organizations continued the former office's acquisition functions.

The contract performed force-transformation work

DOD materials described force transformation through pillars that included innovative concept development using war games, simulations, and field exercises. The TEST contract did exactly that. The contractors:

• developed and carried out war games, simulations, field tests, and experimental projects;
• tested stealth and unmanned aircraft, missile-defense systems, and warning and survivability systems;
• simulated electronic warfare, including jamming and opposing command, communications, and air-defense networks;
• trained warfighters with software-based simulation tools; and
• used results to recommend upgrades and develop capabilities against current and anticipated threats.

That credible, uncontroverted evidence established a force-transformation acquisition program within the statute's intended meaning. The Department's counsel criticized the evidence but presented no admissible contrary evidence creating a material factual dispute.

Tangible property did not require a second deduction analysis

TEST also sold amplifiers, power meter bands, repair parts, and selected off-the-shelf software under the same contract. Because Section 7-9-94 covered the contract receipts broadly, those sales qualified under that deduction too. The contractors' alternative Section 7-9-54 government-property claim was therefore moot; they did not seek to stack deductions.

Result: summary judgment GRANTED and the gross receipts tax protests GRANTED. TEST's full $439,296.72 assessment and EWA Warrior's $25,577.62 protested gross-receipts portion were resolved in the taxpayers' favor. EWA Warrior's unprotested withholding amounts were outside the ruling's merits.

What this means for you

An outdated agency name may not defeat a still-active incentive

When the Legislature repeatedly extends a deduction after a federal reorganization, the statutory purpose and successor functions can matter more than the obsolete name of an office.

Prove the complete acquisition chain

The contractors traced the former Office of Force Transformation's functions through successor DOD acquisition organizations to the office awarding the TEST contract.

Match the work to the program's substantive mission

The strongest evidence connected actual contract tasks—war games, simulations, field experiments, electronic warfare, and emerging-threat capabilities—to DOD's recognized force-transformation pillars.

The cutoff date applies to the program and tested systems

The contract began in 2014, and none of the systems at issue had been physically tested in New Mexico on or before July 1, 2005.

Unsupported argument does not defeat summary judgment

Once the taxpayers supported every material element with credible evidence, the Department needed admissible contrary evidence rather than counsel's criticism or speculation.

Common questions

Q: Did the statute literally name an office that no longer existed?
A: Yes. The Office of Force Transformation was dissolved in 2006, but its functions continued through other DOD acquisition organizations, and New Mexico extended the deduction after that reorganization.

Q: Why was the contract transformational?
A: Its war-gaming, simulation, field-testing, electronic-warfare, and weapons-evaluation work fit DOD's innovative-concept-development pillar of force transformation.

Q: Was all work performed at a qualifying location?
A: The receipts at issue came from RDT&E at White Sands Missile Range, which the decision treated as a New Mexico major range and test facility base.

Q: What happened to tangible-property sales under the contract?
A: They were covered by the broader Section 7-9-94 deduction, making the alternative Section 7-9-54 claim unnecessary.

Q: Did EWA Warrior win its entire $28,570.60 assessment?
A: No such ruling was requested for the withholding portion. EWA Warrior did not protest $2,992.98 of withholding tax, penalty, and interest; it won the $25,577.62 gross-receipts portion at issue.

Citations and references

Statutes:

• NMSA 1978, § 7-9-94(A)-(D) (2015) — transformational acquisition program RDT&E deduction, definition, cutoff, and reporting provision
• NMSA 1978, § 7-9-54 — alternative government tangible-property deduction rendered moot
• NMSA 1978, §§ 7-9-4, 7-9-3.5(A)(1), and 7-9-5 — gross receipts tax and presumption of taxability
• NMSA 1978, §§ 7-1-17(C) and 7-1-3(X) — assessment presumption extends to penalty and interest
• NMSA 1978, § 7-1B-6(D) — hearing jurisdiction and timing cited in the conclusions

Cases:

• State ex rel. Helman v. Gallegos, 1994-NMSC-023 — departure from literal language to correct an evident error and carry out legislative intent
• Proficient Food Co. v. New Mexico Taxation and Revenue Department, 1988-NMCA-042 — substance over form
• Bybee v. City of Albuquerque, 1995-NMCA-061 — Legislature presumed to know the law and act rationally
• National Council on Compensation Insurance v. New Mexico State Corporation Commission, 1986-NMSC-005 — modifying statutory text when necessary to implement clear intent
• Juneau v. Intel Corp., 2006-NMSC-002 — summary judgment standard
• Koenig v. Perez, 1986-NMSC-066 — burden shifts after a prima facie summary-judgment showing

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Test & Evaluation Services, LLC and EWA Warrior Services, LLC
• Decision PDF: D&O 20-15

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 CATHY TASKER
6 EWA WARRIOR SERVICES LLC
7 TO ASSESSMENT ISSUED UNDER
8 LETTER ID NO. L0646511408 Case Number 18.08-171A

9 and

10 IN THE MATTER OF THE PROTEST OF
11 CRYSTAL CANTRALL
12 TEST & EVALUATION SERVICES AND TECHNOLOGIES LLC
13 TO ASSESSMENT ISSUED UNDER
14 LETTER ID NO. L0109640496 Case Number 18.08-172A

15 v. AHO D&O #20-15

16 NEW MEXICO TAXATION AND REVENUE DEPARTMENT

17 DECISION AND ORDER
18 GRANTING SUMMARY JUDGMENT

19 A summary judgment hearing in the above-referenced and consolidated protests occurred

20 on October 30, 2020, before Chris Romero, Esq., Hearing Officer. The hearing was conducted by

21 videoconference due to the circumstances of the public health emergency presented by COVID-

22 19 pursuant to Standing Order 20-02 of the Chief Hearing Officer of the Administrative Hearings

23 Office with additional agreement of the parties.

24 Mr. Kenneth Fladager, Esq., appeared representing the Taxation and Revenue

25 Department (“Department”). Mr. Robert Desiderio, Esq. and Mr. Benjamin Roybal appeared

26 representing EWA Warrior Services, LLC (hereinafter “EWA Warrior”) and Test & Evaluation

27 Services and Technologies, LLC (hereinafter “TEST”) (collectively “Taxpayers”). The matter

28 came before the Hearing Officer on Taxpayers’ Motion for Summary Judgment and

29 Memorandum in Support (hereinafter “Motion”) filed on January 31, 2020, the Department’s

In the Matter of the Consolidated Protests of Test & Evaluation Services and Technologies, LLC
and EWA Warrior Services, LLC
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1 Response to Taxpayers’ Motion for Summary Judgment filed on February 14, 2020 (hereinafter

2 “Response”), and Taxpayers’ Reply to Department’s Response to Taxpayers’ Motion for

3 Summary Judgment (hereinafter “Reply”) filed on March 13, 2020.

4 Taxpayers’ Motion presented a statement of facts that the Department did not effectively

5 challenge and which the Hearing Officer ultimately determined to be undisputed. Based on the

