If New Mexico wrongly denies my investment credit and grants it years later, does the state owe me interest for the delay?

Plain-English summary

Tortilla, Inc. is a New Mexico corporation that operates the Garduno's of New Mexico and Yesterdaves' Grill restaurants (in Albuquerque, Santa Fe, and Las Vegas, Nevada) and also sells take-out foods and manufactured products like bottled salsas. A 1994 audit turned up compensating tax the company had paid on out-of-state equipment used in its food operations — equipment for which it could have claimed an investment credit. In December 1994 it applied for a $18,977.57 credit on the equipment used to prepare pre-packaged dinners, side dishes, and bulk food trays. The Department denied the application in January 1995, reasoning that restaurant food preparation isn't "manufacturing."

More than two years later, in a February 1997 closing agreement, the Department reversed course: it agreed that preparing "ready-to-eat" food items does qualify as a manufacturing operation under the Investment Credit Act, and it granted the full credit. That left one narrow question — the only issue in this decision: does the state owe Tortilla interest for the roughly two years between when it applied and when the credit was finally approved?

The Hearing Officer denied the interest claim:

• Only one statute lets the state pay interest, and sovereign immunity blocks everything else. Section 7-1-68 requires the Department to pay interest on a tax overpayment that is later refunded or credited. Absent that express waiver, the state's sovereign immunity bars any claim for interest against it (Library of Congress v. Shaw).
• An investment credit isn't an "overpayment" until it's approved. An "overpayment" is tax paid in excess of what was due (§ 7-1-3(J)). But the Investment Credit Act (§ 7-9A-8) says a credit can be claimed against gross receipts, compensating, or withholding tax — or refunded — only after the taxpayer "has applied for and been granted approval." Until the Department approves the credit, there is no overpayment for interest to run on.
• So no interest accrues for the pre-approval period. Because § 7-1-68 is the sole waiver of immunity and it reaches only post-approval overpayments, Tortilla was not entitled to interest for the two years before its credit was granted. (The Hearing Officer noted it didn't matter that the company protested the denial directly rather than filing a refund claim under § 7-1-26 — the outcome is the same either way.)

What this means for you

Winning a credit later doesn't earn you interest for the wait

If the state denies a credit and then grants it years afterward, you generally get the credit — but not interest for the delay. New Mexico only owes interest on a tax overpayment, and under the Investment Credit Act your credit doesn't become an overpayment until the Department approves it. The clock for any interest starts at approval, not at application or denial.

Restaurant food preparation can qualify as "manufacturing" for the investment credit

The lasting substantive point in this case: the Department conceded that preparing ready-to-eat food items — pre-packaged dinners, side dishes, bulk trays — is a manufacturing operation under the Investment Credit Act. If your business turns ingredients into packaged food products, equipment used in that process may support an investment credit, even if you also run a restaurant. (This decision binds only these parties, but it shows the Department's position on the point.)

You can't get interest from the state unless a statute clearly allows it

Because of sovereign immunity, the government pays interest only where a statute expressly says so. For New Mexico tax, that statute is § 7-1-68, and it's limited to overpayments that are refunded or credited. Don't assume a long administrative delay entitles you to interest — check whether your situation fits the specific waiver.

The equipment tax itself is where the value is — claim credits promptly

Tortilla only discovered the missed credit during an audit. The credit was still available, but the episode cost two years and a dispute. If you pay gross receipts or compensating tax on equipment used in a qualifying manufacturing operation, apply for the investment credit when you buy the equipment, rather than relying on catching it later.

Common questions

Q: The state took two years to approve my credit. Don't they owe me interest for that time?
A: No. New Mexico owes interest only on a tax overpayment (§ 7-1-68), and an investment credit isn't an overpayment until the Department approves it (§ 7-9A-8). Interest can't run for the period before approval, and sovereign immunity bars any other basis for it.

Q: Does preparing food in a restaurant count as "manufacturing" for the investment credit?
A: Here the Department agreed that preparing ready-to-eat food items (packaged dinners, side dishes, bulk trays) qualifies as a manufacturing operation. The equipment used for that can support an investment credit — separate from serving meals to diners.

Q: I protested the denial directly instead of filing a refund claim. Did that hurt me?
A: No. The Hearing Officer treated the two paths as equivalent for this purpose; the interest result would have been the same whether Tortilla protested the denial or filed and protested a refund claim under § 7-1-26.

Q: When does interest start if the state does owe it on a credit?
A: Only after the Department approves the credit, because that's when it can become an overpayment subject to § 7-1-68. Before approval, there is nothing for interest to accrue on.

