Could a California contractor deduct military-range cleanup services because the Air Force command accepted contract deliverables in Virginia?

Plain-English summary

Timberline Environmental Services could not use New Mexico's out-of-state-buyer deduction for military-range cleanup because the product of its services was remediated real property located in New Mexico. Contract language placing formal acceptance in Virginia did not move the initial use or delivery of the actual service product out of state.

The assessment covered January 2010 through May 2017 and totaled $61,167.87: $45,082.10 of gross receipts tax, $9,016.42 of penalty, and $7,069.35 of interest.

Timberline was a California company with no New Mexico office and no equipment kept in the state. It contracted with the U.S. Air Force Air Combat Command, headquartered at Langley in Virginia, to demilitarize and dispose of debris at two New Mexico training ranges:

• Oscura range at White Sands Missile Range, producing $570,520 of receipts; and
• Melrose range near Cannon Air Force Base, producing $313,170 of receipts.

Timberline inspected the sites, prepared work and quality-control plans, identified and rendered hazardous materials safe, used heavy or specialized equipment to reduce debris, sold recyclable scrap, disposed of unsalvageable material, and submitted final reports. The debris was already at the New Mexico sites, and the contract required the work to occur there in coordination with each range manager.

Government services were not automatically disqualified

The Department argued that Section 7-9-54 barred deductions for all services sold to a government agency. The hearing officer rejected that broad interpretation. Section 7-9-54 limits only its own government-sales deduction; it does not prevent a taxpayer from qualifying under another statute. Nor did the federal government's New Mexico presence prevent Air Combat Command from being an out-of-state buyer for Section 7-9-57.

That meant a government contractor could still qualify if the product of its service was initially used and delivered outside New Mexico.

The actual product stayed in New Mexico

The decisive issue was identifying the benefit Air Combat Command received. Timberline emphasized that the contract designated Langley as the place for inspection, acceptance, and delivery, and that final reports went to Virginia. But a contract label does not control state taxation.

Unlike TPL, where movable munitions could be brought to New Mexico for work that could occur elsewhere, Timberline had to remediate debris already located on two specific New Mexico sites. Its inspections, plans, and physical work depended on those ranges and their managers. The resulting product was the remediated Oscura and Melrose range sites.

When a service improves specific real property, initial use and delivery occur where that property sits. The buyer need not be physically present. A remediated New Mexico range cannot be used or delivered anywhere else, so Section 7-9-57's deduction failed.

Penalty also remained because Timberline did not present evidence or argument showing non-negligence. Interest was mandatory compensation for tax not paid when due.

Result: protest DENIED. Timberline remained liable for the full $61,167.87 assessment, with interest continuing to accrue until the tax was paid.

What this means for you

Identify the service product, not merely the paperwork

Plans, reports, and out-of-state contract acceptance may be deliverables without being the ultimate product for gross receipts tax purposes. Ask what practical benefit the buyer received.

Site-specific work is usually used where the site is located

Environmental remediation, construction-related work, coating structures, and hazardous-material removal tied to New Mexico real property are initially used or delivered in New Mexico.

An out-of-state government buyer can still qualify in principle

Government identity and a New Mexico federal presence do not independently defeat Section 7-9-57. The location of initial use or delivery remains the controlling test.

Section 7-9-54 does not override every other deduction

Its restriction on service receipts applies to the deduction in that section. A contractor may invoke another deduction if every element of that other statute is proven.

Build the penalty record separately

Even a substantial legal dispute over a deduction does not automatically remove penalty. Timberline offered no evidence or argument establishing non-negligence.

Common questions

Q: Was Air Combat Command treated as an out-of-state buyer?
A: Yes. Its headquarters were in Virginia, and federal presence in New Mexico did not by itself defeat that status.

Q: Why didn't Virginia acceptance control?
A: The Department could examine the transaction's substance. The real benefit was two cleaned and remediated New Mexico range sites, not merely reports accepted at Langley.

Q: How was this different from TPL?
A: In TPL, movable property could be serviced in any state and was brought into New Mexico. Timberline's debris was already at specific New Mexico ranges, and the work had to occur on those sites.

Q: Did selling services to the federal government itself bar the deduction?
A: No. Section 7-9-54 did not foreclose other statutory deductions. Timberline lost because initial use and delivery occurred in New Mexico.

Q: What happened to penalty and interest?
A: Both remained. Timberline did not prove non-negligence, and statutory interest was mandatory.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-9-57(A) (2000) — out-of-state-buyer service deduction and in-state initial-use or delivery limitation
• NMSA 1978, § 7-9-54(A) (2018) — government tangible-property deduction; limits only that section
• NMSA 1978, §§ 7-9-4, 7-9-3.3, 7-9-3.5(A)(1), and 7-9-5(A) — gross receipts tax on services performed in New Mexico
• NMSA 1978, §§ 7-1-17(C), 7-1-3(Z), 7-1-67(A), and 7-1-69 — assessment presumption, interest, and penalty
• Regulation 3.2.212.9(A) NMAC — services sold to a governmental agency under Section 7-9-54
• Regulation 3.2.215.12(B) NMAC — buyer with New Mexico presence and out-of-state initial use or delivery
• Regulation 3.1.11.11 NMAC — professional-advice grounds for non-negligence