6 undisputed facts, review of exhibits and arguments presented, IT IS DECIDED AND

7 ORDERED AS FOLLOWS:

8 FINDINGS OF FACT

9 Procedural History

10 1. On March 8, 2018, the Department issued to TEST a Notice of Assessment of

11 Taxes and Demand for Payment under Letter ID No. L0109640496 in the amounts of

12 $344,665.38 in gross receipts tax, $68,933.10 in penalty, and $25,698.24 in interest for a total

13 assessed amount of $439,296.72 for the periods from January 31, 2015 to March 31, 2017. [See

14 Administrative File]

15 2. On March 8, 2018, the Department issued to EWA Warrior a Notice of

16 Assessment of Taxes and Demand for Payment under Letter ID No. L0646511408 in the

17 amounts of $18,336.23 in gross receipts tax, $5,620.25 in gross receipts penalty, $1,621.14 in

18 gross receipts interest, $2,503.41 in withholding tax, $382.18 in withholding tax penalty, and

19 $107.39 in withholding tax interest for a total assessed amount of $28,570.60 for the periods

20 from January 31, 2015 to March 31, 2017. [See Administrative File]

21 3. On June 4, 2018, TEST, by and through its counsel of record, Mr. Roybal,

22 submitted its formal protest of the assessment to the Department’s Protest Office. [See

23 Administrative File]

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1 4. On June 4, 2018, EWA Warrior, by and through its counsel of record, Mr.

2 Roybal, submitted its formal protest of the assessment to the Department’s Protest Office. EWA

3 Warrior did not protest the portion of the relevant assessment attributable to withholdings tax,

4 withholding tax interest, or withholding tax penalty. [See Administrative File]

5 5. On June 18, 2018, the Department acknowledged TEST’s Formal Protest under

6 Letter ID No. L0714766128. [See Administrative File]

7 6. On June 18, 2018, the Department acknowledged EWA Warrior’s Formal Protest

8 under Letter ID No. L0237580080. [See Administrative File]

9 7. On August 1, 2018, the Department filed a Hearing Request in the matter of the

10 protest of TEST. The Department requested a scheduling hearing. [See Administrative File]

11 8. On August 1, 2018, the Department filed a Hearing Request in the matter of the

12 protest of EWA Warrior. The Department requested a scheduling hearing. [See Administrative

13 File]

14 9. On August 2, 2018, the Administrative Hearings Office entered a Notice of

15 Telephonic Scheduling Conference in the matter of the protest of TEST that set a scheduling

16 hearing in reference to Taxpayer’s protest for August 24, 2018. [See Administrative File]

17 10. On August 2, 2018, the Administrative Hearings Office entered a Notice of

18 Telephonic Scheduling Conference in the matter of the protest of EWA Warrior that set a

19 scheduling hearing in reference to Taxpayer’s protest for August 24, 2018. [See Administrative

20 File]

21 11. A telephonic scheduling conference in the matter of the protest of TEST occurred

22 on August 24, 2018. The parties did not object that the hearing was within 90 days of the

23 Taxpayer’s protest as provided by NMSA 1978, Section 7-1B-8 (A) (2015) (amended 2019).

In the Matter of the Consolidated Protests of Test & Evaluation Services and Technologies, LLC
and EWA Warrior Services, LLC
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1 [See Administrative File]

2 12. A telephonic scheduling conference in the matter of the protest of EWA Warrior

3 occurred on August 24, 2018. The parties did not object that the hearing was within 90 days of

4 the Taxpayer’s protest as provided by NMSA 1978, Section 7-1B-8 (A) (2015) (amended 2019).

5 [See Administrative File]

6 13. On August 24, 2018, the Administrative Hearings Office entered a Notice of

7 Second Telephonic Scheduling Conference that upon suggestion of TEST and concurrence of the

8 Department set a subsequent scheduling hearing on November 30, 2018. [See Administrative

9 File]

10 14. On August 24, 2018, the Administrative Hearings Office entered a Notice of

11 Second Telephonic Scheduling Conference that upon suggestion of EWA Warrior and

12 concurrence of the Department set a subsequent scheduling hearing on November 30, 2018. [See

13 Administrative File]

14 15. On October 5, 2018, Mr. Desiderio entered his appearance as co-counsel to Mr.

15 Roybal on behalf of TEST. [See Administrative File]

16 16. On October 5, 2018, Mr. Desiderio entered his appearance as co-counsel to Mr.

17 Roybal on behalf of EWA Warrior. [See Administrative File]

18 17. On November 5, 2018, the parties filed a Joint Motion to Consolidate Protests of

19 TEST and EWA Warrior. [See Administrative File]

20 18. On November 21, 2018, the Administrative Hearing Officer entered a

21 Consolidation Order that consolidated the protests of TEST and EWA Warrior. [See

22 Administrative File]

23 19. On December 3, 2018, the Administrative Hearing Office entered a Scheduling

In the Matter of the Consolidated Protests of Test & Evaluation Services and Technologies, LLC
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1 Order and Notice of Administrative Hearing which in addition to establishing relevant deadlines,

2 set a hearing on the merits of the consolidated protests for July 29, 2019. [See Administrative

3 File]

4 20. On June 11 2019 the parties filed a Joint Motion to Amend Scheduling Order to

5 Vacate and Continue Merits Hearing and Extend Deadlines in which the parties sought to vacate

6 the hearing on the merits of the protest set for July 29, 2019 and reschedule on a date after

7 November 30, 2019. [See Administrative File]

8 21. On July 1, 2019, the Administrative Hearings Office entered an Order Vacating

9 Merits Hearing and Notice of Telephonic Scheduling which vacated the hearing on the merits of

10 the protest set for July 29, 2019 and set a scheduling hearing for July 19, 2019. [See

11 Administrative File]

12 22. On July 19, 2019, the Administrative Hearings Office entered a Scheduling Order

13 and Notice of Administrative Hearing which in addition to establishing various deadlines, set a

14 hearing on the merits of the consolidated protests for December 11, 2019. [See Administrative

15 File]

16 23. On September 24 2019, the parties filed a Joint Motion to Amend Scheduling

17 Order to Vacate and Continue Merits Hearing and Extend Deadlines in which the parties sought

18 to vacate the hearing on the merits of the protest set for December 11, 2019 and reschedule on a

19 date after March 30, 2020. [See Administrative File]

20 24. On October 18, 2019, the Administrative Hearings Office entered an Amended

21 Scheduling Order and Notice of Administrative Hearing which in addition to establishing various

22 deadlines, set a hearing on the merits of the consolidated protests for March 30, 2020. [See

23 Administrative File]

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1 25. On December 4, 2019, the Administrative Hearings Office entered a Second

2 Amended Scheduling Order and Notice of Administrative Hearing. [See Administrative File]

3 26. On December 11, 2019, the parties filed a Joint Motion to Amend Scheduling

4 Order to Extend Deadline for Dispositive Motions. [See Administrative File]

5 27. On December 11, 2019, the Administrative Hearings Office entered an Order

6 Extending Deadline to File Dispositive Motions. [See Administrative File]

7 28. On January 31, 2020, Taxpayers filed their Motion. [See Administrative File]

