A dairy-cow hoof trimmer thought his work was a tax-exempt livestock service. Were his receipts exempt from New Mexico gross receipts tax, and did a Department employee's advice protect him?

Subject

Aguadulce Hoof Trimmers (D&O 00-07)

Plain-English summary

Darrin Dow ran Aguadulce Hoof Trimmers in Roswell, New Mexico, trimming the hoofs of dairy cows so they could keep standing, eating, and producing milk. His work extends a cow's productive life; he is never hired to trim a cow already headed for slaughter. When he registered in 1993, he read in a Department pamphlet about an exemption for "handling livestock prior to sale," decided it covered him, filed gross receipts tax returns showing zero receipts, and eventually stopped filing after a Roswell employee orally agreed he was exempt.

A later audit disagreed. After the Department fixed some inflated numbers (it abated three personal income tax assessments and the penalty, and recalculated the gross receipts tax using the income on Dow's federal Schedule C), the remaining question was whether his hoof-trimming receipts for 1993-1997 owed gross receipts tax. Dow argued two exemptions and estoppel.

The Hearing Officer denied the protest:

• Section 7-9-18 (selling livestock and products) exempts selling animals, unprocessed agricultural products, hides, pelts, wool, or mohair. Dow sells a service, not products — he doesn't sell cows, and he doesn't sell the hoof trimmings (he takes them home for his dog). No exemption.
• Section 7-9-19 (handling livestock prior to sale) was closer — chasing, tying, and trimming a cow is "handling." But the exemption is limited to handling done "prior to sale," and Dow's work is meant to prolong the cow's milking life, not prepare it for sale; he wouldn't trim a slaughter-bound cow at all. Reading "prior to sale" to cover any handling during a cow's life — since it will eventually be sold — was "too broad." Because subsections (A) and (C) lack that limiting phrase while (B) includes it, the legislature meant to require a real connection to the sale.
• Estoppel under Section 7-1-60 requires reliance on a regulation or a written ruling addressed to the taxpayer personally by the secretary. Dow relied on neither — he reached his own conclusion from a pamphlet, and the oral advice of a Department employee is not a "ruling" (citing Bien Mur, where reliance on an employee's oral representations was unreasonable). He was also put on notice in June 1996 that he might owe tax but waited a year and a half to seek written clarification.

What this means for you

• New Mexico's livestock exemptions are for selling animals and products — not for services performed on them. A farrier, hoof trimmer, veterinarian, or other ag-service provider who does not sell livestock, produce, hides, or wool cannot use Section 7-9-18. Selling a service is a taxable event.
• "Prior to sale" means connected to the sale, not merely before an eventual sale. The Section 7-9-19 exemption for handling, penning, feeding, or training livestock "prior to sale" turns on a link to the actual sale. Work that keeps an animal productive — and would be pointless once it is bound for slaughter — is not "prior to sale."
• Oral advice from a state tax employee will not protect you. To estop the Department under Section 7-1-60 you generally need a regulation you followed or a written ruling issued to you by the secretary. A phone call or counter conversation, even one that told you "you're exempt," is not enough — and it is not reasonable to rely on it.
• If you're told you might owe, get it in writing fast. Dow's delay of eighteen months in seeking a written determination, after being warned he might be taxable, undercut any fairness argument. When your status is in doubt, request a written ruling promptly and keep paying (or reserving) in the meantime.

Key questions answered

Why isn't hoof trimming covered by the livestock exemption?
Section 7-9-18 exempts selling livestock and enumerated products. Dow sells a service, not products, and does not sell the hoof trimmings, so there is nothing exempt to sell.

His work is literally "handling" cows — why didn't Section 7-9-19 apply?
Because that exemption is limited to handling "prior to sale." Dow's trimming is meant to extend a cow's milk-producing life, not to prepare it for sale; he would never trim a cow already headed to slaughter. Handling that just happens to occur sometime before an eventual sale is not enough.

A Department employee told him he was exempt — doesn't that bind the Department?
No. Estoppel under Section 7-1-60 requires reliance on a regulation or a written ruling from the secretary. Oral advice from an employee is not a ruling, and relying on it is not reasonable (Bien Mur).

Did he owe everything the Department first assessed?
No. Before the decision, the Department abated the three personal income tax assessments (after accepting that Dow's computer worksheets overstated his income) and abated the penalty on the gross receipts tax assessment. What remained — and was upheld — was gross receipts tax and interest on the receipts shown on his federal Schedule C.