Cases:

• TPL, Inc. v. New Mexico Taxation and Revenue Department, 2003-NMSC-007 — product-of-service analysis for demilitarization and out-of-state buyers
• New Mexico Taxation and Revenue Department v. Dean Baldwin Painting, Inc., 2007-NMCA-153 — delivery of a service product in New Mexico
• Holt v. New Mexico Department of Taxation and Revenue, 2002-NMSC-034 — Department may examine evidence rather than accept contract labels for tax liability
• Kewanee Industries, Inc. v. Reese, 1993-NMSC-006 — taxpayer must clearly establish a deduction
• Security Escrow Corp. v. State Taxation and Revenue Department, 1988-NMCA-068 — strict construction of deductions
• Marbob Energy Corp. v. New Mexico Oil Conservation Commission, 2009-NMSC-013 — mandatory effect of “shall”

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Timberline Environmental Services, LLC
• Decision PDF: D&O 21-05

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 TIMBERLINE ENVIRONMENTAL SERVICES, LLC
6 TO THE ASSESSMENT
7 ISSUED UNDER LETTER ID NO. L1944095536

8 v. AHO No. 18.05-117A, D&O No. 21-05

9 NEW MEXICO TAXATION AND REVENUE DEPARTMENT

10 DECISION AND ORDER

11 On June 26, 2020, Hearing Officer Dee Dee Hoxie, Esq. conducted a telephonic status

12 hearing on the protest to the assessment of Timberline Environmental Services, Inc. (Taxpayer).

13 The Taxation and Revenue Department (Department) was represented by David Mittle, Staff

14 Attorney. Mary Griego, Auditor, also appeared on behalf of the Department. The Taxpayer was

15 represented by its attorney, Joe Lennihan. The parties agreed that the protest should be decided

16 on the pleadings. The parties agreed to submit stipulated facts and arguments on the legal issues.

17 Exhibits 1 through 14 were attached to the stipulated facts. A more detailed description of

18 exhibits submitted at the hearing is included on the Administrative Exhibit Coversheet. The final

19 arguments were due on January 21, 2021. The Hearing Officer requested additional facts in an

20 order for clarification, which were due on February 19, 2021. The Taxpayer and the Department

21 responded to the request on February 18, 2021.

22 The main issue to be decided is whether the Taxpayer’s services were deductible. The

23 Taxpayer claims a deduction under Section 7-9-57. The Hearing Officer considered all of the

24 evidence and arguments presented by both parties. Because the initial use or delivery of the

25 product of the service occurred in New Mexico, the Hearing Officer finds in favor of the

26 Department. IT IS DECIDED AND ORDERED AS FOLLOWS:

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1 FINDINGS OF FACT

2 1. On January 19, 2018, under letter id. no. L1944095536, the Department issued an

3 assessment to the Taxpayer for gross receipts taxes from January 31, 2010 through May 31,

4 2017. The assessment was for tax of $45,082.10, penalty of $9,016.42, and interest of

5 $7,069.35, for a total liability of $61,167.87. [L1944095536].

6 2. On April 11, 2018, the Taxpayer filed a timely written protest to the assessment.

7 [Administrative file].

8 3. On April 16, 2018, the Department acknowledged its receipt of the protest.

9 [Administrative file].

10 4. On May 18, 2018, the Department filed a request for hearing with the

11 Administrative Hearings Office. [Administrative file].

12 5. On June 1, 2018, the Taxpayer waived the 90-day requirement of the statute when

13 it requested a continuance of the initial hearing that was set. 1 [Administrative file].

14 6. On June 29, 2018, the first telephonic scheduling hearing was conducted, which

15 was within 90 days of the protest as required2. [Administrative file].

16 7. On July 13, 2018, a second telephonic scheduling hearing was conducted, and a

17 date for a hearing on the merits was selected. [Administrative file].

18 8. The hearing on the merits was continued several times at the requests of the

19 parties. The hearing on the merits was ultimately set for April 17, 2020. [Administrative file].

1
At the time that the protest was filed, the statute required a hearing be held within 90 days of the receipt of the
protest. See NMSA 1978, § 7-1B-8 (2015). The statute now requires a hearing be held within 90 days of the
Department’s request for hearing. See NMSA 1978, § 7-1B-8 (2019).
2
Both parties failed to appear at the first hearing.
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1 9. On March 23, 2020, the parties filed a stipulated request to stay and to set a status

2 hearing because of the recently declared public health state of emergency 3. [Administrative file].

3 10. On June 26, 2020, the telephonic status hearing was conducted. At that hearing,

4 the parties agreed to submit stipulated facts and arguments and requested that the protest be

5 decided on the pleadings. The request was granted, and deadlines were given. [Administrative

6 file].

7 11. After several extensions of time, the final deadlines were set for November 16,

8 2020 to submit the stipulated facts, for arguments on January 11, 2021, and for final responses

9 on January 21, 2021. [Administrative file].

