TPL, INC. v. NEW MEXICO TAX. & REV. DEPT.

• Decision Date: 19 December 2002
• Docket Number: No. 26,505.,26,505.
• Citation: 133 N.M. 447,2003 NMSC 7,64 P.3d 474
• Parties: TPL, INC., Protestant-Petitioner, v. NEW MEXICO TAXATION & REVENUE DEPARTMENT, Respondent-Respondent.
• Court: New Mexico Supreme Court

64 P.3d 474

133 N.M. 447

2003 NMSC 7

TPL, INC., Protestant-Petitioner, v. NEW MEXICO TAXATION & REVENUE DEPARTMENT, Respondent-Respondent.

No. 26,505.

Supreme Court of New Mexico.

December 19, 2002.

Keleher & McLeod, P.A., Tracy J. Ahr, Claudia Gayheart Crawford, Thomas C. Bird, Albuquerque, for Petitioner.

Patricia Madrid, Attorney General, Bruce J. Fort, Special Assistant Attorney General, Santa Fe, for Respondent.

OPINION

MAES, Justice.

{1} NMSA 1978, § 7-9-57 (1989, prior to 1998 & 2000 amendments) provides New Mexico businesses with a deduction from the gross receipts tax for services provided to out-of-state buyers. Businesses are not eligible for the deduction, however, if the out-of-state buyer either makes initial use or takes delivery of the "product of the service" in New Mexico. Id. Taxpayer TPL, Inc. entered contracts with a division of the United States Army to demilitarize and dispose of unwanted weapons. TPL claimed it could deduct its receipts from these contracts because it was providing services to an out-of-state buyer. The New Mexico Taxation and Revenue Department (hereinafter "Department") denied the deduction on the basis that the buyer made initial use or took delivery of the product of service in New Mexico. The Court of Appeals affirmed. TPL, Inc. v. N.M. Taxation & Revenue Dep't, 2000-NMCA-083, ¶ 14, 129 N.M. 539, 10 P.3d 863. We granted certiorari. Because TPL met its burden to establish that it provided services to an out-of-state buyer that neither made initial use nor took delivery of its product of service in New Mexico, we reverse.

BACKGROUND

{2} TPL, a New Mexico corporation with offices in Albuquerque, is one of the leading companies in the field of "demilitarization" of surplus munitions. It renders live weapons, termed "energetics," unusable so they are safe for disposal. It has developed methods of recovering components of munitions, purifying recovered materials, synthesizing new materials from the recovered components, and identifying commercial markets for the products. TPL's goal is to have "zero waste stream." In other words, it seeks to sell, reuse, or recycle all residual materials after the energetics have been demilitarized. If, however, it cannot identify a commercial market for the recovered components, it disposes of the residual materials.

{3} This appeal concerns TPL's contracts with a division of the United States Army, Industrial Operations Command ("IOC"), located in Rock Island, Illinois. In its winning bid to IOC, TPL proposed that it would demilitarize various types of energetics at Fort Wingate, a decommissioned military base in McKinley County, New Mexico, then process the residual materials. IOC obtained permission to perform its contracts at Fort Wingate. While the contract was in effect, IOC shipped hundreds of tons of munitions to Fort Wingate for demilitarization. At some later point, IOC transferred title to the munitions to TPL so that TPL could then sell, recycle, or dispose of the residual materials. TPL kept the proceeds from the sale of recovered materials.

{4} In June 1997, the Department audited TPL for the tax period beginning January 1992 and ending April 1997. As a result of the audit, the Department disallowed TPL's deduction of its gross receipts from its contracts with IOC. It also disallowed TPL's deduction for two contracts with the Naval Surface Warfare Center, which called for TPL to design a pilot plant that would reprocess surplus energetics, and deductions for certain other transactions. In December 1997, the Department assessed TPL's outstanding tax liability to be $304,964.98, representing $215,507.22 in gross receipts taxes, $6962.30 for compensating taxes, a $22,246.98 penalty, and $60,248.48 in interest. In March 1998, TPL paid $11,773.43 of the assessment and filed a timely formal protest of the remaining amount of the assessment. At a hearing in December 1998, the Department abated the gross receipts tax, penalty, and interest assessed on the receipts of four sales, upon proof that TPL had paid those taxes. TPL continued to dispute the Department's assessment of $293,191.55, representing gross receipts taxes from the contracts with IOC and the Naval Surface Warfare Center, plus penalty and interest.

