Do New Mexico residents owe compensating (use) tax when they buy a mobile home out of state and bring it home to live in?

Plain-English summary

Kerry and Kathy Shahan, New Mexico residents, bought a mobile home in El Paso, Texas in May 1996 to use as their New Mexico residence. They paid $2,726.50 in tax (their contract called it "sales tax"), which the Texas dealer remitted to New Mexico as compensating (use) tax on the buyers' behalf. The dealer didn't pay New Mexico gross receipts tax or charge a passed-through gross receipts tax. The Shahans asked for a refund, arguing the tax shouldn't apply; the Department denied it, and they protested.

The Hearing Officer denied the protest:

• The compensating tax applies to using out-of-state purchases here. Under § 7-9-7, New Mexico taxes the privilege of using tangible property acquired outside the state in a transaction that would have been subject to gross receipts tax if it had happened in New Mexico. Buying the mobile home in New Mexico would have triggered gross receipts tax, so using it here triggers the complementary compensating tax. Out-of-state vendors who exploit New Mexico's market must collect and remit it for their buyers (§ 7-9-10) — but the tax is still imposed on the Shahans.
• Its whole purpose is to level the field. The compensating tax stops people from buying big-ticket items out of state just to avoid the gross receipts tax cost, and it gives a credit for sales/use taxes paid to other states — so buying decisions aren't distorted by tax.
• "Buying a home is a right the state can't tax" — rejected. Even if the New Mexico Constitution's Article II, § 4 protects a right to establish a home, the state's power to tax is inherent and limited only where the Constitution says so (Asplund v. Alarid); Article II, § 4 contains no such prohibition, and Article VIII lists the actual limits on taxing power. Otherwise every property tax would be unconstitutional. The tax also isn't a tax on "owning a home" — it's a tax on using tangible property, and here the property happened to be a home.
• "It should apply only to businesses" — rejected. The compensating tax is imposed on "persons," defined very broadly (§ 7-9-3(H)) to include individuals, and the law expressly contemplates buyers bearing the cost (§ 7-9-9). Out-of-state cases the Shahans cited (from Tennessee, Oregon, Arkansas, and California) rested on other states' constitutions or were non-binding dicta and didn't apply.

What this means for you

Anyone buying big-ticket items out of state

If you're a New Mexico resident and you buy a vehicle, mobile home, equipment, furniture, or other tangible property out of state and then use it in New Mexico, you generally owe compensating (use) tax — even though no New Mexico gross receipts tax was charged at the point of sale. The use tax is the mirror image of the gross receipts tax, designed so out-of-state buying doesn't escape tax. You may get a credit for sales or use tax you already paid to another state, so keep that documentation.

Buyers of out-of-state mobile homes and vehicles specifically

Dealers who advertise to and sell into New Mexico are often required to collect and remit New Mexico compensating tax on your behalf — that's why your out-of-state contract may show a New Mexico tax line even though the dealer isn't a New Mexico business. Paying it to the dealer discharges your liability; not seeing it charged doesn't mean you don't owe it.

Anyone thinking a tax burdens a "right"

The fact that a purchase involves something important — a home, a livelihood — doesn't make it tax-exempt. New Mexico's power to tax is inherent and broad; it's limited only by specific constitutional provisions (mainly in Article VIII), not by the general rights language in Article II, § 4.

Accountants and tax professionals

This is a clean statement of compensating-tax mechanics: § 7-9-7 imposes it on the use of out-of-state property that would have been gross-receipts-taxable in-state, § 7-9-10 puts collection on market-exploiting out-of-state vendors, and § 7-9-9 confirms the buyer's underlying liability. It's also a useful cite for the inherent-power-to-tax principle (Asplund) when a client raises a constitutional-rights objection to a consumer tax.

Common questions

Q: I already paid tax to the dealer in another state — why do I owe New Mexico anything?
A: New Mexico's compensating tax applies to using out-of-state purchases here. If you paid sales or use tax to another state, you generally get a credit for that amount, but you still owe any New Mexico difference. Here the tax the dealer collected was in fact New Mexico compensating tax.

Q: I bought the mobile home to live in — isn't establishing a home a protected right the state can't tax?
A: No. Even if the Constitution protects establishing a home, the state's power to tax is inherent and limited only by specific constitutional provisions, which don't bar this tax. And the tax is on using tangible property generally, not on the "right" to own a home.

