Did New Mexico gross receipts tax apply when a Texas equipment dealer finalized sales and leases in Lubbock and the customer took possession there?
Apply this to your situation
This page answers the general question. Ezel answers yours, under current New Mexico tax law, with citations.
Plain-English summary
Yellowhouse Machinery was entitled to an $89,636.51 gross receipts tax refund because its equipment sales to a New Mexico customer occurred in Texas and it reasonably apportioned the related lease receipts outside New Mexico. The Department also owed statutory interest on the refund.
Yellowhouse was a Texas John Deere dealer with locations in Texas and Oklahoma but none in New Mexico. Ferguson Construction, a Lovington pipeline company operating throughout the New Mexico-Texas Permian Basin, leased heavy equipment from Yellowhouse under indefinite agreements with purchase options.
Ferguson placed orders by telephone. Yellowhouse prepared and finalized the agreements in Lubbock, and Ferguson's own haulers picked up the equipment there. Some leased machines were later purchased, with lease payments applied to the price.
Yellowhouse initially paid New Mexico gross receipts tax on the 2012 sales and leases. After a Texas audit treated the same transactions as Texas sales, Yellowhouse paid Texas sales tax, credited Ferguson for New Mexico tax already charged, and wrote off the difference in Texas's higher tax. It then sought the New Mexico refund.
The equipment sales occurred in Texas
New Mexico gross receipts included property sold in New Mexico. The decision applied interstate-sale cases distinguishing goods delivered and consumed in New Mexico from transactions completed entirely out of state.
Here the seller, agreement execution, transfer of possession, and customer pickup were all in Lubbock. The invoices' preprinted New Mexico “ship to” address did not match the credible evidence that Ferguson collected the equipment in Texas.
Because one sale could not occur in two states and the transactions were finalized and delivered in Texas, the AHO held that the purchase-option sales were Texas sales rather than New Mexico sales.
Lease use was reasonably apportioned outside New Mexico
Leased property employed in New Mexico generally produced taxable receipts, and the regulation provided a formula or other accurate method for multistate apportionment.
Yellowhouse believed Ferguson used the machines throughout the Permian Basin but could not know on which side of the state line each machine operated. The AHO found its witnesses credible, accepted its apportionment of use outside New Mexico, and found no identified rule requiring the dealer to track the customer's precise movements.
The decision took no position on whether Texas correctly imposed its sales tax. The Department's own cited Texas rule nevertheless treated customer pickup in Texas as taxable there.
Possible compensating tax was left for another proceeding
The AHO did not decide whether Ferguson, as buyer or user, owed New Mexico compensating tax or whether Yellowhouse had collection-agent duties. It stated that the Department could develop that issue separately and that Ferguson would receive the statutory credit for sales tax paid to another state if compensating tax applied.
Result: protest GRANTED. New Mexico had to refund $89,636.51 plus interest under Section 7-1-68.
Source-date note
The official PDF's signature line literally says “DATED: June 31, 2016,” which is not a valid calendar date. The official decision post URL is dated June 30. This page leaves issued_date blank rather than silently choosing a correction.
What this means for you
Equipment dealers near state borders
Document where orders are accepted, contracts are finalized, possession transfers, delivery occurs, and equipment is used. Preprinted invoice destinations may not control if the actual transaction evidence points elsewhere.
Lessors serving multistate projects
Create a defensible apportionment method at the start of the lease. If customer equipment moves across state lines, collect usage records where reasonably available and document why a different method accurately reflects in-state use.
Accountants and tax professionals
Analyze sales, lease receipts, and compensating tax separately. A seller's gross receipts refund does not necessarily eliminate a buyer's potential use-tax-style liability.
Common questions
Q: Why did the preprinted New Mexico ship-to address not control?
A: Credible testimony and pickup records showed that Ferguson's haulers took possession in Lubbock and that the form generated the address automatically.
Q: Did the AHO decide Texas tax was correct?
A: No. It expressly took no position on the correctness of the Texas audit.
Q: Where was the equipment used?
A: The record placed use somewhere in the Permian Basin, which spans southeastern New Mexico and southwestern Texas, without precise location tracking.
Q: Did the ruling eliminate all possible New Mexico tax?
A: No. Potential compensating tax on Ferguson was outside this protest and left for the Department to investigate separately.
Q: What refund was ordered?
