I build railroad track and separately bill my customer for materials — can I take New Mexico's railway-roadbed materials deduction on the materials portion?

Plain-English summary

Mountain States Contracting, Inc., an Arizona corporation whose only business is building and rebuilding railroad track and roadbed, reconstructed about 1,680 feet of mainline track and two turnouts for Chino Mines Company near its smelter at Hurley, New Mexico, under a 1993 fixed-price contract. The job specified new rail, ties, spikes, bolts, and crushed-rock ballast, plus excavation, grading, and tamping.

For September 1993, the contractor billed Chino in four statements — $134,940 for labor and $134,760 for materials, listed separately — and charged and paid gross receipts tax on both. It then filed a refund claim for the tax on the materials portion (originally $12,032.35, later agreed to be $7,411.80), relying on a brand-new deduction. The Department denied the claim, and the contractor protested.

The deduction, Section 7-9-51.1 (enacted in 1993), says: "Receipts from the sale of materials necessary for the construction or reconstruction of railway roadbeds may be deducted from gross receipts." Whether it applied to a contractor was a matter of first impression.

Hearing Officer Gerald Richardson denied the refund:

• Materials installed into a construction project are part of a taxable service, not a sale of materials. Section 7-9-3(K) treats tangible personal property that becomes an ingredient or component of a construction project as part of the construction service — it keeps its character as "materials" only when sold to someone else who will incorporate it. Chino did not buy loose materials; it contracted to receive a rebuilt, serviceable rail line. So the contractor's receipts were for a service, and Section 7-9-51.1 (a deduction for selling materials) did not reach them.
• Separately stating the materials on the invoice didn't matter. What the contractor provided was still the service of reconstructing the roadbed.
• The deduction isn't rendered meaningless. Harmonizing Section 7-9-51.1 with the definitions, the deduction operates when materials are bought independently of the services of installing them — for example, by a railroad that does its own track work. (The contractor itself had used the related Section 7-9-51 deduction, via a nontaxable transaction certificate, to buy its ballast tax-free.)
• No illegal discrimination. The contractor argued this lets big railroads with in-house crews buy materials tax-free while a small track owner who hires a contractor cannot. The hearing officer agreed the treatment differs but found it lawful: tax classifications get the highly deferential rational-basis review (Madden v. Kentucky; Michael J. Maloof & Co.; C & D Trailer Sales), and the contractor failed to negate every conceivable basis — the Legislature could rationally have meant to benefit railroads doing their own reconstruction.

What this means for you

Construction contractors (of any kind) in New Mexico

This is the central New Mexico rule for contractors: when you incorporate materials into a construction project, those materials become part of your taxable construction service — you don't get to carve the materials out as a nontaxable "sale of materials," and separately itemizing them on the invoice changes nothing. Buy your materials tax-free up front using a nontaxable transaction certificate (Section 7-9-51) instead of trying to deduct them on the back end.

Railroads and track owners

The Section 7-9-51.1 railway-roadbed materials deduction is aimed at the party that buys the materials to build or rebuild its own roadbed, not at a contractor selling a finished track job. If you hire a contractor, the contractor's whole charge — labor and materials — is generally subject to gross receipts tax; if you buy materials and do the work yourself, the materials receipts can qualify for the deduction.

Accountants and tax professionals

The decision harmonizes a targeted deduction (Section 7-9-51.1) with the long-standing "materials-become-service" rule in Section 7-9-3(K) by reading the deduction to apply only to independent materials sales. It's also a useful example of the deferential rational-basis standard for equal-protection challenges to tax classifications — the taxpayer bears the burden to negate every conceivable rational basis.

Common questions

Q: I list materials separately from labor on my invoices. Doesn't that make the materials a nontaxable sale?
A: No. Under Section 7-9-3(K), materials you install into a construction project are part of your taxable construction service regardless of how you itemize them. Separate billing does not convert the service into a sale of materials.

Q: Then who can use the Section 7-9-51.1 railway-roadbed deduction?
A: A party buying materials independently to construct or reconstruct its own railway roadbed — typically a railroad doing its own track work — not a contractor whose receipts are for the construction service.

