Was a private prison operator selling a license for resale when a county paid it per inmate to operate a county-owned correctional facility?

Plain-English summary

Cornell Corrections of Texas was providing taxable correctional-facility services, not selling Bernalillo County a license that the county resold to the federal government. The AHO denied Cornell's $969,712 state-and-local gross receipts tax refund claim for 2008 and 2009.

Bernalillo County owned the Regional Correctional Center in Albuquerque and leased it to Cornell. The county separately contracted with the U.S. Department of Justice to house, safeguard, and support federal prisoners, then paid Cornell a per-inmate daily rate under an operating and management agreement.

Cornell had timely paid gross receipts tax on those receipts. It later sought a refund under Section 7-9-47, arguing that its accredited ability to house prisoners was a “license” sold to the county and resold to the federal government.

The contracts required a full package of essential services

Cornell had the sole right to manage and operate the facility and was an independent contractor. At its own expense, it had to provide or manage 21 categories of work, including staffing, security, inmate records, training, medical treatment, food, laundry, programming, telephone and commissary access, maintenance, visitation, court access, discipline, drug testing, intake classification, and fire and safety inspections.

The AHO found those services were the substance of the transaction. Without trained guards, security protocols, food, medical care, facility maintenance, and the other required functions, there would be no lawful or operational detention facility.

Cornell received one per diem amount per prisoner. The billing did not separate a supposed license from food, room, security, medical, or other service costs.

Accreditation was a condition, not the product sold

Cornell argued that accreditation supplied the license-like right to house federal prisoners. But Bernalillo County's federal agreement predated Cornell's operating agreement, and Cornell's initial accreditation audit occurred in 2010—after the 2008-2009 refund period.

The decision compared accreditation to a contractor's professional license: it can be a precondition to performing the work without becoming the thing sold. The underlying transaction remained operation and management services.

The hotel-room analogy also failed. Hotel services such as television or breakfast can be incidental to the room license. By contrast, food, security, medical care, and trained staffing were indispensable to a functioning jail.

The wrong NTTC could not create a deduction

After the refund protest began, Bernalillo County timely executed a Type 9 NTTC covering tangible personal property. Cornell's representative knew that certificate did not cover the claimed sale of a license.

Section 7-9-43(A)'s good-faith safe harbor required a properly executed certificate covering a transaction that was otherwise within a recognized deduction. An NTTC could not transform taxable correctional services into a nontaxable license transaction.

Result: protest DENIED on summary judgment. Cornell did not establish the license-for-resale deduction, so the $969,712 refund was denied.

What this means for you

Government contractors

Contract labels and required credentials do not control by themselves. The AHO examined what the contractor was actually obligated to provide and found a service transaction because facility operations dominated the agreements.

Private facility operators

A per-person charge covering staffing, security, food, medical care, and facility operations supports service treatment when no separate license amount is identified.

Businesses accepting NTTCs

Confirm both the certificate type and the underlying deduction. Timely possession of an NTTC does not create a deduction for a transaction the statute does not cover.

Common questions

Q: Who owned the correctional facility?
A: Bernalillo County owned it and leased it to Cornell.

Q: Why wasn't accreditation treated as a license sold to the county?
A: It was a condition of Cornell's ability to perform, while the contracts principally required operation, management, security, care, and support services.

Q: Did the Type 9 NTTC protect Cornell?
A: No. It covered tangible personal property, Cornell knew it was the wrong type, and the transaction did not qualify for the claimed license deduction.

Q: Why was summary judgment appropriate?
A: The parties agreed there was no genuine dispute of material fact, leaving only the legal characterization of the transaction and NTTC effect.

Citations and references

Statutes and regulation:

• NMSA 1978, §§ 7-9-3(M), 7-9-3.3, 7-9-4, and 7-9-5 — services, engaging in business, and gross receipts tax
• NMSA 1978, § 7-9-47 — tangible-property or license-for-resale deduction
• NMSA 1978, § 7-9-43(A) — good-faith NTTC safe harbor
• NMSA 1978, § 33-3-27 — standards for private operation of a jail
• Regulation 3.2.201.15 NMAC — good-faith acceptance of an NTTC

Cases cited:

• Corrections Corporation of America of Tennessee v. State, 2007-NMCA-148 — prison-housing agreement did not qualify as a real-property lease
• McKinley Ambulance Service v. Bureau of Revenue, 1979-NMCA-026 — safe harbor did not apply unless the certificate covered the receipts
• Gas Co. v. O'Cheskey, 1980-NMCA-085 — an NTTC does not transform an otherwise taxable transaction
• Transamerica Leasing Corp. v. Bureau of Revenue, 1969-NMCA-011 — substance and contractual intent control over form