A: $89,636.51 for 2012, plus statutory refund interest.
Citations and references
Statutes and regulations:
- NMSA 1978, §§ 7-9-2, 7-9-3.5, and 7-9-55 — gross receipts and interstate commerce
- NMSA 1978, §§ 7-9-7 and 7-9-79 — compensating tax and other-state tax credit
- NMSA 1978, § 7-1-68 — interest on refunds
- Regulations 3.2.1.15 and 3.2.1.17 NMAC — lease-purchase sales and multistate leasing apportionment
Cases cited:
- Kmart Corp. v. New Mexico Taxation and Revenue Department, 2006-NMSC-006 — multistate gross receipts analysis
- Dell Catalog Sales, LP v. New Mexico Taxation and Revenue Department, 2009-NMCA-001 — destination principle and transactions completed out of state
- Williams Rentals, Inc. v. Tidwell, 516 S.W.2d 614 (Tenn. 1974) — tax where equipment was delivered and lease formed
- Commercial Leasing, Inc. v. Johnson, 197 A.2d 323 (Me. 1964) — leased-equipment use across states
Source
- Listing: New Mexico Decisions & Orders
- Decision post: Yellowhouse Machinery Company
- Decision PDF: D&O 16-33
Original ruling text
STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT
IN THE MATTER OF THE PROTEST OF
YELLOWHOUSE MACHINERY COMPANY No. 16-33
TO DENIAL OF REFUND ISSUED UNDER
LETTER NO. L0980206128
DECISION AND ORDER
A formal hearing on the above-referenced protest was held on May 31, 2016 before
Monica Ontiveros, Hearing Officer. The Taxation and Revenue Department (“Department”) was
represented by Melinda L. Wolinsky, attorney for the Department. Nicholas Pacheco, protest
auditor, appeared and testified as a witness for the Department. Yellowhouse Machinery Company
(“Taxpayer”) appeared and was represented Troy Harrison, CPA. Witnesses testifying on behalf of
Taxpayer were Tracy Thompson, Chief Financial Officer, Rod Thompson, Comptroller, and Jarod
L. Standlee, Sales Manager. The record was held open for the filing of briefs which were filed on
June 10, 2016 and June 14, 2016.
The Exhibits introduced into the record are Exhibits #1-12 and A and B. The Application
for Refund was also included in the record. In addition to the pleadings and filings referred to in
the Findings, the record contains the Notice of Telephonic Scheduling Conference issued on
March 11, 2016; Scheduling Order and Notice of Administrative Hearing issued on April 1, 2016
setting the hearing for May 11, 2016; Notice of Reassignment of Hearing Officer of
Administrative Hearing issued on April 8, 2016; Request for continuance filed by Taxpayer on
April 22, 2016; Amended Scheduling Order and Notice of Administrative hearing setting hearing
for May 31, 2016 issued on April 27, 2016; Certificate of Service filed on April 29, 2016; Second
request to continue the hearing filed by Taxpayer on May 3, 2016; Amended Notice of
Administrative Hearing issued on May 5, 2016 moving the time of the hearing to 1:00 p.m.;
Statement filed by Taxpayer on May 11, 2016; New Mexico Taxation and Revenue’s Response to
Letter Dated May 11, 2016 to the Hearing Officer; Taxpayer’s Brief filed on June 10, 2016 and the
New Mexico Taxation and Revenue Department’s Closing Argument filed on June 14, 2016.
Based on the evidence and arguments presented, IT IS DECIDED AND ORDERED AS
FOLLOWS:
FINDINGS OF FACT
- On December 10, 2015, Taxpayer applied for a refund of gross receipts tax in the
amount of $89,636.51 for tax period January 1, 2012 through December 31, 2012.
- On December 21, 2015, the Department denied the refund because Taxpayer’s
receipts were not deductible under Section 7-9-52.1 Deduction Gross Receipts Tax Lease of
Construction Equipment to Persons Engaged in the Construction Business. [Letter ID No.
L0980206128].
-
Taxpayer protested the denial of the refund on January 22, 2016.
-
The Department acknowledged the protest on February 1, 2016. [Letter ID No.
L1432572464].
- The Department requested a hearing with the Administrative Hearings Office on
March 10, 2015.
- Taxpayer is incorporated in the state of Texas and is a John Deere franchise. [CD
05/31/16, 23:10-23:20].
