Can a New Mexico contractor that builds dairy-farm barns and structures claim the 50% agricultural-implement gross receipts tax deduction on the materials it builds into those facilities?

Plain-English summary

Dairy Construction, Inc., a New Mexico contractor in Dexter, builds dairy-farm facilities — milking barns, commodities and hay barns, silage pits, corrals with feed lanes, and the like. In 1991 it discovered a state tax break, § 7-9-62, that lets a taxpayer deduct 50% of receipts from selling "agricultural implements," farm tractors, and certain unregistered vehicles. After an employee of the Taxation and Revenue Department told the contractor by phone how to apply the deduction to its material costs, the contractor began claiming it and even filed amended returns for prior years. The Department approved a refund of roughly $100,000.

The Department then audited the contractor and reversed course, issuing two assessments totaling more than $200,000 in gross receipts tax, penalty, and interest for 1992 through May 1995. The contractor protested, arguing that the materials it used to build dairy facilities were "agricultural implements" because they are essential to dairy farming.

The Hearing Officer rejected that argument and upheld the gross receipts tax. Under § 7-9-3(K), when tangible personal property is built into a construction project it becomes part of a construction service, not a separate sale of an implement. The Department's regulation (3 NMAC 2.62.7) defines an "agricultural implement" narrowly as a tool or instrument essential to producing crops or livestock — like proportioning pumps or feed bins — not the lumber, concrete, and steel that become permanent buildings. The statute's legislative history (it was enacted alongside a motor-vehicle excise scheme in 1969) confirmed the deduction was meant for farm equipment such as disks and planters, not construction materials.

But the Hearing Officer abated all the penalties. Penalty under § 7-1-69 requires negligence, and one recognized excuse is being affirmatively misled by a Department employee. Here the Department's own employee had advised the contractor to claim the deduction, and the Department had confirmed the theory by paying the ~$100,000 refund. The contractor's president, Mr. Owen Voss, was found honest and credible. Because the Department's actions misled the taxpayer, it was not negligent, and the penalties were improper. The result: granted in part (penalties abated), denied in part (the gross receipts tax on the disallowed deduction stands).

What this means for you

Construction contractors serving farms and ranches

Building agricultural facilities does not turn your building materials into tax-favored "agricultural implements." When materials are incorporated into a completed structure, New Mexico treats the whole thing as a taxable construction service at the full gross receipts tax rate — the same way it treats irrigation pipe built into a pipeline. The § 7-9-62 deduction is for equipment sold as equipment (tractors, implements, unregistered farm vehicles), not for materials you build into a barn.

Any taxpayer relying on verbal advice from the Department

This case is a double-edged lesson. The Department's phone advice and its approval of a $100,000 refund did not make the deduction legal — the tax was still owed once the audit corrected the position. But that same misleading conduct was enough to knock out the penalties. Getting bad advice from the agency won't save you from the underlying tax, yet documented reliance on the agency's own guidance can defeat a negligence penalty. Keep records of who told you what.

Accountants and tax professionals

The decision turns on the § 7-9-3(K) rule that construction materials lose their separate character once installed, and on the narrow regulatory definition of "agricultural implement" in 3 NMAC 2.62.7. It also illustrates the negligence-penalty safe harbor in 3 NMAC 1.11.10 for taxpayers affirmatively misled by the Department — a fact-specific defense that here was corroborated by the agency's own refund approval, not just an uncorroborated phone call.

Common questions

Q: Why weren't the dairy-barn materials "agricultural implements"?
A: Because they were built into permanent structures. Under § 7-9-3(K), tangible personal property that becomes an ingredient or component of a construction project is part of a taxable construction service. The Department's regulation defines an agricultural implement as a tool or instrument essential to producing crops or livestock — not the concrete, steel, and lumber that become a building.

Q: The Department told the contractor to claim the deduction and even paid a refund — why did it still owe the tax?
A: Incorrect advice from a Department employee, and even an erroneous refund, do not change what the statute requires. The audit corrected the position and the gross receipts tax was owed. The agency's conduct affected only the penalty, not the underlying tax.

