Were Video Factory's recorded and edited presentations delivered on DVDs to the State Bar tangible personal property covered by its nonprofit NTTC?

Plain-English summary

Video Factory's finished movies delivered to the State Bar on DVDs were tangible personal property covered by a nonprofit NTTC. The AHO fully abated $3,087.54 of tax, $617.51 of penalty, and $488.55 of interest.

Video Factory recorded live State Bar presentations, removed dead time during breaks, and delivered three DVD copies. The State Bar kept copies in its library, distributed them on request, and allowed viewing. Video Factory earned nothing unless it successfully delivered the DVDs.

The State Bar issued a Type 9 NTTC for tangible personal property sold to a nonprofit. The Department allowed only the raw disc cost, arguing that recording, editing, and transferring the files made the overall transaction predominantly a service.

The completed movie and physical medium formed one product

The AHO found persuasive decisions treating movies and information embedded in a physical medium as tangible personal property. The DVDs had no value without the movies, and the recording effort had no value to the State Bar unless it became a deliverable movie.

The work was limited to recording the presentations and minimal editing. It was not substantially more valuable than the finished tangible product, so the transaction was not predominantly a service under Regulation 3.2.1.29.

The NTTC independently supported the deduction

The State Bar's certificate was timely and properly executed, and Video Factory accepted it in good faith believing the DVDs were deductible tangible property.

The AHO concluded that the Section 7-9-43 safe harbor would protect Video Factory even if the buyer had improperly issued the certificate or the transaction were viewed as a service. A good-faith NTTC could shift exposure to the buyer rather than leave it with the seller.

The Department did not establish other assessed transactions

The auditor suggested the assessment might include other nonprofits and government entities but could not identify them or allocate any tax to them. Video Factory testified that the amount matched its State Bar business. The AHO therefore treated the assessment as relating to the State Bar transactions, and the Department did not rebut Video Factory's evidence after the burden shifted.

Result: protest GRANTED. The entire $4,193.60 assessment was abated, so no tax, penalty, or interest remained.

What this means for you

Video and media producers

When a customer buys a completed work delivered on a physical medium, document the deliverable, payment condition, editing scope, and the relationship between the content and medium. Those facts can affect property-versus-service classification.

Sellers accepting nonprofit NTTCs

Confirm the certificate is timely, properly executed, and matches the product as you reasonably understand it. Good-faith acceptance can provide separate protection from classification disputes.

Taxpayers challenging an audit allocation

Require the Department to identify the customers and receipts supporting the assessment. Once credible evidence rebuts the presumption, an unexplained allocation may not carry the Department's burden.

Common questions

Q: What did the State Bar purchase?
A: Completed recordings of its live presentations delivered on three DVDs.

Q: Why were the DVDs tangible personal property?
A: The finished movies were embedded in physical media, and neither the discs nor production effort had useful independent value to the buyer.

Q: Was the transaction predominantly a service?
A: No. The AHO found the recording and minimal editing did not outweigh the finished property.

Q: What certificate did the State Bar issue?
A: A timely, properly executed Type 9 NTTC for tangible personal property sold to a nonprofit.

Q: How much was abated?
A: The full $4,193.60 assessment: $3,087.54 tax, $617.51 penalty, and $488.55 interest.

Citations and references

Statutes and regulation:

• NMSA 1978, §§ 7-9-43 and 7-9-60 — good-faith NTTC protection and nonprofit tangible-property deduction
• NMSA 1978, §§ 7-9-3, 7-9-3.5, and 7-9-4 — property, services, gross receipts, and business tax
• NMSA 1978, §§ 7-1-67 and 7-1-69 — interest and penalty
• Regulation 3.2.1.29 NMAC — determining whether a mixed transaction is predominantly a service

Cases cited:

• Cinemark USA, Inc. v. Seest, 190 P.3d 793 (Colo. App. 2008) — finished movies on physical media as tangible property
• Comshare Inc. v. United States, 27 F.3d 1142 (6th Cir. 1994) — information embedded in tangible media
• Leaco Rural Telephone Cooperative v. Bureau of Revenue, 1974-NMCA-076 — good-faith NTTC protection
• Continental Inn v. New Mexico Taxation and Revenue Department, 1992-NMCA-030 — certificate representation and buyer exposure
• MPC Ltd. v. New Mexico Taxation and Revenue Department, 2003-NMCA-021 — burden shift after contrary evidence

