The rule that my on-reservation federal contract work is taxable came out after I did the work — can it really be applied to those earlier years?

Plain-English summary

Compliance Technology is an asbestos-abatement consultant — it writes specifications, monitors removal contractors, and performs inspections. On audit, the Department assessed it gross receipts and compensating tax for 1990–1992. By the time of the hearing, the only piece left in dispute was gross receipts tax on $17,290.27 the consultant earned as a contractor for the Bureau of Indian Affairs (BIA) on the Navajo reservation in New Mexico (about $1,037 of tax, plus interest; the Department had already waived the penalty on this point).

In October 1994, the New Mexico Supreme Court decided Blaze Construction Co. v. Taxation and Revenue Department, holding that a contractor doing work for a federal agency (like the BIA) on a reservation is subject to gross receipts tax. The tribal (Indian) preemption doctrine doesn't apply; the ordinary federal-preemption rule does — and it permits a non-discriminatory state tax on federal contractors unless Congress has explicitly barred it. Because the consultant's work came before Blaze, the question was whether Blaze applies retroactively.

Hearing Officer Gerald Richardson held that it does, applying the three-factor retroactivity test from Kennecott Copper Corp. v. Chavez:

• New rule of law? Yes — Blaze answered a first-impression question (which preemption analysis governs a federal-agency contractor working on a reservation) and even reversed two Court of Appeals decisions. So the analysis proceeds.
• Is retroactivity inequitable? No. New Mexico presumes all business receipts are taxable (Section 7-9-5), and a taxpayer must clearly establish an exemption (Reed v. Jones). The consultant had no applicable exemption, and its diligence was weak: it leaned on the BIA's assurance (the Department is the more reliable authority on the taxes it administers), couldn't identify who, when, or what it supposedly asked at the Department, never requested a written ruling under Section 7-1-5 (the mechanism, reviewed by the Attorney General or Department counsel, that would have estopped the Department under Section 7-1-60), and never consulted an accountant or attorney. Aware of a genuine question and choosing not to pay anyway, it took the risk. Even-handed enforcement also cuts against exempting it when other BIA contractors may have paid.
• Does retroactivity further the rule? Yes. The general federal-preemption rule (no preemption without an explicit federal enactment) provides certainty, unlike the discretionary Indian-preemption exception; applying Blaze retroactively furthers that certainty.

So Blaze applied retroactively, the BIA receipts were taxable, and interest under Section 7-1-67 was mandatory. (Blaze's holding that gross receipts tax reaches federal-agency reservation contractors is also reflected in this collection's later decision on Centex Bateson, D&O 96-14.)

What this means for you

Contractors working for federal agencies on tribal land

Doing work for a federal agency (BIA, IHS, etc.) on a reservation does not, by itself, exempt you from New Mexico gross receipts tax. Under Blaze, the ordinary federal-preemption rule applies, so the tax stands unless Congress has expressly barred it or the tax discriminates. Tribal (Indian) preemption generally applies only when you contract directly with a tribe, not a federal agency.

When the law is genuinely unsettled

A court decision clarifying an unsettled tax question can be applied retroactively to earlier years. That means betting on the taxpayer-friendly answer while the law is in flux is risky: if the courts later go the other way, you can owe tax and interest for those back years. Interest is not waived just because the law was unclear when you acted.

How to actually protect yourself on a doubtful tax question

The reliable protection is a written ruling from the Department under Section 7-1-5 — it's reviewed by counsel/the Attorney General and, under Section 7-1-60, estops the Department from later changing its position for you. Oral assurances (from the agency you contract with, or even an unidentified Department employee) give you nothing. If you don't get a written ruling, get professional tax advice and consider paying under protest rather than simply not paying.

Common questions

Q: My contract was with a federal agency on a reservation. Isn't that tax-exempt?
A: Not under Blaze. Contracting with a federal agency (not directly with a tribe) means the ordinary federal-preemption rule applies, and New Mexico may impose a non-discriminatory gross receipts tax unless Congress has barred it.

Q: The rule came out after I did the work. How can it apply to me?
A: A decision resolving an unsettled question can apply retroactively under the Kennecott factors. Here, retroactivity wasn't inequitable given the presumption of taxability and the taxpayer's thin diligence, and it furthered the certainty the general rule provides.