10 12. The parties timely filed the stipulated facts (SF) with exhibits 1 through 14 (Ex.

11 #), their arguments (Taxpayer’s Brief and Department’s Motion), and their responses

12 (Taxpayer’s Response and Department’s Reply). [Administrative file].

13 13. On January 28, 2021, the Hearing Officer issued an order for clarification

14 requesting additional facts, with a deadline of February 19, 2021 for submission of facts or a

15 motion for evidentiary hearing. The Taxpayer filed additional facts on February 18, 2021 (AF).

16 The Department filed its response on February 18, 2021 and did not contest the AF.

17 [Administrative file].

18 14. The Taxpayer is incorporated in California, has its principal place of business in

19 California, and did not have an office or keep equipment in New Mexico during its performance

20 of services in New Mexico. [SF, p. 1, ¶ 1].

21 15. The Taxpayer performs demilitarization and disposal services for the U.S.

22 military. [SF, p. 1, ¶ 1].

3
The public health state of emergency remains ongoing at the time of this decision.
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1 16. The U.S. Air Force Air Combat Command (ACC) 4, one of ten major commands

2 that make up the Air Force, is headquartered at Langley Joint Air Force Base in northern

3 Virginia, and the Air Force secretariat is located at the Pentagon in Arlington, Virginia. [SF, p.

4 1, ¶ 2].

5 17. In 2011, the ACC requested bids for the demilitarization and disposal of items at

6 30 training facilities in 20 different states, including two range sites in New Mexico (Oscura

7 range and Melrose range). [SF, p. 2, ¶ 5; Ex. #2; Ex. #4].

8 18. Demilitarization and disposal of range debris must be done according to the

9 federal standards and regulations. [SF, p. 2, ¶ 3-4; Ex. #2, Ex. #3].

10 19. The ACC informed bidders that New Mexico assesses gross receipts tax on

11 business conducted within the state and that tax is imposed on the basis of revenue derived from

12 business operations within the state without regard to the location of the entity. Bidders were

13 presumed to include this cost of doing business in their bids. [SF, p. 4, ¶ 10; Ex. #4].

14 20. Taxpayer prepared a bid to perform the demilitarization services and submitted

15 the bid to Langley. [SF, p. 4, ¶ 11].

16 21. The Taxpayer was awarded the contract. [SF, p. 4, ¶ 11; Ex. #5].

17 22. Pursuant to the contract, the Taxpayer was to perform range residue removal

18 services, that is to demilitarize and remove munitions debris, from the Oscura test range located

19 within White Sands Missile Range in New Mexico. [SF, p. 4, ¶ 12; Ex. #6]. Pursuant to the

20 contract, the Taxpayer was to perform range residue removal services, that is to demilitarize and

4
In the context of this decision, the ACC includes other federal agencies or offices, such as the Acquisition
Management Integration Center, which assisted the ACC in its contracts for range residue removal and are also
headquartered in Virginia.
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1 dispose of range debris, at the Melrose test range, located near Cannon Air Force Base in New

2 Mexico. [SF, p. 7, ¶ 20; Ex. #10].

3 23. The Taxpayer’s responsibilities under the contract included inspecting the range

4 site, preparing work and quality control plans for the demilitarization and disposal of range

5 debris, determining if the materials were hazardous, rendering such materials safe or removing

6 them from the process if they could not be rendered safe, reducing the materials to marketable

7 salvage, and disposing of materials that were not marketable. [SF, p. 3, ¶ 6; Ex. #2; AF].

8 24. The Taxpayer’s services took place at a designated range holding area, usually

9 locations of one to five acres at each range site, where the military had deposited the range

10 debris. [AF, p. 3, ¶ 7 and its affidavit].

11 25. The Taxpayer was also required to submit a work site plan before it began work

12 and to submit a final report when the work was finished. [SF, p. 3, ¶ 7; Ex. #2, Ex. #4; Ex. #6;

13 Ex. #10].

14 26. The contract did not pass the title to any of the property processed or

15 demilitarized to the Taxpayer. [SF, p.4, ¶ 8; Ex. #2.; Ex. #7, Ex. #11].

16 27. The contract designates Langley as the place where supplies and services will be

17 inspected, accepted, and delivered. [SF, p. 4, ¶ 9; Ex. #4; Ex. #6; Ex. #10].

18 28. In 2012, the Taxpayer sent a team of employees to inspect the Oscura range and

19 submitted a work plan to Langley. The Taxpayer coordinated with the Oscura range’s manager

20 in preparing its work plan. [SF, p. 5, ¶ 14; Ex. #8].

21 29. After the work plan was approved, the Taxpayer inspected the Oscura range’s

22 debris for hazardous materials and remediated or removed such materials. [SF, p. 5-6, ¶ 15; Ex.

23 #9].

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1 30. The Taxpayer brought several pieces of heavy machinery to the Oscura range for

2 use in the demilitarization 5 of the remaining debris. [SF, p. 6, ¶ 16; Ex. #9].

