Dell Catalog Sales v. Taxation & Rev. Dept.

Citation2009 NMCA 001,199 P.3d 863
Decision Date03 June 2008
Docket NumberNo. 26,843.,26,843.
PartiesDELL CATALOG SALES L.P., Protestant-Appellant, v. TAXATION AND REVENUE DEPARTMENT OF the State of NEW MEXICO, Respondent-Appellee.
CourtCourt of Appeals of New Mexico

Freedman Boyd Daniels Hollander, Goldberg & Ives, P.A., John W. Boyd, Albuquerque, NM, Jones Day, Maryann B. Gall, Todd S. Swatsler, Laura A. Kulwicki, Columbus, OH, for Appellant.

Gary K. King, Attorney General, Peter Breen, Special Assistant Attorney General, Julia Belles, Special Assistant Attorney General, Santa Fe, NM, for Appellee.

OPINION

FRY, Judge.

{1} Dell Catalog Sales L.P. (Taxpayer) appeals from a decision and order of a hearing officer of the New Mexico Taxation and Revenue Department (the Department). Pursuant to the Gross Receipts and Compensating Tax Act (the Act), NMSA 1978, §§ 7-9-1 to -111 (1966, as amended through 2007), the Department assessed gross receipts taxes on Taxpayer's mail-order computer sales and compensating taxes on Taxpayer's use of distributed catalogs. Taxpayer disputes that its activities are subject to gross receipts and compensating taxes, arguing that imposition of the taxes (1) is wrong under the language of the Act itself and (2) violates the Commerce Clause of the United States Constitution. We affirm the hearing officer's assessments of both gross receipts tax and compensating tax.

BACKGROUND

{2} Taxpayer is a Texas limited partnership with its principal place of business in Round Rock, Texas. Taxpayer does not own or lease property in New Mexico, has no retail stores within the state, and has no sales agents or employees here. Taxpayer does not franchise or license its trade name in New Mexico.

{3} Taxpayer, an entity created to sell computers to individual customers, is a partnership owned entirely by Dell, Inc. (known as Dell Computer Corporation at the time of the audit). Dell, Inc. owned several other limited partnerships, including Dell USA, L.P., which "performed general and administrative services for the other limited partnerships," Dell Products, L.P., which researched, developed, and manufactured computer products for the other limited partnerships, and Dell Marketing, L.P. and Dell Direct Sales, L.P., which sold computers to businesses and institutions. The limited partnerships were separately controlled by their own individual "executives, officers and employees who were responsible for the policy-making and day-to-day operations." The separate entities did not distinguish themselves by their separate names in contracts and advertising materials with outside parties, referring to themselves collectively and individually as "Dell."

{4} Taxpayer, using a "direct-to-the-customer sales model," sold computers to individual customers, which entailed Taxpayer's purchasing computers and related goods from Dell Products L.P. and re-selling them to individual consumers by way of mail-order catalogs and internet sales. At all relevant times, individual customers contacted Taxpayer in Round Rock, Texas, directly by telephone, mail, or over the internet and placed orders by email, telephone, mail, or facsimile. Taxpayer shipped the computers and merchandise to customers in New Mexico on a common carrier selected by Taxpayer; customers did not have the option to pick up their merchandise directly. The contracts between Taxpayer and its customers specified that the title to the merchandise transferred from Taxpayer to the customer upon shipment from the facility outside of New Mexico, but Taxpayer retained the risk of loss on merchandise until delivery to the customer.

{5} Under the name Dell Home Systems, Taxpayer also advertised by mailing catalogs to potential customers in New Mexico. The catalogs were not designed, printed, prepared, or stored in New Mexico, and they were mailed from out of state into New Mexico. Taxpayer also advertised in national specialty magazines but never entered New Mexico to purchase or display advertising materials.

{6} Taxpayer's merchandise was covered by a manufacturer's limited warranty covering parts and labor in the first year and parts only in the second and third years. The warranty did not provide for "on-site repair services"; rather, it required that a customer ship the defective part(s) back to Taxpayer in Texas for repair or replacement. If the customer was willing to replace a defective part, then Taxpayer would mail the replacement part to the customer and include a prepaid return shipping label for the customer to return the defective part.