8 29. On February 14, 2020, the Chief Hearing Officer of the Administrative Hearings

9 Office reassigned the consolidated protests to Hearing Officer Monica Ontiveros, Esq. and

10 advised the parties of their right to exercise a peremptory excusal within 10 days of the

11 reassignment. [See Administrative File]

12 30. On February 14, 2020, the Department filed its Response and its Peremptory

13 Excusal of Hearing Officer Ontiveros. [See Administrative File]

14 31. On February 20, 2020, the Chief Hearing Officer entered a Notice of

15 Reinstatement of Presiding Hearing Officer, transferring the consolidated protests back to the

16 undersigned Hearing Officer. [See Administrative File]

17 32. On February 25, 2020, Taxpayers filed a Request for Hearing requesting that the

18 Administrative Hearings Office set a hearing to discuss Taxpayers’ request that the hearing on

19 the merits of the protest be converted to a hearing on its Motion. [See Administrative File]

20 33. On February 25, 2020, Taxpayers filed an unopposed Motion for Leave to File

21 Reply Brief. [See Administrative File]

22 34. On February 27, 2020, the Administrative Hearings Office entered an Order

23 Granting Leave to File Reply Brief and an Order Converting Merits Hearing to Motion Hearing.

In the Matter of the Consolidated Protests of Test & Evaluation Services and Technologies, LLC
and EWA Warrior Services, LLC
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1 [See Administrative File]

2 35. On March 13, 2020, Taxpayers filed their Reply. [See Administrative File]

3 36. On March 16, 2020, the Administrative Hearings Office entered a Notice of

4 Videoconference Administrative Hearing which converted the in-person hearing set on March

5 30, 2020 into a videoconference hearing. [See Administrative File]

6 37. On March 23, 2020, Taxpayers filed an unopposed Motion to Continue and

7 Reschedule Hearing on Motion for Summary Judgment. [See Administrative File]

8 38. On March 25, 2020, the Administrative Hearings Office entered an Order

9 Continuing Motion Hearing from March 30, 2020 to August 31, 2020. [See Administrative File]

10 39. On August 12, 2020, Taxpayers filed an unopposed Motion to Continue and

11 Reschedule Hearing on Motion for Summary Judgment. Taxpayers motion expressed optimism

12 that the hearing could be reset at a time when the public health emergency might subside and

13 permit the conduct of an in-person hearing. [See Administrative File]

14 40. On August 26, 2020, the Administrative Hearings Office entered a Second Order

15 Continuing Motion Hearing setting a hearing for October 29, 2020. The order explained that the

16 Hearing Officer selected the date with the expectation that the circumstances could by that time

17 permit in-person hearings but that appropriate adjustments may need to occur as circumstances

18 might otherwise require. [See Administrative File]

19 41. On October 21, 2020, the Administrative Hearings Office, noting that the

20 circumstances prohibiting an in-person hearing had not yet subsided to the point that an in-

21 person hearing could safely occur, converted the hearing set for October 29, 2020 from in-person

22 to videoconference. [See Administrative File]

23 Undisputed Material Facts

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1 42. At all relevant times, TEST was a Delaware limited liability company engaged in

2 research, development, testing and evaluation (hereinafter “RDT&E”) services in and outside the

3 state of New Mexico. [See Administrative File (Protest of Test & Evaluation Services and

4 Technologies LLC filed on June 4, 2018 at Schedule A-1(A)]

5 43. At all relevant times, EWA Warrior was a Delaware limited liability company

6 which engaged in RDT&E services in and outside the state of New Mexico. [See Administrative

7 File (Protest of EWA Warrior Services, LLC filed on June 4, 2018 at Schedule A-1(A)]

8 44. The United States Department of Defense (hereinafter “DOD”) is the agency of

9 the federal government responsible for equipping and supporting the military forces in its efforts

10 to promote national security. [See U.S. Department of Defense Website (January 31, 2020),

11 https://www.defense.gov]

12 45. In October of 2001, the Secretary of Defense established an Office of Force

13 Transformation (hereinafter “OFT”) in the DOD as part of its response to the terrorist attacks of

14 September 11, 2001. [See Motion (Exhibit 1, 1-001 to 1-008 (Affidavit of Michael W. Kelly)

15 (hereinafter “Kelly Affidavit”), ¶7)]

16 46. The OFT was established in the Office of the Secretary of Defense and was

17 administered by a “Director, Force Transformation” during each of the five years that it existed

18 as a separate office. [See Motion (Kelly Affidavit, ¶11; Exhibit 2, 2-001 to 2-004 (Affidavit of

19 Katherine E. Bower) (hereinafter “Bower Affidavit”), ¶8)]

20 47. The objective of the OFT was to manage and direct DOD force transformation

21 functions, including the development and acquisition of transformational military weapons and

22 systems to better address emerging threats to national security. [See Motion (Kelly Affidavit,

23 ¶8)]

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1 48. Force transformation focuses on achieving critical operational goals through four

2 essential components or pillars, including: (a) strengthening joint operations; (b) exploiting

3 United States intelligence advantages; (c) innovative concept development and experimentation;

4 and (d) developing transformational capabilities. [See Motion (Kelly Affidavit, ¶9)]

5 49. Concept development and experimentation involves experimentation with new

6 approaches to warfare through war gaming, simulations, and field exercises focused on emerging

7 challenges and opportunities. [See Motion (Kelly Affidavit, ¶10)]

8 50. In 2006, the executive reorganized the DOD and, as a result, the functions of the

9 OFT, including force transformation military weapons acquisitions, were transferred to other

10 divisions of the DOD, including the Office of Secretary of Defense for Acquisitions,

11 Technology, and Logistics (hereinafter “OSD-AT&L”). [See Motion (Kelly Affidavit, ¶12;

12 Bower Affidavit, ¶9)]

13 51. OSD-AT&L manages all matters relating to the DOD acquisition system, research

14 and development, modeling and simulation, systems engineering, advanced technology,

15 developmental testing, production, systems integration, logistics, DOD manufacturing

16 management policy and guidance in the acquisition of defense systems, and is the office to

17 whom each military department and defense agency must report regarding their defense system

18 acquisition programs. [See Motion (Kelly Affidavit, ¶13; Bower Affidavit, ¶10)]

19 52. OSD-AT&L delegates responsibility for defense system development,

20 acquisition, and implementation to the different United States Armed Forces military service

21 branches for defense system acquisitions related to that service branch, including the Office of

22 the Assistant Secretary of the Army for Acquisitions, Logistics, and Technology (hereinafter

23 “ASA (ALT)”). [See Motion (Kelly Affidavit, ¶14; Bower Affidavit, ¶11)]

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1 53. ASA (ALT) subsequently delegates purchasing responsibility for defense system

