Halliburton Energy Servs. v. N.M. Taxation & Revenue Dep't
| Decision Date | 15 February 2022 |
| Docket Number | A-1-CA-37978 |
| Court | Court of Appeals of New Mexico |
| Parties | HALLIBURTON ENERGY SERVICES, INC., Protestant-Appellant, v. NEW MEXICO TAXATION & REVENUE DEPARTMENT, Respondent-Appellee, IN THE MATTER OF THE PROTEST OF THE DENIAL OF REFUND ISSUED UNDER LETTER ID NOS. L0037204528, L0708364848, and L1630542128. |
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APPEAL FROM THE ADMINISTRATIVE HEARINGS OFFICE Brian VanDenzen Chief Hearing Officer
Adam P. Feinberg
Washington, DC
Sutin Thayer & Browne
Suzanne Wood Bruckner
Andrew J. Simons
Wade L. Jackson
Albuquerque, NM for Appellant
Peifer, Hanson, Mullins & Baker, P.A.
Mark T. Baker
Albuquerque, NM David Mittle, Special Assistant Attorney General Santa Fe, NM
for Appellee
{¶1} Haliburton Energy Services, Inc. (Taxpayer) appeals from a decision and order of the chief administrative hearing officer (AHO) upholding the New Mexico Taxation and Revenue Department's (the Department) assessment of gross receipts taxes under the Gross Receipts and Compensating Tax Act (the Act), NMSA 1978, §§ 7-9-1 to -119 (1966, as amended through 2021), on a portion of receipts from sales related to hydraulic fracturing (fracking) of oil wells in the Permian Basin. Taxpayer argues (1) the AHO erred in determining that it was not entitled to a deduction for the sale of chemicals pursuant to Section 7-9-65 (1969);[1] (2) the AHO's interpretation of the word "lots" in Section 7-9-65 was improper; and (3) the AHO erred in determining curable resin coated (CRC) proppant is not a chemical. We affirm.
{¶2} Between December 2015 and December 2017, Taxpayer filed three claims for gross receipts tax refunds with the Department totaling approximately 84 million dollars[2] for tax periods between December 1, 2011 and April 30, 2015; March 1, 2012 and December 31, 2014; and December 1, 2012 and October 31, 2014. The Department denied each refund, and Taxpayer protested the denials. The parties agreed to consolidate the protests and bifurcate addressing the issues into two hearings. At the first hearing, the AHO was presented with three issues: (1) for products, other than proppants, for which Taxpayer sought a refund, whether Taxpayer sold the products or used the products during the performance of a service; (2) for the purposes of the deduction under Section 7-9-65, how is a "lot" measured; and (3) whether CRC proppant is a chemical for purposes of Section 7-9-65. The AHO's decision and order at this hearing was dispositive, so a second hearing was not necessary.
{¶3} Fracking is a method used in the oil and gas industry to create fractures in oil or gas bearing formations to maximize oil production. Oil and natural gas is contained within rock formations thousands of feet below ground. The purpose of fracking is to crack rock to connect the underground rock formations and release trapped oil and gas. During the fracking process, Taxpayer pumps fluid into their customers' well sites to create fractures. Taxpayer then pumps proppant or a proppant agent, a type of sand that lodges into cracks to keep the fractures from closing, into the well, allowing the oil and gas to flow. The fluids that are pumped into the ground include acid and fluid systems, which are comprised of various chemicals and compounds, such as a gelling agent, a cross-linker, a breaker for the gel, a buffering agent, and water. During the process, Taxpayer crew members mix the components, then pump the mixtures at varying pressures into their customer's wells.
{¶4} Taxpayer makes three general arguments on appeal. It first argues the AHO erred as a matter of law in the determination that it was not entitled to a deduction for the sale of chemicals used in the fracking process pursuant to Section 7-9-65. It next argues the AHO's interpretation of the word "lots" per Section 7-9-65 was legal error. Finally, it argues the AHO erred in determining CRC proppant is not a chemical.
{¶5} A taxpayer may appeal a decision and order of the AHO for further relief, but we may set aside the decision and order only if it is "(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." NMSA 1978, § 7-1-25(C) (2015); Stockton v. N.M. Tax'n & Revenue Dep't, 2007-NMCA-071, ¶ 8, 141 N.M. 860, 161 P.3d 905.