Q: I was told by the agency (or a Department employee) that I wasn't taxable. Doesn't that protect me?
A: No. Oral advice — even from a Department employee — is not binding. Only a written ruling under Section 7-1-5 estops the Department (Section 7-1-60). Without one, you bear the risk that your position is wrong.

Citations and references

Statutes:

• § 7-9-5 NMSA 1978 — presumption that all business receipts are subject to gross receipts tax
• § 7-1-5 NMSA 1978 — a taxpayer may request a written ruling from the Secretary, reviewed by the Attorney General or Department counsel
• § 7-1-60 NMSA 1978 — a written ruling estops the Department from taking a different position
• § 7-1-67 NMSA 1978 — interest is imposed whenever tax is not paid when due
• § 7-1-24 NMSA 1978 — a taxpayer's right to file a written protest (basis for jurisdiction)

Cases cited:

• Blaze Construction Co. v. Taxation and Revenue Department, 118 N.M. 647, 884 P.2d 803 (1994) — gross receipts tax applies to a contractor doing work for a federal agency on a reservation; Indian preemption does not apply
• Kennecott Copper Corp. v. Chavez, 109 N.M. 439, 786 P.2d 53 (Ct. App. 1990) — three-factor test for retroactive application of a decision
• United States v. New Mexico, 455 U.S. 720 (1982) — federal-preemption analysis for federal contractors
• Reed v. Jones, 81 N.M. 481, 468 P.2d 882 (Ct. App. 1970) — a taxpayer must clearly establish a claimed exemption

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Compliance Technology
• Decision PDF: D&O 95-06

Original ruling text

BEFORE THE HEARING OFFICER
OF THE TAXATION AND REVENUE DEPARTMENT
OF THE STATE OF NEW MEXICO

IN THE MATTER OF THE PROTEST
OF COMPLIANCE TECHNOLOGY,
I.D. NO. 02-146329-00 8, PROTEST
TO ASSESSMENT NO. 1740452. NO. 95-06

DECISION AND ORDER

This matter came on for hearing before Gerald B. Richardson, Hearing Officer, on

August 9, 1995. Compliance Technology (hereinafter "Taxpayer") was represented by its owner,

Mr. Craig Fields. The Taxation and Revenue Department (hereinafter Department) was

represented by Frank D. Katz, Chief Counsel.

Based upon the evidence and arguments presented, IT IS DECIDED AND ORDERED as

follows:

FINDINGS OF FACT

1. The Taxpayer works as a consultant in the area of asbestos abatement. As a

consultant, the Taxpayer writes specifications for asbestos abatement jobs, monitors the work of

contractors who remove asbestos and does inspections for asbestos.

2. As a result of an audit, the Department issued Assessment No. 1740452 to the

Taxpayer, assessing $4591.53 in gross receipts tax, $75.00 in compensating tax, $466.66 in penalty
and $1,523.04 in interest for a total of $6,656.23.

3. The assessment covered the reporting period of July 1, 1990 through December 31,
   1992.

4. The assessment was mailed to the Taxpayer on December 28, 1993 and the
   Taxpayer filed a written protest to the assessment on January 28, 1994.

5. At the time of the hearing of the Taxpayer's protest the only issue remaining for
   determination is whether the Taxpayer is liable for gross receipts tax and interest upon $17,290.27
   of receipts it received as a contractor for the Bureau of Indian Affairs (BIA) for work performed on

the Navajo reservation within New Mexico. The amount of gross receipts tax assessed upon the

Taxpayer's receipts from the BIA amounts to $1,037.42. The Department had already agreed that

penalty should not be applied to the Taxpayer regarding the under reporting of taxes related to this

issue.

6. The Taxpayer was informed by the BIA that it was not subject to gross receipts tax

on its receipts from its contracts with the BIA. The Taxpayer claims to have received conflicting

advice from Department personnel concerning the taxability of its receipts from the BIA but cannot

say who or when he received such advice and never sought a written ruling from the Department on

this matter. The Taxpayer never sought an opinion on taxability from a professional tax advisor,

such as an accountant or an attorney.