Q: How should a contractor handle materials to avoid tax on them?
A: Buy them tax-free at purchase by giving your supplier a nontaxable transaction certificate under Section 7-9-51 (as this contractor did for its ballast). You then owe gross receipts tax on your full contract receipts, but you avoid tax on the front-end purchase.

Q: Isn't it unfair that a railroad doing its own work gets a break a hiring customer doesn't?
A: The decision acknowledges the difference but holds it is not illegal discrimination. Tax classifications are reviewed under a very deferential rational-basis standard, and the Legislature could reasonably choose to benefit railroads that do their own roadbed work.

Citations and references

Statutes:

• § 7-9-51.1 NMSA 1978 — deduction for receipts from the sale of materials necessary for the construction or reconstruction of railway roadbeds (Laws 1993, ch. 31, § 14)
• § 7-9-3(K) NMSA 1978 — definition of "service"; installed construction materials are part of the construction service, but materials sold to a construction business are a sale of tangible personal property
• § 7-9-3(C) NMSA 1978 — definition of "construction," including roads, mining appurtenances, and similar work
• § 7-9-51 NMSA 1978 — deduction for sales of construction materials to construction businesses that deliver a nontaxable transaction certificate

Cases cited:

• Madden v. Kentucky, 309 U.S. 83 (1940) — deferential standard for equal-protection challenges to tax classifications
• Michael J. Maloof & Co. v. Bureau of Revenue, 80 N.M. 485, 458 P.2d 89 (1969) — New Mexico's adoption of that standard
• C & D Trailer Sales v. Taxation and Revenue Department, 93 N.M. 697, 604 P.2d 835 (Ct. App. 1979) — courts review only whether a rational basis supports a tax classification
• Gonzales v. Middle Rio Grande Conservancy District, 106 N.M. 426, 744 P.2d 554 (Ct. App. 1987) — the Legislature is presumed aware of existing law
• First National Bank of Santa Fe v. Southwest Yacht & Marine Supply Corp., 101 N.M. 431, 684 P.2d 517 (1984) — statutes on the same subject are construed to give effect to each

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Mountain States Contracting, Inc.
• Decision PDF: D&O 96-04

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
MOUNTAIN STATES CONTRACTING, INC.,
I.D. NO. 02-067325-00 6, PROTEST
TO DENIAL OF CLAIM FOR REFUND. No. 96-04

DECISION AND ORDER

This matter came on for formal hearing on December 6, 1995, before Gerald B.

Richardson, Hearing Officer. Mountain States Contracting, Inc. (hereinafter "Taxpayer") was

represented by Paul D. Barber, Esq. The Taxation and Revenue Department (hereinafter

"Department") was represented by Frank D. Katz, Chief Counsel. The parties have graciously

granted an additional three weeks to render the decision herein.

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

AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer is an Arizona corporation whose sole business is the construction

and repair and reconstruction of railroad tracks and roadbeds.

2. A railroad roadbed means what trains run on and includes everything from the

ballast upon which the ties and track are laid on, to the ties, rails, spikes and other components of

a rail line upon which trains run.

3. In 1993, the Taxpayer entered into a contract with Chino Mines Company to

replace approximately 1,680 feet of mainline railroad track and railroad bed as well as two

railroad turnouts located near the Chino Mines Company smelter at Hurley, New Mexico.

4. The contract was a fixed price contract which contained a "Schedule of Charges"

which specified the price for the mainline track reconstruction on the basis of $1,675 track/feet at
$94 per track/foot and specified the price for the turnout reconstruction at $18,250 per turnout.

The contract specified the quality of rail, joint bars, tie plates and rail anchors; specified that new

track bolts and track spikes be used; specified that new pressure treated creosote crossties of a

specified dimension be used and that new crushed rock ballast be used in the project. The

contract also specified certain work such as the removal and disassembly of existing trackage and

the hauling of this material to a designated area, the excavation of the track area to a suitable

subgrade and the bringing in of new crushed rock ballast to raise the track to the proper grade and

alignment and the tamping of a minimum of 6" of ballast below the ties of the reconstructed

railroad track.