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Cornell Corrections of Texas
• Decision PDF: D&O 14-35

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
CORNELL CORRECTIONS OF TEXAS
TO DEPARTMENT’S FAILURE TO GRANT No. 14-35
OR DENY A REFUND

DECISION AND ORDER
ON DEPARTMENT’S MOTION FOR SUMMARY JUDGMENT

A summary judgment hearing on the above-referenced protest occurred on July 22, 2014,

before Brian VanDenzen, Chief Hearing Officer. Chief Legal Counsel Brad Odell appeared

representing the Taxation and Revenue Department (“Department”), along with protest auditor

Andrick Tsbetsaye. Attorney Timothy R. Van Valen appeared representing Cornell Corrections of

Texas (“Taxpayer”). Josh Cohen and Josh Killian of Ryan, LLC also appeared for Taxpayer. This

matter was presented on the Department’s February 28, 2014 Motion for Summary Judgment and

Taxpayer’s April 7, 2014 response in opposition to Summary Judgment, which Taxpayer

supplemented further on July 11, 2014. All affidavits attached to the parties’ summary judgment

pleadings are admitted into the record. The parties submitted 16 stipulations of fact and stipulated

to the admission of exhibits A-G, all of which are incorporated into the administrative record in

this matter. Based on the Stipulation of Facts, review of stipulated exhibits and arguments

presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. On December 28, 2012, Taxpayer timely filed a claim for refund of $969,712 in

state and local gross receipts tax for the reporting periods of December 31, 2008 through

December 31, 2009. [Stipulation of Facts #2-5].

2. The Department took no action to either approve or deny Taxpayer’s claim for

refund within 120-days. [Stipulation of Facts #2-5].

3. On July 24, 2013, Taxpayer timely filed a protest to the Department’s failure to

allow or deny Taxpayer’s claim for refund.

4. On August 2, 2013, the Department acknowledged receipt of Taxpayer’s protest.

5. On September 9, 2013, the Department requested a hearing in this matter with the

Hearings Bureau.

6. On September 10, 2013, the Hearings Bureau set this matter for a telephonic

Scheduling Conference on September 25, 2013.

7. On September 25, 2013, a Scheduling Conference in this matter occurred, setting

the merits hearing for March 26, 2014.

8. On February 14, 2014, the parties filed their Stipulation of Facts, incorporated

herein.

9. On February 28, 2014, the Department moved for Summary Judgment.

10. On March 13, 2014, Taxpayer moved to vacate and reschedule the hearing on the

merits.

11. On March 25, 2014, the Hearings Bureau granted Taxpayer’s Motion to Vacate and

reschedule, setting a summary judgment motion hearing on April 14, 2014 and a merits hearing on

July 22, 2014.

12. On April 2, 2014, the Hearings Bureau issued a Notice of Reassignment of Hearing

Officer.

In the Matter of Cornell Corrections of Texas, page 2 of 19.

13. On April 7, 2014, Taxpayer filed its Response to the Department’s Motion for

Summary Judgment.

14. On April 9, 2014, the parties jointly moved to supplement their respective summary

judgment pleadings.

15. On April 10, 2014, the parties jointly moved to continue the April 14, 2014

summary judgment motion hearing.

16. On April 15, 2014, the Hearings Bureau issued an order granting joint motion to

supplement summary judgment, motion for continuance of summary judgment hearing, and notice

of hearing on summary judgment motion in lieu of scheduled protest hearing. This order set the

summary judgment motion hearing date for July 22, 2014.

17. On May 14, Taxpayer filed a Motion for Protective Order and a Special Request for

Hearing. On May 20, 2014, the Department filed its Response to Motion for Protective Order.

18. On May 23, 2014, the Hearings Bureau issued an Amended Notice of

Administrative Hearing, scheduling the merits hearing for November 4, 2014.

19. On May 29, 2014, the Hearings Bureau denied Taxpayer’s request for a protective

order.

20. On July 11, 2014, Taxpayer filed its supplement to its response to the Department’s

Motion for Summary Judgment.

21. On July 22, 2014, the summary judgment motion hearing occurred.

22. On October 15, 2014, the Hearings Bureau vacated the November 4, 2014 merits

hearing pending order on summary judgment.

In the Matter of Cornell Corrections of Texas, page 3 of 19.