3 31. The Taxpayer reduced 1047 tons of range debris from the Oscura range into

4 salvageable/recyclable scrap, which was sold to a salvage yard in Texas. [SF, p. 6, ¶ 17; Ex. #9].

5 32. The Taxpayer disposed of 187 tons of unsalvageable debris from the Oscura range

6 at a landfill in New Mexico. [SF, p. 6, ¶ 18; Ex. #9].

7 33. The Taxpayer’s final report on the Oscura range was delivered to the ACC at

8 Langley and to the range manager in New Mexico. [SF, p. 6-7, ¶ 18; Ex. #6].

9 34. The Taxpayer’s gross receipts for work done at the Oscura range totaled

10 $570,520.00, from August 2012 to September 2013. [SF, p. 7, ¶ 19; Ex. #8].

11 35. In 2013, the Taxpayer sent a team of employees to inspect the Melrose range and

12 submitted a work plan to Langley. The Taxpayer coordinated with the Melrose range’s manager

13 in preparing its work plan. [SF, p. 8, ¶ 21; Ex. #10; Ex. #12].

14 36. After the work plan was approved, the Taxpayer inspected the Melrose range’s

15 debris for hazardous materials and remediated or removed such materials. [SF, p. 8, ¶ 22; Ex.

16 #13].

17 37. The Taxpayer brought special equipment to the Melrose range for use in the

18 demilitarization of the remaining debris. [SF, p. 8, ¶ 22; Ex. #13].

19 38. The Taxpayer reduced 320.6 tons of range debris from the Melrose range into

20 recyclable materials, which were sold to a salvage yard in New Mexico. [SF, p. 8, ¶ 23; Ex. #12;

21 Ex. #13].

5
That is to crush or to shear the debris into pieces that meet the federal standards and regulations.
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1 39. The Taxpayer disposed of 20.7 tons of unsalvageable debris from the Melrose

2 range at a landfill in New Mexico. [SF, p. 8-9, ¶ 23; Ex. #13].

3 40. The Taxpayer’s final report on the Melrose range was delivered to the ACC at

4 Langley and to the range manager in New Mexico. [SF, p. 9, ¶ 23; Ex. #10].

5 41. The Taxpayer’s gross receipts for work done at the Melrose range totaled

6 $313,170.00, from September 2013 to February 2014. [SF, p. 9, ¶ 24; Ex. #12].

7 42. The Taxpayer did not pay New Mexico gross receipts tax on its receipts from the

8 services that it performed at the Oscura range or at the Melrose range. [SF, p. 9, ¶ 25; Ex. #14].

9 43. The Taxpayer believed its services were not subject to the gross receipts tax

10 because the work was performed for the ACC. [SF, p. 9, ¶ 25; Ex. #14].

11 DISCUSSION

12 Burden of Proof.

13 Assessments by the Department are presumed to be correct. See NMSA 1978, § 7-1-17

14 (C) (2017). Therefore, the assessment issued to the Taxpayer is presumed to be correct, and it is

15 the Taxpayer’s burden to present evidence and legal argument to show that it is entitled to an

16 abatement.

17 Gross receipts tax.

18 Anyone engaging in business in New Mexico is subject to the gross receipts tax. See

19 NMSA 1978, § 7-9-4 (2010). To engage in business in New Mexico means “carrying on or causing

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

21 (2019) 6. Gross receipts include the total amount received “from performing services in New

22 Mexico.” NMSA 1978, § 7-9-3.5 (A) (1) (2019). There is a statutory presumption that “all receipts

6
The most current version of statutes and regulations will be referenced unless there is a relevant substantive change
between it and the version in effect at the time that the Taxpayer’s services were rendered.
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1 of a person engaging in business are subject to the gross receipts tax.” NMSA 1978, § 7-9-5 (A)

2 (2019). The Taxpayer admits that it was performing range residue removal services in New

3 Mexico, which are the subject of this assessment. [SF, p. 3-9]. Therefore, the Taxpayer’s receipts

4 for engaging in business in New Mexico by providing its services to the Oscura range and to the

5 Melrose range were subject to the gross receipts tax.

6 The Taxpayer argues that it is entitled to a deduction under Section 7-9-57. [Taxpayer’s

7 Brief]. The burden is on the Taxpayer to prove that it is entitled to an exemption or deduction.

8 See Pub. Servs. Co. v. N.M. Taxation & Revenue Dep’t., 2007-NMCA-050, ¶ 32, 141 N.M. 520.

9 See also Till v. Jones, 1972-NMCA-046, 83 N.M. 743. Because of the presumption that receipts

10 are subject to the gross receipts tax, any exemption or deduction must be clearly established by

11 the taxpayer who is claiming it. See Kewanee Indus., Inc. v. Reese 1993-NMSC-006, ¶ 29, 114

12 N.M. 784. “Where an exemption or deduction from tax is claimed, the statute must be construed

13 strictly in favor of the taxing authority, the right to the exemption or deduction must be clearly

14 and unambiguously expressed in the statute, and the right must be clearly established by the

15 taxpayer.” Sec. Escrow Corp. v. State Taxation & Revenue Dep’t., 1988-NMCA-068, ¶ 8, 107