In the Matter of the Protest of Yellowhouse Machinery Company
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- Taxpayer has six locations in Texas, four locations in Oklahoma and no locations in
New Mexico. [CD 05/31/16, 23:19-23:29].
-
Taxpayer has been in business since 1958. [CD 05/31/16, 23:42-23:50].
-
Taxpayer sells and rents (leases) tractors, sells parts and provides repair services on
tractors. [CD 05/31/16, 23:31-23:41].
- Taxpayer is registered in New Mexico and has been paying gross receipts tax on its
sales to Ferguson Construction Inc. (“Ferguson”). [Exhibit #1].
- The receipts at issue are from either payments from leases with an option to
purchase or sales to Ferguson. Ferguson is located in Lovington, New Mexico. [Exhibits #2 and
4].
- Ferguson is a pipeline company for the oil and gas industry and conducts business
in the Permian Basin, which is located in the southeastern portion of New Mexico and into
southwestern portion of Texas. [CD 05/31/16, 24:00-24:34].
- Ferguson purchased, through a lease with an option to purchase, side boom tractors,
excavators, a loader backhoe, a dozer, and a motor grader. [Exhibit #4-1 through #4-7].
- Taxpayer leased other tangible personal property to Ferguson, like heavy
machinery, e.g., bulldozers, backhoes, hydraulic hammers, hydraulic excavators and motor
graders. [Exhibit #2-1 through #2-189].
- The goods leased or purchased by Ferguson, like side boom tractors, excavators,
loader backhoes, dozers, motor graders, bulldozers, hydraulic hammers and hydraulic excavators
are collectively referred to as “equipment.”
- Ferguson entered into a lease agreement with Taxpayer for the lease of the
In the Matter of the Protest of Yellowhouse Machinery Company
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equipment with an option to purchase the equipment. The equipment was either returned to
Taxpayer when Ferguson no longer needed it or the equipment was purchased by Ferguson. The
lease agreements were for an indefinite term and each monthly lease was not a “renewal” of the
lease. [Exhibit #3].
- Not all the leased items were purchased by Ferguson. [Exhibit #4-1 through #4-7
are the purchased equipment for tax year 2012].
- If a piece of equipment was leased first, the lease payments were applied to the
purchase price. [Exhibit #4-2, #4-2, #4-5, and #4-7 and CD 05/31/16, 25:29-25:44].
- Ferguson’s employees called in equipment orders to Taxpayer and Taxpayer
processed the orders. Payment was billed to Ferguson. [CD 05/31/16, 53:14-53:25].
- The lease or sale invoices were created in Lubbock after the order was placed on
the telephone. [CD 05/31/16, 1:19-1:20].
- On all items that were leased or purchased by Ferguson, Ferguson picked up the
items at Taxpayer’s Lubbock store by using Ferguson’s own haulers to transport the equipment.
[CD 05/31/16, 25:06-25:26].
- The invoices with Ferguson state that the equipment will be “ship to” Ferguson’s
office in New Mexico. [Exhibit #2]. The testimony was credible that the “ship to” portion of the
invoice was “regular” or “automatically done” on a preprinted form that was generated from the
system. [CD 05/31/16, 1:21-1:22].
- Lubbock, Texas is approximately two hours from Lovington, New Mexico.
[https://www.mapquest.com/directions/list/1/us/nm/lovington-282037492/to/us/texas/lubb
(06/26/16)].
In the Matter of the Protest of Yellowhouse Machinery Company
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- Taxpayer paid gross receipts tax to New Mexico on all the lease payments and the
sale amounts of equipment to Ferguson during the tax years at issue. [Exhibit #6].
- Ferguson is a large company with plenty of service vehicles to repair the equipment
leased or purchased from Taxpayer. Taxpayer did not repair any of the equipment leased or sold to
Ferguson. Taxpayer searched its records to determine whether it had any service records for
Ferguson and found none. [CD 05/31/16, 27:26-28:39].
- Taxpayer has no employees, no representatives, no offices, and no ownership of
tangible personal property (inventory) in New Mexico.
- Taxpayer is not sure where Ferguson used the equipment, but maybe somewhere in
the Permian Basin. [CD 05/31/16, 29:30-28:32].
- Sometime in 2014, the state of Texas (“Texas”) completed an audit of Taxpayer.