23. Taxpayer is a private prison company that manages and operates Bernalillo

County’s Regional Correctional Center in Albuquerque, New Mexico.

24. Taxpayer timely paid gross receipts tax to the state in 2008 and 2009 for its receipts

derived from its operation of Bernalillo County’s Regional Correctional Center.

25. Bernalillo County owns the Regional Correctional Center in Albuquerque, New

Mexico.

26. On October 14, 2003, Taxpayer and Bernalillo County reached a lease agreement

of the corrections facility. [Stipulated Ex. C].

27. Under the lease, Taxpayer paid Bernalillo County rent monthly, at rates that

increased over the term of the lease in a specified manner. [Stipulated Ex. C-1].

28. Under the lease agreement, Taxpayer was allowed to use and occupy the

correctional facility for the housing of incarcerated inmates only when a valid operating agreement

between Taxpayer and Bernalillo County or other New Mexico County was in effect. [Stipulated

Ex. C-2].

29. The lease agreement required Bernalillo County to complete and submit all

information necessary to the appropriate federal agency to enter into an agreement to house federal

prisoners in the facility. [Stipulated Ex. C-2].

30. In the event Bernalillo County entered into an intergovernmental agreement with

the federal government for the housing of federal prisoners at the facility, then Taxpayer and

Bernalillo County were required to enter into a Qualified Management Agreement covering the

federal prisoners, “pursuant to which Tenant [Taxpayer] shall be vested with authority equivalent

In the Matter of Cornell Corrections of Texas, page 4 of 19.
to that required for services to operate a jail under New Mexico Statute Annotated (1978) Section

33-3-27.” [Stipulated Ex. C-2].

31. Effective July 1, 2004, Bernalillo County reached an Intergovernmental Service

Agreement with the United States Department of Justice for the “housing, safekeeping, and

subsistence of federal prisoners” at the Regional Correctional Center on a per diem rate basis.

[Stipulated Ex. D-1].

32. The Intergovernmental Service Agreement required Bernalillo County to “accept

and provide for the secure custody, care, and safekeeping of federal prisoners in accordance with

federal, state, and local law, standards, policies, procedures, or court orders applicable to the

operations of the facility…” [Stipulated Ex. D-2].

33. Under the Intergovernmental Service Agreement, Bernalillo County was required

to bill the United States Department of Justice for the housing of inmates. [Stipulated Ex. D-4].

34. In 2007, Taxpayer reached an Operating and Management Agreement with

Bernalillo County for the Regional Correctional Center. [Stipulated Ex. B].

35. Under the Operating and Management Agreement, Taxpayer was required to

operate, maintain, and manage the Regional Correctional Center in accord with all operating

standards including federal, state or local laws, rules, codes, regulations and the constitution.

[Stipulated Ex. B-6].

36. Taxpayer under the Operating and Management Agreement had the “sole right to

supervise, manage, operate, control, and direct the performance…” of the required services.

[Stipulated Ex. B-21].

In the Matter of Cornell Corrections of Texas, page 5 of 19.

37. Taxpayer was required under the Operating and Management Agreement to

“maintain all licenses, permits, and franchises necessary for its business where the failure to so

maintain may have a material adverse effect on [Taxpayer]’s ability to perform under this

Management Agreement.” [Stipulated Ex. B-6].

38. The Operating and Management Agreement prohibited Taxpayer from

subcontracting any material portion of the services to be performed under the agreement without

prior written consent. [Stipulated Ex. B-21].

39. The Operating and Management Agreement established Taxpayer as an

independent contractor. [Stipulated Ex. B-21].

40. Under the Operating and Management Agreement, Taxpayer was liable for the

payment of “any federal income, F.I.C.A., or other taxes claimed or owed to by…” Taxpayer.

[Stipulated Ex. B-21].

41. Under the Operating and Management Agreement, Taxpayer at its sole expense

was required to perform, manage, supervise, or provide 21 different services at the Regional

Correctional Center: adequate staffing; establish a separate records department; maintain inmate

records; provide required reports; facility and records access to Bernalillo County; training;

extensive medical treatment; provide food service to inmates; provide laundry and clothing to

inmates; provide necessary supplies; provide programming and special educational/rehabilitation

programming to inmates; provide a commissary to inmates, provide telephone services to inmates,

maintain the facility, establish inmate work opportunities; provide visitation services and court

access; provide a grievance procedure for inmates; establish and maintain a discipline policy;

provide drug testing; provide intake classification standards; meet legal authority requirements;

In the Matter of Cornell Corrections of Texas, page 6 of 19.
establish and train on use of force protocol; provide safety and security; and conduct safety and

fire inspections. [Stipulated Ex. B-7 through B-20].

