Could Peabody deduct trainload coal sales as chemicals sold in lots over eighteen tons when an Arizona power plant burned the coal to generate electricity?

Plain-English summary

Peabody could not deduct its trainload coal sales as sales of chemicals in lots over eighteen tons. The AHO denied its $6,407,751 gross receipts tax refund claim.

Peabody mined coal in McKinley County and sold it to an Arizona power plant. Title transferred when the coal was loaded onto trains in New Mexico. Each railcar carried about 25 tons, and each sale normally included dozens of cars, so there was no dispute that the lots exceeded eighteen tons.

At the power plant, the coal was crushed and pulverized into dust, blown into a boiler, and burned. The heat created steam that turned turbines to generate electricity.

Peabody argued that coal met Regulation 3.2.223.7's definition of a chemical—a substance used for producing a chemical reaction—because burning coal changes molecular bonds and creates new substances.

The deduction was not intended for coal sales

Section 7-9-65 allowed a deduction for receipts from selling chemicals or reagents in lots over eighteen tons. Read in isolation and with a technical definition treating nearly every substance as a chemical, that language could sweep in anything sold by the ton and burned.

The AHO rejected that reading as inconsistent with strict construction of tax deductions and as producing an absurdly broad result.

The statutory history reinforced the narrower interpretation:

• the 1966 Gross Receipts and Compensating Tax Act separately enacted the chemicals deduction and a deduction for coal sold in carload lots;
• the Legislature repealed the separate coal deduction in 1973; and
• a later credit for Navajo Nation tax on coal would have been unnecessary if Section 7-9-65 already covered coal sales generally.

Because the coal and chemicals provisions were enacted separately, the AHO concluded that the eighteen-ton chemical deduction was not meant to cover coal sold to generate electricity.

Coal was used for heat, not to produce a chemical reaction

The decision distinguished between a substance used to cause a desired chemical reaction and a fuel whose combustion inevitably creates chemical changes.

The power plant burned coal to produce heat and ultimately electricity. The resulting carbon dioxide, sulfur, and other substances were undesirable byproducts that the plant had to scrub or minimize.

Thus, even though combustion was a chemical reaction, Peabody's coal was not used for producing that reaction within the regulation's meaning. It was used as fuel to produce energy.

The AHO did not need to decide the parties' additional dispute over whether coal dust was an explosive excluded by the statute.

Result: protest DENIED. Peabody failed to prove a clearly and unambiguously expressed right to deduct the coal sales, so the Department's denial of the $6,407,751 refund remained in place.

What this means for you

Sellers claiming the eighteen-ton chemical deduction

Quantity alone does not establish the deduction. The seller must show both that the product fits the statute's intended class and that it is used to produce a chemical reaction in the relevant sense.

Fuel sellers

A chemical reaction that necessarily occurs during combustion does not automatically turn fuel into a deductible chemical. The decision focused on the purchaser's purpose: producing heat and electricity rather than causing the molecular reaction itself.

Businesses interpreting a broad regulatory definition

Read the regulation with the full statute and its history. The AHO would not apply a technical definition so broadly that it effectively revived a coal deduction the Legislature had repealed.

Common questions

Q: Did Peabody satisfy the eighteen-ton lot requirement?
A: Yes. Each car carried about 25 tons, and each sale generally included a full train.

Q: Is coal technically a chemical?
A: The decision accepted that nearly everything can be called a chemical under a technical definition, but held that this could not control the tax deduction.

Q: Does burning coal cause a chemical reaction?
A: Yes, but the AHO found that reaction was an unavoidable consequence. The coal was used to produce heat and electricity.

Q: Why did the repealed coal deduction matter?
A: A separate carload-coal deduction enacted alongside the chemical deduction showed that the two provisions had different purposes. Repeal of the coal provision did not expand the chemical provision.

Q: Was coal dust treated as an excluded explosive?
A: The AHO did not decide that issue because its other holdings already resolved the refund claim.

Q: How much refund did Peabody seek?
A: $6,407,751 for gross receipts tax paid on December 2011 through December 2012 sales.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-9-2, 7-9-3.5, and 7-9-4 — purpose, gross receipts, and gross receipts tax
• NMSA 1978, § 7-9-65 — chemicals or reagents sold in lots over eighteen tons
• NMSA 1978, § 7-9-88.2 — credit for tax paid to the Navajo Nation on coal
• Regulations 3.2.223.7 through 3.2.223.11 NMAC — chemical definition and deduction rules

Cases cited:

• Pittsburgh & Midway Coal Mining Co. v. Revenue Division, 1983-NMCA-019 — coal sales and clear legislative intent for tax immunity
• Security Escrow Corp. v. State Taxation & Revenue Department, 1988-NMCA-068 — strict construction of deductions
• Wing Pawn Shop v. Taxation & Revenue Department, 1991-NMCA-024 — taxpayer's burden to establish a deduction
• Amoco Production Co. v. New Mexico Taxation & Revenue Department, 1994-NMCA-086 — avoiding absurd statutory results
• Hess Corp. v. New Mexico Taxation & Revenue Department, 2011-NMCA-043 — statutory interpretation

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Peabody Coalsales Company
• Decision PDF: D&O 17-34

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
PEABODY COALSALES COMPANY, No. 17-34
TO THE DENIAL OF REFUND ISSUED UNDER
LETTER ID NO. L0001503792

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on June 15 and 16, 2017

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

was represented by Ms. Lauren Keefe, Attorney, and by Mr. Marek Grabowski, Staff Attorney. Mr.