Q: So what did the contractor actually win?
A: The negligence penalties on both assessments were abated. Penalty requires negligence, and being affirmatively misled by the Department is a recognized non-negligence situation. Because the Department's advice and refund approval misled the contractor, the penalties were improper.

Q: Does this decision apply to my business?
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 shows how the Hearing Officer reads the agricultural-implement deduction and the negligence penalty, but your facts may differ.

Citations and references

Statutes and regulations:

• § 7-9-62 NMSA 1978 — 50% deduction for agricultural implements, farm tractors, aircraft, and vehicles not required to be registered under the Motor Vehicle Code
• § 7-9-3(K) NMSA 1978 — "service" includes construction activities and tangible personal property that becomes an ingredient or component part of a construction project
• § 9-11-6.2(G) NMSA 1978 — Department regulations are presumed a correct implementation of the law
• § 7-1-69(A) NMSA 1978 — penalty for failure to pay due to negligence (2% per month, up to 10%)
• § 7-1-24 NMSA 1978 — taxpayer protest procedure
• 3 NMAC 2.62.7 — definition of "agricultural implement" (a tool or instrument essential to production of crops or livestock)
• 3 NMAC 2.62.13 — irrigation pipe built into a construction project does not qualify for the § 7-9-62 deduction
• 3 NMAC 1.11.10 — definition of negligence and examples of non-negligence, including being affirmatively misled by a Department employee

Case law cited:

• Bettini v. City of Las Cruces, 82 N.M. 633, 485 P.2d 967 (1971) — statutory words are given their common and ordinary meaning
• Reese v. Dempsey, 48 N.M. 417, 152 P.2d 157 (1944) — the fundamental rule of statutory construction is to give effect to legislative intent
• City of Alamogordo v. Walker Motor Co., 94 N.M. 690, 616 P.2d 403 (1980) — New Mexico's policy of taxing motor-vehicle sales differently, informing the purpose of § 7-9-62
• Reaves v. State, 50 S.W.2d 286 (Tex. Crim. App. 1931) — a Texas "implement of husbandry" definition the taxpayer urged but the Hearing Officer declined to adopt

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Dairy Construction, Inc.
• Decision PDF: D&O 97-44

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
DAIRY CONSTRUCTION, INC. , NO. 97-44
ID. NO. 02-111944-00 9, PROTEST TO
ASSESSMENT NOS. 1982481 & 2004322

DECISION AND ORDER

THIS MATTER came on for formal hearing on November 13, 1997 before Gerald

B. Richardson, Hearing Officer. Dairy Construction, Inc., hereinafter, “Taxpayer”, was

represented by Phil Brewer, Esq. The Taxation and Revenue Department, hereinafter,

“Department”, was represented by Bruce J. Fort, Esq. Based upon the evidence and the

arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer is a New Mexico corporation based in Dexter, New Mexico

which does construction contracting work. Although the Taxpayer occasionally performs

other types of construction work, the vast majority of the Taxpayer’s work involves the

construction of facilities for conducting dairy farming.

2. The buildings and elements of a dairy farm operation are the milking barn,

commodities barn(s), hay barn(s), silage pit(s), corrals for the cows with shade structures,

a scale and a scale house, and often, a residence for the owner or manager of the dairy

farm operation. All of these buildings are permanently affixed to the real estate upon

which they are built.

3. The milking barn has three main areas. It has a sprinkler room with floor

mounted sprinklers which wash the cows prior to milking, a drip room where the cows

dry after being washed, and a milking area where the cows are milked. The barn also

houses the milking equipment, milk handling equipment which is a system for

transporting the milk to a storage area and the milk storage equipment. Many milking

barns also have a feed delivery system which measures and distributes feed to each cow

while it is being milked.

4. Commodities barns are three sided buildings with a roof which contain

bays which hold separate types of feed in each bay. They bays and floors of the bays are

constructed of concrete. Each bay holds approximately 75 tons of feed. The bays are

designed so that feed can be removed by a front end loader and dropped into trucks used

to haul and distribute the feed to the cattle.