DISCUSSION
In October, 1994, the New Mexico Supreme Court issued its opinion in Blaze Construction

Co. v. Taxation and Revenue Department, 118 N.M. 647, 884 P.2d 803 (1994), which held that

the Indian preemption doctrine did not apply to preclude the imposition of gross receipts tax on

contractors performing work for the BIA upon Indian reservations in New Mexico. Instead, the

court applied the standard federal preemption doctrine which provided that in the absence of a

congressional enactment barring the imposition of state tax, states may impose non-discriminatory
taxes upon contractors performing work for the United States. Prior to the issuance of this

decision, there was no law directly on point on this issue and it would be safe to say that this issue
of law was unsettled and the subject of dispute among tax practitioners, taxing authorities and the

taxpaying public. The issue presented herein is whether the holding in Blaze Construction should
be given retrospective effect and be applied to other taxpayers and for tax periods which antedate

the issuance of the decision.

In determining whether a decision should be given retrospective effect, the following factors

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must be considered:
(1) whether the decision establishes a new principle of law, either by overruling clear
precedent on which litigants may have relied or by deciding an issue of first
impression whose resolution was not clearly foreshadowed;

(2) the inequity imposed by retrospective application; and

(3) the merits and demerits of each case must be weighed by looking to the history of the
rule in question, the rule's purpose and effect, and whether retrospective operation of
the rule will further or retard its operation.

Kennecott Copper Corp. v. Chavez, 109 N.M. 439, 786 P.2d 53 (Ct. App. 1990).

With respect to the first issue, whether Blaze establishes a new principle of law, the

Department argues that it did not, since the court was merely applying the preemption analysis

applicable to contractors with the federal government which was established in United States v.

New Mexico, 455 U.S. 720 (1982), thus clearly foreshadowing the ruling reached by the court. I

have little doubt, however, that in issuing its decision in Blaze, that the New Mexico Supreme

Court was deciding a matter of first impression. Blaze is the first case to determine whether the

standard federal preemption analysis applied by the Court in United States v. New Mexico should

be applied to contractors for a federal agency performing work on an Indian reservation to benefit

an Indian tribe, or whether the Indian preemption analysis should be applied. The best evidence

that the result of the Blaze decision was not clearly foreshadowed lies in the fact that the New
Mexico Supreme Court reversed the two New Mexico Court of Appeals decisions rendered in the

consolidated case before the court, which had determined that the Indian preemption analysis was

applicable and that the tax was preempted under that analysis. Thus, the Blaze decision did

establish a new principle of law and we may proceed further with the analysis of whether it should
be retroactively applied.

The second issue to be examined is the inequity imposed by retroactive application of the
decision. The Taxpayer contends that it is inequitable to require it to pay taxes under a principle

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which was not clearly established at the time that the taxable events occurred. In analyzing this

issue, however, it is important to consider the context of this dispute, which involves the issue of

whether the state is entitled to receive public monies in the form of taxes. Section 7-9-5 of the

Gross Receipts and Compensating Tax Act provides as follows:
To prevent evasion of the gross receipts tax and to aid in its administration, it is presumed
that all receipts of a person engaging in business are subject to the gross receipts tax.

Thus, the stated public policy is a presumption of taxability, and to avoid the imposition of tax, a

taxpayer must clearly establish its right to an exemption or deduction from tax. Reed v. Jones, 81

N.M. 481, 468 P.2d 882 (Ct.App. 1970). There is no applicable exemption or deduction from

gross receipts tax which applied to the Taxpayer's activities at the time the Taxpayer received the

receipts in question. Of course, if the imposition of tax was preempted by the operation of federal

law, the state would be barred from imposing its tax, but there was no clearly established law upon

which the Taxpayer could have relied to establish its exemption from tax under the circumstances

of this case because no court had addressed the specific issue presented.

It is against this backdrop of a public policy in favor of taxation that we must judge the

Taxpayer's argument of inequity. The Taxpayer's efforts to determine whether it was taxable prior

to determining not to report and pay taxes are not particularly impressive. Although the Taxpayer

claimed that it was informed by the BIA that it was not taxable, the Department should be

considered a more reliable authority on the issue of the applicability of the laws which it is charged
to administer. The Taxpayer claims it received conflicting advice from Department personnel on

the issue of taxability, but the Taxpayer was unable to give any specifics as to who in the

Department was asked, when they were asked, and what information was given to the Department

employees upon which their opinion was based. Even viewing this testimony generously, at best,

the Taxpayer received conflicting advice about taxability, which should have raised a serious

question as to whether it could be held liable for tax. There is a procedure for taxpayers to follow

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when they need to obtain a definitive answer as to taxability. They may request a ruling from the

Secretary pursuant to Section 7-1-5 NMSA 1978. Rulings are required to be in writing and to be

reviewed by the Attorney General or the legal counsel of the Department. Section 7-1-5(C)

NMSA 1978. This ensures that with respect to important issues involving public revenues, that the

determination of taxability is thoroughly reviewed by persons competent to determine difficult

issues of tax law, rather than an employee who may not understand the nuances of the law in

complex areas such as the one at issue herein. When a taxpayer receives such a ruling from the

Department, the legislature has provided protection for the taxpayer in the form of estoppel against

the state taking a different position from that stated in the ruling. Section 7-1-60 NMSA 1978.