{7} For those customers who wanted on-site repair service, Taxpayer contracted with a third-party service provider, BancTec U.S.A., Inc. (BancTec), to repair Dell computers at the customers' homes under service contracts that Taxpayer sold to customers. BancTec is a Delaware corporation with its principal place of business in Dallas, Texas. Taxpayer has no ownership interest in BancTec, and BancTec owns no part of Taxpayer's limited partnership or any other Dell enterprise.

{8} Essentially, Taxpayer sold service contracts to its customers who bought computers, and Taxpayer negotiated with BancTec for BancTec to provide the in-home service repairs on the computers. Purchasers of computers had the option of purchasing a service contract at the time they purchased the computer or at any subsequent time. For example, when a customer ordered a computer over the phone, Taxpayer's representative would ask the customer if he wished to purchase a service contract. Taxpayer often "bundled" the cost of the service contract with other items in the sales package as a marketing tool.

{9} Following a purchase, when a customer in New Mexico contacted Taxpayer regarding a problem with a Dell computer, Dell Customer Technical Support (Technical Support) would first troubleshoot and attempt to resolve the problem over the phone. Only if Technical Support was unable to diagnose and correct the problem over the phone would Technical Support then contact BancTec to dispatch a technician to the customer's house to service the computer. Customers did not contact BancTec directly, but had to go through Taxpayer, and BancTec's name did not appear in Taxpayer's advertising materials. BancTec was required to accept all contracts sold by Taxpayer, and BancTec was the only service provider with which Taxpayer contracted to provide service at the time of the audit. The hearing officer found that "[t]he availability of in-home service was an important factor in establishing [Taxpayer's] market for sales." Approximately seventy-five percent of Taxpayer's customers in New Mexico purchased the additional service contract.

{10} Once BancTec was dispatched to the customer, its activities were specifically defined in the agreement between Taxpayer and BancTec. For example, BancTec had to contact the customer within thirty minutes of the notice of dispatch, track every service call, and train its technicians to meet a certain skill level. BancTec's employees had to "conduct themselves in a manner that would professionally and positively represent the parent company as well as Dell Computer Corporation and other partners."

{11} After BancTec technicians diagnosed the problem on a service call, Technical Support would ship any parts necessary for a repair to a warehouse in Austin, Texas, owned by Taxpayer and subleased by BancTec. BancTec was required to use replacement parts issued by Technical Support, and BancTec, prohibited from using the parts provided by Taxpayer for any purpose other than servicing a customer's computer, was essentially a bailee of the replacement parts issued by Technical Support. If BancTec could not resolve the problem or had further complications on a call, the BancTec technician was required to call Technical Support for additional assistance.

{12} If the customer was unsatisfied with the BancTec technician, the customer did not report the complaint directly to BancTec but instead registered the complaint with Technical Support, which in turn reported the problem to BancTec management. BancTec's work was warranted to Taxpayer, not to the individual customers themselves. The agreement between Taxpayer and BancTec provided that, in the event BancTec's "service level performance" was below a certain level for a set period of time, Taxpayer could take over BancTec's obligations or assign the obligations to another third party.

{13} BancTec was paid based on a formula that considered, among other factors, the number of on-site service repairs made during the previous ninety-day period and the level of BancTec's performance. The arrangement was profitable to both BancTec and Taxpayer. Dell, Inc. acted as agent for BancTec, registered BancTec in New Mexico, and paid all New Mexico gross receipts tax on Taxpayer's sale of BancTec's service agreements to New Mexico customers.

{14} In July 1999, the Department audited Taxpayer and determined that Taxpayer had not reported or paid either gross receipts taxes owed on its sales of computers to New Mexico customers or compensating taxes owed on the value of advertising materials Taxpayer distributed in New Mexico. The Department assessed a total of $1,817,693.43 for the period from January 1993 to June 1999, which included $1,140,735.71 for gross receipts tax and $31,908.69 for compensating tax. Taxpayer filed a written protest to the assessment.

{15} After a formal hearing before a hearing officer, the hearing officer submitted a sixty-page decision and order, incorporating many findings of fact based on the stipulated facts and the testimony at the hearing. The hearing officer concluded that: (1) Taxpayer was selling property in New Mexico and was liable for gross receipts tax on the sales, (2) imposition of the gross receipts tax did not violate the Commerce Clause of the United States Constitution, and (3) Taxpayer was liable for compensating tax on the catalogs it mailed...

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