Grogan v. NM TAXATION & REVENUE DEPT.

• Decision Date: 11 December 2002
• Docket Number: No. 22,552.,22,552.
• Citation: 133 N.M. 354,62 P.3d 1236
• Parties: Vicki C. GROGAN, d/b/a Tobacco Patch, Id. No. 02-397117-00-7, Protestant-Appellant, v. NEW MEXICO TAXATION AND REVENUE DEPARTMENT, Respondent-Appellee.
• Court: Court of Appeals of New Mexico

62 P.3d 1236

133 N.M. 354

Vicki C. GROGAN, d/b/a Tobacco Patch, Id. No. 02-397117-00-7, Protestant-Appellant, v. NEW MEXICO TAXATION AND REVENUE DEPARTMENT, Respondent-Appellee.

No. 22,552.

Court of Appeals of New Mexico.

December 11, 2002.

Certiorari Denied January 31, 2003.

Matthew E. Cohen, Clara Ann Bowler, Albuquerque, NM, for Appellant.

Patricia A. Madrid, Attorney General, Bruce J. Fort, Special Assistant Attorney General, Santa Fe, NM, for Appellee.

Certiorari Denied, No. 27,856, January 31, 2003.

OPINION

SUTIN, Judge.

{1} Taxpayer Vicki C. Grogan, d/b/a Tobacco Patch, appeals from a New Mexico Taxation and Revenue Department hearing officer's decision and order upholding the Department's gross receipts tax assessment against Taxpayer's unreported receipts from "buy-down" contracts and "shelf-display" contracts with cigarette manufacturers. Taxpayer also appeals the Department's assessment of a penalty for negligence. We affirm.

BACKGROUND

{2} Taxpayer is a sole proprietor engaged in the retail sale of tobacco products purchased from wholesale suppliers. She entered into two types of written contracts directly with cigarette manufacturers. These contracts are known in the industry as "buy-down" and "shelf-display" contracts.

The Buy-down Contracts

{3} Under the buy-down contracts, Taxpayer agreed with the manufacturers to advertise and sell cigarettes at a specified discount for a specified period of time, known as the promotion time. The manufacturers paid Taxpayer amounts (hereafter payments) that essentially made up the difference between Taxpayer's usual retail price and the discounted price set in the contracts.

{4} It is the manner in which the parties characterize the nature of the payments that creates the issue for appeal. Taxpayer contends the payments are inventory based. She asserts that, under the contracts, the payments are refunds based on Taxpayer's inventory, not based on sales. Taxpayer thus characterizes the contracts as involving the cost of doing business. She argues that the discount benefits the manufacturers because it reduces Taxpayer's inventory expenses, allowing her to offer special discounts and thereby increase her volume of sales. She points out that the evidence, consisting of worksheets she prepared for the manufacturers, showed that the payments were based on inventory records from which Taxpayer set out her beginning inventory, inventory thereafter purchased, and ending inventory. From this, Taxpayer argues that the manufacturers intended to give a discount based on inventory, because "[i]f the manufacturer[s] intended to give a discount on sales, [they] would have calculated the discount directly from Taxpayer's retail sales records."

{5} The Department describes the contracts as ones in which Taxpayer is either (1) being reimbursed by the manufacturers for the revenue foregone from selling cigarettes at a discounted price, or (2) receiving consideration for promoting the sale of cigarettes at a discounted price. The Department argues that the arrangement does not create a "retroactive discount" on new purchases of inventory. The nature of the buy-down programs, the Department explains, is not that of inventory purchase and reduction, lowering the cost of doing business by the payments. Rather, the Department asserts, the nature of the programs is that of keeping track of cigarettes sold at a discount and then receiving payments for the promoted sales.

{6} The hearing officer entered the following findings of fact:

5. Under the terms of her buydown contracts (also referred to by some manufacturers as a "price promotion" or "discount program"), the Taxpayer agreed to reduce the price of certain brands of cigarettes by a specified dollar amount for a specified period of time. The Taxpayer also agreed to cooperate with the cigarette manufacturer in posting signs to advertise the discounted price. In return, the manufacturer agreed to pay the Taxpayer the difference between her usual retail price and the discounted price of the cigarettes covered by the agreement.

6. The amount of the buydown was determined by calculating the Taxpayer's inventory of covered cigarettes on the day the promotion began, adding inventory purchased during the promotion and then subtracting the inventory remaining at the end of the promotion. The resulting figure, which equaled the number of cigarettes sold at the discounted price, was then multiplied by the amount of the discount.

7. Because the Taxpayer was reimbursed the exact amount of the sales discount, the buydown program did not generate additional profit for the Taxpayer on a per pack or per carton basis. The Taxpayer did benefit, however, from the increased traffic and sales volume that resulted from selling cigarettes at a discounted price.