5. Hay barns are large roofed structures with open sides which are used to

store large volumes of hay for feeding to the cattle.

6. A silage pit is a large structure, set into the ground with concrete sides and

floor which is used for storage of ensilage to be fed to the cattle. It is also designed so

that a front end loader can be used to load the ensilage into feed trucks which distribute

the feed to the cattle.

7. Corrals are built to hold 200 cattle each. They contain water troughs built

of concrete with stainless steel liners which have piped water for a continuous supply.

They also contain shade structures consisting of a roof supported by corners of steel pipe

to provide shade to the cattle. They also contain a concrete “feed lane” which consists of

a concrete slab upon which the feed is put and along which a tractor or truck with a blade

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can run to push the feed back to the center of the feed lane on a regular basis. Finally,

each corral is equipped with 200 stanchions or enclosures, in which the cattle are

individually locked so that they can be inspected, vaccinated, bred, etc.

8. Sometime in 1991 the Taxpayer learned that there is a deduction in the

Gross Receipts and Compensating Tax Act which provides for a deduction of 50% of a

taxpayer’s gross receipts from the sale of agricultural implements. Prior to learning of

this deduction, the Taxpayer had been reporting and paying gross receipts tax upon 100%

of its gross receipts from performing construction services.

9. After learning of the deduction, the Taxpayer’s office manager, who

prepared the Taxpayer’s monthly gross receipts tax returns, contacted an office of the

Department by telephone to inquire about how this deduction applied to the Taxpayer.

The Department employee informed the Taxpayer that they could estimate their taxable

receipts by a formula by which the ten percent of the Taxpayer’s receipts which were

attributable to profit were first deducted from the Taxpayer’s gross receipts. Of the

remaining amount, the Taxpayer estimated that half was attributable to the cost of labor

and half was attributable to the cost of materials. The Taxpayer was informed that the

50% deduction could be claimed against the portion of the Taxpayer’s receipts which

represented the cost of materials used in building dairy facilities.

10. The Taxpayer began using this formula to calculate its gross receipts taxes

when it filed its monthly reports with the Department. Under the formula, the Taxpayer

paid gross receipts tax on all of its receipts attributable to profit and the costs of labor and

paid gross receipts tax on 50% of its receipts attributable to the cost of materials.

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11. The Taxpayer was also informed that it could file a claim for refund for

prior periods within the statute of limitations to claim the deduction which it had not

previously claimed. The Taxpayer prepared amended returns using the formula provided

by the Department and filed a claim for refund. The Taxpayer’s refund claim was granted

in the approximate amount of $100,000.

12. The Taxpayer was audited by the Department, which resulted in the

issuance of two assessments. Assessment No. 1982481 was issued on December 7, 1995

and covered the reporting periods of January, 1992 through December, 1992. The

assessment assessed $15,424.83 in gross receipts tax, $233.85 in withholding tax,

$1,573.88 in penalty and $8,034.00 in interest for a total of $25,266.56. Assessment No.

2004322 was issued on February 22, 1996 and covered the reporting periods of January,

1993 through May, 1995. This assessment assessed $135,379.34 in gross receipts tax,

$13,952.60 in penalty, and $38,360.99 in interest for a total of $187,692.93.

13. The Taxpayer filed timely, written protests to Assessment Nos. 1982481

and 2004322 on December 29, 1995 and March 11, 1996, respectively.

DISCUSSION

The primary issue to be determined herein is whether the Taxpayer was entitled to

claim the deduction provided at Section 7-9-62 NMSA 1978 to deduct 50% of the value

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of the materials it used in its construction work building dairy farm facilities.1 Section 7-

9-62 provides as follows:

Fifty percent of the receipts from selling agricultural
implements, farm tractors, aircraft or vehicles that are not
required to be registered under the Motor Vehicle Code
may be deducted from gross receipts. Any deduction
allowed under section 7-9-17 must be taken before the
deduction allowed by this section is computed.