Q: Isn't the compensating tax only for businesses?
A: No. It's imposed on "persons," which is defined broadly to include individuals. The law expressly anticipates buyers bearing the cost, so individual consumers can owe it.

Q: The dealer called it "sales tax" on my contract — does that matter?
A: No. What controls is the nature of the tax under New Mexico law. The amount was remitted as New Mexico compensating tax on the mobile home, and that's what applied regardless of the label on the contract.

Q: Does this decision apply to my situation?
A: Not directly. A Decision and Order resolves one taxpayer's protest on its specific facts and the law in effect at the time. It illustrates how New Mexico's compensating (use) tax applies to out-of-state purchases, but your facts may differ.

Citations and references

Statutes and regulations:

• § 7-9-7 NMSA 1978 — compensating tax on the privilege of using tangible property in New Mexico that was acquired out of state in a transaction that would have been subject to gross receipts tax if it had occurred in New Mexico
• § 7-9-10 NMSA 1978 — out-of-state vendors who exploit New Mexico's market must collect and remit compensating tax on behalf of their New Mexico buyers
• § 7-9-9 NMSA 1978 — a person using property on which compensating tax is due is liable for it, discharged if the buyer paid it to the seller for remittance
• § 7-9-3(H) NMSA 1978 — "person" defined broadly to include individuals and entities; Regulation 3 NMAC 2.10.8 (formerly GR 10:1) — implements § 7-9-10

Constitutional provisions and case law:

• N.M. Const. art. II, § 4 — natural rights, including acquiring and protecting property (held not to bar this tax); art. VIII — the express limits on the state's taxing power
• Asplund v. Alarid, 29 N.M. 129 (1923) — the state's power to tax is inherent and may be exercised unless the Constitution prohibits it

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Kerry and Kathy Shahan
• Decision PDF: D&O 97-34

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
KERRY AND KATHY SHAHAN NO. 97-34
I.D. NO. 01-907197-00 3, PROTEST
TO DENIAL OF CLAIM FOR REFUND

DECISION AND ORDER

This matter comes on for determination before Gerald B. Richardson, Hearing Officer.

Kerry and Kathy Shahan, hereinafter, "the Shahans", represented themselves in this matter. The

Taxation and Revenue Department, hereinafter, "Department", was represented by Gail

MacQuesten, Special Assistant Attorney General. The parties agreed to submit the matter upon a

stipulation of the parties and briefs or written argument. The last submittal was filed on August 19,

1997 and the matter was considered submitted for determination at that time. Based upon the

stipulated facts and the arguments of the parties, IT IS DECIDED AND ORDERED AS

FOLLOWS:

FINDINGS OF FACT

1. The Shahans are residents of New Mexico.

2. On May 8, 1996, the Shahans purchased a mobile home in El Paso, Texas, from

Ideal Mobile Homes.

3. The Shahans intended to use this mobile home as their residence in New Mexico.

4. The Shahans paid $2,726.50 in tax on the transaction.

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5. The Shahans' contract with Ideal Mobile Homes identified this tax as a "sales tax."

6. The $2,726.50 was paid over to the State of New Mexico and was reported under

the "Mobile Home Comp. Tax" number used by out-of-state dealers to report and

pay compensating tax on behalf of their New Mexico buyers: I.D. No. 01-907197-

00 3.

7. Ideal Mobile Homes did not report or pay New Mexico gross receipts tax on its

receipts from the sale of the mobile home to the Shahans, and did not charge the

Shahans a passed-through gross receipts tax.

8. The Shahans now use the mobile home as their primary residence.

9. On June 27, 1996, the Shahans filed a timely request for refund of the $2,726.50

compensating tax.

10. On September 17, 1996, the Department denied the refund request on the grounds

that the "receipts from May 1996 are not deductible under Section 7-9-7:1."

11. On November 13, 1996, the Shahans filed a timely protest of the refund denial.

DISCUSSION

The Shahan's protest the imposition of compensating tax on their purchase of a mobile

home from an El Paso, Texas mobile home dealer. The mobile home dealer collected the tax and

remitted it to the Department pursuant to § 7-9-10 NMSA 1978, which requires persons who carry

on activity in this state to exploit New Mexico's markets, such as advertising to New Mexico

residents, and who sell property or services for use in New Mexico, to collect and remit on behalf of

their purchasers compensating tax on the value of their sales for use in New Mexico. Thus, even

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though the tax was remitted to the Department by the mobile home dealer, the tax was imposed

upon the Shahans.

