Rauscher v. TAXATION AND REVENUE DEPT.

• Decision Date: 29 April 2002
• Docket Number: No. 26,344.,26,344.
• Citation: 46 P.3d 687,132 N.M. 226,2002 NMSC 13
• Parties: RAUSCHER, PIERCE, REFSNES, INC., Petitioner-Petitioner, v. The TAXATION AND REVENUE DEPARTMENT OF the STATE OF NEW MEXICO, Respondent-Respondent.
• Court: New Mexico Supreme Court

46 P.3d 687

132 N.M. 226

2002 NMSC 13

RAUSCHER, PIERCE, REFSNES, INC., Petitioner-Petitioner, v. The TAXATION AND REVENUE DEPARTMENT OF the STATE OF NEW MEXICO, Respondent-Respondent.

No. 26,344.

Supreme Court of New Mexico.

April 29, 2002.

Sutin, Thayer & Brown, P.C., Mary E. McDonald, Santa Fe, NM, for Petitioner.

Patricia A. Madrid, Attorney General, Bridget Jacober, Special Assistant Attorney General, Santa Fe, NM, for Respondent.

Betzer, Roybal & Hill, P.C., Benjamin C. Roybal, Albuquerque, NM, for Amicus Curiae Southwest Securities, Inc., and KMPG, L.L.P.

OPINION

MINZNER, Justice.

{1} Petitioner Dain Rauscher, Inc., formerly Rauscher, Pierce, Refsnes, Inc. ("Rauscher"), appeals from an opinion of the Court of Appeals. Rauscher, Pierce, Refsnes, Inc., v. Taxation & Revenue Dep't, 2000-NMCA-065, 129 N.M. 404, 9 P.3d 648. In its opinion, the Court of Appeals affirmed the Decision and Order of a hearing officer employed by the New Mexico Taxation and Revenue Department ("the Department"). The hearing officer had affirmed the Department's assessment of gross receipts tax, interest, and penalty under the Gross Receipts and Compensating Tax Act ("the Act"), NMSA 1978, §§ 7-9-1 to -91 (1966, as amended through 2001). Rauscher contends the hearing officer erred in rejecting its claim under NMSA 1978, § 7-9-25 (1969), which provides: "[e]xempted from the gross receipts tax are ... receipts from the sale of stocks, bonds or securities." We granted Rauscher's petition for writ of certiorari to the Court of Appeals pursuant to Rule 12-502 NMRA 2002 and NMSA 1978, § 34-5-14(B) (1972) in order to review the issue of whether any of Rauscher's receipts from the sale of mutual fund shares to its customers are taxable as gross receipts under the Act. The Act defines gross receipts to include "the total commissions or fees derived from the business of buying, selling or promoting the purchase, sale or leasing, as an agent or broker on a commission or fee basis, of any property, service, stock, bond or security." NMSA 1978, § 7-9-3(F)(1)(b) (1989, prior to 2001 amendment). We affirm.

I.

{2} Rauscher is a broker-dealer of securities licensed under the New Mexico Securities Act of 1986, NMSA 1978, § 58-13B-3 (1986). Rauscher was based in Dallas, Texas during the relevant period, but operated an office in Albuquerque. The business transactions at issue in this case are Rauscher's sales of mutual fund shares to individual and corporate investors. On June 3, 1993, the Department assessed Rauscher gross receipts taxes, interest, and penalty for the period from January 1987 to June 1992. The Department based its assessment on an auditor's finding that Rauscher had earned commissions on sales of mutual fund shares and commodities but had deducted sums attributable to the commissions in reporting its gross receipts. Rauscher paid the portion of the assessment attributable to commissions on the sale of commodities. In protesting the assessment attributable to sales of mutual fund shares, Rauscher relied on Section 7-9-25. In opposing the protest, the Department argued that Rauscher had received commissions for its services as an agent and thus it had taxable gross receipts under Section 7-9-3(F)(1)(b). On July 8, 1998, the Department's hearing officer denied the protest. The hearing officer's description of the transactions is unchallenged.

{3} To fill customer orders for mutual fund shares, broker-dealers such as Rauscher purchase shares of the fund from another broker-dealer who has agreed to act as that fund's principal underwriter and who has purchased shares for resale. The contractual terms under which a broker-dealer purchases shares for its customers generally include a "dealer concession," which is a percentage discount on the market price of the shares. This percentage, fixed by the fund's prospectus, varies but is typically five percent. After receiving this discount, a broker-dealer sells the mutual fund shares to its customers at market value, as required by the Investment Companies and Advisors Act of 1940, 15 U.S.C. §§ 80a-1 to -64 (1994).