42. Under the Operating and Management Agreement, the definition of inmate includes

any prisoner assigned and transferred to the Regional Correctional Center “pursuant to the

Intergovernmental Service Agreement between the County and the United States Government or

the County and the State of New Mexico.” [Stipulated Ex. B-3].

43. Taxpayer is paid on a per diem basis for the housing of inmates at the Regional

Correctional Center. [Stipulated Ex. B-22].

44. In 2008 and 2009, Bernalillo County made payment to Taxpayer for the housing of

federal prisoners at the Regional Correctional Center. [Stipulated Ex. F].

45. Taxpayer sought and obtained accreditation of its operation of the Regional

Correctional Center in Albuquerque through the Commission on Accreditation for Corrections.

The initial audit for the accreditation occurred in 2010, after the period encompassing the refund

period. [Stipulated Ex. E].

46. On October 3, 2013, after the initiation of this protest, Lizzy Vedamanikam of the

Department’s Protest Office told Taxpayer that she could not obtain approval of Taxpayer’s claim

for refund. [Stipulation of Facts #8].

47. On October 23, 2013, Lizzy Vedamanikam also provided Taxpayer with 60-days

notice to obtain any applicable non-taxable transaction certificates (“NTTC”). [Stipulation of Facts

8].

48. On November 20, 2013, Bernalillo County executed a Type 9 NTTC covering the

purchase of tangible personal property to Taxpayer. [Stipulation of Facts #10; Stipulated Ex. A].

In the Matter of Cornell Corrections of Texas, page 7 of 19.

49. Taxpayer’s representative knew that the Type 9 NTTC covered tangible personal

property rather than the sale of a license that Taxpayer claimed as the basis of the deduction.

[Affidavit of Joshua Cohen, ¶6].

50. Taxpayer provided the Department with an executed Type 9 NTTC on December 2,

2013, within the 60-day deadline. [Stipulation of Facts #9].

DISCUSSION

The primary issue in this matter is whether for the purposes of NMSA 1978, Section 7-9-

47 (1994), Taxpayer provided Bernalillo County a license, which Bernalillo County resold to the

federal government for the housing of federal inmates at the Regional Correctional Center in the

regular course of its business. Taxpayer claims it is entitled to a deduction under Section 7-9-47

because it was selling a license to Bernalillo County to house prisoners in an accredited facility,

which Bernalillo County resold to the federal government. The Department moved for summary

judgment, arguing that that Taxpayer was selling services to Bernalillo County rather than a

license, which the Department argued as a matter of law did not qualify for the claimed deduction

under Section 7-9-47. The secondary issue is whether Taxpayer was entitled to good faith, safe

harbor protection when it accepted the incorrect type of NTTC from Bernalillo County.

Burden of Proof and Standard of Review.

Although the Department did not issue Taxpayer an assessment in this matter, Taxpayer

still has the burden of establishing it was entitled to the claimed refund at issue. Taxpayer’s claim

for refund is premised on a deduction from gross receipts tax. “Where an exemption or deduction

from tax is claimed, the statute must be construed strictly in favor of the taxing authority, the right to

the exemption or deduction must be clearly and unambiguously expressed in the statute, and the right

In the Matter of Cornell Corrections of Texas, page 8 of 19.
must be clearly established by the taxpayer.” Wing Pawn Shop v. Taxation and Revenue Department,

1991-NMCA-024, ¶16, 111 N.M. 735 (internal citation omitted); See also TPL, Inc. v. N.M. Taxation

& Revenue Dep't, 2003-NMSC-7, ¶9, 133 N.M. 447; See also Corr. Corp. of Am. of Tenn. v. State,

2007-NMCA-148, ¶17 & ¶29, 142 N.M. 779 (Court of Appeals reviewed a refund denial through

“lens of presumption of correctness” and applied the principle that deductions underlying the claim

for refund are to be construed narrowly). Consequently, Taxpayer still must show that it is entitled to

the deduction that is the basis of its claim for refund.

