Phillips Mercantile Co. v. New Mexico Taxation and Revenue Dept.

• Decision Date: 16 January 1990
• Docket Number: No. 10650,10650
• Citation: Phillips Mercantile Co. v. New Mexico Taxation and Revenue Dept., 786 P.2d 1221, 109 N.M. 487, 1990 NMCA 6 (N.M. App. 1990)
• Parties: PHILLIPS MERCANTILE COMPANY, Appellant, v. The NEW MEXICO TAXATION AND REVENUE DEPARTMENT, Appellee.
• Court: Court of Appeals of New Mexico

Page 1221

786 P.2d 1221

109 N.M. 487

PHILLIPS MERCANTILE COMPANY, Appellant, v.The NEW MEXICO TAXATION AND REVENUE DEPARTMENT, Appellee.

No. 10650.

Court of Appeals of New Mexico.

Jan. 16, 1990.

Charles L. Saunders, Jr., Colin L. Adams, Kemp, Smith, Duncan & Hammond, P.C., Albuquerque, for appellant.

Hal Stratton, Atty. Gen., Carolyn A. Wolf, Sp. Asst. Atty. Gen., Santa Fe, for appellee.

OPINION

ALARID, Judge.

Taxpayer, Phillips Mercantile Company(Phillips), appeals a decision and order of the Secretary of the Taxation and Revenue Department of the State of New Mexico(the department) upholding the assessment of compensating tax on the value of catalogs and newspaper inserts purchased by Phillips.On appeal, Phillips contends: (1) contracting for the distribution of the catalogs and newspaper inserts is not a taxable use of them: (2) purchase of the newspaper inserts would not have been subject to gross receipts tax had it occurred in New Mexico: (3) the correct tax base for the compensating tax is 77% of the amount taxpayer was billed: and (4) assessment of a negligence penalty is improper.We affirm.

FACTS

This matter was before the department's hearing officer on stipulated facts and the briefs of the parties.Phillips, doing business as Value House, retails a variety of consumer goods at stores in Santa Fe and Albuquerque and by mail order.During the audit period, Phillips used the services of what are known in the trade as coordinators.In 1981, Phillips used Mutual Merchandising Coop. of New York City, and between 1982 and 1986, the coordinator used was Paul Schultz Catalogues of Louisville, Kentucky.All of these coordinators' activities occurred outside of New Mexico.

Essentially, the coordinator solicits manufacturers and produces an annual trade show for retailers like Phillips.After attending the trade show, retailers decide what goods to offer for sale.The coordinator then develops a program to promote retail sales through catalogs, mailers, and newspaper inserts, which the coordinator designs, produces, and ships via common carrier.Retailers determine the quantity of catalogs and inserts they require and how those printed materials should be distributed.

Phillips contracted with the Albuquerque Journal/Tribune and the Santa Fe New Mexican to distribute newspaper inserts, and the inserts were shipped directly to those newspapers from the printer.The inserts bore the legend, "Supplement to the Albuquerque Journal/Tribune and Santa Fe New Mexican."Phillips contracted with a mailing service in Albuquerque to address and mail the catalogs and other mailing pieces to New Mexico residents.Phillips had approximately 90% of the catalogs and mailing pieces shipped to the Albuquerque mailing service and approximately 99.35% of the newspaper inserts shipped to the three New Mexico newspapers.Phillips had the remainder of the catalogs and inserts shipped to its retail stores in New Mexico for use in those stores.

Phillips paid the coordinators for their activities on the basis of a fixed price per catalog or insert.Paul Schultz Catalogues has stated that 77% of its charges were attributable to printing and manufacturing the catalogs and inserts and that 23% was for related services.There was no information providing a similar breakdown for Mutual Merchandising Coop.

DISCUSSION

1.Whether Phillips' contracting for the distribution of the catalogs and newspaper inserts was a taxable use of them.

Phillips contends that it did not "use" the catalogs, mailers, and newspaper inserts within the meaning of NMSA 1978, Section 7-9-7(Repl.Pamp.1988), which imposes a compensating tax for the privilege of using property in New Mexico under certain circumstances.For the purposes of Section 7-9-7, " 'use' or 'using' includes use, consumption or storage other than storage for subsequent sale in the ordinary course of business or for use solely outside this state[.]"NMSA 1978, Sec. 7-9-3(L)(Repl.Pamp.1988).