[Exhibit #1].
- Prior to the audit, Taxpayer had not paid sales tax to Texas on the lease payments
from Ferguson or the sales to Ferguson because it paid the gross receipts tax to New Mexico.
[Exhibit #1, page 1 of 36 through 36 of 36].
- Texas determined that all sales that had a destination point or a delivery point of
Texas were Texas sales and all lease payments where delivery was in Texas, were also Texas sales
taxable in Texas. [Exhibit #1, pages 1 of 36 through 36 of 36].
- Texas described the location of Ferguson as Lubbock. [Exhibit #1, pages 1 of 36
through 36 of 36 and Exhibit #5-1].
- Taxpayer was assessed by Texas for the Ferguson sales and lease payments and it
paid the sales tax on the Ferguson sales and lease payments. Taxpayer provided a copy of the
In the Matter of the Protest of Yellowhouse Machinery Company
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check payable to Texas. [Exhibit #1, pages 1 and 4 and Exhibit #7].
- Texas took the position in the audit that under Section 151.330(a) …“when a
customer picks up good in Texas and removes them from the state, the transaction is simply not
covered by the exemption and is, thus, taxable.” [Exhibit #5-1].
- During the hearing, the Hearing Officer reviewed a sample of the invoices, the
Texas audit (item 450), and the amounts requested for refund. The amounts requested in the
refund are the same amounts that Taxpayer previously paid gross receipts tax to New Mexico and
subsequently paid sales tax to Texas. [Exhibits #1, page 1of 36 through 36 of 36, #2 and #7 and
CD 05/31/16, 1:33-1:47].
- Taxpayer billed Ferguson for the Texas sales tax it paid but provided them with a
credit of the gross receipts tax Ferguson already paid. [Exhibit #9]. Taxpayer wrote off the
difference between the New Mexico gross receipts tax amount and the higher sales tax from
Texas.
- Taxpayer had an ongoing relationship and long history with Ferguson and did not
solicit orders from them. [CD 05/31/16, 32:00-32:09 and 58:59].
- Taxpayer had other customers in New Mexico and delivered and repaired
equipment to some of its customers in New Mexico (not to Ferguson), but it was unclear when this
occurred or how often. [CD 05/31/16, 31:21-32:00].
- The only New Mexico customer that Texas included in its audit for sales tax is
Ferguson. [Exhibit #1, pages 1-22 through 1-76].
- Taxpayer stated that it had nexus with New Mexico because it was doing business
in New Mexico. [Taxpayer’s U.S. Commerce Clause and How it Supports the Refund, page
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1].
- The authorized dealer for John Deere equipment in New Mexico is 4 Rivers
Equipment, a Colorado corporation. [CD 05/31/16, 26:32-26:44; www.https://
portal.sos.state.nm.us/BFS/online/CorporationBusinessSearchCorporationBusiness
Information?businessId=343095 (0628/13)].
- Taxpayer and 4 Rivers are not interrelated companies. [www.https://
portal.sos.state.nm.us/BFS/online/CorporationBusinessSearch CorporationBusiness
Information?businessId=343095 (0628/13)].
- The only transactions that Taxpayer is requesting a refund are the receipts from
Ferguson.
DISCUSSION
The issue to be decided in this case is whether Taxpayer owes gross receipts tax on the sale
of equipment to Ferguson and on the lease payments of equipment from Ferguson, a New Mexico
company, and if not, then is Taxpayer entitled to a refund. The Department argued that Taxpayer
owes both gross receipts tax and Texas sales on the sale of the equipment to Ferguson and on the
receipts from the lease payments received from Ferguson. The Department argued that Taxpayer’s
record keeping was poor because it did not know where Ferguson used the equipment and that the
Texas audit is incorrect. Taxpayer argued that it is entitled to a refund because under the
Commerce Clause, it cannot be charged tax by two different states on the same transaction.
Burden of Proof
Regulation 3.1.8.10(A) provides that (t)he taxpayer shall have the burden of proof, except
as otherwise provided by law.
In the Matter of the Protest of Yellowhouse Machinery Company
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Did the Legislature Intend to Tax Yellowhouse’s Underlying Receipts?
Sales of Equipment
When an interstate transaction occurs, the Kmart Corp. case should be applied to the
transaction to determine whether the sale is taxable in New Mexico.1 In Kmart Corp. v. N.M.