The Taxpayer argues that it is entitled to the deduction on the basis that the materials it

used in constructing dairies should be considered agricultural implements, because they

are used in and are essential to the business of dairy farming. While the Department does

not dispute that dairy farming is an agricultural activity, it disputes that because

construction materials are used in building a dairy farm, that they can be considered to be

agricultural implements.

There is no definition of agricultural implement in the statute or the gross receipts

and compensating tax, nor have I found or been cited to a definition adopted by the courts

of New Mexico. The Taxpayer has cited to a decision of the Court of Criminal Appeals

of Texas, Reaves v. State, 50 S.W.2d 286 (1931) in which an “implement of husbandry”

was defined as “something necessary to the carrying on of the business of farming, etc.,

without which the work cannot be done” id. at 287, and urges that such a broad definition

be adopted herein. This definition would allow any “something” to be considered an

agricultural implement, so long as it is necessary to the business of farming.

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The Taxpayer also performed construction services with respect to some non-dairy farm facilities, such as
a sales barn for cows and some other small construction jobs, but because the majority of the Taxpayer’s
activities during the audit period related to the construction of dairy farm facilities and because that is the
context in which the Taxpayer has focused its legal arguments, the applicability of the deduction will be
first determined with respect to dairy construction.

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Although there is not a definition of “agricultural implement” in the Gross

Receipts and Compensating Tax Act, it is defined and illustrated in the Department’s

regulations which are presumed to be a correct implementation of the laws which the

Department is charged with administering. Section 9-11-6.2(G) NMSA 1978. A review

of these regulations indicates that the definition is not so broad as the Taxpayer would

urge. Regulation 3 NMAC 2.62.7 (formerly GR Regulation 62:2) defines an agricultural

implement as follows:

An “agricultural implement” is an article of equipment,
such as a tool or instrument, essential to the production of
crops or livestock on a commercial farm or ranch.
(emphasis added.)

This definition would also appear to be a proper interpretation of an agricultural

implement based upon the generally accepted rule of statutory construction that words in

statutes are presumed to be used in their common and ordinary sense. Bettini v. City of

Las Cruces, 82 N.M. 633, 485 P.2d 967 (1971). An implement is defined to be, “a tool or

utensil forming part of equipment for work.” Webster’s Third New International

Dictionary.

In addition to defining an agricultural implement, the Department’s regulations

provide examples of what the Department considers to qualify or not qualify as

agricultural implements. Thus, under the Department regulations, proportioning pumps

used to distribute metered amounts of fertilizer, herbicides, pesticides, fumigants and the

like to crop land by mixing those substances with irrigation water are agricultural

implements. 3 NMAC 2.62.9. Fruit harvesting equipment such as picking sacks, field

boxes, orchard machinery and ladders used for fruit picking are agricultural implements.

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3 NMAC 2.62.10. Metal bins and similar devices designed to store feed on a farm or

ranch, which, in addition to storing, measure and control the flow of feed to livestock are

agricultural implements. 3 NMAC 2.62.11. Things not considered to be agricultural

implements are fuel for irrigation pumps, 3 NMAC 2.62.12; baling wire, 3 NMAC

2.62.15; and irrigation pipe, 3 NMAC 2.62.13.

Of particular interest with respect to the facts of this case is the regulation

concerning irrigation pipe. 3 NMAC 2.62.13.1 provides:

The receipts from building irrigation pipelines for persons
engaged in the business of farming or ranching are receipts
from performing a construction service. The receipts from
the sale of completed construction projects are subject to
the gross receipts tax.

3 NMAC 2.62.13.2 provides:

The deduction provided for by Section 7-9-62 does not
apply to irrigation pipe which becomes an ingredient or
component part of a completed construction project.

Thus, the Department takes the position that materials incorporated into a construction

project, even if it is a construction project related to agriculture, become part of the

construction service provided and are not considered to be agricultural implements. This

position is supported by the definition of “service” as found at Section 7-9-3(K) NMSA

1978. “Service” is defined in pertinent part as follows:

“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. (emphasis
added.)

