GTE Southwest Inc. v. Taxation and Revenue Dept.

Decision Date27 February 1992
Docket NumberNo. 12419,12419
Citation830 P.2d 162,113 N.M. 610,1992 NMCA 24
PartiesGTE SOUTHWEST INCORPORATED, Plaintiff-Appellant, v. TAXATION AND REVENUE DEPARTMENT, Defendant-Appellee.
CourtCourt of Appeals of New Mexico
OPINION

HARTZ, Judge.

GTE Southwest Incorporated (GTE) appeals from an order of the Taxation and Revenue Department (Department) denying its protest of an assessment for gross receipts tax and a penalty with respect to the reporting period from January 1, 1984, through December 31, 1986. The taxes were imposed on (1) receipts of payments from interstate telephone carriers for access to GTE's local telephone services; (2) receipts of payments from interstate carriers for ancillary services rendered by GTE, such as billing GTE customers for telephone service provided by interstate carriers; and (3) receipts of payments from GTE customers which are identified as pass-throughs of municipal franchise fees. We hold that the gross receipts tax was properly assessed on receipts for ancillary services and for pass-throughs of franchise fees, but no tax should have been assessed on receipts for access services. Of great assistance in our review of this case was the decision and order by hearing officer Gerald B. Richardson. Because his decision and order can serve as a model for administrative law rulings, we attach it as an appendix to this opinion. See William W. Bivins, Findings and Conclusions: A Modest Proposal for Preparation Using a Different Technique, 30 B.Bull.No. 48, at 4, (N.M.1991).

I. ACCESS SERVICES
A. Background

To explain access services, we begin with some history. The Modified Final Judgment (MFJ) entered in United States v. American Telephone & Telegraph Co., 552 F.Supp. 131 (D.D.C.1982), aff'd sub nom. Maryland v. United States, 460 U.S. 1001, 103 S.Ct. 1240, 75 L.Ed.2d 472 (1983), ordered American Telephone and Telegraph Company (AT & T) to divest its telephone subsidiaries effective January 1, 1984. As a result of the divestiture, the United States was divided into 161 "local access and transport areas" (LATAs). A company cannot provide telephone services both within LATAs and between LATAs. See AT & T Communications v. Department of Revenue, 778 P.2d 677, 678-79 (Colo.1989) (en banc). InterLATA service is provided by such companies as AT & T, Sprint, and MCI. GTE provides intraLATA service. New Mexico is composed of only one LATA. Therefore, in New Mexico all intrastate calls are intraLATA calls and all interstate calls are interLATA calls.

Under the new arrangement, an interLATA call consists of three components. A customer originates the call by sending the signal over the local exchange on equipment owned by an intraLATA company. The intraLATA company routes the call to a switching center operated by the customer's interLATA carrier. This is the originating link. The interLATA carrier then routes the signal over its long-distance lines and equipment to a switching center in the destination LATA. This is the intermediate link. Finally, the signal is switched from the interLATA carrier to the local exchange network owned by the intraLATA company serving the destination, and the local carrier routes the signal to the end-user receiving the call. This is the terminating link. See id.; GTE Sprint Communications Corp. v. Department of Treasury, 179 Mich.App. 276, 445 N.W.2d 476, 477 (1989); GTE Sprint Communications Corp. v. Wisconsin Bell, 155 Wis.2d 184, 454 N.W.2d 797, 799 (1990). If, for example, a GTE customer in Hobbs wishes to make a long-distance call via AT & T to someone in Dallas who uses Southwestern Bell as her local carrier, (1) the originating link routes the call over GTE equipment from the Hobbs customer to the AT & T switching center in Hobbs, (2) the intermediate link routes the call on AT & T equipment from Hobbs to the AT & T switching center in Dallas, and (3) the terminating link routes the call from the AT & T switching center over Southwestern Bell lines to the recipient of the call in Dallas. Physically, the process may be identical to what it was prior to divestiture, but the business entities involved and their relationships to one another are now likely to be radically different.

Under this new regime, the customer placing the long distance call pays the interLATA carrier for the long distance service. The interLATA carrier in turn must pay a charge to the intraLATA carriers at each end of the telephone call. "Access service" is defined by the Federal Communications Commission as including "services and facilities provided for the origination or termination of any interstate or foreign telecommunication." 47 C.F.R. Sec. 69.2(b) (1990). The fee paid by the interLATA carrier to the intraLATA carrier for access to the local exchange network is called an access charge. See 47 C.F.R. ch. I., subch. B, pt. 69 (1990) (FCC rules for access charges).