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Video Factory
• Decision PDF: D&O 16-10

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
VIDEO FACTORY, No. 16-10
TO ASSESSMENT ISSUED UNDER
LETTER ID NO. L0257619264

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on January 15, 2016 before

Hearing Officer Dee Dee Hoxie. The Taxation and Revenue Department (Department) was

represented by Ms. Melinda Wolinsky, Staff Attorney. Ms. Sonya Varela, Auditor, also appeared on

behalf of the Department. Ms. Lisa Benjamin, owner of Video Factory (Taxpayer), and Mr. David

Newquist, a freelancer and former employee, appeared for the hearing. The Hearing Officer took

notice of all documents in the administrative file. Based on the evidence and arguments presented,

IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. On January 10, 2013, the Department assessed the Taxpayer for gross receipts tax, penalty,

and interest for the tax period ending on December 31, 2008. The assessment was for

$3,087.54 tax, $617.51 penalty, and $488.55 interest.

2. On February 8, 2013, the Taxpayer filed a formal protest letter.

3. On October 16, 2015, the Administrative Hearings Office first learned of the Taxpayer’s

protest when the Department filed a Request for Hearing asking that the Taxpayer’s protest

be scheduled for a formal administrative hearing.

4. On October 29, 2015, the Hearings Office issued a notice of hearing. As the protest was filed

prior to the change in the statute, the hearing was not required to be set within 90 days of the

receipt of the protest.

5. On February 12, 2016, the Hearing Officer issued an Order for Briefing and later an Order

Extending Time.

6. Ultimately, the parties were given until March 11, 2016 to file a brief. Both parties timely

filed a brief.

7. The Taxpayer is a video production company. It provides various services and products for

its customers, including recording, editing, sound, and video duplication and production.

8. The bulk of the assessment relates to services and products that the Taxpayer provided for the

State Bar of New Mexico, which had provided a nontaxable transaction certificate (NTTC).

See NMSA 1978, § 7-9-60 (allowing for deductions with a NTTC for sale of tangible

personal property to nonprofit organizations).

9. The Taxpayer recorded various live presentations, edited the recordings, and provided copies

of the recordings on three DVDs to the State Bar.

10. The State Bar maintains copies in its library, distributes copies upon request, and allows

viewing of the copies.

11. The Taxpayer did not receive any payment from the State Bar, and was not entitled to any

payment from the State Bar, until the DVDs had been delivered.

12. If the Taxpayer spent time recording a presentation but was unable to deliver DVDs to the

State Bar, the Taxpayer was responsible for its own lost time and effort.

13. The Taxpayer was deducting the sales of the DVDs to the State Bar as tangible personal

property pursuant to the NTTC issued to the Taxpayer by the State Bar.

14. The Department audited the Taxpayer and determined that the Taxpayer was treating the

DVDs that it provided to the State Bar solely as tangible personal property.

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15. The Department concluded that the actual value of the DVDs was not as tangible personal

property and was predominantly from the service of recording, editing, and transferring video

files.

16. The Department allowed deductions for the cost of the DVDs as tangible personal property,

but disallowed the bulk of the deductions as they were from services performed in recording,

editing, and copying of the video files.

DISCUSSION

The issue to be decided is whether the Taxpayer is liable for the gross receipts taxes, penalty,

and interest as assessed.

Burden of Proof.

Assessments by the Department are presumed to be correct. See NMSA 1978, § 7-1-17. Tax

includes, by definition, the amount of tax principal imposed and, unless the context otherwise

requires, “the amount of any interest or civil penalty relating thereto.” NMSA 1978, § 7-1-3. See

also El Centro Villa Nursing Ctr. v. Taxation and Revenue Department, 1989-NMCA-070, 108 N.M.

795. Therefore, the assessment issued to the Taxpayer is presumed to be correct, and it is the

Taxpayer’s burden to present evidence and legal argument to show that it is entitled to an abatement

of the assessment.

The burden is on the Taxpayer to prove that it is entitled to an exemption or deduction. See

Public Services Co. v. N.M. Taxation and Revenue Dep’t., 2007-NMCA-050, ¶ 32, 141 N.M. 520.