16 N.M. 540. Tax statutes should be given fair and unbiased construction, without favor or

17 prejudice to either party, so that the legislative intent is effectuated, and the public interest is

18 furthered. See Wing Pawn Shop v. Taxation & Revenue Dep’t., 1991-NMCA-024, ¶ 16, 111

19 N.M. 735. See also Chavez v. Comm’r of Revenue, 1970-NMCA-116, ¶ 7, 82 N.M. 97. See also

20 Pittsburgh & Midway Coal Mining Co. v. Revenue Div., 1983-NMCA-019, 99 N.M. 545.

21 Because exemptions to gross receipts tax are to be strictly construed, taxation is the rule. See

22 Rauscher, Pierce, Refsnes, Inc. v. Taxation & Revenue Dep’t, 2002-NMSC-013, ¶ 11, 132 N.M.

23 226.

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1 Section 7-9-54.

2 “Receipts from selling tangible personal property to” a government agency may be deducted

3 from gross receipts, but the portion of those receipts attributable to the performance of a service for

4 a government agency are not deductible. NMSA 1978, § 7-9-54 (A) (2018). See also 3.2.212.9

5 NMAC (A) (2001). The Department argues that this statute “explicitly bars any deduction from

6 gross receipts for the sale of services to government agencies,” irrespective of any other statutory

7 deductions. [Department’s Motion, p. 1]. The Department argues that Section 7-9-54 prevents the

8 Taxpayer from taking a deduction under Section 7-9-57 because its services were performed for a

9 government agency. [Department’s Motion, p. 5-8].

10 The first step in statutory interpretation is to look at the plain language of the statute and

11 to refrain from further interpretation if the plain language is not ambiguous. See Marbob Energy

12 Corp. v. N.M. Oil Conservation Comm’n., 2009-NMSC-013, 146 N.M. 24. Statutes are to be

13 applied as written unless a literal use of the words would lead to an absurd result. See N.M. Real

14 Estate Comm’n. v. Barger, 2012-NMCA-081, ¶ 7. If a statute is ambiguous or would lead to an

15 absurd result, then it should be construed in accordance with the legislative intent or spirit and

16 reason for the statute, even though it may require a substitution or addition of words. See id. See

17 also State ex rel. Helman v. Gallegos, 1994-NMSC-023, 117 N.M. 346. See also Kewanee

18 Indus., Inc., 1993-NMSC-006. When a statute is ambiguous or would lead to an absurd result, it

19 should be construed according to its obvious purpose. See T-N-T Taxi Co. v. N.M. Pub.

20 Regulation Comm’n, 2006-NMSC-016, ¶ 5, 139 N.M. 550. The heading of a statute may be

21 considered in its interpretation, but the heading does not limit or change the plain meaning of the

22 text of the statute. See State v. Gutierrez, 2020-NMCA-045, ¶ 15.

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1 Section 7-9-54 has the heading “[d]eduction; gross receipts tax; governmental gross

2 receipts tax; sales to governmental agencies.” NMSA 1978, § 7-9-54. Generally, the receipts

3 from selling tangible personal property to a governmental agency may be deducted from gross

4 receipts. See id. However, “the deduction provided by this subsection does not apply to: …that

5 portion of the receipts from performing a ‘service’ that reflects the value of tangible personal

6 property utilized or produced in performance of such service.” Id. (emphasis added). The

7 Legislature’s choice of words expresses a clear intent that the exclusions contained in Section 7-

8 9-54 only limit the availability of that section. There is no expression of an intent to disallow all

9 deductions for receipts derived from services sold to governmental agencies. Otherwise, the

10 Legislature would not have limited its scope with the use of a single determiner, “this.” The

11 Department’s own regulation also provides that “[r]eceipts from the sale of a service to a

12 governmental agency are not deductible pursuant to Section 7-9-54 NMSA 1978.” 3.2.212.9 (A)

13 NMAC (emphasis added). In its argument, the Department emphasizes the part of the regulation

14 that sale of a service to a government agency is not deductible and fails to address the part of the

15 regulation that limits it to Section 7-9-54. [Department’s Motion, p. 6]. The regulation

16 demonstrates an interpretation of the law consistent with the enactment itself, that the exclusion

17 contained in Section 7-9-54 only applied to Section 7-9-54. There is no indication in the

18 regulation that the statute was interpreted to enact a wider or broader general prohibition on all

19 receipts derived from services sold to governmental agencies. See 3.2.212.9 NMAC. Instead,

20 the Department simply echoed the language that was already contained in the statute, limiting the

21 availability of that single deduction. See id. Moreover, the Department’s argument is

22 inconsistent with the caselaw. See TPL, Inc. v. N.M. Taxation & Revenue Dep’t, 2003-NMSC-

23 007, 133 N.M. 447 (holding that Section 7-9-57 afforded a deduction for the sale of a service to a

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1 governmental agency). See also In re the Protest of Sandia Corp., Decision & Order No. 19-11,

2 p. 74-80 (Admin. Hearings Office, April 19, 2019) (non-precedential) (rejecting the

3 Department’s argument that Section 7-9-54 precluded deductions from being taken under

4 Section 7-9-57 and finding that the Department’s position was inconsistent with caselaw and its

5 own publications).