2 acquisitions related to United States Army Program Executive Offices, which includes the

3 Program Executive Office for Simulation, Training and Instrumentation (PEO STRI), one of the

4 ten Program Executive Offices within ASA (ALT). [See Motion (Kelly Affidavit, ¶15; Bower

5 Affidavit, ¶12)]

6 54. OSD-AT&L, through the defense system acquisition chain, continued to acquire

7 military systems that qualify as force transformation, including concept development and

8 experimentation projects, after OFT’s functions were transferred to other DOD divisions. [See

9 Motion (Kelly Affidavit, ¶16; Bower Affidavit, ¶13)]

10 55. On November 19, 2014, TEST and PEO STRI entered into a contract (hereinafter

11 “TEST Contract”) for TEST to provide RDT&E services to the DOD at the White Sands Missile

12 Range in New Mexico. [See Motion (Kelly Affidavit, ¶17; Bower Affidavit, ¶14)]

13 56. Pursuant to the Test Contract (as modified and amended from time to time), TEST

14 developed, delivered, operated and maintained an Electronic Warfare Threat Network comprised

15 of select threat systems designed to evaluate and test the capabilities of the following

16 transformational military weapons:

17 a. F35 Lightning II Stealth Aircraft;
18 b. AH-64E Apache Helicopter;
19 c. Integrated Air and Missile Defense System;
20 d. Joint Light Tactical Vehicles;
21 e. UH-60M Black Hawk Helicopter;
22 f. Warfighter Information Network-Tactical Increments 2 and 3;
23 g. EA-18G Growler Electronic Warfare Aircraft;
24 h. Joint Tactical Radio System Handheld Manpack and Small Form-Fit;
25 i. Distributed Common Ground System-Army Increments 1 and 2;
26 j. MQ-1C Gray Eagle Unmanned Aircraft;
27 k. Airborne Maritime Fixed-Station Joint Tactical Radio System;
28 l. RQ-7B Shadow Unmanned Aerial Vehicle;
29 m. Armored Multipurpose Vehicle;
30 n. F-15 Eagle Passive/Active Warning and Survivability System;

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1 o. PAC-3 Missile Segment Enhancement.

2 [See Motion (Kelly Affidavit, ¶18)]

3 57. Among other work, the TEST Contract requires TEST to provide the following

4 services utilized in or in connection with DOD war gaming, simulations and field exercises:

5 a. Deploy, operate, repair, maintain, fuel and redeploy current and emerging

6 foreign threat systems, including, among other things, unique injection jamming devices (that

7 simulate actual jamming of electronic systems), virtual training (software based simulation tools

8 to train warfighters for real world situations), virtual infrastructure (that simulate an opposing

9 force’s command structure), foreign commercial cell phone systems (replicates an adversaries’

10 wireless communication network) and foreign air defense systems in the live and virtual

11 electronic warfare environment.

12 b. Design, fabricate, install, calibrate and maintain specialized electronic

13 warfare instrumentation and data acquisition systems for ground threats and support equipment

14 including simulators, hardware protection systems, power generation equipment, and control

15 systems.

16 c. Develop, integrate, store, train, test and demonstrate foreign threat

17 representative electronic surveillance and electronic attack systems.

18 d. Operate, maintain, and sustain validated electronic warfare and air defense

19 threat systems for test and training events.

20 e. Plan personnel and equipment resources and data collection for threat

21 electronic warfare field exercises and test events.

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1 f. Prepare test event plans and conduct test events through, for example,

2 delivery of electronic signatures and sensing that replicate adversary electronic surveillance and

3 electronic attack capabilities.

4 g. Demonstrate electronic warfare threat systems hardware, including static

5 displays and also fully integrated operational setups.

6 h. Evaluate, analyze and recommend upgrades to instrumentation

7 components and designs.

8 i. Test and evaluate hardware and software capabilities for multiple

9 transformational systems, including electronic warfare threat systems, communications

10 networks, precision navigation, and computer systems.

11 j. Test system and subsystem level operations, including electronic warfare

12 test tools, test procedures, test execution and test results to ensure overall war gaming simulation

13 performance.

14 k. Perform technical acceptance testing to demonstrate that the actual threat

15 assets and threat simulators constitute a valid representation of the actual electronic warfare

16 threat.

17 l. Analyze electronic surveillance and electronic attack systems functional

18 performance to identify performance characteristics to be tested and determine needed test

19 instrumentation and facility requirements, prepare the test plan, and conduct the test.

20 m. Conduct tests and evaluation, including systems integration testing (to

21 verify functional, performance and reliability of electronic warfare threat systems), qualification

22 testing (to confirm a system meets or exceeds technical and operational specifications), field

23 testing (to demonstrate the threat system in development meets or exceeds technical and

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1 operational specifications) electromagnetic interference testing (to identify potential interference

2 issues).

3 n. Perform radio frequency propagation analysis to evaluate the impact of

4 environmental factors on electronic warfare systems and targets.

5 o. Provide verification and validation services for, among other things,

6 comparison of electronic warfare threat simulators and targets to approved emerging electronic

7 warfare threat profiles and intelligence data.

8 p. Facilitate development of emerging threat concepts and capabilities and

9 development of transformational capabilities to counter known and anticipated electronic warfare

10 threats.

11 [See Motion (Kelly Affidavit, ¶19)]

12 58. TEST subcontracted certain RDT&E services to EWA TRIAD, LLC, which in

13 turn subcontracted those services to EWA Warrior (“EWA Subcontract”). [See Motion (Bower

14 Affidavit, ¶15)]

15 59. None of the systems tested and evaluated by TEST or EWA Warrior pursuant to

16 the TEST Contract (or the EWA Subcontract) was physically tested in New Mexico prior to July

17 1, 2005. [See Motion (Bower Affidavit, ¶16)]

18 60. All of the systems tested and evaluated by TEST pursuant to the TEST Contract

19 (or the EWA Subcontract) were tested at the White Sands Missile Range in New Mexico. [See

20 Motion (Bower Affidavit,¶17)]

21 61. In addition to services provided under the TEST Contract (and the EWA

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1 Subcontract), TEST also sold tangibles to the DOD pursuant to the TEST Contract, including

2 amplifiers, power meter bands, various repair parts and selected off-the-shelf software. [See

3 Motion, (Bower Affidavit, ¶18)]

4 DISCUSSION

5 This is a consolidated protest of two assessments for gross receipts tax, penalty, and interest

6 arising from the same underlying facts. In 2014, TEST entered into a contract with the United States

7 Department of Defense to provide research, development, and testing and evaluation services at

8 White Sands Missile Range1 in New Mexico. TEST thereafter subcontracted certain services to

9 EWA TRIAD, LLC which then subcontracted with EWA Warrior. The Department alleges that the

10 gross receipts of TEST and EWA Warrior, all of which derived from the contract with the United

11 States Department of Defense, are taxable pursuant to the Gross Receipts and Compensating Tax

12 Act.

13 In contrast, Taxpayers dispute the taxability of the receipts derived through the contract

14 asserting that the receipts generated from services performed, and tangible personal property sold to

15 the United States Department of Defense, are deductible from gross receipts tax under NMSA 1978,

16 Sections 7-9-94 and 7-9-54 of the Gross Receipts and Compensating Tax Act.

17 Presumption of Correctness

18 Consideration of the issues in dispute begins with the presumption that the Department’s

19 assessments of tax are correct pursuant to NMSA 1978, Section 7-1-17 (C) (2007).