See also Till v. Jones, 1972-NMCA-046, 83 N.M. 743. “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

must be clearly established by the taxpayer.” Sec. Escrow Corp. v. State Taxation and Revenue

Dep’t., 1988-NMCA-068, ¶ 8, 107 N.M. 540. See also Wing Pawn Shop v. Taxation and Revenue

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Letter ID No. L0257619264
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Dep’t., 1991-NMCA-024, ¶ 16, 111 N.M. 735. See also Chavez v. Commissioner of Revenue, 1970-

NMCA-116, ¶ 7, 82 N.M. 97.

Gross Receipts Tax.

Anyone engaging in business in New Mexico is subject to the gross receipts tax. See NMSA

1978, § 7-9-4. Gross receipts tax applies to the total amount of money received from selling property

or services. See NMSA 1978, § 7-9-3.5. It was undisputed that the Taxpayer was engaging in

business and generally subject to the gross receipts tax.

Assessed transactions.

There was some dispute about what transactions were related to the assessment. Ms.

Benjamin indicated that her understanding was that the assessment related to gross receipts from the

Taxpayer’s transactions with the State Bar. Ms. Varela indicated that her research indicated that the

assessment was also related to other nonprofit businesses and some government entities that had

transactions with the Taxpayer. However, Ms. Varela was unable to identify all of the other entities

and was unable to specify what amount of gross receipts taxes would have applied to these other

transactions. Ms. Benjamin reiterated her understanding and explained that the amount of the

assessment corresponded with the amount of business that the Taxpayer did with the State Bar.

Based upon the totality of the evidence, the assessment is likely related to the Taxpayer’s gross

receipts from its transactions with the State Bar and will be treated as such.

Tangible personal property.

Most of the arguments centered on whether the DVDs constituted “tangible personal

property” that would be subject to the deduction per se. See NMSA 1978, § 7-9-60. The parties

agree that the primary product for which the State Bar was paying was the video files on the DVDs

(movies). “Tangible personal property” is not defined by the statutes. See NMSA 1978, §§ 7-1-3

and 7-9-3. Generally, “tangible personal property” is “corporeal personal property of any kind;

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Letter ID No. L0257619264
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personal property that can be seen, weighted, measured, felt, or touched, or is in any other way

perceptible to the senses”. Black’s Law Dictionary, 1337-8 (9th ed. 2009). “Tangible personal

property” is included in the definition of “property”. See NMSA 1978, § 7-9-3 (J). “Tangible

personal property” is also included in the definition of “service” when it is included as part of a

construction project. See NMSA 1978, § 7-9-3 (M). “Service” also includes “activities [that]

involve predominantly the performance of a service as distinguished from selling or leasing

property.” Id.

The Department argues that the Taxpayer’s production of the DVDs is predominantly the

performance of service. The Department has promulgated a regulation in relation to determining if a

transaction is predominantly a service. See 3.2.1.29 NMAC. The Department argues that the

Taxpayer is not engaged in selling DVDs except in conjunction with the service of producing the

movies and that the DVDs are incidental to the service and that the service is of greater value than

the DVDs. See id.

The Taxpayer argues that the State Bar is paying for the movies, and that the movies are

impossible to produce without a physical medium, like the DVDs. The Taxpayer analogizes its

production of the movies to a dressmaker’s production of a dress. The dress is the product of

intensive labor by the dressmaker, from choosing fabric, making patterns, cutting fabric, piecing it

together, and finally, sewing, but the end product that is the subject of the transaction is the dress, a

piece of tangible personal property.

There do not seem to be any New Mexico cases that deal with this particular type of

transaction, involving movies and tangible personal property. However, federal tax cases have long

considered movies to be tangible personal property for purposes of taxation and applications of credit

against taxes. See Walt Disney Productions v. U.S., 480 F.2d 66 (9th Cir. 1973); Walt Disney

Productions v. U.S., 549 F.2d 576 (9th Cir. 1976); Texas Instruments, Inc. v. U.S., 551 F.2d 599 (5th

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Cir. 1977); and Bing Crosby Productions, Inc. v. U.S., 588 F.2d 1293 (9th Cir.1979). Cases in other

jurisdictions have also routinely found that movies are tangible personal property for tax purposes.

See Fla. Ass’n of Broadcasters v. Kirk, 264 So.2d 437 (Fla. Dist. Ct. App. 1972); Boswell v.