5. The contract specified that on the tenth day of each month, the Taxpayer would

render to Chino Mines Company a statement for "all Work performed during the previous month"

which would be based upon the Schedule of Charges and which would be supported by such

vouchers or other evidence as Chino may require.

6. During the month of September, 1993, the Taxpayer invoiced Chino Mines

Company, in four separate statements, a total of $134,940 for labor and $134,760 for materials,

pursuant to its contract with Chino Mines Company. Although the materials were listed by the

various materials used in the work, there was no breakdown of the expense for each type of

material used in the project, only a total for all materials. Similarly, the labor was invoiced as

merely a total charge and was not broken down into more detail.

7. It was the Taxpayer's practice with all of its customers to separately state its

charges for labor and materials when it invoiced its customers.

8. The Taxpayer charged Chino Mines Company gross receipts tax upon both the

materials and labor portions of the amounts it invoiced Chino Mines Company. It also reported

and paid gross receipts to the Department for the September, 1993 reporting period, upon its

receipts from the Chino Mines Company for the materials and labor involved in its contract with

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Chino.

9. On February 25, 1994, the Taxpayer submitted to the Department a claim for

refund, requesting a refund in the amount of $12,032.35 in gross receipts tax, representing the

gross receipts taxes it believed that it paid for the September, 1993 reporting period on the

materials portion of its receipts from Chino Mines Company for that reporting period.

10. On May 6, 1994, the Department denied the Taxpayer's claim for refund.

11. On May 16, 1994, the Taxpayer protested the Department's denial of its claim for

refund.

12. The Department's original basis for denying the Taxpayer's refund claim, the

issuance of an improper type of non-taxable transaction certificate, was admittedly incorrect, and

this matter was clarified through correspondence between the Taxpayer and the Department. By

letter dated December 28, 1994, the Department then proposed to grant the refund claim based

upon the deduction found at Section 7-9-51.1 NMSA 1978, upon receiving a new application for

refund, an amended return and a protest withdrawal form for the Taxpayer's pending protest. The

Department wrote the Taxpayer again, on January 5, 1995, informing the Taxpayer that it had

erroneously concluded that the deduction found at Section 7-9-51.1 NMSA applied to the

Taxpayer's circumstances and it offered an explanation of why the deduction claimed was not

available.

13. The Taxpayer agreed that it had not calculated the amount of its original claim for

refund correctly and that the correct amount of its refund claim should be $7,411.80.

DISCUSSION
This case presents a matter of first impression, the operation of the deduction found at

Section 7-9-51.1 NMSA 1978 (1995 Repl.Pamp.). This deduction was enacted by the 1993

Legislature1 and provides as follows:

1
Laws 1993, ch. 31, §14

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Receipts from the sale of materials necessary for the construction or reconstruction of
railway roadbeds may be deducted from gross receipts.

While there is no doubt that the materials at issue qualify as materials necessary for the

construction or reconstruction of railway roadbeds, the availability of the deduction claimed by the

Taxpayer also requires us to examine how that deduction interacts with other provisions of the

Gross Receipts and Compensating Tax Act, specifically the definitions of "service" and

"construction" found at Section 7-9-3(C) and (K), NMSA 1978 (1993 Repl.Pamp.), respectively.

Section 7-9-3(K) defines "service" in pertinent part as follows:
"service" means all activities engaged in for other persons for a consideration, which
activities involve predominantly the performance of a service as distinguished
from selling of leasing property . . . . "Service" includes construction activities
and all tangible personal property that will become an ingredient or component
part of a construction project. Such tangible personal property retains its
character as tangible personal property until it is installed as an ingredient or
component part of a construction project in New Mexico. However, sales of
tangible personal property that will become an ingredient or component part of a
construction project to persons engaged in the construction business are sales of
tangible personal property; . . . . (emphasis added)