Phillips concedes "using" the catalogs shipped to and used in its stores, within the meaning of the statute.However, Phillips contends it did not use the remaining catalogs or inserts because it never had physical possession of those printed materials.Phillips offers no New Mexico authority for the proposition that "use" requires actual physical possession and control of the property.Further, the cases Phillips relies on are distinguishable because in those cases, the in-state retailer had the advertising material shipped directly from the out-of-state seller or printer to the in-state recipient, and those materials were never in possession, in the taxing state, of a third party having a contractual relationship with the retailer.SeeDistrict of Columbia v. W. Bell & Co., 420 A.2d 1208(D.C.App.1980);Bennett Bros., Inc. v. State Tax Comm'n, 62 A.D.2d 614, 405 N.Y.S.2d 803(1978);Modern Merchandising, Inc. v. Department of Revenue, 397 N.W.2d 470(S.D.1986).

Phillips had a contractual relationship with the Albuquerque mailing service used to address and mail the catalogs to New Mexico residents.Additionally, Phillips had a contractual relationship with the New Mexico newspapers through which it directed the manner and timing for the distribution of its newspaper inserts to New Mexico residents.Thus, Phillips exercised control over the catalogs and inserts through its contractual relationship with the mailing service and newspapers in New Mexico.By exercising control over its distribution contractors in New Mexico, Phillips has used the advertising materials distributed in the state within the meaning of Section 7-9-7.SeeK Mart Corp. v. Idaho State Tax Comm'n, 111 Idaho 719, 727 P.2d 1147(1986), appeal dismissed, 480 U.S. 942, 107 S.Ct. 1597, 94 L.Ed.2d 784(1987);Deere & Co. v. Allphin, 49 Ill.App.3d 164, 7 Ill.Dec. 130, 364 N.E.2d 117(1977);Wisconsin Dep't of Revenue v. J.C. Penney Co., 108 Wis.2d 662, 323 N.W.2d 168(Ct.App.1982).

2.Whether purchase of the newspaper inserts would have been subject to gross receipts tax had it occurred in New Mexico.

Phillips argues that the newspaper inserts were not acquired in transactions that, had they occurred in New Mexico, would have been subject to gross receipts tax because of the deductions allowed by NMSA 1978, Sections 7-9-63and7-9-64 (Repl.Pamp.1988).Phillips concludes it is not then subject to compensating tax under Section 7-9-7(A)(2).Sections 7-9-63and7-9-64 allow deductions from gross receipts for receipts from publication or sale of newspapers.Thus, if the inserts Phillips purchased from the coordinators constitute newspapers, the imposition of compensating tax was improper.

While no New Mexico case defines "newspaper," G.R. Regulation 64:1 provides:

As used in Section 7-9-63and7-9-64, the term "newspaper" is limited to those publications which are commonly understood to be newspapers and which are printed and distributed periodically at daily, weekly, or other short intervals for the dissemination of news of a general character and of a general interest.The term does not include handbills, circulars, flyers or the like, unless printed and distributed as part of a publication which otherwise constitutes a newspaper within the meaning of this paragraph.Neither does the term include any publication which is issued to supply information on certain subjects of interest to particular groups, unless such publication otherwise qualifies as a newspaper within the meaning of this paragraph.Advertising is not considered to be news of a general character and of a general interest.

The last sentence of the regulation is the clearest indication that the inserts do not constitute newspapers.The inserts Phillips purchased are advertising, which the last sentence of the regulation states is not considered news of a general character and interest.

The exemptions on which Phillips relies refer to "[r]eceipts from publishing newspapers or magazines, except from selling advertising space" and "[r]eceipts from selling newspapers, except from selling advertising space."SeeSecs. 7-9-63,7-9-64.The coordinators sold inserts to Phillips.At the moment the inserts were sold to Phillips, they were circulars or flyers, which the regulation specifically excludes from the definition of a newspaper.The coordinators did not sell newspapers within the meaning of Section 7-9-64.

Although G.R. Regulation 64:1 provides that "[t]he term [newspaper] does not include handbills, circulars, flyers or the like, unless printed and distributed as part of a publication which otherwise constitutes a newspaper within the meaning of this paragraph[,]" this portion of the regulation does not mean that Phillips' inserts are newspapers subject to the deductions provided for in Sections 7-9-63and7-9-64.We agree with the suggestion of the state that whatever the language "unless printed and distributed as part of a publication which otherwise constitutes a newspaper ..." means, that language was not intended to exempt Phillips' use of the inserts from imposition of the compensating tax.For these purposes, the focal point is the transaction in which Phillips acquired the insert.SeeSec. 7-9-7(A)(2).

The focal...