Paramount Television Sales, Inc., 291 Ala. 490, 282 So.2d 892 (Sup. Ct. Ala. 1973); Cinemark USA,

Inc. v. Seest, 190 P.3d 793 (Ct. App. Colo. 2008). Much as the Taxpayer analogizes, the courts have

acknowledged that “[t]here is scarcely to be found any article susceptible to sale or rent that is not the

result of an idea, genius, skill and labor applied to a physical substance.” Fla. Ass’n of Broadcasters,

264 So.2d at 438. This is particularly true of movies, all of which are the product of extensive time

and effort by the producers. When the item is a movie, the value of the item is not determined by the

cost of the celluloid, film, disc, or material on which it is saved; rather, the value is the use of the

movie. See Boswell, 282 So.2d at 894. Without the movie, the item would have no value to the

purchaser. See id. Therefore, separating the finished movie from the raw materials on which it is

saved would destroy the value of the product. See id. Colorado has adopted a totality of the

circumstances test in determining whether an item should be considered tangible personal property or

a service or an intangible. See Cinemark, 190 P.3d at 796. The factors include the comparative

value of the item, the constraints on its use, and if the item represents a finished product. See id.

When the item is a finished product in its final form, like a movie on film, the Colorado court

concluded that the item is tangible personal property. See id. at 797. The federal courts have

adopted a similar rationale and found that when the value of an item is dependent upon its

information being embedded in a physical, tangible medium and the price of the item includes the

value of the information so embedded, then the item is tangible personal property. See Comshare

Inc. v. U.S., 27 F.3d 1142, 1143 (6th Cir. 1994).

The Taxpayer’s argument and the line of cases from federal and state courts are persuasive.

The true value of the movies is in the State Bar’s presentations. The Taxpayer’s services in relation

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to the movies are to bring a camera to the State Bar’s presentations, to hit the record button, to hit the

stop button, and to edit the footage a minimal amount so that dead time during breaks in the live

presentation is not included in the movies. Therefore, the transactions between the State Bar and the

Taxpayer do not require the performance of a service that is substantially greater in value than the

tangible personal property. The Taxpayer’s production of the movies is not predominantly a service

because the Taxpayer’s efforts have no value by themselves and the Taxpayer has no recompense

without the movies being saved to a tangible medium. The DVDs have no value without the movies

contained on them. Therefore, the DVDs are tangible personal property that would be covered by the

NTTC in any event.

NTTCs.

A taxpayer engaged in business may be able to deduct certain gross receipts when they are

provided with NTTCs from buyers. See NMSA 1978, § 7-9-43 (2011). A taxpayer should be in

possession of NTTCs when the taxes from the transaction are due, but may also produce NTTCs

within a deadline set by the Department. See NMSA 1978, § 7-9-43. The seller must accept the

NTTC in good faith. See id. The Taxpayer produced a timely, properly executed NTTC for tangible

personal property. There was no dispute that the NTTC was timely and properly executed. The

Taxpayer trusted that the State Bar was using the items in a nontaxable manner, accepted the NTTC,

and took the deductions accordingly. A properly executed NTTC “shall be conclusive evidence, and

the only material evidence, that the proceeds from the transaction are deductible[.]” NMSA 1978, §

7-9-43 (A) (emphasis added). The word “shall” indicates that the provision is mandatory, not

discretionary. See Marbob Energy Corp. v. N.M. Oil Conservation Comm’n., 2009-NMSC-013, ¶ 22,

146 N.M. 24.

The Department argued that the NTTC was not of the proper type and that an NTTC must be

in the proper form and of the proper type to be valid. See 3.2.201.8 (D) NMAC (2001). See also

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Letter ID No. L0257619264
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McKinley Ambulance Serv. v. Bureau of Revenue, 1979-NMCA-026, 92 N.M. 599 (noting that a

NTTC is conclusive evidence only if the NTTC applies to the transaction at issue). See also Arco

Materials, Inc. v. State of New Mexico Taxation and Revenue Dep’t., 1994-NMCA-062, 118 N.M.