{¶6} The parties to this case do not dispute the AHO's findings of fact, but rather focus their arguments on the meaning of the statutes in the Act and related regulations that guided the AHO's conclusions of law. Because we must interpret the statutes and regulations in effect at the time, we adhere to a de novo standard in our review. Quantum Corp. v. N.M. Tax'n & Revenue Dep't, 1998-NMCA-050, ¶ 8, 125 N.M. 49, 956 P.2d 848. Nonetheless, "in state taxation cases, although we apply the de novo standard, we consider the issues through the lens of a presumption that the [d]epartment's assessment is correct." Corr. Corp. of Am. v. State, 2007-NMCA-148, ¶ 17, 142 N.M. 779, 170 P.3d 1017; see NMSA 1978, § 7-1-17(C) (2007) ().
{¶7} The Act imposes an excise tax equal to five and one-eighth percent of gross receipts upon any person engaging in business in New Mexico. Section 7-9-4(A). "The purpose of the gross receipts tax is that individuals should pay taxes for the privilege of engaging in business within New Mexico." ITT Educ. Servs., Inc. v. N.M. Tax'n & Revenue Dep't, 1998-NMCA-078, ¶ 5, 125 N.M. 244, 959 P.2d 969 (internal quotation marks and citation omitted). The Act establishes a presumption that all receipts are taxable. Section 7-9-5(A) (2002).[3] When as here, we construe a statutory exception to a tax, we do so strictly in favor of the taxing authority. Chavez v. Comm'r of Revenue, 1970-NMCA-116, ¶ 7, 82 N.M. 97, 476 P.2d 67.
{¶8} Given these presumptions, "the party claiming entitlement to an exemption or deduction from the gross receipts tax bears the burden of clearly overcoming" the presumptions. Pub. Serv. Co. of N.M. v. N.M. Tax'n & Revenue Dep't, 2007-NMCA-050, ¶ 32, 141 N.M. 520, 157 P.3d 85. "The exemption must be clearly and unambiguously expressed in the statute, and must be clearly established by the taxpayer[.]" Id. (internal quotation marks and citation omitted).
{¶9} Generally, "[i]n construing the language of a statute, our goal and guiding principle is to give effect to the intent of the Legislature." Lujan Grisham v. Romero, 2021-NMSC-009, ¶ 23, 483 P.3d 545. "In determining legislative intent, [appellate courts] look to the plain language of the statute and the context in which it was enacted, taking into account its history and background." Pirtle v. Legis. Council, 2021-NMSC-026, ¶ 14, 492 P.3d 586. "[W]here the language of the legislative act is doubtful or an adherence to the literal use of words would lead to injustice, absurdity or contradiction, the statute will be construed according to its obvious spirit or reason, even though this requires the rejection of words or the substitution of others." N.M. Real Estate Comm'n v. Barger, 2012-NMCA-081, ¶ 7, 284 P.3d 1112 (internal quotation marks and citation omitted). Moreover, "[w]e consider all parts of the statute together, reading the statute in its entirety and construing each part in connection with every other part to produce a harmonious whole." Dep't of Game & Fish v. Rawlings, 2019-NMCA-018, ¶ 6, 436 P.3d 741 (alterations, internal quotation marks, and citation omitted).
(Emphasis added.) The parties stipulated to the AHO that the question of whether "for products, other than proppants for which Taxpayer seeks a refund, did Taxpayer sell the products or did the Taxpayer use those products during the performance of a service?" Reframing the parties' stipulation slightly, we see the question before us as whether receipts associated for the provision of fracking amount to a sale of chemicals under the Act. Taxpayer argues that because fracking does not meet the definition of a service under the Act, see § 7-9-3(M) (2007), which statutorily codified the predominant ingredient test, the transactions at issue were predominantly sales of chemicals and thus subject to Section 7-9-65's deduction for receipts from selling chemicals or reagents in lots in excess of eighteen tons. Under the predominant ingredient test we look to the seller's relative investment of skills and materials to determine what constitutes the predominant ingredient of the transaction and accordingly determine whether a transaction is a sale of a service. E G & G, Inc. v. Dir., Revenue Div. Tax'n & Revenue Dep't, 1979-NMCA-139, ¶¶...
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