Proficient Food Co. v. New Mexico Taxation and Revenue Dept.

• Decision Date: 03 May 1988
• Docket Number: No. 10028,10028
• Citation: 1988 NMCA 42,107 N.M. 392,758 P.2d 806
• Parties: PROFICIENT FOOD COMPANY, Appellant, v. The NEW MEXICO TAXATION AND REVENUE DEPARTMENT, Appellee.
• Court: Court of Appeals of New Mexico

Page 806

758 P.2d 806

107 N.M. 392

PROFICIENT FOOD COMPANY, Appellant, v. The NEW MEXICO TAXATION AND REVENUE DEPARTMENT, Appellee.

No. 10028.

Court of Appeals of New Mexico.

May 3, 1988.

Hal Stratton, Atty. Gen., D. Sandi Gilley, Carolyn A. Wolf, Sp. Ass't. Attys. Gen., Taxation & Revenue Depart., Santa Fe, for appellee.

Mary E. McDonald, Sutin, Thayer & Browne, P.C., Santa Fe, for appellant.

OPINION

DONNELLY, Chief Judge.

Proficient Food Company (PFC) appeals the administrative decision and order of the Taxation and Revenue Department (Department) denying its protest to an assessment of gross receipts tax, assessing interest and penalties upon it for food and supplies sold by PFC to restaurants in New Mexico. PFC raises three issues on appeal: (1) whether the New Mexico gross receipts tax levied against it violates the commerce clause of the United States Constitution, article I, section 8, clause 3; (2) whether the Blanket Exemption Certificate obtained by PFC substantially complies with the requirements of NMSA 1978, Section 7-9-43 (Repl.1986) of the Gross Receipts and Compensating Tax Act, entitling it to deduct the receipts from the sales of food to Denny's; and (3) whether the proper tax to be levied against PFC is the compensating tax, not the gross receipts tax. We affirm.

The parties stipulated to the material facts. On December 6, 1985, the Department issued a notice of assessment against PFC for payment of state gross receipts tax, and accrued penalty and interest in the total amount of $262,274.21. PFC protested the assessment and following a hearing, an administrative hearing officer upheld the validity of the assessment.

PFC is a California corporation, registered with the Department for tax purposes. PFC owns and operates a food and restaurant supply business with a warehouse located in Arlington, Texas. During the audit period, PFC sold food and other restaurant supplies to Denny's and Grandy's restaurants for use in New Mexico. The sales arrangement between PFC, Denny's and Grandy's was negotiated and administered outside New Mexico. PFC, however, obtained orders for deliveries by telephoning restaurants and taking down the orders over the phone. The ordered goods were delivered by PFC in its own trucks from its warehouse in Texas to the restaurants in New Mexico.

PFC does not maintain an office or other place of business in New Mexico and none of its employees, agents or salesmen reside within the state. PFC's customer service representatives sometimes travel from Texas to New Mexico in order to respond to complaints or other matters on an unscheduled basis. The food and other supplies sold by PFC to New Mexico restaurants are invoiced and paid for by Denny's and Grandy's through their corporate headquarters located outside New Mexico.

During the audit period, records indicated that PFC had deducted the receipts from its sales of food to Denny's and Grandy's, but failed to supply the Department with non-taxable transaction certificates within the sixty days provided for in Section 7-9-43. PFC did, however, obtain a form entitled, "Blanket Exemption Certificate," and submitted it to the Department from Denny's Incorporated.

I. COMMERCE CLAUSE

The Gross Receipts and Compensating Tax Act, NMSA 1978, Section 7-9-4 to -82 (Repl.1986), provides for the imposition of a gross receipts tax on any person engaging in business in this state based upon the privilege of engaging in business within New Mexico. The Act also raises a presumption that all receipts by persons engaging in business are subject to the gross receipts tax. Sec. 7-9-5. Receipts, however, from transactions in interstate commerce are subject to deduction from gross receipts to the extent that the tax would be unlawful under the United States Constitution. Sec. 7-9-55.

The United States Supreme Court has defined a four prong test to determine whether a state tax violates the commerce clause of the federal constitution. Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977). Under Brady the Court reaffirmed the rule that the commerce clause of the United States Constitution does not preclude a state from imposing a nondiscriminatory, properly apportioned state tax upon foreign corporations performing exclusively interstate business when the tax is related to the corporation's local activities and the state has provided benefits and protections for those activities for which it is justified in seeking a fair and reasonable return. ¹ In order to avoid conflict with the commerce clause, the test enunciated in Brady requires a showing that: (1) a sufficient nexus exists between the activity being taxed and the taxing state; (2) the tax is fairly apportioned; (3) the tax imposed does not discriminate against interstate commerce; and (4) the tax is fairly related to services provided by the state. On appeal, PFC asserts that the first three prongs of this test have not been met; it does not address the fourth requirement.