Summary Judgment is appropriate when there is no genuine dispute as to any material fact

and the moving party is entitled to prevail as a matter of law. See Romero v. Philip Morris, Inc.,

2010-NMSC-035, ¶7, 148 NM 713. If the movant for summary judgment makes a prima facie

showing that it is entitled to a judgment as a matter of law, the burden shifts to the opposing party

to show evidentiary facts that would require a trial on the merits. See Roth v. Thompson, 1992-

NMSC-011, ¶17, 113 N.M. 331. Both parties agreed at the summary judgment motion hearing that

there were no genuine disputes of fact in this matter, making this matter ripe for a decision upon

the Department’s summary judgment motion if the Department is entitled to judgment as a matter

of law.

Gross Receipts Tax and the Claimed Deduction

For the privilege of engaging in business, New Mexico imposes a gross receipts tax on the

receipts of any person engaged in business. See NMSA 1978, § 7-9-4 (2002). “Engaging in

business” is defined as “carrying on or causing to be carried on any activity with the purpose of

direct or indirect benefit.” NMSA 1978, § 7-9-3.3 (2003). Under the Gross Receipts and

Compensating Tax Act, there is a statutory presumption that all receipts of a person engaged in

In the Matter of Cornell Corrections of Texas, page 9 of 19.
business are taxable. See NMSA 1978, § 7-9-5 (2002).

Taxpayer is engaged in business in New Mexico operating Bernalillo County’s Regional

Correctional Center. As such, all receipts of Taxpayer are presumed subject to New Mexico’s gross

receipts tax. Taxpayer did timely pay gross receipts tax on its receipts from operating Bernalillo

County’s Regional Correctional Center, but now seeks a refund based on the claimed deduction.

In this case, Taxpayer’s claim for refund is premised on the deduction for sale of tangible

personal property or licenses for resale found under Section 7-9-47. Section 7-9-47 states that:

Receipts from selling tangible personal property or licenses may be
deducted from gross receipts or from governmental gross receipts if
the sale is made to a person who delivers a nontaxable transaction
certificate to the seller. The buyer delivering the nontaxable
transaction certificate must resell the tangible personal property or
license either by itself or in combination with other tangible personal
property or licenses in the ordinary course of business.

License is not specifically defined either under Section 7-9-47 or broadly defined under the

Gross Receipts and Compensating Tax Act or under the Tax Administration Act. See

Quantum Corp. v. State Taxation & Revenue Dep't, 1998-NMCA-050, ¶10, 125 N.M. 49. In the

absence of a statutory definition, the New Mexico Court of Appeals turned to Black’s Law Dictionary

to define “license” as “[a] permission, by a competent authority to do some act which without such

authorization would be illegal or would a trespass or a tort…” N.M. Sheriffs & Police Ass'n v. Bureau

of Revenue, 1973-NMCA-130, ¶7, 85 N.M. 565; See also Quantum Corp., ¶10.

The fundamental question in this case is whether Taxpayer was providing a license to

Bernalillo County potentially deductible under that section or instead was predominately performing

a service. NMSA 1978, Section 7-9-3 (M) (2007) defines “service” as “all activities engaged in for

other persons for a consideration, which activities involve predominantly the performance of a

In the Matter of Cornell Corrections of Texas, page 10 of 19.
service as distinguished from selling or leasing property.” Section 7-9-3 (M) indicates that “[i]n

determining what is a service, the intended use, principal objective or ultimate objective of the

contracting parties shall not be controlling.”

In constructing the Lease and the Operating and Management Agreement between Taxpayer

and Bernalillo County, the form does not determine the character of the instruments; instead, it is the

intention of the parties as shown by the contents of the instruments that controls. See Transamerica

Leasing Corporation v. Bureau of Revenue, 1969-NMCA-011, ¶17, 80 N.M. 48. Looking at the

Lease, the Operating and Management Agreement, and the Intergovernmental Service Agreement, it

is clear that the intention of the parties was that Bernalillo County contracted for the provision of

services: the operation and management of the Regional Correctional Center in accord with relevant

law and standards.

There is no indication in the content or structure of the Intergovernmental Service

Agreement that Bernalillo County and the federal government considered the transaction the sale

of a license. The Intergovernmental Service Agreement between Bernalillo County and the federal

government required Bernalillo County to accept and provide secure custody, care, safekeeping,

food service, and medical services to federal prisoners. These services were required to maintain

the facility in accord with applicable legal standards. There is no indication that either party

contemplated the agreement to be the sale of license because the agreement itself focused

predominantly on the services that Bernalillo County was required to provide and perform.