Taxation & Revenue Dep’t., 2006-NMSC-006, ¶11, 139 N.M. 172, 131 P.3d 22, the New Mexico
Supreme Court set out a two-part analysis to determine whether the gross receipts tax applies in
multistate transactions. The first part of the test is whether the Legislature intended to tax the sale
of products from Taxpayer, an out of state corporation, to customers in New Mexico.
Generally speaking NMSA 1978, Section 7-9-2 (1966) provides that the Gross Receipts
Tax Act is intended to "provide revenue for public purposes by levying a tax on the privilege of
engaging in certain activities within New Mexico and to protect New Mexico businessmen from
the unfair competition that would otherwise result from the importation into the state of property
without payment of a similar tax.” (emphasis added). “Gross receipts” is defined as “the total
amount of money or the value of other consideration received from selling property in New
Mexico.” NMSA 1978, Section 7-9-3.5(A)(1) (2007). In Dell Catalog Sales, LP v. N.M. Taxation
& Revenue Dep’t., 2009-NMCA-001, ¶30, 145 N.M. 419, 199 P.3d 863, the court held that for
purposes of determining whether an interstate transaction is a taxable sale under gross receipts tax
law, the “destination principle” applies. The “destination principle” is defined as taxing the sale of
goods that cross state lines at the point of destination or where the goods are consumed, which
may be different from the point of delivery and where title is transferred. Jerome R. Hellerstein &
Walter Hellerstein, State Taxation ¶18.02[1]. In Dell, the assumption is that the goods are
1 A lease purchase agreement may be treated as a sale. 3.2.1.15 NMAC (2/29/12).
In the Matter of the Protest of Yellowhouse Machinery Company
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consumed at the destination. Dell Catalog Sales, LP, 2009-NMCA-001, ¶28. It is clear from Dell
that if an out-of-state seller sells goods that are delivered in New Mexico, and consumed in New
Mexico, then gross receipts tax applies on the sale of the goods.
However, the Dell court also found that its analysis did not “apply in cases where the entire
transaction occurs out-of-state and the parties are present out-of-state at the time and place of the
transaction.” Dell Catalog Sales, LP, 2009-NMCA-001, ¶25. The court concluded that “in those
circumstances, the transaction is clearly not a sale “in NM’ for purposes of the Act.” Dell Catalog
Sales, LP, 2009-NMCA-001, ¶25. We know that the orders were placed on the telephone, and that
the lease or purchase agreements were finalized in Lubbock, Texas. We also know that the
equipment was picked up or Ferguson took possession in Lubbock, Texas. We know that the
equipment was transported somewhere in the Permian Basin. This fact is difficult to ascertain
since the Permian Basin knows no geographic taxing boundary. The leading treatise on state and
local taxation argues that the crucial factor is where does the buyer take possession of the good.
Jerome R. Hellerstein & Walter Hellerstein, State Taxation ¶18.02[1].
The courts are somewhat split over these interstate transactions where the use or
consummation of tangible personal property is different from the destination. In Williams Rentals,
Inc. v. Tidwell, 516 SW 2d 614, 616 (Tenn. 1974) (quoting Central Transport Co. v. Atkins, 202
Tenn. 512, 305 SW 940, 942 (1956), cert. denied, 355 U.S. 912, 78 S. Ct. 343 (1958) the
Tennessee court upheld a sales tax on rental receipts from a lease of construction equipment where
the equipment was delivered in Tennessee and the lease agreement was entered into in Tennessee.
However, the equipment was transported for use in job sites in Arkansas and Mississippi. The
court held that the sale occurred in Tennessee because the equipment was delivered in Tennessee
In the Matter of the Protest of Yellowhouse Machinery Company
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and the lease agreements were entered in Tennessee. But see, Commercial Leasing, Inc. v.
Johnson, 160 Me. 32, 197 A2d 323, 329 (1964) (the lease payments are only taxable to the state
where the trailers were used and not purchased, but if the trailers are returned to the originating
state for repairs, then the lease payments are taxable to the originating state). Most states provide
a credit for payment of tax to another state which obviates the risk of different taxing jurisdictions
imposing a tax on the same transaction. New Mexico provides a credit of compensating tax if a
gross receipts, sales, compensating or similar tax has been levied by another state or political
subdivision thereof on the transaction under NMSA 1978, Section 7-9-79 (1991).2 In addition,
New Mexico allows a deduction for receipts from transactions in interstate commerce if the tax
would be unlawful under the United States Constitution. NMSA 1978, §7-9-55 (1993).