6 Section 7-9-57.

7 Generally, sales of a service to an out-of-state buyer who provides a nontaxable

8 transaction certificate or other suitable evidence may be deducted from gross receipts “unless the

9 buyer of the service or any of the buyer’s employees or agents makes initial use of the product of

10 the service in New Mexico or takes delivery of the product of the service in New Mexico.”

11 NMSA 1978, § 7-9-57 (A) (2000). The statute only requires that a buyer be out-of-state. See id.

12 It does not explicitly classify or exclude receipts based solely on the identity of a buyer, such as a

13 governmental agency. See id.

14 Out-of-state buyer.

15 The Department argues that the ACC is not an out-of-state buyer because “[i]ts

16 headquarters may be out-of-state, but it has a presence is [sic] in every state, including New

17 Mexico.” [Department’s Motion, p. 9]. The Department made a similar argument, which did not

18 prevail, in TPL. See TPL, 2003-NMSC-007, ¶ 5 (noting that the Department argued that the

19 federal government and all of its military agencies are present in New Mexico). Moreover, the

20 Department’s own regulation says that a buyer who has a presence in New Mexico may still take

21 the deduction under Section 7-9-57 when the product of the service performed in New Mexico is

22 delivered and initially used outside of New Mexico. See 3.2.215.12 (B) NMAC (2000).

23 Therefore, the fact that a governmental agency may have a presence in New Mexico does not

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1 prohibit the Taxpayer from claiming the deduction under Section 7-9-57 so long as the product

2 of the service is delivered to the buyer outside of New Mexico, and the buyer makes the initial

3 use of the product of the service outside of New Mexico.

4 Initial use or delivery of the product of the service.

5 The Taxpayer argues that the contract provided that all deliverables were deemed

6 delivered in Virginia. [Taxpayer’s Brief, p. 8]. The contract between the parties does not decide

7 the issue of state taxation. See Holt v. N.M. Dep’t. of Taxation & Revenue, 2002-NMSC-034, ¶

8 25, 133 N.M. 11 (holding “that the Department has the authority to examine information or

9 evidence in order to determine or establish an individual’s tax liability.”) The Taxpayer argues

10 that it is entitled to the deduction because the product of its service is identical to that in TPL.

11 [Taxpayer’s Brief, p. 7; Taxpayer’s Response, p. 4]. Although the Taxpayer’s situation is similar

12 to TPL, there are several crucial differences that lead to a different conclusion in this protest.

13 In TPL, the court found that concerns about competition were paramount to the

14 interpretation of the deduction because “[t]here was no requirement that the services be

15 performed in New Mexico.” TPL, 2003-NMSC-007, ¶ 30. The services in TPL were performed

16 on personal property that was not located in New Mexico prior to the contract. See id. at ¶ 22, ¶

17 25. The court did not impute use or delivery on movable personal property that was shipped into

18 New Mexico for service. See id. at ¶ 23. Unlike TPL, the range debris was in New Mexico prior

19 to the Taxpayer’s contract. [Ex. #4]. Unlike TPL, the Taxpayer was required to perform its

20 services within New Mexico, as it had to do on-site inspections and coordinate its plans with the

21 range managers. [Ex. #4]. When the range site was closed by the manager, the Taxpayer was

22 unable to perform its services. [Ex. #9]. The ACC informed bidders about New Mexico taxes,

23 which is a clear indication that the ACC intended for the services to be performed in New

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1 Mexico. [Ex. #4]. The contract required the Taxpayer to deliver copies of its final reports to the

2 range managers in New Mexico. [Ex. #4].

3 In TPL, a New Mexico company was providing demilitarization services for an out-of-

4 state governmental agency. See TPL, 2003-NMSC-007. The Taxpayer is a California company

5 providing demilitarization services in New Mexico for an out-of-state governmental agency.

6 [SF, p. 1, ¶ 1]. In TPL, the court found that the deduction under Section 7-9-57 was restricted

7 “to situations where competition with firms from other states is of paramount concern because

8 the service could be performed equally well in any state.” TPL, 2003-NMSC-007, ¶ 20. Hence,

9 according to the court’s rationale, the deduction is meant to prevent New Mexico companies

10 from being “at a competitive disadvantage in facing firms from other states if required to pay

11 gross receipts tax on these contracts.” Id., at ¶ 30. In contrast to the situation in TPL, where the

12 court determined that the deduction would ensure a level playing field for in-state companies

13 providing services in New Mexico that could have been performed elsewhere, the Taxpayer is an

14 out-of-state company providing services in New Mexico that were required to be performed in

15 New Mexico. Therefore, the Taxpayer was not at a competitive disadvantage to any other

16 company because any company that was required to perform these services in New Mexico

17 would be subject to the New Mexico gross receipts tax. See id. See also Wing Pawn Shop,