This provision makes clear that if tangible personal property is sold to persons engaged in

the construction business, it retains its character as tangible personal property only until it is

actually installed as an ingredient or component part of a construction project. At that point it

becomes part of the construction service being sold by the contractor engaged in the construction

business. The last two sentences of this definition, which establish that the construction materials
do not make this transformation into being part of the construction service until it is incorporated

into the construction project are designed to correspond to the deduction provided at Section
7-9-51 NMSA 1978, which allows sellers of tangible personal property to persons engaged in the

construction business to deduct their receipts if the purchaser delivers a non-taxable transaction
certificate which certifies that the purchaser will incorporate the materials into a construction

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project that will be subject to gross receipts tax upon its completion or sale.2

Section 7-9-3(C) NMSA 1978 (1993 Repl. Pamp.) sets out the definition of

"construction". In pertinent part it provides:
"construction" means building, altering, repairing or demolishing in the ordinary course of
business any:
(1) road, highway, bridge, parking area or related project;
...

(11) shaft, tunnel or other mining appurtenance; or

(13) similar work; . . .

Although railway roadbeds are not specifically mentioned, they can be considered similar

work to roads and highways, or possibly a mining appurtenance, since cars operated on rails have

been commonly used to move mined materials out of mines and from mine sites to processing

facilities, such as the copper smelter involved in this case. If there is any question that the

railroad roadbed project was a construction project reference to the deduction claimed by the

Taxpayer, Section 7-9-51.1, which refers to "materials necessary for the construction or

reconstruction of railway roadbeds" (emphasis added) should remove that doubt.

With this statutory background in mind, we can now review the arguments of the parties.

The Taxpayer argues that it is entitled to the deduction at Section 7-9-51.1 because it falls

squarely within the clear and unambiguous language of the provision which provides a deduction
for receipts from the sale of materials used in railway roadbed construction or reconstruction. It

cited to the evidence that the materials used in the project for Chino Mines Company were

separately stated on the invoices to support its argument that it was selling materials to Chino

which fall clearly within the provisions of the deduction. It further argues that even if Sections

2
This Taxpayer benefitted from this deduction with respect to its purchase of the ballast used in this project. It
purchased the ballast from Southwest Transit Mix in Silver City. Because the Taxpayer had delivered a non-taxable
transaction certificate to Southwest Transit Mix, Southwest was able to claim the deduction provided at Section 7-9-51 and no
gross receipts tax was charged to the Taxpayer upon this purchase.

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7-9-3 (C) and (K) are taken into consideration, they are general provisions which apply to

construction in general, but Section 7-9-51.1 is a specific deduction which applies to the facts of

this case and under the well established rule of statutory construction that specific statutory

provisions govern over more general provisions, it is entitled to the deduction claimed. The

Taxpayer also cites to the specific reference in the deduction to "construction or reconstruction of

railway roadbeds" as evidence that the legislature was aware that these materials would be used in

railway roadbed construction when it enacted the deduction as a further grounds for applying the

specific deduction over the general provisions concerning construction materials.

The Department argues that the availability of the deduction turns upon what is being sold,

whether it is construction services or only construction materials. In this case, it is clear from the

contract between the Taxpayer and Chino Mines that Chino has contracted for the construction of

railway roadbed. Since Section 7-9-3(K) clearly establishes that all materials which will become

an ingredient or component part of a construction project are a service and not a tangible, the

deduction is not available since the Taxpayer's receipts are from the sale of a service and not from

the sale of materials.

Although the Taxpayer's argument has an immediate facial appeal, I am persuaded that the

Department is correct in its analysis of the operation of the statutes at issue. The fact that the

materials are separately reflected in the Taxpayer's invoices does not alter the fact that what it is

providing to Chino is the service of constructing the railway roadbed. Chino is not just

purchasing the materials for its railway roadbed, it has contracted to receive reconstructed and

serviceable rail line and turnouts.

The Taxpayer argues that if the Department's construction is accepted, it will lead to a

discriminatory result, since it would allow the large railroads who have their own railway repair

and reconstruction crews to buy the materials for those projects free of gross receipts tax but a

minor railway roadbed owner, such as Chino Mines who contracts out the reconstruction work

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would not be able to acquire the materials without the cost of the gross receipts tax, which

presumably, the contractor would include in its contract cost, since the deduction would not be

available.

