Could Team Specialty Products obtain New Mexico technology jobs tax credits for 2001 when employee misconduct delayed its application until September 2003?

Plain-English summary

Team Specialty Products lost its 2001 basic and additional technology jobs tax credits because it applied after the statutory one-year period. Employee misconduct and the new owners' lack of knowledge did not make the deadline optional, and the Department had no statutory authority to grant a good-cause extension for a tax-credit application.

New owners Robert and Daniel Sachs purchased Team Specialty Products in November 2001 and retained two accounting employees. The owners later discovered unpaid bills and taxes, unauthorized credit-card purchases, and a $67,000 company check forged by one employee. After hiring a CPA in February 2003, they learned that the company had previously obtained a technology jobs tax credit for 2000 but had never applied for 2001.

The CPA submitted an application for the 2001 basic and additional credits in September 2003. The Department denied it because Section 7-9F-9(A) required an application within one year after the end of the calendar year in which the qualified expenditures were made.

The one-year period was mandatory

The Technology Jobs Tax Credit Act provided a basic credit equal to four percent of qualified research expenditures. A taxpayer could obtain an additional four percent by meeting the Act's payroll-increase requirement.

TSP argued that Section 7-9F-9(A)'s statement that a taxpayer "may apply" within one year made the time period permissive. The decision instead read the Act as a whole. "May" gave a taxpayer the choice whether to seek the credit; once it chose to apply, the application had to be filed within the stated period.

For expenditures made during 2001, TSP's deadline was December 31, 2002. Its September 2003 application was late.

The payroll rules depended on timely filing

The additional credit compared annual payroll for the one-year period ending on the application date with base payroll for the preceding one-year period. Timely filing kept those payroll periods aligned with the qualified expenditures claimed.

The decision found that allowing applications years later would break that relationship. TSP's own late application illustrated the problem because its stated payroll periods were one year earlier than the statutory definitions required.

Open-ended applications would undermine legislative reporting

Section 7-9F-12 required the Department to report the credit's fiscal and economic effects using recent data. If taxpayers could wait indefinitely to claim old expenditures, the Legislature could not reliably measure the credit's effect, cost, or the state's potential liability for unclaimed credits.

That reporting structure reinforced the conclusion that the one-year period was a mandatory prerequisite to approval.

The Department could not grant a good-cause extension

TSP asked for a retroactive extension because its former employees had failed to apply and one had committed forgery and embezzlement. The decision found no extension authority in either the Technology Jobs Tax Credit Act or the Tax Administration Act.

Section 7-1-13(E) permitted the Department's cabinet secretary to extend the time to file or pay taxes by up to twelve months. It did not authorize an extension for filing a tax-credit application.

The employee's failure to apply was treated as negligence rather than part of the criminal conduct. The owners remained responsible for supervising the employees handling the company's tax accounts, and that unfortunate history could not expand the Department's statutory powers.

Result: protest DENIED. The one-year application period was mandatory, and TSP's late filing barred approval of both the basic and additional credits.

What this means for you

Technology companies claiming research-related credits

Calendar the application deadline separately from return-filing deadlines. For this version of the Act, qualified expenditures for a calendar year had to be submitted within the following year.

Businesses changing ownership or accounting staff

Review prior credit correspondence and pending application deadlines during the transition. A new owner's lack of knowledge did not preserve the expired credit.

Taxpayers asking an agency for equitable relief

An agency can exercise only authority granted by statute. Serious employee wrongdoing did not allow the Department to create an extension that the statutes did not provide.

Employers relying on bookkeepers or accountants

Management remains responsible for supervising tax matters. Delegating the work did not transfer the legal consequence of a missed application deadline to the Department.

Common questions

Q: What credits did TSP seek?
A: The basic and additional technology jobs tax credits for qualified expenditures made during 2001.

Q: When was the application due?
A: By December 31, 2002.

Q: When did TSP apply?
A: In September 2003.

Q: Did the word "may" make the deadline optional?
A: No. It made applying optional, but an applicant still had to use the one-year period specified by Section 7-9F-9(A).