18 1991-NMCA-024, ¶ 16 (noting that tax statutes should be construed to effectuate the legislative

19 intent). See also Chavez, 1970-NMCA-015, ¶ 7. Thus, the rationale underlying the decision in

20 TPL is not applicable to the facts and claim for deduction in the Taxpayer’s protest.

21 To identify the product of the service, one must “determine what benefit the buyer

22 received”. TPL, 2003-NMSC-007, ¶ 12. See also N.M. Taxation & Revenue Dep’t v. Dean

23 Baldwin Painting, Inc., 2007-NMCA-153, ¶ 9, 143 N.M. 189. It can be difficult to distinguish

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1 between the service itself and the product of the service. See TPL, 2003-NMSC-007, ¶ 13. In

2 TPL, the court found that the product of the service was “freedom from responsibility for

3 dangerous munitions.” Id. at ¶ 16. The Taxpayer argues that the product of its service was the

4 same as that in TPL. [Taxpayer’s Brief, p. 7; Taxpayer’s Response, p. 4]. However, the

5 Taxpayer’s contracted services were more specific than those in TPL. [Ex. #4]. See also TPL,

6 2003-NMSC-007. Like TPL, the Taxpayer provided demilitarization services. [Ex. #4; SF, p. 1,

7 ¶ 1]. See also TPL, 2003-NMSC-007. Unlike TPL, the Taxpayer’s services were required to

8 occur at two specific range sites in New Mexico. [SF, p. 4-7; Ex. #4; Ex. #6; Ex. #10]. See also

9 TPL, 2003-NMSC-007. Consequently, the product of the Taxpayer’s service was remediated

10 range sites in New Mexico. When services are performed to improve a piece of real property,

11 the initial use and delivery of the product of the service is necessarily where the real property is

12 located. See TPL, 2003-NMSC-007, ¶ 21. In such situations, a buyer need not be physically

13 present to make initial use or take delivery. See id. “[T]he key factor in any of these scenarios is

14 the necessity that the services be performed upon the real property within New Mexico.” Id.

15 Since the court’s decision in TPL, the issue of the deduction under Section 7-9-57 has

16 been addressed a few times in protests. See In re the Protest of Dean Baldwin Painting, Inc.,

17 Decision & Order No. 06-08 (Admin. Hearings Office, May 8, 2006) (non-precedential). See In

18 re the Protest of JTC, Inc., Decision & Order No. 18-17 (Admin. Hearings Office, June 6, 2018)

19 (non-precedential). See In re the Protest of Advanced Envtl. Solutions, Inc., Decision & Order

20 No. 18-42 (Admin. Hearings Office, December 3, 2018) (non-precedential). See In re the

21 Protest of Sandia Corp., Decision & Order No. 19-11.

22 In Dean Baldwin Painting, the taxpayer painted airplanes that were flown into New

23 Mexico for the service, a situation more closely related to that in TPL than the Taxpayer’s

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1 situation. See In re the Protest of Dean Baldwin Painting, Inc., Decision & Order No. 06-08.

2 The hearing officer found that the initial use or delivery of the product of the service occurred in

3 New Mexico because the taxpayer’s crew took possession of the painted airplanes in New

4 Mexico and then flew them back to the taxpayer’s hub. See id. The court found that the initial

5 use of the painted airplanes, for their intended purpose of carrying passengers or cargo, did not

6 occur in New Mexico. See Dean Baldwin Painting, Inc., 2007-NMCA-153, ¶ 10. However, the

7 court upheld the conclusion that delivery of the product of the service occurred in New Mexico

8 when the taxpayer’s crew took possession of the painted airplanes, a fact that distinguished the

9 taxpayer’s case from TPL. See id. at ¶ 25-27.

10 In JTC, the taxpayer primarily painted large architectural structures and provided blasting

11 and coating services. See In re the Protest of JTC, Inc., Decision & Order No. 18-17. The

12 hearing officer found that the taxpayer was not entitled to the deduction for several reasons,

13 including that the product of the taxpayer’s service was for inclusion in a construction project in

14 New Mexico. See id. at p. 14.

15 In Advanced, the taxpayer provided services by removing hazardous materials. See In re

16 the Protest of Advanced Envtl. Solutions, Inc., Decision & Order No. 18-42. The hearing officer

17 found that the product of the service was initially used or delivered in New Mexico because it

18 involved the removal of hazardous materials from specific sites in New Mexico. See id.

19 In Sandia, the taxpayer provided research and development services on a wide variety of

20 projects, including software programs and sensors. See In re the Protest of Sandia Corp.,

21 Decision & Order No. 19-11. The hearing officer found that the products of the services were

22 delivered and initially used on projects, such as the space shuttle, outside of New Mexico. See

23 id. Consequently, the taxpayer was entitled to take the deduction. See id.