If the Taxpayer did not wish to seek a written ruling from the Department, the Taxpayer

could have also sought the advice of an attorney or an accountant to advise him on this matter.

This was not done either.

Although it is admitted that the law in this area was not clearly established, given the

presumption of taxability which exists, the Taxpayer's efforts to determine taxability were not

sufficient to tip the scales of equity in its favor on this issue. It is simply too convenient to decide

not to pay taxes if there is any question about it, and the law does not support the choice made by

the Taxpayer under these circumstances. Although the Taxpayer was not aware of the litigation

surrounding the issue herein, the Taxpayer was aware that there was substantial question as to the

taxability of its activities, and by electing to not report or pay taxes without receiving any

authoritative answer on this issue, the Taxpayer chose to take the risk that it could be held liable for

taxes in the future on its activities.

The issue of the equities involved in retroactive enforcement should also be viewed in the

context of the tax department's obligation to enforce tax laws in an even-handed manner. Public

perception that the tax laws are administered fairly is essential to the functioning of a self-reporting

tax system such as ours. Certainly, there is some inequity if the Blaze Construction Company is

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held liable for taxes on its receipts from contracts with the BIA, but other taxpayers are allowed an

exemption for the same time period prior to the finalization of the Blaze litigation. One must ask

how equitable it is to exempt the Taxpayer in the instant case when there may well have been other

BIA contractors operating at the same time who paid tax on their receipts from other BIA contracts?

The equities simply do not weigh in favor of protecting this Taxpayer from retroactive application

of the rule announced in Blaze.

The final step in the retroactivity analysis is to look at the history of the rule in question, the

rule's purpose and effect and whether retrospective operation of the rule will further or retard its

operation. The rule which was applied by the court in Blaze is the general rule that with respect to

the federal preemption of state tax upon federal contractors, that in the absence of some explicit

federal enactment which prohibits the imposition of tax, there is no preemption. The Indian

preemption rule is a limited exception to the general law about federal preemption, which implies

preemption in the absence of an explicit federal enactment. The court in Blaze gave precedence to

the general rule over the limited exception. The purpose and effect of the general rule is to strike

an appropriate balance between state and federal governmental powers under our federal system

and to provide certainty in the determination of whether federal preemption exists. Preemption can

be readily determined under the general rule, because there is either an explicit federal enactment

prohibiting state taxation, or there is not. The Indian preemption exception is much more difficult

to ascertain because it involves the exercise of discretion and judgment in weighing the competing

state, federal and tribal interests in determining whether preemption exists. The purpose of the

general rule is furthered by the retroactive application of the Blaze decision because there were no

explicit federal enactments barring the imposition of the tax in question and certainty in the area of

taxation is furthered by the application of this general rule.

Based upon all of these considerations, it is determined that the Blaze decision is

retroactively applicable to the Taxpayer.

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With respect to the imposition of interest, Section 7-1-67 mandates that interest be imposed

any time that tax is not paid when due. Since the underlying tax was not paid when it was due,

interest is owing on the unpaid tax liability until it is paid.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment No. 1740452 and

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

2. As determined in Blaze Construction Co. v Taxation and Revenue Department,

the Taxpayer was subject to gross receipts tax upon its receipts from performing services for the

Bureau of Indian Affairs on Indian reservation lands within New Mexico.

3. The ruling in Blaze Construction Co. v. Taxation and Revenue Department should

be retroactively applied to the Taxpayer because it is not inequitable to do so and because the

purposes of the rule about when federal preemption is applied are furthered by the application of the

rule retrospectively.

4. Interest was properly assessed against the Taxpayer for failure to pay tax when it

was due.

For the foregoing reasons, the Taxpayer's protest IS HEREBY DENIED.

DONE, this 30th day of August, 1995.

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