Verbatim citations

The livestock-selling exemption covers products, not services:

The exemption applies to receipts from selling the products enumerated. Mr. Dow is not entitled to this exemption because he is engaged in selling services, not products. Mr. Dow does not sell cows or other livestock; he does not sell unprocessed agricultural products; he does not sell the hides or pelts of cows or other animals, nor does he sell wool or mohair.

Why "prior to sale" was read narrowly:

Subsection B of Section 7-9-19 NMSA 1978 limits the gross receipts tax exemption for receipts from handling livestock to activities performed "prior to sale." Neither of the exemptions contained in Subsections A or C of Section 7-9-19 contain such limiting language. This indicates the legislature did not intend to grant a blanket exemption ... but intended to require some connection between the handling of the livestock and the sale of the livestock.

Oral advice does not create estoppel:

Although Mr. Dow maintains the oral advice he received from the Department's employee constitutes a "ruling" for purposes of Section 7-1-60 NMSA 1978, the statute requires that the ruling be "addressed to the party personally and in writing by the secretary." Oral advice from a Department employee does not meet this requirement.

The holding:

Mr. Dow's receipts from hoof trimming services are not exempt from gross receipts tax under Section 7-9-18 NMSA 1978. ... are not exempt from gross receipts tax under Section 7-9-19 NMSA 1978. The Department is not estopped from assessing gross receipts tax against Mr. Dow. For the foregoing reasons, Mr. Dow's protest ... is denied.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Aguadulce Hoof Trimmers
• Decision PDF: D&O 00-07

Original ruling text

BEFORE THE HEARING OFFICER
OF THE TAXATION AND REVENUE DEPARTMENT
OF THE STATE OF NEW MEXICO

IN THE MATTER OF THE PROTESTS OF

AGUADULCE HOOF TRIMMERS
ID NO. 02-198377-00 1
ASSESSMENT 2260093 No. 00-07

DARRIN DOW
ASSESSMENTS 322042, 322043 & 322044

DECISION AND ORDER

A formal hearing on the above-referenced protests was held February 3, 2000, before

Margaret B. Alcock, Hearing Officer. Darrin Dow, d/b/a Aguadulce Hoof Trimmers, was

represented by R. “Trey” Arvizu, III, Arvizu Law Firm. The Taxation and Revenue Department

("Department") was represented by Bridget A. Jacober, Special Assistant Attorney General. Based on

the evidence and arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. In 1993, Darrin Dow moved to Roswell, New Mexico, and opened a business known

as “Aguadulce Hoof Trimmers.”

2. Mr. Dow is engaged in the business of trimming the hoofs of dairy cows.

3. The average milk-producing life of a dairy cow is approximately three years, after

which the cow is sold to a slaughterhouse.

4. A dairy generally sells and replaces one-third of its stock of dairy cows each year.

5. The hoofs of a dairy cow must be regularly trimmed to prevent “rot foot”, warts, and

other infections and diseases which prevent the dairy cow from being able to stand. If a dairy cow is

unable to stand, it will not be able to eat and will not produce milk.

6. Mr. Dow’s services are purchased by local dairies and serve to prolong the useful life

of the dairy’s cows.

7. Mr. Dow is not hired to trim the hoofs of dairy cows about to be sold for slaughter

because, at that point, their useful life is over.

8. In order to trim a cow’s hoofs, Mr. Dow first chases the cow into a chute, turns the

cow over and ties its feet. Mr. Dow then trims the hoofs by hand.

9. Mr. Dow takes the hoof trimmings home for his dog to chew on, but does not sell the

trimmings.

10. When Mr. Dow opened his business in 1993, he went to the Department’s Roswell

office to register for the payment of gross receipts, compensating and withholding taxes.

11. At the time he registered, Mr. Dow was given a pamphlet of forms and instructions

explaining the application of the gross receipts tax.

12. Mr. Dow read in the pamphlet that receipts from handling livestock prior to sale are

exempt from gross receipts tax under Section 7-9-19 NMSA 1978. Mr. Dow concluded that this

exemption applied to him because he had to handle dairy cows in order to trim their hoofs.

13. Based on his belief that his receipts were exempt from tax, Mr. Dow filed quarterly

gross receipts tax returns reporting his receipts as zero.

14. At some point, Mr. Dow had a discussion with a Department employee at the

Roswell office, who agreed with Mr. Dow that his receipts were exempt. The employee told Mr.

Dow it was not necessary for him to continue to file gross receipts tax reports.

15. On April 8, 1996, the Department sent Mr. Dow a letter notifying him that

Aguadulce Hoof Trimmers had been selected for audit and assigned to auditor George Romero

(Department Exhibit 2, page B9).