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Thus, under this definition it is clear that because the Taxpayer was selling his customers

construction services, which includes the materials incorporated in the buildings and

structures it built for its customers, that it was not selling tangible personal property

which could be considered to be agricultural implements.

Lest there be even the smallest doubt that the construction materials supplied by

the Taxpayer for incorporation into its dairy construction projects are not agricultural

implements, the legislative history of Section 7-9-62 provides further support for this

conclusion. The fundamental rule of statutory construction is to ascertain and give effect

to the intention of the legislature. Reese v. Dempsey, 48 N.M. 417, 152 P.2d 157 (1944).

Section 7-9-62 was enacted by Laws 1969, Ch. 144, §52. In addition to allowing a 50%

deduction for agricultural implements and farm tractors, the statute also provides the

same deduction for “vehicles that are not required to be registered under the Motor

Vehicle Code.” As recognized by the New Mexico Supreme Court in City of

Alamogordo v. Walker Motor Co., 94 N.M. 690, 616 P.2d 403 (1980), it is the

demonstrated legislative policy in New Mexico to treat the taxation of motor vehicle sales

differently from the taxation of most other business activities. As evidence of this, the

Court cited to Section 66-6-27 NMSA 1978 (Cum. Supp. 1979) which imposed an excise

tax of 2% of the sales price on the issuance of a certificate of title arising from the sale of

a motor vehicle and to Section 7-9-22 NMSA 1978 which provided that the receipts from

sales of motor vehicles on which a tax was imposed under Section 64-11-15 NMSA 1953

(predecessor to Section 66-6-27 NMSA 1978) were exempt from the gross receipts tax.

As a review of these statutes demonstrates, it has been the legislative policy to exempt the

sales of motor vehicles from the gross receipts tax and to subject them to an excise tax

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under the Motor Vehicle Code. The exemption from gross receipts tax, Section 7-9-22

NMSA 1978 was enacted at the same time and in the same legislative act as the deduction

at issue here, Section 7-9-62. Both were enacted by Laws 1969, ch. 144. It is also

interesting to note that the gross receipts tax rate at that time was 4%. See, Laws 1969,

ch. 144, § 2. In the same legislative session that the exemption from gross receipts tax

for the sale of motor vehicles was enacted and the deduction at issue was enacted, the

excise tax on the issuance of title for motor vehicles was raised to 2% of the sales price.

Laws 1969, ch. 150, §1. Thus, it appears that what the legislature was doing when it

enacted the 50% deduction at issue herein for agricultural implements, farm tractors and

vehicles not subject to registration under the Motor Vehicle Code was to extend the same

effective 2% tax rate to farm vehicles and other vehicles not subject to registration under

the Motor Vehicle Code as was imposed on vehicles subject to registration under the

Motor Vehicle Code. Given this legislative history, it would appear that the 50%

deduction for agricultural implements was actually intended to cover the types of

agricultural implements commonly thought of, such as disks, planters, etc. which are

vehicles because they are pulled behind tractors, but are not the type of vehicles which

must be registered under the Motor Vehicle Code. This interpretation is also supported

by the canon of statutory construction, ejusdem generis, which applies where a statute

enumerates certain classes of things and also uses general words. Under the canon, the

general words are construed to refer to things of the same character as the enumerated

items. Thus “farm implements” should be construed to be items of the same character,

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(e.g. vehicles) as farm tractors, aircraft or vehicles that are not required to be registered

under the Motor Code.2

In addition to the Taxpayer’s receipts from the construction of dairy farm

structures, the Taxpayer also claimed the 50% deduction for its receipts from building

other buildings related to agriculture, such as cattle auction barns, residences for dairy

farm owners, feed storage facilities, a large animal veterinary clinic, etc. Although

related to agriculture, the materials used to construct these structures are not agricultural

implements. They are neither tools or instruments essential to the production of crops or

livestock, but rather, by definition, when sold as part of a construction project as they

were by the Taxpayer in this case, they become part of the construction service and are

subject to gross receipts tax at the full tax rate.