Q: Could the Department extend the deadline for good cause?
A: No. The decision found no statutory authority to extend a technology jobs tax credit application deadline.

Citations and references

Statutes:

• NMSA 1978, §§ 7-9F-1 through 7-9F-12 — Technology Jobs Tax Credit Act
• NMSA 1978, § 7-9F-3(B)-(C) — annual and base payroll expense definitions
• NMSA 1978, § 7-9F-6(B) — payroll increase required for the additional credit
• NMSA 1978, § 7-9F-9(A) — one-year period to apply for credit approval
• NMSA 1978, § 7-9F-12 — Department reporting on the credit's fiscal and economic effects
• NMSA 1978, § 7-1-13(E) — extensions for filing or paying taxes

Cases cited:

• Roth v. Thompson, 113 N.M. 331, 825 P.2d 1241 (1992)
• State v. Davis, 2003-NMSC-022, 134 N.M. 172, 74 P.3d 1064
• Murphy v. Taxation and Revenue Department, 94 N.M. 90, 607 P.2d 628 (Ct. App. 1979), aff'd, 94 N.M. 54, 607 P.2d 592 (1980)
• Maxwell Land Grant Co. v. Jones, 28 N.M. 427, 213 P. 1034 (1923)
• Chalamidas v. Environmental Improvement Division, 102 N.M. 63, 691 P.2d 64 (Ct. App. 1984)
• El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Team Specialty Products
• Decision PDF: D&O 04-02

Original ruling text

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

IN THE MATTER OF THE PROTEST OF
TEAM SPECIALTY PRODUCTS, INC. No. 04-02
ID NO. 02-124490-00 1
DENIAL OF APPLICATION FOR TECHNOLOGY
JOBS TAX CREDIT FOR TAX YEAR 2001

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on February 10, 2004,

before Margaret B. Alcock, Hearing Officer. The Taxation and Revenue Department

("Department") was represented by Susanne Roubidoux, Special Assistant Attorney General.

Team Specialty Products, Inc. was represented by James Lawrence Sanchez with the law firm

of Rael and Sanchez. Based on the evidence and arguments presented, IT IS DECIDED AND

ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. In November 2001, Robert Sachs and Daniel Sachs (“Owners”) purchased

Team Specialty Products, Inc. (“TSP”).

2. Two employees of TSP were retained by the Owners: Barbara Blanton and her

assistant, Jeff Hurley.

3. Ms. Blanton and Mr. Hurley were responsible for paying bills, filing tax

returns, and performing general accounting tasks for TSP.

4. For the first six months after the Owners purchased TSP, Ms. Blanton

maintained that she was unable to provide them with any financial information because the
computer system was being updated. The Owners received their first financial statement in

May 2002.

5. In June 2002, Ms. Blanton resigned without giving notice. Mr. Hurley then

took over her duties.

6. After Ms. Blanton’s departure, TSP’s cash flow improved, but then the Owners

began to receive notices that TSP’s vendors were not being paid.

7. About the same time, Mr. Hurley told the Owners that he had lost TSP’s credit

card and that someone had run up unauthorized charges. After the Owners contacted the

stores at which the charges were made, they determined that it was Mr. Hurley himself who

made the “unauthorized” purchases.

8. The Owners fired Mr. Hurley and began to review TSP’s bookkeeping and

accounting records.

9. The Owners discovered that bills and taxes had not been paid.

10. The Owners also discovered that Mr. Hurley forged a company check written

to himself in the amount of $67,000. Criminal charges were subsequently brought against Mr.

Hurley.

11. In February 2003, the Owners hired a certified public accountant to help them

straighten out their accounting problems.

12. The CPA discovered two letters concerning a tax credit available from the

State of New Mexico under the provisions of the Technology Jobs Tax Credit Act, NMSA

1978, §§ 7-9F-1 through 7-9F-12.

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13. The first letter was dated December 26, 2001 from Neff & Ricci LLP, TSP’s

former accounting firm, to Barbara Blanton reminding her that TSP’s application for the

technology jobs tax credit for the period July 4, 2000 through December 31, 2000 had to be

mailed “no later than December 31, 2001.”