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16. When Mr. Dow received the audit notice, he went to the Department’s Roswell

office. George Romero was out of the office, so Mr. Dow spoke with Allen Wesson, one of the other

auditors.

17. Mr. Dow explained the nature of his business to Mr. Wesson and told him another

Department employee had previously advised Mr. Dow his receipts were exempt.

18. Mr. Wesson checked with someone in the Santa Fe office and then told Mr. Dow his

receipts were not exempt under Section 7-9-19 NMSA 1978, but might be deductible under Section

7-9-59 NMSA 1978.

19. Mr. Wesson wrote a note summarizing his conversation with Mr. Dow and gave the

note to George Romero on June 12, 1996.

20. On November 28, 1997, Mr. Dow wrote a letter to the Department’s Tax

Information/Policy Office in Santa Fe requesting information on whether his receipts from

performing hoof trimming services were subject to gross receipts tax.

21. On January 5, 1998, the Tax Information/Policy Office sent Mr. Dow a letter

advising him that receipts from his hoof trimming services were neither exempt under Section 7-9-19

NMSA 1978 nor deductible under section 7-9-59 NMSA 1978 and were subject to gross receipts tax.

22. In March 1998, George Romero began the field audit of Mr. Dow’s business.

23. During the audit, Mr. Dow provided Mr. Romero with computer worksheets listing

his monthly receipts.

24. Mr. Dow was not familiar with all the functions of his computer and usually relied on

his son, who lived in Arizona, to help him operate the computer. When Mr. Dow’s son learned that

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Mr. Dow had given the auditor the computer worksheets, he told his father the worksheets were not

accurate because the computer program ran cumulative totals that counted receipts more than once.

25. When the auditor asked Mr. Dow why the receipts shown on Mr. Dow’s work-sheets

were higher than receipts reported on his federal and state income tax returns, Mr. Dow told the

auditor the worksheets might not be accurate, but did not explain what caused the errors.

26. In the absence of a clear explanation as to why Mr. Dow’s own worksheets would not

accurately reflect his receipts, the auditor decided to use the higher income figures shown on the

worksheets instead of the figures shown on Mr. Dow’s income tax returns.

27. On May 29, 1998, the Department issued gross receipts tax assessment 2260093 to

Aguadulce Hoof Trimmers in the total amount of $46,650.20, representing gross receipts tax, penalty

and interest for tax years 1993 through 1997.

28. On August 27, 1998, the Department issued the following assessments of personal

income tax to Mr. Dow: Assessment No. 322042 for tax year 1994 in the amount of $1,838.25;

Assessment No. 322043 for tax year 1995 in the amount of $3,673.80; and Assessment No. 322044

for tax year 1996 in the amount of $2,471.43. The personal income tax assessments were based

solely on the discrepancy between the receipts reported on Schedule C of Mr. Dow’s federal income

tax returns and the receipts shown on Mr. Dow’s computer worksheets.

29. On August 16, 1998, pursuant to an extension of time granted by the Department,

Mr. Dow filed a written protest to the Department’s assessments.

30. At the formal hearing held February 3, 2000, the Department stated that it would

abate the penalty assessed under Assessment No. 2260093. Accordingly, the issue of Mr. Dow’s

liability for this portion of the assessment is no longer before the hearing officer and will not be

addressed in this decision.

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31. At the formal hearing held February 3, 2000, the parties agreed to leave the record

open until February 24, 2000, so Mr. Dow could provide additional information to establish that the

computer worksheets he gave the Department’s auditor were inaccurate and the income shown on

Schedule C to Mr. Dow’s federal income tax returns reflect his true income for the audit period.

32. On February 28, 2000, Department counsel notified the hearing officer the

Department had accepted Mr. Dow’s explanation concerning the inaccuracy of his worksheets. The

Department stated that it would abate the three assessments of personal income tax and adjust

Assessment No. 2260093 to reflect gross receipts tax and interest on the receipts shown on Mr.

Dow’s federal income tax returns, rather than the receipts shown on Mr. Dow’s computer

worksheets.

33. The only issue remaining in protest is whether Mr. Dow is liable for gross receipts

tax and interest on his receipts, as reflected on Schedule C of his federal income tax returns, from

hoof trimming services performed in New Mexico during the period January 1993 through

December 1997.

DISCUSSION

Mr. Dow raises the following arguments in protest to the Department’s assessment of gross

receipts tax: (1) the receipts from his hoof trimming services are exempt from tax under Section 7-9-

18 NMSA 1978; (2) the receipts from his hoof trimming services are exempt from tax under Section

7-9-19 NMSA 1978; and (3) the estoppel provisions of Section 7-1-60 NMSA 1978 bar the

Department from assessing the tax against Mr. Dow.