Danny Pogan, Auditor, also appeared on behalf of the Department. Dr. Corey Leclerc appeared

as a witness for the Department. Mr. Chris Holland and Ms. Suzanne Bruckner, attorneys for

Peabody Coalsales Company (Taxpayer), appeared for the hearing. Mr. Josh Cohen and Mr. Josh

Killian of Ryan LLC also appeared for the Taxpayer. Mr. David Jacobs, Mr. Mitch Knapton,

and Dr. Richard Holder appeared as witnesses for the Taxpayer. Mr. Cohen, Mr. Jacobs, Mr.

Knapton, Dr. Holder, Mr. Pogan, and Dr. Leclerc testified at the hearing.

The Taxpayer’s exhibits #1, #2, #3, #4, #5, #8, #11, #12, #15, #16, #17, and #19 were

admitted. The Department’s exhibits “R”, “U”, “V”, and “W” were admitted. A more detailed

description of exhibits submitted at the hearing is included on the Administrative Exhibit

Coversheet. Some exhibits referred to at the hearing and some parts of exhibits were not

accepted because those documents were already contained in the administrative file as

attachments to motions, to responses, to the protest, or to other documents. Such exclusions

were noted on the record. The Hearings Office prepared a log of the pleadings filed in this case

and provided the list to the parties. Neither party objected to the accuracy of the pleadings log.
The Hearing Officer took notice of all documents in the administrative file. The parties were

given until July 14, 2017 to file their proposed findings of fact and conclusions of law. Both

parties filed timely proposals. Based on the evidence and arguments presented, IT IS DECIDED

AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

Procedural history.

1. On November 30, 2015, the Taxpayer filed an application for refund of gross receipts

taxes paid from December 2011 through December 2012. The amount of refund claimed

was $6,407,751.00.

2. On February 27, 2016, the Department denied the claim for refund.

3. On April 21, 2016, the Taxpayer filed a formal protest letter.

4. On April 28, 2016, the Department acknowledged receipt of the protest.

5. On June 10, 2016, the Department filed a Request for Hearing asking that the Taxpayer’s

protest be scheduled for a formal administrative hearing.

6. On June 10, 2016, the Hearings Office issued a notice of telephonic scheduling hearing.

7. On June 24, 2016, a telephonic scheduling hearing was conducted. The parties did not

dispute that the scheduling hearing occurred within 90 days of the protest.

8. On July 26, 2016, an attorney entered appearance on behalf of the Taxpayer.

9. On July 26, 2016, the Taxpayer filed its preliminary witness and exhibit lists.

10. On July 27, 2016, the Department filed its preliminary witness and exhibit lists.

11. On September 14, 2016, the Taxpayer’s attorney filed a motion to withdraw from

representation.

12. On October 4, 2016, the Taxpayer’s attorney filed a certificate of correct/current address

for the Taxpayer.
Peabody Coalsales Company
Letter ID No. L0001503792
page 2 of 18

13. On October 11, 2016, the order granting the motion to withdraw was filed.

14. On February 24, 2017, the Department’s outside counsel filed an entry of appearance.

15. On March 3, 2017, the attorneys who represented the Taxpayer at the hearing on the

merits filed their entry of appearance.

16. On March 29, 2017, the Department filed a request to extend deadlines, which the

Taxpayer did not oppose.

17. On April 19, 2017, the order granting the extension was filed. The new deadline for

discovery was May 15, 2017, the new deadline for motions was May 22, 2017, the new

deadline for responses was June 5, 2017, and the new deadline for the prehearing

statement was June 5, 2017. Other deadlines remained the same, including the general

deadline to respond to motions within 15 days of filing.

18. On April 27, 2017, the Taxpayer filed a motion for protective order. The motion

included attachments. Part or all of the attachments to this motion are included in the

documents that were not admitted separately as exhibits during the hearing since they

were already included in the administrative record as attachments 1.

19. On May 1, 2017, the Department requested a hearing on the motion for protective order.

20. On May 2, 2017, the Department filed a response to the motion for protective order. The

response included attachments.

21. On May 2, 2017, the Taxpayer filed a motion to compel discovery. The motion included

attachments.

1
This is also true of the attachments mentioned in subsequent findings of fact, including but not limited to #20, #21,

24, #26, #27, #28, #30, and #31.

Peabody Coalsales Company
Letter ID No. L0001503792
page 3 of 18

22. On May 3, 2017, the parties filed a joint request, via email, requesting no ruling on the

motion for protective order.