14. The second letter was dated July 29, 2002 from the New Mexico Taxation and

Revenue Department to Barbara Blanton notifying her that TSP’s application for the

technology jobs tax credit for 2000 had been approved. A copy of this letter was faxed to TSP

on February 11, 2003.

15. TSP’s Owners were not aware of the existence of the technology jobs tax credit

until their CPA came across these letters.

16. The Owners subsequently determined that neither Barbara Blanton nor Jeff

Hurley had filed an application for the tax credit for the period January through December

2001.

17. TSP’s new CPA completed an application for the basic and additional

technology jobs tax credits for the 2001 calendar year and submitted it to the Department in

September 2003.

18. On September 19, 2003, the Department denied the application because it was

not filed within one year following the end of the calendar year in which the qualified

expenditures were made.

19. On October 15, 2003, TSP filed a written protest to the Department’s denial.

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DISCUSSION

The issue to be decided is whether TSP’s failure to submit its application for the basic

and additional technology jobs tax credits within the one-year period provided in NMSA 1978, §

7-9F-9(A) bars the Department from approving the credit.

The Technology Jobs Tax Credit Act was enacted by Laws 2000 (2nd S.S.), ch. 22, §§ 1-

12, and became effective on July 3, 2000. The Act, which is codified at NMSA 1978, §§ 7-9F-1

through 7-9F-12, allows a taxpayer that conducts qualified research at a facility in New Mexico

to claim a basic credit equal to four percent of qualified expenditures, which are defined to

include rent, equipment, software, payroll, technical manuals and materials, and operation and

maintenance of facilities. The taxpayer may qualify for an additional four percent credit by

raising the annual payroll expense at its qualified facility by at least $75,000 over base payroll

for every $1,000,000 in qualified expenditures claimed by the taxpayer in a taxable year in the

same claim. NMSA 1978, § 7-9F-9(A) states that a taxpayer “may apply for approval of a credit

within one year following the end of the calendar year in which the qualified expenditure was

made.”

In this case, TSP filed an application for the technology jobs tax credit in September

2003, claiming both the basic and additional credits for the period January through December

2001. The application was denied by the Department because it was not filed within one year

following the end of the calendar year in which the qualified expenditures were made. TSP is

challenging this denial, arguing that the Legislature’s use of the word “may” in § 7-9F-9(A)

makes the time limit set out in the statute optional rather than mandatory. TSP also maintains

that the Department has discretion to extend the time within which an application for the

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technology jobs tax credit may be filed when the taxpayer has good cause for delay. In contrast,

the Department interprets the word “may” in § 7-9F-9(A) to mean that a taxpayer has the right,

but not the obligation, to apply for the credit provided under the Technology Jobs Tax Credit

Act. If a taxpayer chooses to apply for the credit, then the taxpayer’s application must be filed

within the one-year time frame set out in the statute.

Application of the Rules of Statutory Construction. It is a fundamental rule of

statutory construction that all provisions of a statute, together with other statutes in pari materia,

must be read together to ascertain legislative intent. Roth v. Thompson, 113 N.M. 331, 334, 825

P.2d 1241, 1244 (1992). In support of its position concerning the correct interpretation of § 7-

9F-9(A), TSP points out that the limitations period set out in NMSA 1978, § 7-9A-8(A) of the

Investment Credit Act uses the word “shall” rather than “may”, and states that a taxpayer “shall

apply for approval for a credit within one year following the end of the calendar year in which

the qualified equipment for the manufacturing operation is purchased or introduced into New

Mexico.” TSP argues that the Legislature’s use of the word “shall” in the Investment Credit Act

indicates that its use of the word “may” in § 7-9F-9(A) of the Technology Jobs Tax Credit Act

was intended to make that limitations period permissive rather than mandatory.