20 Consequently, Taxpayers carry the burden of overcoming the correctness of the assessments

1
“White Sands Missile Range, DoD’s largest, fully-instrumented, open air range, provides America’s Armed
Forces, allies, partners, and defense technology innovators with the world’s premiere research, development, test,
evaluation (RDT&E), experimentation, and training facilities to ensure our nation’s defense readiness.” See Mission
Statement, https://www.wsmr.army.mil/Pages/home.aspx (as of November 3, 2020)

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1 central to this consolidated protest. See Archuleta v. O’Cheskey, 1972-NMCA-165, ¶11, 84 N.M.

2 428, 504 P.2d 638. Unsubstantiated statements that the assessments are incorrect are insufficient to

3 overcome the presumption of correctness. See MPC Ltd. v. N.M. Taxation & Revenue Dep’t, 2003-

4 NMCA-021, ¶13, 133 N.M. 217, 62 P.3d 308.

5 Unless otherwise specified, for the purposes of the Tax Administration Act, “tax” includes

6 interest and civil penalty. See NMSA 1978, Section 7-1-3 (X) (2013). Under Regulation 3.1.6.13

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

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

9 Revenue, 2006-NMCA-050, ¶16, 139 N.M. 498, 134 P.3d 785 (agency regulations interpreting a

10 statute are presumed proper and are to be given substantial weight).

11 Gross Receipts and Applicable Deductions

12 For the privilege of engaging in business within this state, New Mexico imposes a gross

13 receipts tax on the receipts of any person engaged in business. See NMSA 1978, Section 7-9-4

14 (2002). Under NMSA 1978, Section 7-9-3.5 (A) (1) (2007), the term “gross receipts” is defined to

15 mean:

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

22 Under the Gross Receipts and Compensating Tax Act, there is a statutory presumption that

23 all gross receipts of a person engaged in business are taxable. See NMSA 1978, Section 7-9-5

24 (2002). Yet, despite the general presumption of taxability, taxpayers may also avail themselves of

25 the benefits of various deductions and exemptions when applicable, in which case, “[w]here an

26 exemption or deduction from tax is claimed, the statute must be construed strictly in favor of the

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1 taxing authority, the right to the exemption or deduction must be clearly and unambiguously

2 expressed in the statute, and the right must be clearly established by the taxpayer.” See Wing Pawn

3 Shop v. Taxation & Revenue Dep't, 1991-NMCA-024, ¶16, 111 N.M. 735, 809 P.2d 649.

4 Meanwhile, summary judgment is appropriate if no genuine issue as to any material fact

5 exists and the movant is entitled to a judgment as a matter of law. See Juneau v. Intel Corp., 2006-

6 NMSC-002, ¶8, 139 N.M. 12. In considering a motion for summary judgment, the Hearing Officer

7 in similar fashion to a trial court will view pleadings, affidavits, depositions, and other evidence in

8 the light most favorable to the opposing party, or in this case, the Department. See Juneau, 2006-

9 NMSC-002, ¶8.

10 In this case, Taxpayers, the movants, bear the initial burden of demonstrating entitlement to

11 summary judgment; once the movant makes out a prima facie showing, the burden then shifts to the

12 opposing party, the Department, to demonstrate through admissible evidence that a genuine issue of

13 material fact indeed exists. See Koenig v. Perez, 1986-NMSC-066, ¶9, 104 N.M. 664.

14 Summary judgment “may be proper even though some disputed issues remain, if there are

15 sufficient undisputed facts to support a judgment and the disputed facts relate to immaterial issues.”

16 See Oschwald v. Christie, 1980-NMSC-136, ¶6, 95 N.M. 251.

17 Thus, it is with this well-established framework in mind that the Hearing Officer evaluated

18 Taxpayers’ Motion, and having carefully considered the respective presumptions and burdens

19 placed upon the parties, as well as the evidence and argument presented, the Hearing Officer was

20 persuaded that summary judgment is appropriate because there are no genuine issues as to any

21 material fact and Taxpayers are entitled to judgment as a matter of law. For the reasons that follow,

22 Taxpayers’ Motion should be granted.

23 Application of NMSA 1978, Section 7-9-94 (2015)

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1 NMSA 1978, Section 7-9-94 establishes a deduction from gross receipts for revenue

2 derived from “transformational acquisition programs performing research and development, test

3 and evaluation at New Mexico major range and test facility bases pursuant to contracts entered

4 into with the United States department of defense[.]” See Section 7-9-94 (A) (2015).

5 The deduction is not without its limitations. Receipts generated from programs existing

6 on or before July 1, 2005 are not eligible. See Section 7-9-94 (C) (2015). Otherwise, in order to

7 qualify for the deduction, a taxpayer’s receipts must be derived from: (1) a “transformational

8 acquisition program;” (2) performing research and development, test and evaluation services; (3)

9 at a major New Mexico range and test facility base; (4) pursuant to a DOD contract; (5) that

10 began after July 1, 2005.

11 The evidence accompanying Taxpayers’ Motion persuaded the Hearing Officer that

12 Taxpayers engaged in the business of research and development, and test and evaluation services

13 pursuant to a contract with the United States department of defense. Moreover, receipts

14 generated from services under the relevant contract were performed at White Sands Missile

15 Range which is a major range and test facility base in New Mexico, and those services were

16 provided several years after July 1, 2005. Indeed, the Department devotes minimal effort to

17 presenting contradictory evidence on any of these particulars. Accordingly, Taxpayers satisfy

18 items listed 2, 3, 4, and 5 above.

19 The principal disagreement among the parties therefore concentrates on the first element

20 listed above; whether the receipts central to the assessment were derived from a

21 “transformational acquisition program” as that term is employed in the statute.

22 The definition provides that “‘transformational acquisition program’ means a military

23 acquisition program authorized by the office of the secretary of defense force transformation and

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1 not physically tested in New Mexico on or before July 1, 2005.” See NMSA 1978, Section 7-9-

2 94 (B).

3 The Department contends that Taxpayers’ exhibits and affidavits are insufficient to

4 establish that Taxpayers’ receipts derived through a contract with a “transformational acquisition

5 program” that was “authorized by the office of the secretary of defense force transformation.”