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1 When personal property is shipped into New Mexico for service, a taxpayer’s eligibility

2 for the deduction under Section 7-9-57 will depend on where the product of that service is

3 initially used and delivered, that is whether it occurs inside of or outside of New Mexico. See

4 TPL, 2003-NMSC-007. See also Dean Baldwin Painting, Inc., 2007-NMCA-153. When the

5 product of the service is initially used and delivered outside of New Mexico, a taxpayer is

6 entitled to the deduction under Section 7-9-57. See TPL, 2003-NMSC-007. See also In re the

7 Protest of Sandia Corp., Decision & Order No. 19-11. When the product of the service directly

8 involves a specific location inside of New Mexico, then the product of the service is initially

9 used or delivered at that location within New Mexico, and a taxpayer is not entitled to take the

10 deduction under Section 7-9-57. See TPL, 2003-NMSC-007. See also In re the Protest of JTC,

11 Inc., Decision & Order No. 18-17. See also In re the Protest of Advanced Envtl. Solutions, Inc.,

12 Decision & Order No. 18-42. The product of the Taxpayer’s service is two range sites located

13 within New Mexico that have been remediated of their range debris. As remediated range sites

14 in New Mexico cannot be used or delivered anywhere other than in New Mexico, the ACC’s

15 initial use or delivery occurred within New Mexico, and the Taxpayer is not entitled to the

16 deduction. See NMSA 1978, § 7-9-57.

17 Assessment of Penalty.

18 Tax includes, by definition, the amount of tax principal imposed and, unless the context

19 otherwise requires, “the amount of any interest or civil penalty relating thereto.” NMSA 1978, §

20 7-1-3 (Z) (2019). See also El Centro Villa Nursing Ctr. v. Taxation and Revenue Department,

21 1989-NMCA-070, 108 N.M. 795. Penalty “shall be added to the amount assessed” when a tax is

22 not paid on time due to negligence. See NMSA 1978, § 7-1-69 (2007) (emphasis added).

23 However, a taxpayer will generally not be negligent when the taxpayer relied on advice from tax

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1 counsel or an accountant. See 3.1.11.11 NMAC (2001). The Taxpayer did not argue or provide

2 evidence to show that it was not negligent. Therefore, penalty was properly assessed.

3 Assessment of Interest.

4 Interest “shall be paid” on taxes that are not paid on or before the date on which the tax is

5 due. NMSA 1978, § 7-1-67 (A). The word “shall” indicates that the assessment of interest is

6 mandatory, not discretionary. See Marbob, 2009-NMSC-013, ¶ 22. The assessment of interest is

7 not designed to punish taxpayers, but to compensate the state for the time value of unpaid

8 revenues. Because the tax was not paid when it was due, interest was properly assessed.

9 CONCLUSIONS OF LAW

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

11 jurisdiction lies over the parties and the subject matter of this protest. See NMSA 1978, § 7-1B-8.

12 B. The hearing was timely set and held within 90 days of the protest. See id.

13 C. The Taxpayer’s receipts for performing services in New Mexico were subject to the

14 gross receipts tax. See NMSA 1978, §§ 7-9-3.5, 7-9-4, and 7-9-5.

15 D. Sales of services to out-of-state governmental agencies may be eligible for deduction

16 under Section 7-9-57 as Section 7-9-54 does not abrogate or limit the application of deductions

17 under any other subsection. See NMSA 1978, § 7-9-54 and § 7-9-57.

18 E. Sales of services to governmental agencies that have a presence in New Mexico may

19 be eligible for the deduction under Section 7-9-57 if the product of the service is delivered and

20 initially used outside of New Mexico. See NMSA 1978, § 7-9-57. See also 3.2.215.12 (B) NMAC.

21 F. The product of the Taxpayer’s service was remediated range sites in New Mexico;

22 therefore, the buyer made initial use or took delivery of the product of the service in New Mexico,

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1 and the Taxpayer was not entitled to the deduction under Section 7-9-57. See NMSA 1978, § 7-9-

2 57. See also TPL, 2003-NMSC-007.

3 G. The Taxpayer failed to establish that it was entitled to take the deduction and failed

4 to overcome the presumption that the assessment was correct. See Pub. Servs. Co., 2007-NMCA-

5 050, ¶32. See also Till, 1972-NMCA-046. See also NMSA 1978, § 7-1-17.

6 For the foregoing reasons, the Taxpayer’s protest IS DENIED. IT IS ORDERED that

7 Taxpayer is liable for the total assessment of $61,167.87. Interest continues to accrue until tax

8 principal is paid.

9 DATED: March 17, 2021.
10 Dee Dee Hoxie
11 Dee Dee Hoxie
12 Hearing Officer
13 Administrative Hearings Office
14 P.O. Box 6400
15 Santa Fe, NM 87502

16 NOTICE OF RIGHT TO APPEAL
17 Pursuant to NMSA 1978, Section 7-1-25 (2015), the parties have the right to appeal this

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

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

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

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

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

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

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

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

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

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

3 CERTIFICATE OF SERVICE
4 On March 17, 2021, a copy of the foregoing Decision and Order was submitted to the
5 parties listed below in the following manner:
6 Email Email

7 INTENTIONALLY BLANK
8
9 John Griego
10 Legal Assistant
11 Administrative Hearings Office
12 P.O. Box 6400
13 Santa Fe, NM 87502

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