The weakness in TSP’s argument is that the Investment Credit Act was enacted twenty

years earlier than the Technology Jobs Tax Credit Act. Before resorting to a comparison of

the language used in similar, but unrelated, pieces of legislation, it is first necessary to look at

other sections of the Technology Jobs Tax Credit Act itself. As the New Mexico Supreme

Court noted in State v. Davis, 2003-NMSC-022, ¶ 12, 134 N.M. 172, 74 P.3d 1064: “The rule

that statutes in pari materia should be construed together has the greatest probative force in

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the case of statutes relating to the same subject matter passed at the same session of the

legislature. 2B Norman J. Singer, Statutes and Statutory Construction § 51.03, at 237 (6th

ed., rev. 2000).” When § 7-9F-9(A) of the Technology Jobs Tax Credit Act is read in

conjunction with other provisions of the same Act, it becomes apparent that compliance with

the time requirements set out in § 7-9F-9 is a mandatory prerequisite to qualifying for the

credit.

As discussed earlier, a taxpayer that has qualified for the basic four percent credit

provided in the Technology Jobs Tax Credit Act may qualify for an additional four percent

credit by raising its annual payroll expense at the qualified facility by at least $75,000 over base

payroll for every $1,000,000 “in qualified expenditures claimed by the taxpayer in a taxable year

in the same claim.” § 7-9F-6(B). For purposes of claiming the additional credit, the term

“annual payroll expense” is defined as “the wages paid or payable by the taxpayer for the one-

year period ending on the day the taxpayer applies for an additional credit....” § 7-9F-3(B). The

term “base payroll expense” is defined as “the wages paid or payable by the taxpayer for the one-

year period ending on the day one year prior to the day the taxpayer applies for an additional

credit....” § 7-9F-3(C).

In this case, TSP filed its initial application for the technology jobs tax credit at the end

of December 2001. Pursuant to the limitations period set out in § 7-9F-9(A), TSP should have

filed its application for qualified expenditures made during the year 2001 on or before December

31, 2002. If this had been done, the base payroll expense used to measure increased payroll for

purposes of the additional technology jobs tax credit would correspond to wages paid during the

period for which the base credit was claimed. The annual payroll expense would correspond to

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wages paid during the subsequent year, ending on the day the application was filed. Allowing a

taxpayer’s application to be filed beyond the one-year period set out in § 7-9F-9(A) disrupts the

symmetry of the statutory scheme by severing the interrelationship between qualified

expenditures and the increase in payroll needed to qualify for the additional technology jobs tax

credit.1

Based on TSP’s argument that the limitations period set out in § 7-9F-9(A) is merely

precatory, taxpayers could wait years after expenses were incurred to claim the technology jobs

tax credit. As the Department points out, this would substantially limit the value of the reporting

requirement set out in § 7-9F-12, which states:

In October 2003 and each year thereafter, the department shall report to the
legislative finance committee and the revenue stabilization and tax policy
committee on the fiscal and economic impacts of the Technology Jobs Tax
Credit Act using the most recently available data for the two prior fiscal
years. The report shall include the number of taxpayers who have received
basic credits or additional credits under the...Act, the amounts of the basic
credits and additional credit, the geographic locations of the qualified
facilities and the payroll increases of taxpayers related to additional
credits....

This section indicates that the Legislature intends to closely monitor the effect of the tax credit

on the economic development of technology-based businesses engaging in research in New

Mexico. Allowing taxpayers to wait an indefinite period of time before applying for accrued

credits on qualified expenditures would undermine the Legislature’s ability to assess the credit’s

impact on this kind of economic development. It would also make it extremely difficult for the

Legislature to determine the actual cost of the credit or the state’s potential liability for

1
TSP’s application illustrates the problem created by late filing. Statement 4 of the application lists TSP’s
annual payroll expense as wages paid during the period August 15, 2001 through August 15, 2002; Statement
4-1 lists TSP’s base payroll expense as wages paid during the period August 15, 2000 through August 15,

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unclaimed credits. When § 7-9F-9(A) is read in conjunction with the stated purpose of the

reporting requirement in § 7-9F-12, it seems clear that the one-year limitation period set out in §

7-9F-9(A) was intended as a mandatory prerequisite for approval of the technology jobs tax

credit.

