New Mexico Depo v. New Mexico Taxation & Revenue Department, 010421 NMCA, A-1-CA-37835

Docket NºA-1-CA-37835
Opinion JudgeBRIANA H. ZAMORA, JUDGE
Party NameNEW MEXICO DEPO and ANA KOEBLITZ, Protestants-Appellants, v. NEW MEXICO TAXATION & REVENUE DEPARTMENT, Respondent-Appellee.
AttorneyNew Mexico Litigation Group, LLC Robert Koeblitz Albuquerque, NM for Appellants Hector H. Balderas, Attorney General Regina Ryanczak, Special Assistant Attorney General Santa Fe, NM for Appellee
Judge PanelWE CONCUR: JENNIFER L. ATTREP, Judge, ZACHARY A. IVES, Judge
Case DateJanuary 04, 2021
CourtCourt of Appeals of New Mexico

NEW MEXICO DEPO and ANA KOEBLITZ, Protestants-Appellants,

v.

NEW MEXICO TAXATION & REVENUE DEPARTMENT, Respondent-Appellee.

No. A-1-CA-37835

Court of Appeals of New Mexico

January 4, 2021

APPEAL FROM THE ADMINISTRATIVE HEARINGS OFFICE Chris Romero, Hearing Officer

New Mexico Litigation Group, LLC Robert Koeblitz Albuquerque, NM for Appellants

Hector H. Balderas, Attorney General Regina Ryanczak, Special Assistant Attorney General Santa Fe, NM for Appellee

OPINION

BRIANA H. ZAMORA, JUDGE

{¶1} Ana Koeblitz (Taxpayer) appeals from an administrative hearing officer's decision and order upholding an assessment of gross receipts tax liability made by the New Mexico Taxation and Revenue Department (the Department) pursuant to the Gross Receipts and Compensating Tax Act (GRCTA), NMSA 1978, §§ 7-9-1 to -117 (1966, as amended through 2020). Taxpayer argues that New Mexico law only permits the Department to impose tax liability on the individual or entity who is engaging in business in New Mexico, and contends that the hearing officer erred in holding her personally liable for taxes that should have been assessed against a limited liability company (LLC) that was engaged in business. We reverse.

BACKGROUND

{¶2} New Mexico law imposes gross receipts tax on all entities that engage in business in New Mexico. See § 7-9-4. With limited exceptions not relevant to this case, the Department requires taxpayers subject to gross receipts tax to register with the Department. When a taxpayer registers and opens an account with the Department, the Department issues the taxpayer a Combined Reporting System (CRS) number for the purposes of identification and tracking. If a taxpayer with an existing CRS number converts from one form of legal entity to another (e.g., from a sole proprietorship to an LLC), the Department requires the taxpayer to submit a business tax registration update. Upon receipt of an updated business registration, the Department apparently closes the taxpayer's existing account, opens a new account to reflect the change in the taxpayer's legal status, and assigns the taxpayer a new CRS number.

{¶3} In 2009, Taxpayer established New Mexico Depo, a business which provides court reporting services. New Mexico Depo registered with the Department and was assigned a CRS number for tax reporting purposes in January 2009. From 2009 until 2012, Taxpayer operated New Mexico Depo as a sole proprietorship. See Jackson Constr. Inc. v. Smith, 2012-NMCA-033, ¶ 14, 277 P.3d 470 (clarifying that "a sole proprietor is simply a single individual who owns all the assets of a business, is solely liable for its debts and employs in the business no person other than himself" (internal quotation marks and citation omitted)). However, on January 17, 2012, Taxpayer converted New Mexico Depo into an LLC.

{¶ 4} However, Taxpayer did not update New Mexico Depo's registration, and New Mexico Depo continued to operate under the original CRS number assigned to the sole proprietorship. Following the 2012 conversion, Taxpayer held out New Mexico Depo, LLC as an LLC to the general public. New Mexico Depo's business records, profit and loss statements, bank statements, and its Federal Employee Identification Number reflect that it was operating as an LLC during this period.

{¶5} At some point prior to May 2014, the Department's computerized auditing system detected a mismatch between the information Taxpayer reported to the Internal Revenue Service and the information Taxpayer reported to the Department. When such a mismatch is detected, the computerized auditing system automatically assigns an auditor to review the discrepancy. In this case, auditor Laura Gage was assigned to review New Mexico Depo's records. During the course of her review, Gage discovered that New Mexico Depo had registered with the Secretary of State as an LLC, even though the Department's records continued to reflect that New Mexico Depo was a sole proprietorship. After conferring with her supervisor regarding the discrepancy, Gage updated the Department's computerized records to reflect that New Mexico Depo was operating as an LLC as of May 9, 2014, but Gage did not issue a new CRS number to the LLC, and New Mexico Depo continued to operate under the previously assigned CRS number.1

{¶ 6} On October 12, 2017, the Department issued a Notice of Assessment of Taxes and Demand for Payment for gross receipts tax against Taxpayer as the sole proprietor of New Mexico Depo for the 2012 tax year. Taxpayer protested the tax assessment, and a hearing officer was assigned to hear the protest. During the protest, Taxpayer argued, among other things, that the Department had no legal authority to assign tax liability generated by an LLC to a sole proprietorship.

{¶ 7} The hearing officer denied the protest. Because Taxpayer did not submit an updated registration alerting the Department that New Mexico Depo had converted to an LLC, the hearing officer found that, at the time the tax liability was incurred, the CRS number on file with the Department was assigned to Taxpayer, as the sole proprietor of New Mexico Depo, rather than New Mexico Depo, LLC. The hearing officer concluded that "New Mexico Depo, the sole proprietorship, is obligated for the liability subject of the assessment . . . since that was the identity of the taxpayer engaging in business in New Mexico." This appeal followed.

DISCUSSION

{¶8} We presume that an "assessment of taxes or demand for payment made by the [D]epartment is . . . correct." NMSA 1978, § 7-1-17(C) (2007); see Corr. Corp. of Am. v. State, 2007-NMCA-148, ¶ 17, 142 N.M. 779, 170 P.3d 1017. The burden is on the taxpayer to overcome the presumed correctness of the Department's assessment. See Archuleta v. O'Cheskey, 1972-NMCA-165, ¶ 11, 84 N.M. 428, 504 P.2d 638. On appeal, a decision and order issued by a hearing officer for an administrative agency will only be set aside 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." Team Specialty Prods., Inc. v. N.M. Tax'n & Revenue Dep't, 2005-NMCA-020, ¶ 8, 137 N.M. 50, 107 P.3d 4 (internal quotation marks and citation omitted). "An agency abuses its discretion [if] its decision is not in accord with legal procedure or supported by its findings, or when the evidence does not support its findings[ or] . . . when its decision is contrary to logic and reason." Oil Transp. Co. v. N.M. State Corp. Comm'n, 1990-NMSC-072, ¶ 25, 110 N.M. 568, 798 P.2d 169 (citation omitted).

{¶ 9} On appeal, Taxpayer argues that Section 7-9-4 of the GRCTA imposes tax liability only on a "person" who is "engaging in business in New Mexico." Taxpayer contends that she cannot be held individually liable for taxes assessed...

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