The compensating tax compliments the gross receipts tax. Gross receipts tax is imposed

upon the sale of property and services in New Mexico. The compensating tax is imposed in

instances where gross receipts tax was not imposed for various reasons. One instance is where

property is bought from an out-of-state vendor. If New Mexico did not impose a compensating tax,

buyers would otherwise be encouraged to purchase things out-of-state in order to save the cost of

the passed on gross receipts tax. There could be a significant cost differential for such high ticket

items as mobile homes. There is also a credit against compensating tax for the amount of gross

receipts, sales or compensating taxes levied on the out-of-state transaction by other taxing

authorities. Thus, the compensating tax is intended to create a level playing field between in-state

and out-of-state businesses, and purchasers may make their buying decisions without regard to the

tax consequences of the transaction.

Compensating tax is imposed pursuant to § 7-9-7 NMSA 1978. The portion of the statute

pertinent to the facts of this case is as follows:

A. For the privilege of using tangible property in New Mexico, there
is imposed on the person using the property an excise tax equal to
five percent of the value of the tangible property that was:

(2) acquired outside this state as the result of a transaction
that would have been subject to the gross receipts tax had it occurred
within this state;

Had the Shahans bought their mobile home in New Mexico, the mobile home dealer would have

been subject to gross receipts tax on its receipts from the sale. Because they acquired their mobile

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home out of state, they are subject to the compensating tax for the privilege of using property in

New Mexico.

The Shahans have raised a number of legal challenges to the imposition of compensating

tax under the facts of this case. First, they argue that they were exercising their right to establish a

home and that this is not one of the taxable activities listed in Regulation GR 10:1.1This regulation

is promulgated to interpret and implement § 7-9-10, the statute which imposed the obligation to

collect and remit compensating tax on behalf of the Shahans on the mobile home dealer. It is

irrelevant that the Shahans were exercising their right to establish a home for purposes of

establishing whether Ideal Mobile Homes was required to collect and remit compensating tax

because § 7-9-10 looks at the activities of the person exploiting New Mexico markets, the vendor,

in determining whether their activities subject them to the obligation to collect and remit

compensating tax on behalf of their purchasers

The Shahans next argue that the imposition of compensating tax is unconstitutional because

in purchasing their mobile home, they were exercising their right to establish a home, and they

argue that the state may not impose a tax upon the exercise of this right which they argue is

protected by Article II, Section 4 of the New Mexico Constitution. This article provides as follows:

All persons are born equally free, and have certain natural, inherent
and inalienable rights, among which are the rights of enjoying and
defending life and liberty, of acquiring, possessing and protecting
property, and of seeking and obtaining safety and happiness.

While this provision is probably broad enough to encompass a right to establish a home in New

Mexico, the fact that such right may be guaranteed by the Constitution does not mean that the

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This regulation is now renumbered as 3 NMAC 2.10.8

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legislature may not impose a tax which indirectly burdens the exercise of such a right. Arguably,

any tax imposed by the state might burden a citizen’s efforts to seek and obtain happiness, to

paraphrase this constitutional provision. Nonetheless, the Shahans have not directed me to, nor

have I found a single case striking down any New Mexico case based upon a violation of Article II,

§4 of the New Mexico Constitution. In fact, it has been recognized that the state's power to tax is

inherent, and the state may tax under its inherent power unless the constitution prohibits such

taxation. Asplund v. Alarid, 29 N.M. 129, 137 (1923). As noted above, Article II, § 4 contains no

such prohibition, nor have I found any other restriction or prohibition which would apply elsewhere

in the Constitution. Article VIII of the New Mexico Constitution contains examples of express

limitations on the state's inherent power to tax, with provisions requiring uniformity of taxation,

providing for exemption of certain property from property taxes, imposing certain limits on

property taxes, etc. Obviously, the right to acquire, possess and protect property secured in Article

II, § 4 is not so encompassing as the Shahan's argue, for otherwise, all taxes on property would be

prohibited. Instead, the Constitution's framers understood that the power to tax property was

inherent in the state and they provided for certain limitations on that power under Article VIII.

Additionally, the Shahan's argument is erroneous in its characterization of the tax at issue.