{5} Before the hearing officer, the Department argued that TPL was not entitled to the deduction because the buyer, IOC, made initial use of or took delivery of "the product" of TPL's service in New Mexico. It argued that the product of service was the "rendering safe, and perhaps recyclable, ordnance that otherwise was dangerous." It further argued "[t]hat deconstruction and rendering safe was delivered here and initially used here." In support of this argument, the Department explained that initial use does not require the actual physical presence of the buyer. In addition, the Department argued that the buyer was the federal government, not IOC specifically, and that the federal government and all of its military agencies are present in New Mexico. TPL, on the other hand, argued that its services are "productless" because they are "deconstructive" in nature—there is nothing left over at the end of the process to use or deliver. It further argued that, even if there was a product of service, IOC neither made initial use of or took delivery of the product of service in New Mexico, because it had no office, employees, or agents in New Mexico.

{6} The hearing officer ruled that the gross receipts from the contracts with the Naval Surface Warfare Center were properly deducted but denied the deductions of receipts from three demilitarization contracts with IOC. She rejected TPL's argument that IOC had no presence in New Mexico, concluding that the presence of IOC munitions, once shipped to Fort Wingate, constituted IOC presence in New Mexico. She also concluded that IOC was present in New Mexico because it "had sufficient authority over the Army's facilities at Fort Wingate, New Mexico, to negotiate an agreement with TPL for use of those facilities." The hearing officer also rejected the argument that TPL's service was "productless." The hearing officer concluded that the "product of TPL's demilitarization services was the transformation of formerly dangerous munitions into components and materials suitable to be recycled and reused for other purposes." She further concluded that "IOC took delivery of this product in New Mexico by virtue of the fact that TPL's services were performed on IOC property that was physically located in New Mexico and remained in New Mexico after completion of the services." In addition, she concluded that "IOC made initial use of the deconstructed materials and components when it transferred title and risk of loss to TPL as consideration for TPL's reduction of the bid price on its demilitarization services. This transfer took place in New Mexico." Based on these conclusions, she affirmed the Department's denial of TPL's deduction.

{7} TPL appealed the hearing officer's decision regarding the IOC contracts to the Court of Appeals. At stake was $218,826.37, representing the gross receipts taxes for the three IOC contracts, plus penalties and interest. In its appeal, TPL complained that the hearing officer based her decision on theories that she crafted, rather than those presented by the Department, and that she drew improper inferences from the factual record. TPL specifically disputed whether IOC had control over the Fort Wingate facility, and complained that, because the Department did not raise this theory, it had no opportunity to present evidence on this issue. It also disputed the hearing officer's conclusion that the transfer of title to TPL represented consideration for a reduction in bid price. TPL noted that its bid price was reduced for only one of the three contracts in question. It also raised several constitutional arguments.

{8} The Court of Appeals defined the product of TPL's services as both "neutralized materials" and "the ability to dispose of the inert munitions in an environmentally responsible way." TPL, 2000-NMCA-083, ¶ 14, 129 N.M. 539, 10 P.3d 863. It then concluded that IOC "made initial use or took delivery of the product generated by Taxpayer's services when it transferred title to the disposable materials to Taxpayer." Id. ¶ 17. Unlike the hearing officer, however, the Court of Appeals attached no relevance to the possibility that consideration was given for the transfer of title. Instead, it concluded that "[i]t is dispositive that Buyer transferred title to the munitions when they were capable of being disposed—and Taxpayer admits this—and that this happened in New Mexico." Id. at ¶ 15. It therefore did not address the hearing officer's conclusions regarding IOC's control over Fort Wingate. After the Court of Appeals denied its motion for rehearing, TPL filed a petition for writ of certiorari, which we granted.

DISCUSSION

{9} The central issue in this case is whether TPL is liable for gross receipts taxes on the payments received from IOC, or is eligible to deduct its receipts for those contracts pursuant to Section 7-9-57, which, during the relevant time period, provided that:

A. Receipts from performing a service may be deducted from gross receipts if the sale of the service is made to a buyer who delivers to the seller either a nontaxable transaction certificate or other evidence acceptable to the secretary that the transaction does not contravene the conditions set out in Subsection C of this section:

...

C. Receipts from performance of a service shall not be subject to the deduction provided in this section if the buyer or any of the buyer's employees or agents:

(1) makes initial use of the product of the service in New Mexico; or

(2) takes delivery of the product of the service in New Mexico.¹

There is a presumption that all persons engaging in business in New Mexico are subject to the gross receipts tax. NMSA 1978, § 7-9-5(A) (2002)....