TPL, INC. v. NEW MEXICO TAXATION & REVENUE

• Decision Date: 27 June 2000
• Docket Number: No. 20,321.,20,321.
• Citation: 10 P.3d 863,129 N.M. 539,2000 NMCA 83
• Parties: TPL, INC., Protestant-Appellant, v. NEW MEXICO TAXATION & REVENUE DEPARTMENT, Respondent-Appellee.
• Court: Court of Appeals of New Mexico

10 P.3d 863

129 N.M. 539

2000 NMCA 83

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

No. 20,321.

Court of Appeals of New Mexico.

June 27, 2000.

Certiorari Granted September 13, 2000.

Tracy J. Ahr, Claudia G. Crawford, Keleher & Mcleod, P.A., Albuquerque, NM, for Appellant.

Patricia A. Madrid, Attorney General, Bruce J. Fort, Special Assistant Attorney General, Santa Fe, NM, for Appellee.

Certiorari Granted, No. 26,505, September 13, 2000.

OPINION

PICKARD, Chief Judge.

{1} This appeal involves NMSA 1978, § 7-9-57 (1989), which permits a deduction from gross receipts tax for money received for the performance of certain services, but does not permit the deduction if the buyer of the service makes initial use or takes delivery of the "product of the service" in New Mexico. The central question on appeal is whether Taxpayer, whose services performed for a federal agency (Buyer) were the deconstruction of ammunition, ordnance, and other energetic material, was entitled to a deduction because its services allegedly did not result in a product and therefore it was impossible for Buyer to initially use or take delivery of a product in New Mexico. We uphold the hearing officer's decision that there was a product of the service which was used or for which delivery was taken in New Mexico. We also reject a number of Taxpayer's other contentions.

BACKGROUND

{2} Taxpayer is a New Mexico corporation with offices in Albuquerque, New Mexico. Taxpayer provides deconstructive services, whereby it takes physical possession of energetic materials and then renders them inert through sophisticated processes it has developed. Buyer is a part of the United States Army Materiels Central Command. Buyer is headquartered in Rock Island, Illinois.

{3} Taxpayer and Buyer entered into three demilitarization contracts between January 1992 and April 1997. The contracts were administered in Phoenix, Arizona, and were paid from Columbus, Ohio. Under the terms of these contracts, Buyer shipped surplus munitions to Taxpayer in New Mexico. Taxpayer assumed responsibility for deconstructing the munitions. In order to fulfill its responsibility, Taxpayer had to determine how to disassemble the munitions, actually disassemble the munitions, and then dispose of the munition residuals in a safe and environmentally responsible manner.

{4} Buyer retained ownership of the munitions until the demilitarization process was completed. After Taxpayer performed its deconstructive services, Buyer transferred title to all materials and components arising out of the disassembly and demilitarization of the munitions to Taxpayer. Taxpayer then assumed responsibility, as well as liability, for disposing the inert materials in a safe manner.

{5} In June 1997, the Department audited Taxpayer's gross receipts reporting practices for tax periods January 1992 through April 1997. The Department disallowed Taxpayer's claimed deductions of the receipts it had obtained from performing the three demilitarization contracts it had entered into with Buyer during that time frame. Taxpayer filed a written protest with the Department, which was submitted to the hearing officer for consideration.

{6} The hearing officer denied the protest on two bases. The hearing officer concluded that Buyer made initial use of the product in New Mexico when it transferred title to the inert materials and risk of loss to Taxpayer as consideration for the services performed. She also concluded that Buyer took delivery of the product in New Mexico because Taxpayer performed the services on property purportedly owned by Buyer in New Mexico.

STANDARD OF REVIEW

{7} The issue presented for our review is whether the hearing officer properly denied Taxpayer's claimed gross receipts tax deductions on the grounds that Buyer initially used or took delivery of a product in New Mexico. See § 7-9-57. This issue requires us, in part, to answer a question of statutory interpretation, which we review de novo. See Cox v. Municipal Boundary Comm'n, 120 N.M. 703, 705, 905 P.2d 741, 743 (Ct.App.1995) (ruling that interpretation of a word as it appears in a statute presents a question of law); Western Bank of Las Cruces v. Malooly, 119 N.M. 743, 748, 895 P.2d 265, 270 (Ct.App.1995) (ruling that we review questions of law de novo). To the extent that we are asked to apply the law of gross receipts tax deductions to undisputed facts, we are again presented with a question of law, which we review de novo. See Quantum Corp. v. Taxation & Revenue Dep't, 1998-NMCA-050, ¶ 8, 125 N.M. 49, 956 P.2d 848.