6 The Department explains that the secretary of defense established the Office of Force

7 Transformation on October 29, 2001 with the purpose of pursuing “force transformation” within

8 the U.S. military, but the office had dissolved amid additional department reorganization by

9 October 1, 2006. Therefore, the Department contends in order to qualify for the deduction

10 provided by Section 7-9-94, Taxpayers must submit evidence that the DOD designated particular

11 acquisition programs as transformational because the mere assertion that a program is

12 transformational is inadequate. Accordingly, the Department argues,“[a]bsent official DOD

13 documentation that Taxpayers were engaged in a ‘transformational acquisition program,’ they

14 cannot meet their burden of establishing that they are entitled to this specific deduction.” The

15 Hearing Officer is unpersuaded by the Department’s logic. Neither the Legislature by enactment

16 nor the Department by rule has imposed such a requirement. Moreover, the Department’s

17 argument ostensibly exalts form over substance which is an approach our courts have repeatedly

18 disfavored and discouraged. See Proficient Food Co. v. N.M. Taxation & Revenue Dep't, 1988-

19 NMCA-042, ¶22, 107 N.M. 392, 758 P.2d 806.

20 Section 7-9-94 (B) defines a “transformational acquisition program” as “a military

21 acquisition program authorized by the office of the secretary of defense force transformation and

22 not physically tested in New Mexico on or before July 1, 2005.” Taxpayer correctly asserts that

23 the definition contains three essential components: (1) it must be a military acquisition program;

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1 (2) it must be authorized by the “office of the secretary of defense force transformation;” and (3),

2 it has not been physically tested in New Mexico on or before July 1, 2005.

3 Taxpayers assert that the first and third components of the definition are satisfied. The

4 Hearing Officer concurs finding that the TEST Contract is a contract for services for a military

5 acquisition program in which Taxpayers provided research and development and test and

6 evaluation services. The contract also did not begin until November 2014 and none of the

7 systems tested and evaluated by Taxpayers under the contract were physically tested in New

8 Mexico prior to July 1, 2005.

9 The critical question is then whether the TEST Contract was authorized by the “office of

10 the secretary of defense force transformation.” The evidence established that at the time Section

11 7-9-94 was initially enacted in 2005, there was a DOD office named “Office of Force

12 Transformation” (also referred to herein as “OFT”). It was established within the Office of the

13 Secretary of Defense and was administered by a “Director, Force Transformation.” Thus, it was

14 not remarkable that in 2005, when the Legislature initially enacted Section 7-9-94, that it would

15 reference the relevant office by its then-proper name. However, in 2006, the executive

16 implemented a reorganization of the DOD which essentially dissolved the OFT and distributed

17 its responsibilities among other DOD divisions which further divided and delegated those

18 responsibilities.

19 Because the original enactment was intended to expire on June 30, 2008, the New

20 Mexico Legislature subsequently amended Section 7-9-94 in 2006 and then again in 2015 to

21 ultimately extend the availability of the deduction through June 20, 2025. See Section 7-9-94 (A)

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1 (2005); Section 7-9-94 (A) (2006); Section 7-9-94 (A) (2015) 2. Despite the fact that the

2 Legislature was cognizant of the deduction’s impending expiration and on two occasions enacted

3 amendments to extend it, it did not disturb its reference to OFT despite the fact it no longer

4 existed as it had at the time of its original enactment in 2005.

5 Taxpayers argued that amending Section 7-9-94 in 2006 and 2015 in order to extend its

6 sunset date through 2025 exemplified a clear legislative intent to continue the deduction even if

7 OFT no longer existed in the same form as it had in 2005, perhaps because the most essential

8 component of the statute concerned the type and location of services being performed, not the

9 proper name of the office in the DOD through which the contract derived. See Bybee v. City of

10 Albuquerque, 1995-NMCA-061, ¶11, 120 N.M. 17 (it is presumed that the Legislature “knows

11 the law and acts rationally”). The Hearing Officer concurs.

12 By referring to “office of the secretary of defense force transformation,” the Legislature

13 intended to attract “force transformation” projects to New Mexico. This conclusion is reinforced

14 considering the ultimate goal of statutory interpretation which is to give effect to legislative

15 intent. See State ex rel. Helman, 1994-NMSC-023, ¶ 25. If statutory language is clear and

16 unambiguous, it must be applied according to its plain language without further investigation.

17 See Id. ¶18. If, however, a statute is ambiguous, contains a clear legislative error, or applying its

18 plain language would lead to absurd or unreasonable results, there must be “a willingness to

19 depart from the literal wording of a statute” in order to construe it “according to its obvious spirit

20 or reason.” See Id. ¶ 19 (internal citations and quotations omitted); see id. ¶¶ 18-25 (summarizing

21 New Mexico caselaw on the limitations of the plain meaning rule and when courts should

2
The 2015 amendment imposed a reporting requirement on the Department which is not relevant to this protest. See
NMSA 1978, Section 7-9-94 (D) (2015). Otherwise, there have been no substantive changes to subsection B and C,
and the only amendments to subsection A have been to extend the law’s sunset date.

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1 deviate from literal statutory language to achieve the Legislature’s purpose). The interpreting

2 tribunal may even “substitute, disregard or eliminate, or insert or add words to a statute, if it is

3 necessary to do so to carry out the legislative intent or to express the clearly manifested meaning

4 of the statute.” See Nat'l Council on Comp. Ins. v. New Mexico State Corp. Comm'n., 1986-

5 NMSC-005, ¶5, 103 N.M. 707. The tribunal may also depart from legislative definitions when “a

6 particular definition would result in an unreasonable classification.” See Inc. Cty. of Los Alamos

7 v. Johnson, 1989-NMSC-045, ¶4, 108 N.M. 633.

8 In Helman, the New Mexico Supreme Court upheld a rule that contradicted the plain

9 language in its governing statute because the statute contained an error that “everyone knew ran

10 contrary to the legislature’s intent” and was “apparent on the face of the statute[.]” See Helman,

11 1994-NMSC-023, ¶38. The error arose from an amendment to the Public Employees Retirement

12 Act that if read literally permitted public employees to purchase credit toward early retirement at

13 one-twelfth of the pre-amendment cost. See Helman, 1994-NMSC-023, ¶11. The Court found no

14 justification in logic or legislative intent for such a drastic shift in policy, observing that there

15 was simply no purpose served by permitting inequitable treatment of employees who had

16 purchased credit the year before and employees purchasing in the current year, not to mention

17 the absence of any legislative acknowledgement of the fiscal consequences that such a drastic

18 reduction would cause. See Helman, 1994-NMSC-023, ¶37. The Court therefore departed from

19 the plain language of the statute in favor of the regulation, which it found corrected the error and

20 accomplished the Legislature’s intended purpose. See Helman, 1994-NMSC-023, ¶38. In this

21 case, Section 7-9-94 utilizes an outdated reference which if read literally requires that the

22 relevant DOD contract be authorized by a DOD office that has not existed since 2006, despite

23 the fact that the Legislature as recently as 2015, amended the deduction permitting its availability

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1 for another decade. This evidences the clear intent of the Legislature to attract and incentivize

2 transformation acquisition programs in New Mexico consistent with the elements contained in

3 Section 7-9-94.

4 This conclusion is reinforced when considering legislative documentation that discusses

5 the deduction’s goal of attracting substantive programs to New Mexico, rather than programs

6 authorized by a particular office within the DOD. See New Mexico Legislative Finance

7 Committee, Fiscal Impact Report, Military Acquisition Gross Receipts End Dates, New Mexico

8 Legislature Website (March 18, 2015, accessed November 10, 2020),

9 https://www.nmlegis.gov/Sessions/15%20Regular/firs/SB0448.PDF (hereinafter “FIR”)

10 (indicating that the deduction incentivizes “military transformational acquisition programs” and

11 “military mission related projects” to locate in New Mexico, without referencing the OFT or any

12 other DOD department); see Helman, 1994-NMSC-023, ¶ 35 (legislative documents “presented

13 to and presumably considered by the Legislature during the course of enactment of a statute”

14 may be considered in determining legislative intent). These documents confirm the deduction’s

15 purpose is to encourage transformational military projects in New Mexico, and that the proper

16 name of the office within the DOD authorizing the contract for such work is irrelevant.