Citations and references

Statutes:

• § 7-9A-8 NMSA 1978 — Investment Credit Act; a taxpayer must have "applied for and been granted approval" before claiming the credit against gross receipts, compensating, or withholding tax, or seeking a refund
• § 7-1-68 NMSA 1978 — the Department must pay interest, at 15% per year, on a tax overpayment that is later refunded or credited; § 7-1-3(J) NMSA 1978 — "overpayment" means an amount paid in excess of tax due
• § 7-1-26 NMSA 1978 — claim for refund, available where a credit has been denied; § 7-1-24 NMSA 1978 — administrative protest

Cases cited:

• Library of Congress v. Shaw, 478 U.S. 310 (1986) — under the "no-interest rule," sovereign immunity bars interest against the government unless a statute expressly and specifically waives it

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Tortilla, Inc.
• Decision PDF: D&O 97-30

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
TORTILLA, INC., NO. 97-30
ID NO. 02-019211-00 8,
PROTEST TO DENIAL OF APPLICATION
FOR INVESTMENT CREDIT

DECISION AND ORDER

This matter came on for formal hearing on June 23, 1997, before Gerald B. Richardson,

Hearing Officer. Tortilla, Inc., hereinafter, "Taxpayer," was represented by Benjamin C. Roybal,

Esq. of Rodey, Dickason, Akin & Robb, P.A. The Taxation and Revenue Department,

hereinafter, "Department," was represented by Margaret B. Alcock, Esq. The facts were agreed to

by the parties and argument was presented. Based upon the agreed facts and the arguments

presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer is a New Mexico corporation which does business as Garduno's of

New Mexico and Yesterdaves' Grill, with restaurant locations in Albuquerque and Santa Fe, New

Mexico and in Las Vegas, Nevada.

2. In addition to selling meals to the patrons of its restaurants, the Taxpayer also sells

"take-out" foods and other manufactured food products, such as bottled salsas.

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3. In 1994, the Department audited the Taxpayer. As a result of that audit, the

Taxpayer discovered that it had paid compensating tax on equipment it purchased out-of-state

which it used in its New Mexico restaurant and food operations and for which it had not applied

for an investment credit under the Investment Credit Act.

4. On December 21, 1994, the Taxpayer submitted to the Department an Application

for Investment Credit in connection with equipment used to prepare pre-packaged dinners, side

dishes and bulk food trays sold to customers on a "take-out" basis. The application requested an

investment credit in the amount of $18,977.57.

5. On January 20, 1995, the Department denied the Taxpayer's Application for

Investment Credit on the basis that the investment credit is limited to equipment used in a

manufacturing operation and it did not consider food preparation in a restaurant to be a

manufacturing process.

6. On January 30, 1995, the Taxpayer filed a timely protest to the Department's

denial of its Application for Investment Credit.

7. On February 7, 1997, the Department entered into a closing agreement with the

Taxpayer. The closing agreement resolved the matters which were in dispute as a result of the

Department's audit and assessment of the Taxpayer. It also resolved all but one issue raised by the

Taxpayer's protest of the Department's denial of the Taxpayer's Application for Investment Credit

with the Department's agreement that the preparation of "ready-to-eat" food items does qualify as

a manufacturing operation under the Investment Credit Act. By the agreement, the Department

agreed to grant the Taxpayer's Application for Investment Credit in the full amount requested,

$18,977.57.

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8. The issue which was left open by the closing agreement, which is the only issue to

be determined herein, is whether the Taxpayer is entitled to interest from the date the Application

for Investment credit was filed by the Taxpayer to the date the credit was granted by the

Department.

DISCUSSION

The Taxpayer in this case applied for an investment credit under the Investment Credit

Act, Chapter 7, Article 9A NMSA 1978, in December of 1994 and the Department denied the

application for credit the following month. The Taxpayer promptly filed a protest to the denial of

its application for an investment credit. The Taxpayer also had two assessments of tax in protest.

In February 1997, as part of a closing agreement which settled the disputed issues concerning the

Department's assessments as well as the dispute as to whether the Taxpayer was entitled to the

investment credit applied for, the Department agreed that the Taxpayer was entitled to the credit

and it granted it. The only unresolved issue and the matter at issue herein is whether the Taxpayer

is entitled to interest on the amount of the credit claimed from the date of the denial of the credit

until it was granted.

Pursuant to § 7-9A-8 NMSA 1978 of the Investment Credit Act, taxpayers with approved

investment credits may obtain the benefit of their credit by either claiming the credit against the

taxpayer's compensating tax, gross receipts tax or withholding tax due to the Department, or it

may claim a refund of the amount of available credit by proving to the Department that either it

paid gross receipts tax on the purchase price of property used in the Taxpayer's manufacturing

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operation, or on the purchase of construction services used in connection with the qualified

manufacturing equipment (such as constructing a building to house the manufacturing equipment)

or that it paid compensating tax on the value of the qualified equipment. Because of the two year

delay between the Taxpayer's application for the investment credit and when it was approved, the

Taxpayer objects to not being compensated for not receiving the value of the credit in a more

timely manner and claims that the Department is required to pay interest, pursuant to § 7-1-68

NMSA 1978, which requires the Department to pay interest to taxpayers on overpayments of tax

under certain circumstances.

Section 7-1-68 provides in pertinent part as follows:

A. As provided in this section, interest shall be allowed and paid
on the amount of tax overpaid by a person which is
subsequently refunded or credited to that person.