Regardless, the goods cannot be sold in more than one state (there is no apportionment
based on use of a product). Since the orders were placed in Texas, the seller is in Texas, the
possession of the equipment occurred in Texas, the purchase agreements were finalized in Texas,
the sales occurred in Texas. The receipts from the sale of equipment to Ferguson are receipts from
sales occurring in Texas.
Lease Payments
The Department argued that regulation 3.2.1.17 NMAC (2/29/12) supports the proposition
that the lease payments from Ferguson to Taxpayer are taxable gross receipts because the
equipment was employed in New Mexico. Regulation 3.2.1.17(A)(1) provides that “receipts
derived from the rental or leasing of property employed in New Mexico are subject to gross
receipts tax.” Regulation 3.2.1.17(A)(1) interprets the general provision under Section 7-9-3.5(A)
2 The Department alleged that there was no credit available to Taxpayer, which is true if the gross receipts tax is
applied. If the compensation tax is applied, then there is a credit to the buyer whom the tax is imposed upon available
under Section 7-9-79.
In the Matter of the Protest of Yellowhouse Machinery Company
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(1) that gross receipts includes leasing property employed in New Mexico. Both Section 7-9-3.5
and regulation 3.2.1.17(A)(1) require that the leased property be employed in New Mexico.
Regulation 3.2.1.17(D)(2) provides a complicated formula for apportioning the multi use of leased
equipment in a multistate transaction. Regulation 3.2.1.17(D)(3) provides that “(t)he department
will allow a person engaged in the business of leasing property employed both within and without
New Mexico to use other methods of apportioning the receipts of such leasing activities upon
showing that the other methods more accurately reflect the portion of employment of leased items
within New Mexico.” Thus, at best Taxpayer is refunded a portion of the receipts from the leases
of equipment under the Department’s argument.
The Hearing Officer found the testimony of Taxpayer’s witnesses very credible that they
believed that the equipment was being leased to be used or employed in the Permian Basin and
there was no way it could know where the equipment was being employed. Since the regulation
contemplates the taxpayer apportioning based on the leasee’s activities, the Hearing Officer
accepts Taxpayer’s apportionment of the use occurring entirely outside New Mexico. While the
Department argued that Taxpayer had poor record keeping, it is unclear how Taxpayer was
required to track the use of the equipment in the Permian Basin.
The Department also argued that the Texas audit is incorrect and Taxpayer should ask for a
refund of the Texas sales tax and not of the New Mexico gross receipts tax on both the sale and
lease payments received by Taxpayer. The Department submitted a rule from Texas’
Administrative Code, rule §3.294 to stand for the proposition that Texas is incorrect in taxing the
lease payments because many of the lease payments are “renewals.”3 In reading rule §3.294(f)(1)
3 The Department provided no legal argument as to why the monthly lease payments constituted a “renewal” of the
lease. The lease agreements were for an indefinite term until the equipment was returned or purchased.
In the Matter of the Protest of Yellowhouse Machinery Company
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(A), the rule states that the lessor or Taxpayer is responsible for paying the tax on the lease
payments regardless of where the leased goods were used, so long as the person leasing the
property taxes delivery in the state. The Department’s own evidence does not support the
Department’s position.
The information provided by Ms. Laura Lane, CPA for Texas, deals only with sales and
states that the Texas Tax Code applicable is Section 151.330(a) which provides that “(w)hen the
customer picks up the goods in Texas and removes them from the state, the transaction is simply
not covered by the exemption and is, thus, taxable.” This Section dovetails with the
aforementioned rule. As for the sales, it appears as if the exemption from sales tax cannot apply to
the Ferguson transactions because Ferguson took possession or delivery of the goods in Texas.
The Hearing Officer is unable to make a finding regarding whether the Texas sales tax was applied
appropriately to the receipts from Ferguson and takes no position on whether the Texas sales tax
was applied correctly.