The final issue to be determined is whether penalty was properly imposed upon

the Taxpayer under the facts and circumstances of this case. The imposition of penalty is

governed by the provisions of NMSA 1978, Section 7-1-69(A)(1995 Repl. Pamp.), which

imposes a penalty of two percent per month, up to a maximum of ten percent:

In the case of failure, due to negligence or disregard of rules and regulations,
but without intent to defraud, to pay when due any amount of tax required to
be paid or to file by the date required a return regardless of whether any tax
is due,....

This statute imposes penalty based upon negligence (as opposed to fraud) for failure to

timely pay tax. Thus, there is no contention that the failure to report and pay taxes was

based upon any conscious attempt by the Taxpayer to underreport taxes. What remains to be

determined is whether the Taxpayer was negligent in failing to report its taxes properly.

2
While not deciding this issue as it is not necessary to determining the case at issue, it would appear that
some of the Department’s regulations under Section 7-9-62 go well beyond the legislative intent of what

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Taxpayer "negligence" for purposes of assessing penalty is defined in Regulation 3 NMAC

1.11.10 (formerly TA 69:3) as:

1) failure to exercise that degree of ordinary business care and prudence
which reasonable taxpayers would exercise under like circumstances;

2) inaction by taxpayers where action is required;

3) inadvertence, indifference, thoughtlessness, carelessness, erroneous
belief or inattention.

In this case, the Taxpayer contends that it was not negligent because it relied upon

information provided to it by a Department employee who led the Taxpayer to believe

that it was eligible to claim the deduction for agricultural implements, and by the

Department’s own actions in honoring its claim for refund of taxes based upon its claim

of the deduction for previous years.

Regulation 3 NMAC 1.11.10 contains examples of what the Department

considers to be indications of non-negligence, justifying the abatement of penalty. One of

those examples is where the taxpayer proves that it was affirmatively misled by a

Department employee. I found the testimony of the Taxpayer’s President, Mr. Owen

Voss, to be honest and trustworthy. Although Mr. Voss was unable to testify to the

content of the telephone conversation with the Department employee, the Department’s

actions in approving the Taxpayer’s claim for refund in this case essentially affirmed to

the Taxpayer that it was entitled to claim the deduction at issue herein upon a portion of

its receipts from building structures used for or related to agricultural purposes. Thus, the

Department’s actions misled the Taxpayer and this provides a basis for concluding that

the Taxpayer was not negligent under the circumstances of this case. There being no

should be considered an agricultural implement subject to the deduction.

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negligence by the Taxpayer in the manner in which it reported its taxes, the assessment of

penalty is improper.

CONCLUSIONS OF LAW

1. The Taxpayer filed timely, written protests, pursuant to Section 7-1-24

NMSA 1978 to Assessment Nos. 1982481 and 2004322 and jurisdiction lies over both

the parties and the subject matter of this protest.

2. The construction materials used by the Taxpayer in its construction

business are not agricultural implements within the meaning of Section 7-9-62 NMSA

1978 even though they may be used in constructing buildings used for agricultural

purposes and thus, the Taxpayer was not entitled to claim the deduction provided by

Section 7-9-62 with respect to the sale of those materials.

3. The Taxpayer was not negligent in claiming the deduction found at

Section 7-9-62 NMSA 1978 with respect to the materials it used in building structures

used for agricultural purposes and therefore the assessment of penalty was improper.

For the foregoing reasons, the Taxpayer’s protest IS HEREBY GRANTED IN

PART AND DENIED IN PART. The Department IS HEREBY ORDERED TO ABATE

THE PENALTY ASSESSED BY ASSESSMENT NOS. 1982482 AND 2004322

RELATING TO THE GROSS RECEIPTS TAX ASSESSED THEREIN.

DONE, this 4th day of December, 1997.

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