{8} There is a statutory presumption that "all receipts of a person engaging in business are subject to the gross receipts tax." NMSA 1978, § 7-9-5 (1966). A taxpayer has the burden of overcoming the statutory presumption created by Section 7-9-5. See Wing Pawn Shop v. Taxation & Revenue Dep't, 111 N.M. 735, 741, 809 P.2d 649, 655 (Ct.App.1991). When a taxpayer claims a tax deduction, the statute giving rise to such a deduction "must be construed strictly in favor of the taxing authority, the right to the. . . deduction must be clearly and unambiguously expressed in the statute, and the right must be clearly established by the taxpayer." Security Escrow Corp. v. Taxation & Revenue Dep't, 107 N.M. 540, 543, 760 P.2d 1306, 1309 (Ct.App.1988). Put another way, taxation is the rule and the burden is on the taxpayer to bring itself within any claimed exception. See NRA Special Contribution Fund v. Board of County Comm'rs, 92 N.M. 541, 549, 591 P.2d 672, 680 (Ct.App.1978).

DISCUSSION

I. TAX DEDUCTION

{9} Taxpayer claims it is entitled to a gross receipts tax deduction under Section 7-9-57. Section 7-9-57, as it existed during the relevant time period, provided in relevant part:

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 of the service 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.

Id. According to Taxpayer, it is entitled to a deduction because there was no product generated by its services. In the alternative, Taxpayer argues that even if such a product existed, Buyer did not initially use the product in New Mexico nor did it take delivery of the product in New Mexico. We address each argument in turn.

A. Product

{10} Taxpayer claims that because the services it performed were deconstructive, "there simply is no `product of the service.'" If this claim holds true, then it follows that Taxpayer is entitled to a deduction because Buyer cannot initially use or take delivery of something that simply does not exist. Taxpayer attempts to support its claim by resorting to a plain language analysis of Section 7-9-57(A) and, in particular, of the term "product," as that term is used in the statute.

{11} In construing a statute's meaning, we seek to "determine and give effect to the intention of the legislature." Security Escrow Corp., 107 N.M. at 543, 760 P.2d at 1309. When the legislature has not defined a word in the statute, as in this case where it has failed to define product, we will give that word "its ordinary meaning unless a different intent is clearly indicated." Quantum Corp., 1998-NMCA-050, ¶ 10, 125 N.M. 49, 956 P.2d 848. If the language of a statute is unambiguous, the literal meaning of the words must be applied. See Cummings v. X-Ray Assocs. of New Mexico, P.C., 1996-NMSC-035, ¶ 45, 121 N.M. 821, 918 P.2d 1321.

{12} Taxpayer asserts that the term product is defined in Webster's New Collegiate Dictionary as "something produced" and in Black's Law Dictionary as "[s]omething produced by physical labor or intellectual effort or something produced naturally or as a result of natural process as by generation of growth." The thrust of Taxpayer's assertion is that the term product refers to tangible objects that have been assembled or put together and not to items that have been pulled apart or broken down, as the energetic materials were in this case.

{13} The Department contends, and we agree, that Taxpayer's definition of product is unduly narrow and incomplete. In addition to the meanings provided by Taxpayer, the term product is defined in Webster's II New Riverside University Dictionary (Riverside Publishing, 1984) as "[a] direct result; consequence," in American Heritage Dictionary of the English Language (New College Edition, 1981) as "[a] direct result; consequence," and in World Book Dictionary (Doubleday & Co., 1972) as "that which is produced; result of work or growth." It is evident from the foregoing definitions that the term product refers not only to tangible objects that have been assembled, but also to results or consequences that might yield lesser objects, whether in terms of weight, quantity, or chemical composition, than existed prior to any action having been initiated.

{14} In the case at bar, we initially observe that the service provided by Taxpayer consisted of taking dangerous munitions located in New Mexico, rendering those munitions safe, and then disposing of or recycling those munitions. The product of those services was not only neutralized materials but, more importantly, the ability to dispose of the inert munitions in an environmentally reasonable way, as well. It was this ability to safely dispose of the materials that Buyer bargained for when it entered into the demilitarization contracts with Taxpayer. That the inert munitions were disassembled and otherwise broken down into...