The Hearing Officer does not rule on the issue of whether compensating tax is due on the
buyer or Ferguson, who purchased and used the equipment and whether Taxpayer should be an
agent for compensating tax on its transactions with New Mexico customers. The Gross Receipts
and Compensating Tax Act, NMSA 1978, Sections 7-9-1 to 114 (1966, as amended through 2011),
imposes a compensating tax on the buyer or the person using property “acquired inside or outside of
this state as a result of a transaction with a person located outside of this state that would have been
subject to the gross receipts tax had the tangible personal property been acquired from a person with
nexus with New Mexico” NMSA 1978, Section 7-9-7(A)(2)(2011). Compensating tax is imposed
when gross receipts tax cannot be imposed because the seller has no nexus with New Mexico and the
In the Matter of the Protest of Yellowhouse Machinery Company
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goods are destined for New Mexico and used in New Mexico. In Dell Catalog Sales, LP, 2009-
NMCA-001, ¶30, the court used the same “destination principle” to apply to transactions taxable
under the compensating tax. New Mexico provides a credit of compensating tax if a gross
receipts, sales, compensating or similar tax has been levied by another state or political
subdivision thereof on the transaction under NMSA 1978, Section 7-9-79. This matter is for the
Department to develop and make its determination. If a compensating tax is owed, Ferguson is
entitled to a credit of the (revised) sales tax it paid to Taxpayer under Section 7-9-79.
CONCLUSIONS OF LAW
A. Taxpayer filed a timely written protest to the Department’s denial of claim for
refund issued under Letter Id No. L0980206128 and jurisdiction lies over the parties and the
subject matter of this protest.
B. The hearing was timely set as required by NMSA 1978, Section 7-1B-8(A) (2015).
C. Holding the April 1, 2016 telephonic scheduling hearing satisfied the 90-day hearing
requirement found in NMSA 1978, Section 7-1B-8 (2015).
D. Pursuant to regulation 3.1.8.10(A) NMAC (8/30/01), it is Taxpayer’s burden to
come forward with evidence and legal argument to establish that it was entitled to a refund.
E. Taxpayer sold equipment to Ferguson in Texas during the tax period at issue under
a lease with an option to purchase agreement, and the sale transactions did not occur in New
Mexico.
F. Ferguson leased equipment from Taxpayer during the tax period at issue and
Taxpayer apportioned the lease payments outside New Mexico based on the information it had.
G. Ferguson took possession of the equipment from Taxpayer in Lubbock, Texas,
In the Matter of the Protest of Yellowhouse Machinery Company
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where the lease agreements with option to purchase were entered into and finalized.
H. The equipment was consumed or used in the Permian Basin, which encompasses
both New Mexico and Texas.
I. After Texas conducted an audit of Taxpayer, Taxpayer paid sales tax to Texas on the
transactions with Ferguson and it applied the sales tax to Ferguson’s invoices, writing off the
difference in the higher sales tax in Texas.
J. Taxpayer paid sales tax to Texas on both the lease payments received from
Ferguson and on the sales of equipment to Ferguson.
K. The Department improperly denied Taxpayer’s claim for refund for gross receipts
tax in the amount of $89,636.51 for tax period January 1, 2012 through December 31, 2012.
L. The Department shall pay interest on the refunded amount in accordance with
NMSA 1978, Section 7-1-68 (2011).
For the foregoing reasons, the Taxpayer's protest IS GRANTED.
DATED: June 31, 2016
Monica Ontiveros
Monica Ontiveros
Hearing Officer
Administrative Hearings Office
Post Office Box 6400
Santa Fe, NM 87502
In the Matter of the Protest of Yellowhouse Machinery Company
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NOTICE OF RIGHT TO APPEAL
Pursuant to NMSA 1978, Section 7-1-25 (2015), the Taxpayer has the right to appeal this
decision by filing a notice of appeal with the New Mexico Court of Appeals within 30 days of the
date shown above. See NMRA, 12-601 of the Rules of Appellate Procedure. If an appeal is not
filed within 30 days, this Decision and Order will become final. A party filing an appeal shall file
a courtesy copy of the Notice of Appeal with the Administrative Hearings Office
contemporaneously with the filing of the Notice with the Court of Appeals so that the
Administrative Hearings Office may prepare the record proper. The Notice of Appeal should be
mailed to John Griego, Administrative Hearings Office at P.O. Box 6400, Santa Fe, New Mexico
- Mr. Griego may be contacted at 505-827-0466.
John Griego
In the Matter of the Protest of Yellowhouse Machinery Company
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