EXEMPTIONS FROM TAX. Section 7-1-17(C) NMSA 1978 provides that any

assessment of tax by the Department is presumed to be correct, and it is the taxpayer's burden to

overcome this presumption. Archuleta v. O'Cheskey, 84 N.M. 428, 431, 504 P.2d 638, 641 (Ct. App.

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1972). Where an exemption from tax is claimed, the statute must be construed strictly in favor of the

taxing authority, the right to the exemption must be clearly and unambiguously expressed in the statute,

and the right must be clearly established by the taxpayer. Wing Pawn Shop v. Taxation and Revenue

Department, 111 N.M. 735, 740, 809 P.2d 649, 654 (Ct. App. 1991). Accordingly, it is Mr. Dow’s

burden to come forward with evidence and legal arguments to show he is entitled to the exemptions

claimed.

Section 7-9-18 NMSA 1978 states:

Exempted from the gross receipts tax and from the governmental gross
receipts tax are the receipts from selling livestock and receipts of growers,
producers, trappers or nonprofit marketing associations from selling
livestock, live poultry, unprocessed agricultural products, hides or pelts.
Persons engaged in the business of buying and selling wool or mohair or of
buying and selling livestock on their own account are producers for the
purposes of this section.

Receipts from selling dairy products are not exempted from the gross receipts
tax.

The exemption applies to receipts from selling the products enumerated. Mr. Dow is not entitled to

this exemption because he is engaged in selling services, not products. Mr. Dow does not sell cows

or other livestock; he does not sell unprocessed agricultural products; he does not sell the hides or

pelts of cows or other animals, nor does he sell wool or mohair. Although Mr. Dow testified that he

often takes hoof trimmings home for his dog, he also acknowledged that he does not sell the hoof

trimmings to any third party. Accordingly, even if hoof trimmings could be classified as an

agricultural product or as some form of a hide or pelt, Mr. Dow does not have any receipts from

selling such products and is ineligible for the exemption.

Section 7-9-19 NMSA 1978 states:

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A. Exempted from the gross receipts tax are the receipts of any person
derived from feeding or pasturing livestock.

B. Receipts derived from penning or handling livestock prior to sale are
receipts derived from feeding livestock for the purposes of this section.

C. Receipts derived from training livestock are receipts derived from feeding
livestock for the purposes of this section.

Mr. Dow claims the exemption for handling livestock provided in Subsection B. Mr. Dow’s hoof

trimming services include chasing the cow into a chute, turning the cow over, tying its feet, and then

trimming the hoofs by hand. In the absence of any statutory or regulatory definition to the contrary,

Mr. Dow’s activities appear to come within the common meaning of “handling”. To be eligible for

the exemption, however, the taxpayer’s receipts must be derived from “handling livestock prior to

sale.” (emphasis added). Mr. Dow argues that because the milk-producing life of a dairy cow is only

three years, after which the cow is sold to the slaughterhouse, all hoof trimming services performed

during the cow’s life are performed “prior to sale.” This is too broad a reading of the statute.

Section 7-9-5 NMSA 1978 creates a statutory presumption that “all receipts of a person

engaging in business are subject to the gross receipts tax." If a tax is clearly applicable, except for a

statutory exemption, the provision for the exemption must be narrowly but reasonably construed.

Chavez v. Commissioner of Revenue, 82 N.M. 97, 99, 476 P.2d 67 (Ct. App.1970). Subsection B of

Section 7-9-19 NMSA 1978 limits the gross receipts tax exemption for receipts from handling livestock

to activities performed “prior to sale.” Neither of the exemptions contained in Subsections A or C of

Section 7-9-19 contain such limiting language. This indicates the legislature did not intend to grant a

blanket exemption for receipts from the activities described in Subsection B, but intended to require

some connection between the handling of the livestock and the sale of the livestock. To find otherwise

would render the limitation meaningless. Accepting Mr. Dow’s argument, receipts from handling a

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cow at any point in its life would qualify for the exemption, as long as there was a likelihood the animal

would someday be sold. Such a construction of the statute is neither narrow nor reasonable.

Mr. Dow’s hoof trimming services are not performed in conjunction with or in preparation

for the cow’s sale. To the contrary, Mr. Dow acknowledged there would be no point to trimming the

hoofs of a cow designated for sale to the slaughterhouse. His services are intended to prolong the

useful life of the dairy cow and put off the date when the cow can no longer produce milk and must

be sold for beef. Although the cows on which Mr. Dow performs services will someday be sold—if

they do not die in the dairy—his hoof trimming services do not come within the exemption for

handling livestock “prior to sale.”