In this case, the Lease is contingent on a valid operating and management agreement, making

that Operating and Management Agreement the heart of the transaction between Taxpayer and

Bernalillo County. But turning briefly to the Lease, in the event that Bernalillo County entered into an

In the Matter of Cornell Corrections of Texas, page 11 of 19.
agreement with the federal government, the Lease required that Taxpayer and Bernalillo County enter

into a management agreement that vested Taxpayer with authority equivalent to that required for

services to operate the jail in compliance with New Mexico law. Under the lease, reaching an

agreement for the performance of services was critical.

Similarly, the substantive heart of the Operating and Management Agreement are the services

Taxpayer is required to provide as part of its contractual obligation to “supervise, manage, operate,

control and direct the performance of services” under the agreement. While not dispositive to the

intent of the parties, the fact that the Operating and Management Agreement is replete with the words

“service” or “services” is instructive as to how the parties conceived of the nature of their agreement.

Article III of the Operating and Management Agreement is devoted to the scope of 21 different listed

services Taxpayer was required to provide. These 21 services included the critical security, training of

officers, maintenance of facility, medical, and food services necessary to operate a jail. Without

performance of most of these services, Taxpayer could not have operated the facility as a correctional

facility because these services were necessary for Taxpayer, as operator of the Regional Correctional

Center, to fulfill its duty of maintaining public order and holding prisoners in secure custody. See

Methola v. County of Eddy, 1980 NMSC 145, ¶17, 95 N.M. 329 (jailers are charged with a public

duty to maintain order and hold persons in custody); See also NMSA 1978, Section 33-3-27 (2007)

(setting minimum comprehensive standards for a private independent contractor for the operation of

jail before approval of operation agreement).

Further, under the Operating and Management Agreement, the term inmate includes prisoners

“assigned and transferred” to the Regional Correctional Center under Bernalillo County’s

“Intergovernmental Service Agreement.” The Operating and Management Agreement itself specified

In the Matter of Cornell Corrections of Texas, page 12 of 19.
that Bernalillo County would assign federal prisoners pursuant to Bernalillo County’s service

agreement with the federal government rather than a license.

Regarding accreditation, in this case Bernalillo County entered into its agreement with the

United States Department of Justice even before it had an Operating and Management Agreement in

place. And, based on the stipulated exhibit, Taxpayer did not undergo the initial accreditation audit

until 2010, after the period in which Taxpayer claims a refund. Given these timeline issues, the

accreditation that Taxpayer relies so heavily on in arguing it was selling a license does not appear to

have the importance that Taxpayer suggests.

In any case, the Department’s analogy to a construction contractor with a professional license

referenced in Stipulated Ex. G is persuasive. Before performing any construction work, a construction

professional must obtain the professional license from the state before engaging in construction

activity. That is a precondition of the transaction, not the nature of the transaction itself, which is the

performance of the construction services. Similarly, Taxpayer was required under the terms of the

Operating and Management Agreement to maintain the accreditation because failure to do so would

adversely affect Taxpayer’s ability to perform under the agreement. While the accreditation may have

been a condition to house federal prisoners, the transaction itself was Taxpayer performing the

services necessary to operate, manage, and maintain a detention facility in accord with legal

requirements and the accreditation standards.

Taxpayer argues that the services contracted for and rendered are merely incidental to the

license in a similar manner to the incidental services rendered by a hotel as part of the guest’s license

to use the room for the evening. This argument does not persuade. A hotel may still provide its

essential function—the licensing of a room for the evening—even when an incidental service like

In the Matter of Cornell Corrections of Texas, page 13 of 19.
providing cable television or climate control do not function. If the complimentary breakfast

promised at a hotel never materializes, a person may leave the hotel grounds to get something to eat

around the corner. However, if the Correctional Facility fails to provide food service, a prisoner is not

at liberty to walk to the local coffee shop for breakfast.

Unlike the incidental services of a hotel, the contracted services Taxpayer provided are

critical to providing a functioning and lawful correctional facility. Without trained guards, security

protocols, and maintained premises, a jail cannot meets is essential function as a secure detention

facility. Nor can a correctional facility meets its rehabilitation purpose without the programming

services contained in the Operating and Management Agreement. Without appropriate medical care,

legal visits, and court transportation services, a correctional facility cannot comply with its legal

obligations. Without all of those services, the ostensible license that Taxpayer claims would be

meaningless for the purposes of housing federal prisoners because there would not be a functional

correctional facility. Indeed, without these core services involving security, training, staffing, and

operational standards, Bernalillo County could not have entered into agreement with Taxpayer. See

Section 33-3-27 (setting minimum comprehensive standards for a private independent contractor for

the operation of jail before approval of operation agreement). The agreements between Taxpayer and

Bernalillo County were predominately about Taxpayer’s performance of services, satisfying the

definition of a “service” under Section 7-9-3 (M)1.