B. Interest payable on overpayments of tax shall be paid at the
rate of fifteen percent a year, computed at the rate of one and
one-fourth percent per month or fraction thereof.

C. Unless otherwise provided by this section, interest on an
overpayment not arising from an assessment by the department
shall be paid from the date the claim for refund was made until
a date preceding by not more than thirty days the date on which
the amount thereof is credited or refunded to any person;....

Subsection C provides for calculation of interest on overpayments which do not arise from an

assessment by the Department as running from the date a claim for refund was made. Although

there was no claim for refund made in this case, the Taxpayer points out that § 7-1-26, the statute

which provides for claims for refund of tax, allows taxpayers to file claims for refund with the

Department if they have been "denied any credit" and also provides that taxpayers may file an

administrative protest to a denial of any claim for refund. Section 7-1-26(A). Thus, the Taxpayer

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had the option in this case of either directly protesting the Department's denial of its application

for investment credit, or of filing a claim for refund after denial of the credit and protesting the

Department's denial of the claim for refund. In this case, after discussing its remedies with a

representative of the Department, the Taxpayer filed a direct protest to the Department's denial of

its application for the credit, because this is the procedure the Department preferred for handling

the Taxpayer's administrative protest. Because the Taxpayer could have filed a claim for refund

under § 7-1-26, however, the fact that no refund claim was actually filed will not be treated as

barring the Taxpayer's claim for interest on its investment credit.

Regardless of the avenue by which the Taxpayer administratively protested the

Department's denial of its application for an investment credit, it is clear that if the Taxpayer is

entitled to interest from the date of the denial of its application to the point where the investment

credit was granted, it must qualify under the provisions of § 7-1-68 because this is the only

authority which exists which would require the state to pay interest with respect to taxes which

were overpaid or subject to refund. The sovereign immunity of the state would bar any other

claim, absent an express waiver of such sovereign immunity. Library of Congress v. Shaw, 478

U.S. 310 (1986).

As noted above, § 7-1-68 applies to an overpayment of taxes which is subsequently

credited or refunded to a taxpayer. A tax "overpayment" is defined at § 7-1-3(J) NMSA 1978 as

follows:

"overpayment" means any amount paid, pursuant to any law
subject to administration and enforcement under the provisions of
the Tax Administration Act, by any person to the Department, or
withheld from the person, in excess of tax due from the person to
the state at the time of the payment or at the time the amount
withheld is credited against tax due;....

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The Taxpayer claims that the amount of its investment credit qualifies as a tax

overpayment because § 7-9A-8 allows taxpayers to claim the investment credit against gross

receipts, compensating or withholding taxes due. Thus, it would qualify as an overpayment every

time a return reporting such taxes is filed which return also claims the investment credit against

such taxes. While this may be true, it overlooks one crucial aspect of the operation of the

investment credit and of § 7-1-68. Section 7-1-68(A) provides for the payment of interest on "the

amount of tax overpaid by a person which is subsequently refunded or credited to that person"

(emphasis added), and § 7-9A-8(A) requires that in order for a taxpayer to claim the investment

credit against the taxpayer's compensating tax, gross receipts tax or withholding tax due the state

of New Mexico, that the taxpayer must have "applied for and been granted approval for a credit

by the Department pursuant to the Investment Credit Act...." (emphasis added).Even had the

Taxpayer sought an immediate refund of the investment credit it applied for pursuant to

Subsection B of § 7-9A-8, subsection B, by its unambiguous terms, limits its application to "[A]

taxpayer having applied for and been granted approval for an investment credit....(emphasis

added). It is clear, therefore, that § 7-9A-8, the specific statute which governs the granting of

investment credits and qualifies the manner in which they may be claimed and credited against

future taxes or refunded, requires that first, the credit must be applied for and approved by the

Department, before it can be refunded or credited against future tax liabilities. Thus, the amount

of any investment credit cannot become an overpayment of tax which would be subject to the

payment of interest, until the investment credit has been approved. Because Section 7-1-68 is the

only provision of law which would authorize the payment of interest on the Taxpayer's claim for

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investment credit, and any other claim for interest would be barred by the State's sovereign

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immunity, the Taxpayer's claim for interest on its claim for an investment credit, prior to its

approval, must be denied.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely protest, pursuant to Section 7-1-24 NMSA 1978, to

the denial of its Application for Investment Credit and jurisdiction lies over the parties and the

subject matter of this protest.

2. The sovereign immunity of the state bars the granting of interest on the Taxpayer's

claim of an investment credit for any period of time prior to the approval of the credit by the

Department pursuant to § 7-9A-8 NMSA 1978.

3. Section 7-9A-8 requires that an investment credit must both be applied for and

approved by the Department before the credit may be claimed against other taxes or be subject to

a claim for refund.

4. Section 7-1-68 NMSA 1978 would only apply to waive the State's sovereign

immunity from the payment of interest on the Taxpayer's claim for an investment credit after the

Department has approved the Taxpayer's application for investment credit pursuant to Section 7-

9A-8 NMSA 1978.

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

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DONE, this 12th day of August, 1977.

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