They argue that it is a tax upon the exercise of the privilege of owning and establishing a home.

While under the facts of this case, the tax applied to the cost of the purchase of the Shahan's home

because the thing purchased was a mobile home, the compensating tax is broadly imposed upon the

privilege of using any kind of tangible personal property in New Mexico. The fact that in this case,

the property being used is a home does not change the legislative determination that the tax is

imposed upon the use of property, and the legislative determination governs this issue.

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The Shahan's argue that the compensating tax should be applied only to those engaging in

business, that such taxes should be enforced against businesses and the Department should prohibit

the passing on of the cost of such taxes to individual consumers. I can find no language in the

statutes imposing compensating tax which limits the imposition of the tax to businesses. The tax is

imposed upon persons. See, §7-9-7. "Person" is defined quite broadly in the Gross Receipts and

Compensating Tax Act. Specifically, "person" is defined at § 7-9-3(H) to mean:

(1) any individual, estate, trust, receiver, cooperative association,
club, corporation, company, firm, partnership, limited liability
company, limited liability partnership, joint venture, syndicate or
other entity, including any gas, water or electric utility owned or
operated by a county, municipality of other political subdivision of
the state, or

(2) any national, federal, state, Indian or other governmental unit or
subdivision, or any agency, department or instrumentality of any of
the foregoing;

Thus, it is clear that the tax is imposed far more broadly than just upon businesses. Additionally,

there is no prohibition on businesses passing on the cost of such taxes to their customers. In fact, §

7-9-9 contains a legislative recognition that in many instances the cost of the compensating tax may

be paid by the purchaser because it provides that:

Any person in New Mexico using property on the value of which
compensating tax is payable but has not been paid is liable to the
state for payment of the compensating tax, but this liability is
discharged if the buyer has paid the compensating tax to the seller
for payment over to the department. (emphasis added).

Finally, the Shahan's cite to a number of cases from other states in support of their claim for

refund. First, they cite to Jack Cole Company v. MacFarland, 337 S.W.2d 453 (Tenn, 1960) for

the proposition that the legislature may not name something to be a taxable privilege unless it is

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first a privilege. In this case, the Tennessee Supreme Court struck down a tax imposed upon

income. A review of this case reveals that the Tennessee Supreme Court based this conclusion on

some rather unique language found in the Tennessee Constitution which had granted the legislature

the power to tax the income from stocks and bonds. The Tennessee Supreme Court in Evans v.

McCabe, 52 S.W.2d 159 (1932) had construed this language narrowly as only granting the

legislature the right to tax income from stocks and bonds, thus implicitly restricting the legislature's

right to tax income from any other source other than stocks and bonds. The language the Tennessee

Supreme Court relied upon is not found in either the United States Constitution or the Constitution

of the State of New Mexico. Thus, the ruling in that case has no applicability here.

The Shahans cite to Redfield v. Fisher, 292 P. 813 (Or. 1930) for the proposition that

natural, inherent rights cannot be taxed. This language was dicta2 in the court's opinion which is

not even binding law in Oregon, let alone other taxing jurisdictions.

Nor do the other decisions cited to apply to the facts of this case. Stevens & Woods v.

State, 2 Ark 291 (1840), held that under the Arkansas Constitution, keeping billiard tables was not

a privilege subject to taxation. As noted above, New Mexico's Constitution does not limit the

state's inherent power to tax to only enumerated privileges. Spring valley Water Works v. Barber,

33 P. 735 (Cal, 1893) had struck down a special franchise tax on property. That decision turned on

the definition of franchise, which has no applicability in the case at bar.

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Dicta is shorthand for the Latin phrase obitur dictum, which refers to statements, remarks or
observations of a court which are not essential to the determination of the issue in the case and are
thus not binding upon lower courts.

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In conclusion, there is simply nothing in the laws or constitution of New Mexico which

prohibits the imposition of compensating tax upon the Shahans under the circumstances of this

case.

CONCLUSIONS OF LAW

1. The Shahans filed a timely, written protest to the denial of their claim for refund and

jurisdiction lies over both the parties and the subject matter of this litigation.

2. The imposition of compensating tax in the circumstances of this case is not

prohibited by Article II, §4 of the New Mexico Constitution.

3. Compensating tax was properly imposed upon the Shahans under the circumstances

of this case for the privilege of using property in New Mexico.

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

DONE, this 16th day of September, 1997.

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