GTE has paid and protested a gross receipts tax of $969,311.03 on access charges and a penalty of $114,446.53 arising from delay in paying the protested tax. The protested tax was assessed for receipts from access charges between January 1, 1984--the official date of the AT & T divestiture--and July 1, 1986--the effective date of an amendment to the New Mexico Gross Receipts and Compensating Tax Act that clearly deducted access charges from gross receipts. NMSA 1978, Sec. 7-9-56(C) (Repl.1986); 1986 N.M. Laws, ch. 52, Sec. 7 (effective date).

B. Discussion

The pertinent statutory provision is the following language from the version of NMSA 1978, Section 7-9-55 (Repl.Pamp.1983), in effect during the period at issue in this case:

Receipts from transmitting messages or conversations by telegraph, telephone or radio other than from one point in this state to another point in this state ... may be deducted from gross receipts.

Reading the statutory provision today, it may seem ambiguous. The ambiguity concerns what is being modified by the words "other than from one point in this state to another point in this state." If the phrase is read as modifying the verb "transmitting," then the tax could be imposed with respect to a transmission between two points in New Mexico even if the message originated outside of New Mexico or was destined for a point outside of New Mexico. For example, when a call is placed from Hobbs to Dallas the tax could be imposed on a receipt for the transmission over GTE lines between the caller in Hobbs and the AT & T switching center in Hobbs. If, on the other hand, the phrase is read as modifying "messages or conversations," then the tax could be imposed only if the message or conversation originated at one point in the state and was destined for another point in the state. Under this reading, the state could not impose the tax with respect to an intrastate component of the transmission of an interstate telephone conversation between New Mexico and another state.

The proper reading is set forth in our supreme court's decision in Ealey v. Bureau of Revenue, 89 N.M. 160, 548 P.2d 440 (1976). The State Bureau of Revenue attempted to impose a gross receipts tax on compensation Mrs. Ealey received as an agent for Western Union Telegraph Company in Farmington, New Mexico. She was paid seventy cents per message that she sent or received. She transmitted both intrastate and interstate messages. Interstate messages that she sent or received were relayed through the Western Union office in Albuquerque. Apparently the transfer of the message to or from the national wires was nearly automatic. The supreme court held that Mrs. Ealey's compensation with respect to interstate messages was exempt under Section 7-9-55, which was then codified as NMSA 1953, Section 72-16A-14.10 (Supp.1975). The pertinent language was identical to the language in effect during the taxing period at issue in this case. The court first held that Mrs. Ealey's compensation consisted of "receipts from transmitting messages." Id. at 161, 548 P.2d at 441. The court then stated that the language of the section "appears to us to be clear and unambiguous and is applicable to [Mrs. Ealey] insofar as she transmits interstate messages." Id. As we understand Ealey, if the message is an "interstate message," then a receipt from transmitting it is deductible from gross receipts, even if the receipt relates only to an intrastate component (say, from Farmington to Albuquerque) of the interstate transmission. In other words, Ealey read the statutory language "other than from one point in this state to another point in this state" as modifying "messages or conversations."

The Department attempts to distinguish Ealey on two grounds. First, it notes that "Mrs. Ealey was an agent of Western Union, using the Western Union network to transmit the message." In contrast, GTE is independent of every interstate carrier. The Ealey opinion itself referred to Mrs. Ealey's status as an agent. The reference appears in the following passage:

[I]n unequivocal language the words "receipts from transmitting messages" describe [Mrs. Ealey's] position. In addition, she is an agent of Western Union and not an independent contractor. Her activities are vital to the only purpose involved, i.e., the transmission of messages, both interstate and intrastate.

Id. The opinion does not, however, explain why Mrs. Ealey's status as an agent was material to the result, nor does the Department provide an explanation. We do not read Ealey as suggesting that an independent contractor could be taxed for receipts from the intrastate transmission of a message that had originated outside the state or that was destined to be forwarded interstate by another carrier. Rather, Ealey seems to be saying that even if a person does not actually transmit a...

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