8. When selling cigarettes under the terms of a buydown contract during the audit period, the Taxpayer charged her customers gross receipts tax on the discounted price and did not include the buydown amount she received from the manufacturer when reporting her gross receipts to the Department.

Taxpayer challenges findings of fact numbered 5 and 7. She also challenges the hearing officer's conclusion of law number 2 that "[t]he Taxpayer's receipts from her buy-down contracts with cigarette manufacturers come within the definition of gross receipts and are subject to tax."

The Shelf-Display Contracts

{7} Under one-year shelf-display contracts, representatives of the manufacturers set up and stocked their own shelf and counter displays at a designated location in Taxpayer's store. The dispute centers on whether these contracts constituted leases or licenses.

{8} The hearing officer found that, under the terms of these contracts, Taxpayer (1) permitted manufacturers "to place free-standing, movable shelves at designated places in the store and temporary displays on the counter or hanging from the ceiling"; (2) gave manufacturers a priority over shelf and advertising placement and feet of shelf space based on sales volume; and (3) agreed that each manufacturer would set up and stock its own displays, but had access to do so only during the hours Taxpayer's store was open, 6 a.m. to 6 p.m., six days a week. The hearing officer also found that Taxpayer kept the shelves stocked for the manufacturers during the month-long period between the representatives' visits to the store. The hearing officer concluded that "[t]he Taxpayer's receipts from her shelf-display contracts with cigarette manufacturers are not receipts from the lease of real property, and the Taxpayer is not entitled to the deduction provided in [the statutes]." Taxpayer challenges this conclusion of law. Taxpayer does not challenge the findings of fact, but contends evidence presented at trial not recited in the findings should be considered.

The Assessment, Protest, and Administrative Decision

{9} In an administrative hearing on Taxpayer's protest, the Department's hearing officer upheld the Department's assessments of (1) gross receipts tax of $23,931.86 on unreported "buy-downs" received by Taxpayer from manufacturers; (2) tax of $555.23 on unreported receipts under the shelf-display contracts; (3) a penalty based on Taxpayer's negligence; and (4) interest associated with the two assessments. Pursuant to NMSA 1978, § 7-1-25 (1989), Taxpayer appeals the hearing officer's decision and order upholding the Department's assessments of gross receipts tax and penalty.

DISCUSSION

A. The Standard of Review and Presumptions

{10} We will set aside the "decision and order of the hearing officer only if found to be: (1) arbitrary, capricious or an abuse of discretion; (2) not supported by substantial evidence in the record; or (3) otherwise not in accordance with the law." § 7-1-25(C); Carlsberg Mgmt. Co. v. Taxation & Revenue Dep't, 116 N.M. 247, 249, 861 P.2d 288, 290 (Ct.App.1993). "We view the evidence in the light most favorable to the [Department's] decision to determine whether the decision is supported by substantial evidence in the record as a whole." Id.; Brim Healthcare, Inc. v. Taxation & Revenue Dep't, 119 N.M. 818, 819, 896 P.2d 498, 499 (Ct.App.1995). To the extent our review involves interpretation of a statute, or the application of law to undisputed facts, the review is de novo. Quantum Corp. v. Taxation & Revenue Dep't, 1998-NMCA-050, ¶ 8, 125 N.M. 49, 956 P.2d 848.

{11} There exists a statutory presumption that all receipts are taxable. NMSA 1978, § 7-9-5 (1966) (amended 2002). The taxpayer claiming that receipts are not taxable bears the burden of proving that assertion. TPL, Inc. v. Taxation & Revenue Dep't, 2000-NMCA-083, ¶ 8, 129 N.M. 539, 10 P.3d 863, cert. granted, 129 N.M. 519, 10 P.3d 843; ITT Educ. Servs., Inc. v. Taxation & Revenue Dep't, 1998-NMCA-078, ¶ 5, 125 N.M. 244, 959 P.2d 969; Brim Healthcare, 119 N.M. at 820, 896 P.2d at 500; Wing Pawn Shop v. Taxation & Revenue Dep't, 111 N.M. 735, 741, 809 P.2d 649, 655 (Ct.App. 1991).

{12} The Department's assessment is presumed to be correct. NMSA 1978, § 7-1-17(C) (1992); Carlsberg, 116 N.M. at 249,861 P.2d at 290. "The effect of the presumption of correctness is that the taxpayer has the burden of coming forward with some countervailing evidence tending to dispute the factual correctness of the assessment made by the secretary. Unsubstantiated statements that the assessment is incorrect cannot overcome the presumption of correctness." 3.1.6.12(A) NMAC 2001.

B. The Buy-down Contract Payments Are Taxable

{13} Our initial inquiry is whether the payments made under the buy-down contracts constitute taxable gross receipts. The inquiry centers on whether the payments are to be taxed as reimbursements of revenue that would have otherwise been lost due to the sale of cigarettes at a discounted price, or whether the payments are to be viewed as a method of lowering the cost of doing business and therefore are not taxable. The inquiry includes...