Taxpayer’s argument that the parties contracted for the sale of a license in a similar vain to a

hotel selling a license to a lodger appears to stem from an over reading of Corrections Corp. of

1
Even if it were possible to separate the contracted services from the functioning of the jail, there is no evidence that the
billing occurred in such a manner to differentiate the services from the claimed license. Cf Corrections Corp., ¶24.
Taxpayer received a per diem rate by prisoner, not broken down by food costs, room cost, security cost, medical costs etc.

In the Matter of Cornell Corrections of Texas, page 14 of 19.
America v. State of N.M., 2007-NMCA-148, 142 N.M. 779. In Corrections Corp., ¶1, the taxpayer

sought a refund of gross receipts tax because it claimed its agreements to house prisoners for

governmental agencies at facilities that taxpayer owned and operated constituted a lease not subject to

gross receipts tax under a different applicable deduction. The issue in Corrections Corp. was whether

the contract constituted a lease, not whether the contract was for the sale of a license. The agreements

in Corrections Corp., ¶3-10, are quite similar to the Operating and Management Agreement in this

case. Like in this protest, the taxpayer in Corrections Corp., ¶6, charged the governmental entities on

a per diem basis. However, unlike the present protest where Bernalillo County owned the facilities it

leased to Taxpayer, the Corrections Corp. taxpayer owned the prison facilities outright. The Court of

Appeals in Corrections Corp., ¶28, ultimately held that the contract was not a lease that qualified for

the claimed deduction in that case because the “government entities did not pay a fixed amount in

exchange for the guarantee of physical real property to house inmates…” In the next sentence, after

the Court of Appeals had already reached its holding, the court indicated that the agreement in dispute

was “more like” the arrangement between hotels and lodgers than leases of real property.

Id. While this sentence appears to be dicta because it is not essential to the court’s holding, it also

does not go as far as Taxpayer’s argument suggests. Between two choices, the court simply stated

that the arrangement was “more like” one alternative than another. The Court of Appeals in fact did

not state that the agreement in Corrections Corp. was identical to the hotel-lodger agreement or was

in fact a license. And the fact that Bernalillo County owned the facility rather than the private prison

company at issue in Corrections Corp. may further distinguish that statement from this protest.

In the very next paragraph, Corrections Corp., ¶29, the Court of Appeals reiterates that its

holding is an accord with the presumption of taxation and the construction of deductions narrowly.

In the Matter of Cornell Corrections of Texas, page 15 of 19.
Indeed, the Court of Appeals stated that “[w]e find nothing in our law to support CCA’s position that

we should expand the definition of ‘lease for real property…’ to include agreements between

governmental entities and private prison companies.” That same principal would certainly apply to

Taxpayer’s attempt to expand the concept of a license to include Taxpayer’s agreement to manage

and operate Bernalillo County’s jail. In the absence of clear proof that Taxpayer sold a license for

resale, there is nothing to suggest that the Legislature intended Section 7-9-47 to apply to Taxpayer’s

management, operation, and provision of services for Bernalillo County’s Regional Correctional

Center.

Good Faith Acceptance of a NTTC.

In the alternative, Taxpayer argued in briefing that its timely acceptance of the incorrect type

9 NTTC executed by Bernalillo County entitled it to the safe harbor protection of NMSA 1978,

Section 7-9-43 (A) (2011). In support of this argument, Taxpayer cited Leaco Rural Tel. Coop. v.

Bureau of Revenue, 1974-NMCA-076, ¶15, 86 N.M. 629 and a decision and order of the Hearings

Bureau, In the Matter of the Protest of Rio Grande Electric Co., Inc, No. 13-16 (June 10, 2013) to

support its argument2.

NMSA 1978, §7-9-43(A) (2011) grants taxpayers a good-faith acceptance, conclusive

evidence safe harbor in some circumstances:

[w]hen the seller or lessor accepts a nontaxable transaction certificate within
the required time and in good faith that the buyer or lessee will employ the
property or service transferred in a nontaxable manner, the properly executed
nontaxable transaction certificate shall be conclusive evidence, and the only
material evidence, that the proceeds from the transaction are deductible from
the seller's or lessor's gross receipts.

2
Rio Grande Electric Co., Inc. was premised on the Hearings Bureau decision and order In the Matter of Case Manager
(Theresa Maestas), No. 13-12 (May 15, 2013). In the Matter of Case Manager is currently on appeal.