17 Remarkably, the Hearing Officer further observed that two departments of state

18 government were identified as contributors to the information contained in the FIR and neither

19 department alerted the Legislature to the fact that the statute might contain a discrepancy in

20 terminology by referring to the name of an office within the DOD that no longer existed. Those

21 agencies were the Department of Military Affairs and the Taxation and Revenue Department.

22 See FIR (sections headings “Sources of Information,” “Substantive Issues,” and “Technical

23 Issues”). This observation is significant because it demonstrates how the Department perceived

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1 no issues, either substantive or technical, with the enactment’s reference to OFT in 2015. Had it

2 the apprehensions then that it has now regarding the reference to OFT, it surely would have

3 addressed them at that time as the entity responsible for implementing and enforcing the tax laws

4 of this state. By 2015 when the Department contributed to the FIR, the OFT had been dismantled

5 for nearly a decade.

6 As the Court did in Helman, the Hearing Officer must resolve this contradiction by

7 departing from the literal language of the statute and interpret it to accomplish its intended

8 statutory purpose.

9 The Hearing Officer was persuaded that the Legislature’s intent in referencing the “office

10 of the secretary of defense force transformation” was not to provide taxpayers a deduction for

11 working with a certain DOD office having a specific name, but to attract and incentivize “force

12 transformation” projects in New Mexico. The OFT was merely the arm of the DOD that

13 managed and directed force transformation initiatives until its functions were disbursed among

14 other divisions of DOD, but that reorganization did not, nor could it nullify New Mexico tax law.

15 To find otherwise would produce absurd results which the Legislature clearly did not intend.

16 The next question is whether Taxpayers’ receipts were derived through the type of work

17 contemplated by the Legislature when it enacted Section 7-9-94. Although the Legislature did

18 not define “force transformation” when it referred to “office of the secretary of defense force

19 transformation,” Taxpayers persuasively explain through argument and supporting evidence that

20 the term is defined by DOD and includes: (1) strengthening joint operations by developing joint

21 concepts and architectures and improving interoperability; (2) exploiting U.S. intelligence

22 advantages through intelligence collection, global surveillance and reconnaissance, and enhanced

23 usage and dissemination; (3) innovative concept development by experimenting with new

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1 approaches to warfare through war gaming, simulations, and field exercises; and (4)

2 development of transformational capabilities, which is achieved by the success of the above.

3 The terms “force transformation,” “defense transformation,” and “defense force

4 transformation” are all synonymous. See Motion (Exhibit 1, 1-009 to 1-029 (“Elements of

5 Defense Transformation”) (using the terms interchangeably)).

6 Moreover, both DOD and independent third parties such as the Congressional Research

7 Service recognize these four “pillars” as the essential components of force transformation. See

8 Motion (Exhibit 1, 1- 009 to 1-029 (“Elements of Defense Transformation”); Exhibit 1, 1-030 to

9 1-053 (“Defense Transformation: Background and Oversight Issues for Congress”)).

10 In viewing Taxpayer’s evidence in the light most favorable to the Department, and noting

11 the absence of any reliable evidence to the contrary, the Hearing Officer finds that if a DOD

12 acquisition program fits within one of these pillars, then the logical conclusion is that the

13 program is within the realm of programs contemplated by Section 7-9-94 when the Legislature

14 referred to “transformation acquisition programs.”

15 Although OFT no longer exists in the same form as it did in 2005, the DOD’s demand for

16 force transformation services continued. The evidence established that transformation

17 acquisitions projects are now authorized by the DOD’s general acquisitions arm, not by any

18 particular force transformation office, division, or department. When the DOD was reorganized

19 in 2006, the Office of Force Transformation’s functions and projects were transferred to various

20 other DOD departments in accordance with the DOD’s new structure. One of those departments

21 was the OSD-AT&L, the branch of the DOD that oversees the DOD’s acquisitions chain, as well

22 as its initiatives in research and development, modeling and simulation, advanced technology,

23 and more. When OFT was reorganized, therefore, its acquisition functions (among others) were

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1 moved to OSD-AT&L.

2 After the reorganization, OSD-AT&L continued to acquire military systems that qualify

3 as force transformation. OSD-AT&L delegates acquisitions functions to departments within each

4 Armed Forces military service branch. One such service branch is ASA (ALT) which then

5 delegates certain acquisition purchasing responsibilities to PEO STRI.

6 Following the relevant chain of command it becomes apparent that a force transformation

7 acquisition contract authorized by OSD-AT&L (through PEO STRI) is a force transformation

8 contract within the meaning of Section 7-9-94.

9 Therefore, the TEST Contract, under which Taxpayers provided services to DOD,

10 qualifies as a “defense force transformation” project as contemplated by Section 7-9-94. First,

11 the services Taxpayers performed for DOD include and consist of “innovative concept

12 development,” which is the third “pillar” of force transformation. “Innovative concept

13 development” is defined as “experimentation with new approaches to warfare, operational

14 concepts and capabilities, and organizational constructs through war gaming, simulations, and

15 field exercises focused on emerging challenges and opportunities.”

16 Taxpayers engaged in precisely these activities pursuant to the TEST Contract in which

17 they developed and carried out war games, simulations, field tests, and other experimental

18 projects to evaluate and test the capabilities of military weapons and equipment, including stealth

19 and unmanned aircraft, missile defense systems, and warning and survivability systems.

20 Taxpayers developed and maintained a comprehensive set of devices, systems, resources,

21 and procedures to accurately simulate a variety of modern threats including devices that

22 simulated electronic warfare tactics such as jamming of electronic systems; software-based

23 simulation tools to train warfighters for real-world situations; and virtual infrastructure to

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1 simulate an opposing force’s command structure, communication networks, and air defense

2 systems. Taxpayers utilized these systems to carry out real-time simulations of foreign threats;

3 applied the results of those simulations to recommend upgrades to military components and

4 designs; tested various electronic warfare systems, procedures, and capabilities; facilitated

5 development of transformational capabilities to counter known and anticipated electronic warfare

6 threats; and much more. These activities clearly come within the meaning of “innovative concept

7 development” and the mission of force transformation as preparing the US military to better

8 respond to modern and emerging threats.

