Vivigen, Inc. v. Minzner, 14325

• Decision Date: 08 February 1994
• Docket Number: No. 14325,14325
• Parties: VIVIGEN, INC., Plaintiff-Appellee, v. Richard C. MINZNER, Secretary, New Mexico Taxation and Revenue Department, Defendant-Appellant.
• Court: Court of Appeals of New Mexico

Page 1382

870 P.2d 1382

117 N.M. 224

VIVIGEN, INC., Plaintiff-Appellee, v. Richard C. MINZNER, Secretary, New Mexico Taxation and Revenue Department, Defendant-Appellant.

No. 14325.

Court of Appeals of New Mexico.

Feb. 8, 1994.

[117 N.M. 225] Marshall G. Martin, Joe W. Wood, Fred W. Schwendimann, Hinkle, Cox, Eaton, Coffield & Hensley, Albuquerque, for plaintiff-appellee.

Tom Udall, Atty. Gen., Margaret B. Alcock, Sp. Asst. Atty. Gen., New Mexico Taxation & Revenue Dept., Santa Fe, for defendant-appellant.

OPINION

HARTZ, Judge.

The Secretary of the New Mexico Taxation and Revenue Department (Department) appeals from a district court judgment awarding Vivigen, Inc., a refund of $115,016.77 in compensating taxes, interest, and penalty that Vivigen paid following the Department's audit for the period January 1, 1984, through June 30, 1990.

The Department based its assessment of taxes against Vivigen on Vivigen's failure to pay compensating taxes. Compensating tax is imposed on one who uses tangible property "acquired outside this state as the result of a transaction that would have been subject to the gross receipts tax had it occurred within this state." NMSA 1978, Section 7-9-7(A) (Repl.Pamp.1990); see Section 7-9-9 (Repl.Pamp.1990) (user is liable for payment of compensating tax); cf. NMSA 1978, Sec. 7-9-4 (Repl.Pamp.1990) (seller is liable for payment of gross receipts tax). The district court ruling stated four grounds why Vivigen did not have to pay all or part of this tax. First, the district court held that Vivigen was a manufacturer and therefore entitled to the deduction for certain sales of tangible personal property to a person engaged in the business of manufacturing. NMSA 1978, Sec. 7-9-46 (Repl.Pamp.1990). Second, the district court held that the procedures of the Department violated Vivigen's constitutional rights and therefore the Department was not entitled to recover any taxes, interests, or penalty from Vivigen. Third, the district court held that Vivigen was entitled to an offset for investment credits for 1984 through 1990 pursuant to the New Mexico Investment Credit Act, NMSA 1978, Secs. 7-9A-1 through 7-9A-9 (Repl.Pamp.1990), even though Vivigen had not claimed the credits within the one-year statute-of-limitations period. Section 7-9A-8 (Effective until January 1, 1991). Fourth, the district court held that Vivigen was not negligent and should not have to pay a negligence penalty. We reverse on all grounds.

I. DEDUCTION FOR SALES TO MANUFACTURER

Vivigen is a biotechnology company whose expertise is in the diagnosis of genetic disorders that can be detected through the appearance of chromosomes. Vivigen receives specimens of amniotic fluid or other human tissue, uses chemical reagents to nurture cell reproduction in a controlled environment, and then harvests the cultures. The harvested cells are stained and dried by Vivigen's technicians, and individual slides are then reviewed by Vivigen's scientific experts, who render a diagnosis. Vivigen produces two tangible objects that are provided to its customers. First, it provides a written report of its experts' diagnosis. Second, it provides what it calls a laminated karyotype, which consists of photographs of chromosomes that are numbered and pasted onto a piece of laminated cardboard. The laminated karyotype illustrates the findings made by Vivigen and presumably can be used by an outside expert to review Vivigen's diagnosis.

We need not decide whether Vivigen can be said to "manufacture" its reports or laminated karyotypes. See NMSA 1978, Sec. 7-9-3(G) (Repl.Pamp.1990) (Effective until July 1, 1993) (defining "manufacturing"). Even if it does manufacture those objects, Vivigen has not established its entitlement to a deduction. The manufacturing deduction applies only to a sale of personal property that is incorporated as an ingredient or component part of the manufactured product. Section 7-9-46 states in its entirety:

Receipts from selling tangible personal property may be deducted from gross receipts if the sale is made to a person engaged in the business of manufacturing who delivers a nontaxable transaction certificate to the seller. The buyer delivering the nontaxable transaction certificate must incorporate the tangible personal property as an ingredient or component part of the product which he is in the business of manufacturing. ¹