ESTOPPEL. Mr. Dow argues that Section 7-1-60 NMSA 1978 estops the Department from

enforcing its assessment of gross receipts tax. Section 7-1-60 states:

In any proceeding pursuant to the provisions of the Tax Administration Act, the
department shall be estopped from obtaining or withholding the relief requested
if it is shown by the party adverse to the department that the party's action or
inaction complained of was in accordance with any regulation effective during
the time the asserted liability for tax arose or in accordance with any ruling
addressed to the party personally and in writing by the secretary, unless the
ruling had been rendered invalid or had been superceded by regulation or by
another ruling similarly addressed at the time the asserted liability for tax arose.
(emphasis added).

Mr. Dow has not identified any Department regulation on which he relied in failing to pay gross

receipts tax on receipts from his hoof trimming business. Nor has the Department issued a formal

ruling to Mr. Dow. Although Mr. Dow maintains the oral advice he received from the Department’s

employee constitutes a “ruling” for purposes of Section 7-1-60 NMSA 1978, the statute requires that

the ruling be “addressed to the party personally and in writing by the secretary.” Oral advice from a

Department employee does not meet this requirement. See also, Taxation and Revenue Department v.

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Bien Mur Indian Market, 108 N.M. 228, 231, 770 P.2d 873, 876 (1989) (taxpayer’s reliance on the oral

representations of a Department employee was not reasonable).

It should also be noted that this is not a situation where Mr. Dow was paying tax on his receipts

and only stopped in reliance on advice received from the Department. Mr. Dow made his own

determination that his receipts were exempt after reading a Department pamphlet describing the

exemption in Section 7-9-19 NMSA 1978. He testified that he initially filed gross receipts tax returns

reporting zero receipts and then stopped filing altogether after he met with an unidentified employee in

the Department’s Roswell office.1 Mr. Dow could not remember exactly when this meeting occurred.

Although he thought it might have been in 1994, the Department’s audit workpapers indicate that Mr.

Dow did not stop filing gross receipts tax reports until March 1996 (Department Exhibit 1, page 1 of

Audit Narrative).

In June 1996, Mr. Dow discussed his liability for gross receipts tax with Allen Wesson, an

auditor in the Roswell office. After checking with someone in Santa Fe, Mr. Wesson told Mr. Dow his

receipts were not exempt from tax under Section 7-9-19 NMSA 1978, but might be deductible under

another section of the Gross Receipts and Compensating Tax Act (Department Exhibit 2, page B5). At

that point, Mr. Dow was on notice that he could be liable for payment of gross receipts tax. He did not

seek written clarification of his tax status until November 28, 1997, a year and a half after his

discussion with Mr. Wesson. On January 5, 1998, the Tax Information/Policy Office sent Mr. Dow a

letter advising him that his receipts from hoof trimming were neither exempt nor deductible and were

subject to New Mexico gross receipts tax (Department Exhibit 2, page B6.1).

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The June 12, 1996 note from Allen Wesson to George Romero (Department Exhibit 2, page B5) tentatively
identified the unknown employee as “Frank.” In his audit narrative (Department Exhibit 1, page 2) George Romero
states that based on the description Mr. Dow gave Mr. Wesson, Mr. Dow “could have talked to a former auditor
(Frank Montoya).”

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Given the above facts, Mr. Dow cannot claim that his failure to pay gross receipts tax during

the years 1993 through 1997 was solely due to erroneous advice received from the Department.

Clearly, his failure to pay tax was not based on his reliance on a written regulation or ruling issued by

the Department, and the estoppel provisions of Section 7-1-60 NMSA 1978 do not apply to this case.

CONCLUSIONS OF LAW

1. Mr. Dow filed a timely written protest to Assessment No. 2260093 and jurisdiction lies

over the parties and the subject matter of this protest.

2. Mr. Dow’s receipts from hoof trimming services are not exempt from gross receipts

tax under Section 7-9-18 NMSA 1978.

3. Mr. Dow’s receipts from hoof trimming services are not exempt from gross receipts

tax under Section 7-9-19 NMSA 1978.

4. The Department is not estopped from assessing gross receipts tax against Mr. Dow.

For the foregoing reasons, Mr. Dow’s protest of the Department’s assessment of gross receipts

tax and interest is denied.

DATED March 1, 2000.

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