In the Matter of Cornell Corrections of Texas, page 16 of 19.
In other words, the statute grants the seller of the nontaxable property or service safe harbor from

taxation when the seller timely accepts a properly executed NTTC in good faith from the buyer.

Regulation 3.2.201.15 NMAC (05/31/01) discusses good faith acceptance of a NTTC:

Acceptance of [NTTCs] in good faith that the property or service sold
thereunder will be employed by the purchaser in a nontaxable manner is
determined at the time of each transaction. The taxpayer claiming the
protection of a certificate continues to be responsible that the goods delivered
or services performed thereafter are of the type covered by the certificate.

As recently made clear in another Hearings Bureau decision and order In the Matter of the

Protest of Adecco USA, No. 14-16 (May 22, 2014), even under the broader reading of the safe harbor

exception applied by the Hearings Bureau in In the Matter of the Protest of Case Manager and In the

Matter of the Protest of Rio Grande Electric Co., Inc, the safe harbor protection only applies when

the underlying transaction itself is covered by a recognized deduction. That is, the safe harbor

provision cannot serve to make a taxable transaction not covered by any deduction into a nontaxable

transaction merely by possession of a NTTC. In McKinley Ambulance Serv. v. Bureau of Revenue,

1979-NMCA-026, ¶10, 92 N.M. 599, the Court of Appeals held that the good faith safe harbor

provision did not protect a seller from taxation “unless the certificate covered the receipts in

question.” The court went on to say that since there was “no certificate applicable” for the type of

services that taxpayer provided, the Department’s denial of the deduction was proper. See McKinley,

¶13. Although perhaps dicta, the Court of Appeals stated in Gas Co. v. O'Cheskey, 1980-NMCA-085,

¶12, 94 N.M. 630 that “[t]he issuance of a ‘Nontaxable Transaction Certificate’ does not operate to

transform an otherwise taxable transaction into a nontaxable transaction.” In order for the safe harbor

provision to apply, the receipts in question must otherwise be covered by a recognized deduction.

That is not the case in this protest.

In the Matter of Cornell Corrections of Texas, page 17 of 19.
Here, since Taxpayer did not establish that the transaction constituted a license, the

transaction is not covered by a recognized deduction, and Taxpayer cannot rely on its acceptance of

the NTTC in good faith to convert this taxable transaction into a nontaxable transaction. The

Department’s summary judgment motion is well-taken and is granted. Consequently, Taxpayer’s

protest is denied.

CONCLUSIONS OF LAW

A. Taxpayer filed a timely, written protest of the Department’s failure to grant or deny

Taxpayer’s claim for refund and interest, and jurisdiction lies over the parties and the subject matter

of this protest.

B. Because, as the parties agreed during the summary judgment motion hearing, there

is no genuine dispute as to any material fact, summary judgment is appropriate in this matter. See

Romero v. Philip Morris, Inc., 2010-NMSC-035, ¶7, 148 NM 713.

C. Under NMSA 1978, § 7-9-3.3 (2003), Taxpayer is engaged in business in the

management and operation of Bernalillo County’s Regional Correctional Center in Albuquerque.

D. Under NMSA 1978, Section 7-9-5 (2002), all of Taxpayer’s receipts in New Mexico

are presumed subject to New Mexico’s gross receipts tax.

E. Taxpayer had the burden to establish its claim for refund premised on the deduction

articulated under NMSA 1978, Section 7-9-47 (1994), a deduction that must be narrowly construed.

See Corr. Corp. of Am. of Tenn. v. State, 2007-NMCA-148, ¶17 & ¶29, 142 N.M. 779.

In the Matter of Cornell Corrections of Texas, page 18 of 19.
F. The Operating and Management Agreement between Taxpayer and Bernalillo County

predominately involved the performance of services, satisfying the definition of “services” under

NMSA 1978, Section 7-9-3 (M) (2007) subject to gross receipts tax.

G. As a matter of law, without establishing that the transaction involved the sale of a

license for resale, Taxpayer did not meet its burden of establishing it was entitled to the deduction

under NMSA 1978, Section 7-9-47 (1994). See Corr. Corp. of Am. of Tenn. v. State, ¶29.

For the foregoing reasons, Taxpayer’s protest is DENIED.

DATED: November 20, 2014.

Brian VanDenzen, Esq.
Chief Hearing Officer
Taxation & Revenue Department
Post Office Box 630
Santa Fe, NM 87504-0630

In the Matter of Cornell Corrections of Texas, page 19 of 19.