Thus, the deduction here would be proper only for purchases of materials that constitute an ingredient or component part of the report or laminated karyotype. Those materials would primarily be paper, cardboard, paste, and film. See Deduction--Gross Receipts Tax--Sales to Manufacturers, N.M. Taxation & Revenue Dep't Reg. 7-9-46, No. GR 46:2 (Nov. 26, 1990) (plates used in printing newspapers are not ingredients or component parts of the newspaper); No. GR 46:4 (electricity used in manufacturing does not become an ingredient or component part of the manufactured article). At the hearing in district court Vivigen did not identify any out-of-state purchases (those purchases that would be subject to the compensating tax) of products incorporated into its reports or laminated karyotypes. (The Department had identified as subject to the compensating tax such items as microscopes, sinks, and furniture, which undoubtedly were not incorporated into the documents or laminated karyotypes.) Because the Department's assessment of taxes is presumed to be correct, NMSA 1978, Sec. 7-1-17(C) (Repl.Pamp.1990), the failure of Vivigen to put on any evidence of expenditures for products that became an ingredient or component part of Vivigen's reports or laminated karyotypes forecloses it from any recovery pursuant to the deduction for sales to manufacturers. See also NMSA 1978, Sec. 7-9-8(A) (Repl.Pamp.1990) (presumption that property purchased for delivery into this state is bought or sold for taxable use in the state); Wing Pawn Shop v. Taxation & Revenue Dep't, 111 N.M. 735, 740-41, 809 P.2d 649, 654-55 (Ct.App.1991) (taxpayer has burden to establish clearly the entitlement to an exemption or deduction).

II. DUE PROCESS AND EQUAL PROTECTION

As an alternative ground for setting aside the total amount of the assessment against Vivigen, the district court stated that the conduct of the Department in determining the assessment violated Vivigen's rights to due process and equal protection of the law. See N.M. Const. art. II, Sec. 18. We disagree.

The essential facts do not appear to be disputed by the parties. In February 1989 an auditor with the Department overheard a conversation of a passenger sitting directly behind her on an airplane. The passenger, an employee of Vivigen, was discussing the success and rapid growth of the company. Upon returning to her office, the auditor reviewed Vivigen's reporting history on the Department's computer and discovered that the company had never reported compensating taxes. The Department therefore selected Vivigen for a field audit. On February 17, 1989, the Department sent a notice of audit to Vivigen. The notice advised Vivigen that the audit would ordinarily cover records relating to transactions for the three previous years but the period of examination could be extended.

The field audit of Vivigen's books did not begin until August 15, 1990. The Department contends that this delay was the result of normal backlog and the promotion of the auditor who overheard the conversation on the airplane. The audit established a 100% underreporting of compensating taxes during the three-year period under examination. As a result, the audit period was extended back an additional three years to include 1984 through 1986. By mid-September 1990 the Department's auditor had completed examination of all records provided to her by Vivigen. Because Vivigen had provided no invoices, ledgers, or similar records for the tax years 1984 through 1986, the Department relied on Vivigen's corporate income tax returns to estimate its compensating tax liability for those years. The Department offered to delay assessment until Vivigen had an opportunity to locate its records, but only if the company would sign a waiver of any statute-of-limitations defense. Vivigen refused. On November 4, 1990, the Department issued an assessment for taxes, plus penalties and interest, for the period January 1, 1984, through June 30, 1990.

Vivigen paid the assessment and then filed a claim for refund. Vivigen still had not provided the Department with books and records for the tax years 1984 through 1986. The Department denied Vivigen's refund claim, so Vivigen filed a complaint for refund in district court. In the district court proceedings the Department obtained Vivigen's books and records pursuant to a formal request for production. After reviewing the records, the Department concluded that it had overestimated Vivigen's compensating tax liability for 1984 through 1986 by $911.41. Because the statute of limitations barred the assessment of tax for 1984, Vivigen received an actual tax refund of $2017.77, plus the applicable penalty and interest.

Later in the court proceeding Vivigen produced copies of invoices supporting a claim for deduction for sales taxes paid to other states for 1987 through 1990. Based on an examination of those records the Department refunded to Vivigen an additional principal amount of $10,292.08, plus the applicable penalty and interest. At trial Vivigen offered no evidence challenging the accuracy of the Department's final audit figures.

Vivigen's brief on appeal raises several attacks on the Department's procedures. First, it contends that the Department's estimated assessment, not having been based upon a review of Vivigen's books of account, was "clearly unwarranted, arbitrary and capricious." Vivigen does not, however, describe the methods of estimation used by the Department and explain why they were irrational. See Archuleta v. O'Cheskey, 84 N.M. 428, 504 P.2d 638 (Ct.A...