{4} The same contractual terms provide that the purchasers act as principals rather than agents. They may hold such shares briefly in inventory, but when not purchasing for their own investment can only purchase to fill a customer's order. The hearing officer's Finding of Fact 18 indicates that "[d]uring the audit period [Rauscher] did not make purchases of mutual fund shares for its own investment. All purchases were made as a result of the placement of an order for purchase of shares by [Rauscher's] clients...."

{5} The hearing officer made other findings relevant to this appeal. First, the hearing officer found that Rauscher did not act as an agent of either its customers or the mutual fund underwriters in its mutual fund transactions. Second, the hearing officer found that Rauscher purchased mutual fund shares for its own account. Third, the hearing officer found that during the audit period, Rauscher made its mutual fund purchases for its customers and not for its own investment. Fourth, the hearing officer found that Rauscher bears the risk of loss in the event that its customers do not purchase the mutual fund shares, but that Rauscher's contracts with its customers allow Rauscher to hold the customer liable for any losses Rauscher incurs.

{6} Relying in part on definitions of "broker" in statutes outside the Act, the hearing officer ultimately concluded that Rauscher was acting as a broker in its mutual fund transactions. Relying on the breadth of the phrase "commissions or fees" in Section 7-9-3(F)(1)(b), the hearing officer also concluded that the dealer concession discussed above was a taxable gross receipt under the Act. Consequently, the hearing officer denied Rauscher's protest and held in favor of the Department.

{7} Pursuant to NMSA 1978, § 7-1-25 (1989), Rauscher appealed to the Court of Appeals, arguing that it had engaged in sales of securities and that the sums upon which the Department had assessed gross receipts taxes represented its profits on these sales, not commissions or fees. Relying on the hearing officer's finding that it had purchased the mutual fund shares for its own account, Rauscher argued that it was not acting as a broker but rather was acting as a principal. The Department, on the other hand, argued, as it had argued to the hearing officer, "that the substance of the transactions, as opposed to [the] form, was not a true sale of [Rauscher's] own securities." Rauscher, 2000-NMCA-065, ¶ 4, 129 N.M. 404, 9 P.3d 648.

{8} The Court of Appeals held that Rauscher "was actually earning `commissions or fees' (the `dealer concessions') which are taxable when earned by a `broker' from the sale or promotion of stocks, bonds or securities owned by others." Id. The Court of Appeals rejected Rauscher's reliance on the hearing officer's finding that it purchased the mutual fund shares for its own account, on the grounds that Rauscher had purchased for its own account because federal securities law required it to do so, and that federal securities law requirements were not dispositive of the state tax law questions presented by Rauscher's protest and appeal. Id. ¶ 13. The Court of Appeals affirmed the hearing officer's conclusions that Rauscher was acting as a broker in the mutual fund transactions and had earned taxable commissions or fees for its services in New Mexico. Id. ¶¶ 18, 26. The Court of Appeals also rejected Rauscher's argument that if it performed any services, these services were part of a transaction in which the dominant taxable element was an exempt sale of property and that the hearing officer's decision should be applied prospectively as a new administrative rule. Id. ¶¶ 27-28. Finally, the Court of Appeals rejected Rauscher's argument that its mutual fund transactions were substantially completed outside of New Mexico and therefore not subject to taxation under the Act. Id. ¶ 30.

{9} On appeal to this Court, Rauscher continues to argue that its receipts from the mutual fund transactions are exempt from the gross receipts tax because the transactions that generate the receipts are sales of securities. Relying on the hearing officer's findings, Rauscher contends that the findings compel a conclusion that it sold its own property and is therefore exempt from the tax. Rauscher also argues that even if a portion of the sales price can be characterized as compensation for services, it is entitled to claim the exemption because the hearing officer found that almost all of its receipts from the mutual fund transactions were sale proceeds rather than compensation for services. In addition, Rauscher argues that the majority of its mutual fund transactions occurred out-of-state and are not taxable under the Act. Finally, Rauscher asks that the Court of Appeals' affirmance of the hearing officer be given prospective effect. We consider each of these arguments below in light of the statutory standard of review. See § 7-1-25(C). "Upon appeal, the court shall set aside a decision and order of the hearing officer only if found to be: (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." Id.

II.

{10} We first review the statutory scheme governing the Department in assessing Rauscher's gross receipts taxes, interest, and penalty. The Act imposes an "excise tax equal to five percent of gross receipts" upon any person engaging in business in New Mexico. NMSA 1978, § 7-9-4(A) (1990). "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. Taxation & Revenue Dep't, 1998-NMCA-078, ¶ 5, 125 N.M. 244, 959 P.2d 969 (citation omitted). In addition, the Act is intended to "protect New Mexico businessmen from the unfair competition that...