In Tyler Pipe Industries, Inc. v. Washington State Department of Revenue, --- U.S. ----, 107 S.Ct. 2810, 97 L.Ed.2d 199 (1987), the Supreme Court held that there was a sufficient nexus between the state of Washington and the sale of products manufactured outside Washington but sold in Washington, to permit the imposition of a state gross receipts tax upon the corporation. In upholding the gross receipts tax assessed against the corporation's sales, the Court held that the tax was valid despite the fact that Tyler Pipe maintained no office in Washington, had no employees residing within the state and owned no property within the state. Tyler Pipe's solicitation of sales was directed by executives who maintained offices outside Washington and by an independent contractor within Washington.

PFC attempts to distinguish Tyler Pipe on the basis that the Court found the independent contractor, as the corporation's agent, acted daily on behalf of the taxpayer and its activities on behalf of Tyler Pipe within Washington were substantial in nature. Although the record herein does not indicate the frequency with which PFC's representatives contact the restaurants in New Mexico, PFC acknowledges that orders for food and other products sold by it are taken directly over the phone from purchasers in New Mexico. Additionally, the record indicates that PFC's employees deliver food and supplies to restaurants within this state and that PFC's representatives have followed a policy of visiting restaurants in New Mexico as needed to respond to complaints or other matters.

PFC argues that it is not engaged in the business of selling in New Mexico and that all selling activities are concluded when the order is accepted and the goods identified and placed in transit from its locations in Texas. PFC characterizes its activities in New Mexico as limited to delivery of the goods from its trucks. This characterization, however, is contradicted by the stipulated facts which establish that PFC also sends representatives to the restaurants in New Mexico to respond to complaints and other matters and that its employees directly call the restaurants in New Mexico to take orders. Although PFC challenges the inference that its placement of these calls constitutes a solicitation of sales in New Mexico, from the record before us the hearing officer could properly conclude otherwise from the facts presented. PFC's on-going relationship with Denny's and Grandy's does not obviate the necessity of determining the specific needs of its customers at various times and the placing of specific sales orders in response to calls PFC makes to its customers. Furthermore, the fact that PFC did not have a resident agent or representative within New Mexico does not negate the substantial nexus between its activities in New Mexico and this state. PFC's activities in this state are significantly associated with its ability to establish and maintain a market in New Mexico for sales. See Tyler Pipe Indus., Inc. v. Washington Dep't of Revenue.

PFC has not established that the activities of its representatives who visit the restaurants in New Mexico, the delivery of the goods by its trucks to the restaurants in New Mexico and the calls placed by its employees to the restaurants in New Mexico are not decisive factors in establishing and holding its New Mexico market. See Norton Co. v. Department of Revenue, 340 U.S. 534, 71 S.Ct. 377, 95 L.Ed. 517 (1951).

PFC's activities adequately support New Mexico's jurisdiction to impose a gross receipts tax on PFC. Tyler Pipe Indus., Inc. v. Washington State Dep't of Revenue. See also General Trading Co. v. State Tax Comm'n, 322 U.S. 335, 64 S.Ct. 1028, 88 L.Ed. 1309 (1944) (tax upheld where out-of-state merchant had traveling sales agents). Compare EVCO v. Jones, 409 U.S. 91, 93 S.Ct. 349, 34 L.Ed.2d 325 (1972) (impermissible tax levied on out-of-state sales of reproducible educational materials); National Bellas Hess, Inc. v. Department of Revenue, 386 U.S. 753, 87 S.Ct. 1389, 18 L.Ed.2d 505 (1967) (impermissible tax levied where seller's only connection with customers in taxing state was by mail or common carrier); Miller Bros. Co. v. Maryland, 347 U.S. 340, 74 S.Ct. 535, 98 L.Ed. 744 (1954) (impermissible tax levied where seller accepted no mail or telephone orders; products delivered to customers in Maryland were ordered at Delaware store; no C.O.D.'s accepted).

The gross receipts tax assessed against PFC was limited to the receipts from the products sold by it to New Mexico restaurants. The Act defines gross receipts as the "total amount of money * * * received from selling property in New Mexico." NMSA 1978, Sec. 7-9-3(F) (Repl.1986). The Act defines selling as "any transfer of property for consideration." Sec. 7-9-3(B). Although not explicitly stated in the stipulated facts, the hearing officer determined it was reasonable to infer that the products delivered to the...