Although there would be disparate treatment in the situation outlined above, this does not

establish that it would amount to illegal discrimination. With respect to claims of illegal

discrimination in tax statutes, the New Mexico Supreme Court has adopted the United States

Supreme Court's highly deferential test announced in Madden v. Kentucky, 309 U.S. 83 (1940):
In the field of taxation, more than in other fields, the legislature possesses the greatest
freedom in classification, and to attack such as a violation of the Fourteenth
Amendment places the burden on the one attacking to negative every conceivable
basis which might support the classification.

Michael J. Maloof & Co. v. Bureau of Revenue, 80 N.M. 485, 458 P.2d 89 (1969).

Thus, as noted by the court of appeals in C & D Trailer Sales v. Taxation and Revenue

Department, 93 N.M. 697, 699, 604 P.2d 835 (Ct. App. 1979):
Where the State seeks to raise revenue through its exercise of the taxing power, reviewing
courts have no right to determine the propriety or the wisdom of the classifications
drawn, but only if any rational basis can be found to support it.

In this case the Taxpayer merely alleged that if the deduction were to be construed as the

Department does, that it would amount to an arbitrary discrimination, but it has failed to carry its

burden of proving that there can be no rational basis to support the differential treatment resulting

from the differential treatment which would result. It could well be that the legislature was quite

aware of the ongoing track repair required by the larger railroads operating in New Mexico and

specifically had in mind providing the deduction to benefit those railroads operating in New

Mexico even though smaller operations with only a small amount of track might not receive the

same benefit. There would be nothing illegal about the legislature drawing such a distinction.

There are other rules of statutory construction which are also relevant to the determination

of the issue at hand. It is presumed that the legislature is well informed as to existing statutory

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and common law and did not intend to enact any law inconsistent with existing law. Gonzales v.

Middle Rio Grande Conservancy District, 106 N.M. 426, 744 P.2d 554 (Ct. App. 1987). The

provisions defining construction materials as part of a construction service are a longstanding

fixture of the Gross Receipts and Compensating Tax Act, dating back to its original enactment in

1966. See, Laws 1966, Ch. 47 §3. Thus, the operation of the gross receipts tax with respect to

materials to be incorporated into construction projects should not have been a mystery to the

legislature.

Additionally, statutes relating to the same subject matter are to be construed so as to give

effect to every provision of each statute where possible. First National Bank of Santa Fe v.

Southwest Yacht & Marine Supply Corp., 684 P.2d 517, 101 N.M. 431 (1984). Sections 7-9-3

(C) and (K) defining "construction" and "service" and the deduction at issue for materials used in

railway roadbed construction, Section 7-9-51.1 can be construed and harmonized with no damage

to the operation of any of them. It merely means that the deduction is available only when

materials used for the construction or reconstruction of railroad roadbeds are purchased

independently of any services involved in incorporating those materials into the construction of

such railway roadbeds. Although this construction does not benefit the Taxpayer in the

circumstances of this case, the statute providing the deduction would not be meaningless. The

deduction would still operate to provide a benefit to railroads who perform their own railroad

construction and reconstruction work. As noted above, the legislature would have been well

within its power in enacting such a provision and it appears to be the proper construction of the

deduction at issue herein.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to the Department's denial of its claim

for refund, and jurisdiction lies over both the parties and the subject matter of this protest.

2. The Taxpayer's activities in reconstructing railway roadbed pursuant to its contract

8
with Chino Mines Company was "construction" as defined in Section 7-9-3(C) NMSA 1978.

3. The Taxpayer was selling construction services to Chino Mines Company which

included the materials which it incorporated into the railroad roadbed reconstruction project which

it did for Chino Mines.

4. The Taxpayer was not selling railroad construction materials to Chino Mines

Company under its contract to reconstruct certain rail line and turnouts and therefore the Taxpayer

was not entitled to claim the deduction found at Section 7-9-51.1 with respect to the materials

incorporated in its railroad roadbed reconstruction project for Chino Mines Company. 5.

The Department properly denied the Taxpayer's claim for refund.

For the foregoing reasons, the Taxpayer's protest is hereby denied.

Done, this 23rd day of January, 1996.

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