12, overruled on other grounds by Blaze Constr. Co. v. Taxation and Revenue Dep’t., 1995-NMSC-

110, 118 N.M. 647 (holding that the seller had a duty to know that a previously valid NTTC had been

invalidated by a change in the statute that disallowed the previously allowed deduction). The

Department argued that the Type 9 NTTC was for the sale of tangible personal property to a non-

profit entity and that a similar deduction for sale of service to a non-profit entity does not exist. The

Department argued that NTTCs were prohibited when the tangible personal property sold in a

transaction that was predominantly a service. See 3.2.1.29 NMAC (2001). In its brief filed on

March 4, 2016, the Department argued that the Type 9 NTTC could not render the taxable

transaction into a nontaxable transaction and that “[t]he safe harbor provision of NMSA 1978, § 7-9-

43(A) does not apply when a customer tenders a NTTC that does not apply to the transaction at

issue.”

Several cases indicate that a NTTC is conclusive evidence that the seller is entitled to take the

deduction even when the buyer improperly issued the NTTC. See Leaco Rural Tel. Coop. v. Bureau

of Revenue, 1974-NMCA-076, ¶ 22, 86 N.M. 269 (holding that the taxpayer was not entitled to

deduct the sale of phone services as they were not tangible personal property, but also holding that

the taxpayer was not liable for the tax because the NTTC that it accepted in good faith protected it

from liability). See also Continental Inn v. N.M. Taxation and Revenue Dep’t., 1992-NMCA-030, ¶

12-13, 113 N.M. 588 (holding that a NTTC represents to the seller that it is entitled to take a

deduction and that the NTTC does not transform the taxable transaction into a nontaxable transaction

but allows the Department to pursue the buyer for compensating tax). See also Gas Co. v.

O’Cheskey, 1980-NMCA-085, ¶ 12, 94 N.M. 630 (holding that a NTTC does not transform a taxable

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Letter ID No. L0257619264
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transaction into a nontaxable transaction and recognizing that a NTTC does serve to shift the burden

of the tax to the buyer when the seller accepts a NTTC in good faith even though the buyer wrongly

issued it).

The Taxpayer accepted the NTTC in good faith from the State Bar. The Taxpayer believed

in good faith that it was selling tangible personal property that was deductible under the NTTC, and

the safe harbor provision would apply even if the movies were predominantly the sale of a service.

Therefore, the NTTC was accepted in good faith even if improperly issued and is conclusive

evidence that the Taxpayer was entitled to take the deduction. See NMSA 1978, § 7-9-43 (A).

However, the evidence and argument established that the movies were items of tangible personal

property that were, in fact, deductible under the NTTC.

CONCLUSIONS OF LAW

A. The Taxpayer filed a timely written protest to the Notice of Assessment issued under

Letter ID number L0257619264, and jurisdiction lies over the parties and the subject matter of this

protest.

B. The Taxpayer accepted a NTTC from the State Bar in good faith, and it is conclusive

evidence that the Taxpayer was entitled to take the deduction. See NMSA 1978, § 7-9-43. See also

Leaco, 1974-NMCA-076; Continental Inn, 1992-NMCA-030; Gas Co., 1980-NMCA-085; and Arco

Materials, 1994-NMCA-062.

C. The DVDs that the Taxpayer provided to the State Bar were tangible personal property

and were covered by the NTTC. See Walt Disney Productions, 480 F.2d 66; Cinemark, 190 P.3d 793;

and Comshare, 27 F.3d 1142.

D. The Taxpayer overcame the presumption of correctness and the burden shifted to the

Department to establish that the assessments were correct. See NMSA 1978, § 7-1-17. See also

MPC Ltd. v. New Mexico Taxation and Revenue Dep’t., 2003-NMCA-021, ¶ 13, 133 N.M. 217.

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E. The Department failed to rebut the Taxpayer’s evidence. See MPC Ltd., 2003-

NMCA-021; Leaco, 1974-NMCA-076; Continental Inn, 1992-NMCA-030; Gas Co., 1980-NMCA-

085; and Arco Materials, 1994-NMCA-062.

F. As the Taxpayer was entitled to deduct the gross receipts, no gross receipts taxes were

owed and penalty and interest do not apply. See NMSA 1978, §§ 7-9-43, 7-1-69, and 7-1-67.

For the foregoing reasons, the Taxpayer's protest is GRANTED and the assessment is

HEREBY ABATED in full.

DATED: April 6, 2016.

Dee Dee Hoxie
DEE DEE HOXIE
Hearing Officer
Administrative Hearings Office
Post Office Box 6400
Santa Fe, NM 87502

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