New Mexico courts have held that tax credits, along with tax exemptions and

deductions, “are strictly matters of legislative grace and are to be construed against the

taxpayer.” Murphy v. Taxation and Revenue Department, 94 N.M. 90, 93, 607 P.2d 628, 631

(Ct. App. 1979), aff’d, 94 N.M. 54, 607 P.2d 592 (1980). There is no common law right to a tax

credit. In this case, the only section of the Technology Jobs Tax Credit Act that addresses the

manner in which the credit may be claimed is § 7-9F-9(A), which states that a taxpayer “may

apply for approval of a credit within one year following the end of the calendar year in which the

qualified expenditure was made.” There is no provision of the Act that would allow a taxpayer

to apply for the credit during any other period. In the absence of such authorization, the

Department has no statutory basis for accepting the Taxpayer’s September 2003 application.

Extension of Time. TSP maintains that the Department has discretion to grant TSP an

extension of time to file its application for the technology jobs tax credit because TSP had good

cause for the delay. There is no provision, however, in the Technology Jobs Tax Credit Act or

the Tax Administration Act that allows the Department to extend the deadline set out in § 7-9F-

9(A).

In Maxwell Land Grant Co. v. Jones, 28 N.M. 427, 213 P. 1034, 1035 (1923), the New

Mexico Supreme Court recognized that the “state tax commission is a creature of statute, and

2001. In each case, the wages listed are for a period one year earlier than that required by the definitions of

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it has only such powers as are conferred upon or granted to it by the statute under which it

assumed to act, and must be able to support its action by statutory authorization.” See also,

Chalamidas v. Environmental Improvement Division, 102 N.M. 63, 66, 691 P.2d 64, 67

(Ct.App.1984) (“Administrative bodies are creatures of statute and can act only on those

matters which are within the scope of authority delegated to them”). The only statutory

authority for the Department to grant extensions is found in NMSA 1978, § 7-1-13(E), which

gives the Department’s cabinet secretary discretion to grant a taxpayer or a class of taxpayers

up to twelve additional months to file or pay taxes due to the state. The statute does not give

the secretary authority to grant an extension of time within which to file an application for tax

credits.

Finally, TSP argues that the Department’s refusal to grant TSP a retroactive extension

of time to file its application allows the state to benefit from a crime. This argument fails for

two reasons: first, while Mr. Hurley’s acts of embezzlement and forgery were clearly crimes,

his failure to file TSP’s application for tax credits was merely negligent; second, TSP’s

owners—not the Department—must bear responsibility for this negligence. As stated by the

New Mexico Court of Appeals in El Centro Villa Nursing Center v. Taxation and Revenue

Department, 108 N.M. 795, 799, 779 P.2d 982, 986 (Ct. App. 1989):

"[e]very person is charged with the reasonable duty to ascertain the
possible tax consequences of his action [or inaction]." Tiffany Constr.
Co. v. Bureau of Revenue, 90 N.M. at 17, 558 P.2d at 1156. We are not
inclined to hold that the taxpayer can abdicate this responsibility merely
by appointing an accountant as its agent in tax matters.

annual and base payroll in § 7-9F-3.

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Here, TSP’s owners had the duty to supervise the employees assigned to handle the company’s

tax accounts. Unfortunate as the facts of this case may be, they do not provide grounds for the

Department to extend or waive the time limit for filing TSP’s application for the technology jobs

tax credit.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to the Department’s denial of its

claim for the technology jobs tax credit, and jurisdiction lies over the parties and the subject

matter of this protest.

2. The one-year limitation period set out in NMSA 1978, § 7-9F-9(A) is mandatory

and not discretionary.

3. TSP’s failure to submit its application for the basic and additional technology

jobs tax credits within the one-year period provided in NMSA 1978, § 7-9F-9(A) bars the

Department from approving the credit.

For the foregoing reasons, the Taxpayer's protest IS DENIED.

DATED February 16, 2004.

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