9 Furthermore, Taxpayers performed these services pursuant to an acquisition contract with

10 PEO STRI. As explained above, PEO STRI’s acquisitions functions are delegated to it by OSD-

11 AT&L, and OSD-AT&L directs the acquisition functions of the former Office of Force

12 Transformation. Therefore, Taxpayers’ gross receipts derived from a force transformation

13 program that was authorized by the DOD department that currently handles the acquisition of

14 force transformation work. Taxpayers satisfied the requirements of Section 7-9-94 and are

15 entitled to relief under that statute as a matter of law.

16 The Department does not agree suggesting during the hearing on Taxpayers’ Motion that

17 the DOD reorganization of 2006 rendered the deduction practically impossible to claim. But

18 “bait and switch” was certainly not the intention of the Legislature when it extended the

19 deduction in 2006 and again in 2015, ultimately extending availability of the deduction to mid-

20 2025. Instead, the Legislature intended to attract force transformation projects to New Mexico as

21 it had prior to the DOD reorganization and the deduction should be construed consistent with

22 that purpose in mind. To do otherwise would produce results that the Legislature did not intend.

23 Application of NMSA 1978, Section 7-9-54

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1 At the onset of the hearing, Taxpayers alerted the Hearing Officer that they would not be

2 addressing the application of Section 7-9-54. The parties seemingly had no dispute over its

3 application and concurred that Taxpayers should be entitled to the benefit of the deduction upon

4 satisfactory documentation.

5 Nevertheless, approaching conclusion of the hearing, the Hearing Officer inquired

6 whether a ruling in favor of Taxpayers on the issue of Section 7-9-94 would dispose of the

7 protest in full, or if there would remain any residual issues concerning the application of Section

8 7-9-54 so that a final and appealable Decision and Order would be premature.

9 Taxpayers asserted that Section 7-9-54 would apply only if it does not prevail under

10 Section 7-9-94. In other words, Section 7-9-54 represents an alternative and secondary claim for

11 relief that need not be addressed if the Taxpayers should prevail under Section 7-9-94 since all

12 receipts claimed to be deductible under Section 7-9-54 should also be deductible under Section 7-9-

13 94. Taxpayers, according to counsel, do not intend to seek the benefit of multiple deductions to the

14 same taxable event, but avail themselves primarily of the broader deduction afforded by Section 7-

15 9-94.

16 The Department asserted that issues arising under Section 7-9-54 were not ripe for decision.

17 However, given the strength of the evidence and subsequent decision that Taxpayers are entitled to

18 a deduction afforded by Section 7-9-94, the Hearing Officer agrees that issues arising under the

19 application of Section 7-9-54 are moot because tangible property sold to DOD under the TEST

20 Contract is deductible under Section 7-9-94. The undisputed facts in this protest provide that TEST

21 sold amplifiers, power meter bands, various repair parts and selected off-the-shelf software to PEO-

22 STRI under the TEST Contract. Therefore, for the reasons previously discussed, Section 7-9-94

23 should also apply to the sales of tangible goods that could also be subject to deductions under

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1 Section 7-9-54.

2 As Taxpayer emphasized, a finding in favor of Taxpayers on the applicability of Section 7-

3 9-94 resolves all issues, including those that were presented in the alternative under Section 7-9-54.

4 Since Taxpayers readily acknowledge that they do not intend to stack deductions, but seek relief

5 under Section 7-9-54 only if they are denied relief under Section 7-9-94, the Hearing Officer need

6 not further address the application of Section 7-9-54.

7 The Department’s Arguments in Opposition to Motion

8 The Department argues that Taxpayers’ Motion failed to present sufficient evidence to

9 establish a prima facie case because the evidence presented by Taxpayers concerning the present

10 status of “force transformation” initiatives in the DOD is assertedly speculative and outdated.

11 The Department further claims that Taxpayers’ affiants lack personal knowledge to testify

12 regarding the DOD’s force transformation projects or the meaning of force transformation and

13 that it is uncertain what services Taxpayers performed under the TEST Contract, which

14 apparently omits any reference to the terms “transformation” or “transformational.”

15 These condemnations of Taxpayers’ evidence, however, are insufficient to establish the

16 existence of genuine issues of material fact. Instead, the non-moving party must demonstrate

17 through admissible evidence that a genuine issue of material fact exists. See Koenig, 1986-

18 NMSC-066; ¶9. Arguments of counsel are not evidence. See Chevron U.S.A., 2006-NMCA-050,

19 ¶36.

20 Contrary to the Department’s perception, the Hearing Officer finds Taxpayers’ evidence

21 credible, uncontroverted, and persuasive. Taxpayers rely on documentation from the DOD and

22 the Congressional Research Service and testimony from Taxpayers’ affiants to establish that the

23 DOD’s force transformation initiatives continued after the OFT was dismantled in 2006 and that

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1 force transformation has a specific, well-accepted definition within the DOD. Taxpayers,

2 pursuant to their DOD contract, engaged in work that clearly fits within the definition of force

3 transformation. The testimony of Taxpayers’ affiants on these matters was within their personal

4 knowledge and uncontroverted by any contradictory evidence presented by the Department.

5 Taxpayer’s protest should be granted.

6 CONCLUSIONS OF LAW

7 A. Taxpayers filed timely, written protests of the Department’s assessments and

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

9 B. A hearing was held within 90 days of Taxpayers’ protests. See NMSA 1978, Section

10 7-1B-6 (D).

11 C. There is no genuine dispute as to any material fact and summary judgment is

12 appropriate in this matter. See Romero v. Philip Morris, Inc., 2010-NMSC-035, ¶7, 148 NM 713.

13 D. Taxpayers are entitled to a deduction from gross receipts for receipts derived from

14 transformation acquisition programs performing research and development, test and evaluation at

15 New Mexico major range and test facility bases pursuant to contracts entered into with the United

16 States Department of Defense under NMSA 1978, Section 7-9-94.

17 For the foregoing reasons, Taxpayer’s protest is GRANTED.

18 DATED: November 13, 2020

19
20 Chris Romero
21 Hearing Officer
22 Administrative Hearings Office
23 P.O. Box 6400
24 Santa Fe, NM 87502
25

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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 the

6 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

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1 CERTIFICATE OF SERVICE

2 On November 13, 2020, a copy of the foregoing Decision and Order Granting Summary

3 Judgment was emailed to the parties listed below:

4 Email Only Email Only

5
6 John D. Griego
7 Legal Assistant
8 Administrative Hearings Office
9 Post Office Box 6400
10 Santa Fe, NM 87502
11 PH: (505)827-0466
12 FX: (505)827-9732
13 [email protected]

In the Matter of the Consolidated Protests of Test & Evaluation Services and Technologies, LLC
and EWA Warrior Services, LLC
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