23. On May 3, 2017, an order reserving ruling on the protective order was filed.

24. On May 17, 2017, the Department filed a response to the motion to compel. The

response included attachments. The response was filed within 15 days of the motion,

although the deadline for discovery had already lapsed.

25. On May 19, 2017, the Hearings Office issued amended notices of hearing, which changed

the commencement time of the hearing.

26. On May 22, 2017, the Department filed a motion for partial summary judgment. The

motion included attachments.

27. On May 22, 2017, the Taxpayer filed two separate motions for partial summary

judgment. Both motions included attachments.

28. On May 22, 2017, the Taxpayer filed a motion to prohibit evidence and argument on

legislative intent. The motion included attachments.

29. On June 2, 2017, the order partially granting and partially denying the motion to compel

was filed.

30. On June 5, 2017, the Department filed its response to the motion to prohibit. The motion

included attachments.

31. On June 5, 2017, the Department filed its responses on each of the motions for partial

summary judgment. Both responses included attachments.

32. On June 5, 2017, the joint prehearing statement was filed. The statement indicated that

the Department’s motion for partial summary judgment was moot as the Taxpayer

withdrew the protest as to that issue.

Peabody Coalsales Company
Letter ID No. L0001503792
page 4 of 18

33. On June 6, 2017, the Department’s outside counsel filed another entry of appearance.

34. On June 7, 2017, the Taxpayer filed a motion to exclude certain witnesses and exhibits.

35. On June 9, 2017, the order on the motions filed May 22, 2017 was filed. The order

reserved ruling on the Taxpayer’s motions for partial summary judgment and indicated

that the arguments of the motions and responses would be considered as part of the

parties’ closing arguments. The order also made preliminary findings of fact based on

the information in the motions and responses. The parties did not object to any of the

preliminary findings of fact.

36. On June 14, 2017, the Department filed its response to the motion to exclude.

37. At the hearing, the Taxpayer’s motion to exclude undisclosed witnesses was granted.

The witnesses’ testimony was expected to deal largely with the documents already

attached to motions or responses that had been filed.

38. The Taxpayer’s motion to exclude undisclosed exhibits was denied. Almost all of the

exhibits at issue had already been entered into the administrative record as attachments to

motions or to responses. Moreover, all of the exhibits at issue were public documents.

Legislative History.

39. In 1964, the Legislature established an exemption from the Compensating Tax Act for

“chemicals and reagents sold in lots in excess of 18 tons.” NMSA 1953, § 72-17-4

(1964).

40. In 1965, the Legislature enacted an exemption from the Emergency School Tax Act for

“[t]he gross receipts derived from…retail sales of chemicals and reagents sold in lots in

excess of 18 tons.” NMSA 1953, § 72-16-15(14) (1965).

Peabody Coalsales Company
Letter ID No. L0001503792
page 5 of 18

41. In 1966, the Legislature repealed the Emergency School Tax Act and the Compensating

Tax Act and enacted the Gross Receipts and Compensating Tax Act (GRCTA). Included

in the newly created GRCTA were deductions for “receipts from selling chemicals or

reagents in lots in excess of eighteen tons” and for “[r]eceipts from selling coal in carload

lots”. See NMSA 1953, § 72-16A-14.21(1966) and § 72-16A-14.20 (1966), respectively.

42. The current statute allowing for deductions for sales of chemicals in lots in excess of 18

tons is worded identically to the statute enacted in 1966. See NMSA 1978, § 7-9-65

(1969). See also NMSA 1953, § 72-16A-14.21 (1966).

43. In 1973, the deduction for coal sold in carload lots was repealed. See NMSA 1953, § 72-

16A-14.20 (1973).

44. In 1984, the Department amended the regulation to include a definition of chemical,

which is substantially similar to the current definition in the regulation and “means a

substance used for producing a chemical reaction.” 3.2.223.7 NMAC (2001).

45. Since the deduction for coal sold in carload lots was repealed, the Department has

collected gross receipts taxes on sales of coal, whether or not sold in lots in excess of 18

tons. See Pittsburgh and Midway Coal Mining Co. v. Revenue Division, 1983-NMCA-

019, 99 N.M. 545.

46. In 2001, the Legislature enacted a tax credit for tax paid to the Navajo Nation against

gross receipts tax from selling coal severed from Navajo Nation land. See NMSA 1978,

§ 7-9-88.2 (2001). There is no lot requirement or limitation. See id.

The Taxpayer’s claim for refund.

47. The Taxpayer has consistently paid gross receipts taxes on its sales of coal to its

customers.

Peabody Coalsales Company
Letter ID No. L0001503792
page 6 of 18

48. Ryan, LLC is a tax-consulting firm. Ryan, LLC was contacted by one of the Taxpayer’s

customers to consult about how to lower that customer’s costs.

49. Ryan, LLC determined that buying coal was one of the customer’s greatest expenses and

focused on trying to reduce the customer’s coal expense.

50. Ryan, LLC determined that the customer was buying coal from the Taxpayer, and the

Taxpayer was charging the customer for the Taxpayer’s gross receipts taxes on those

sales.

51. Ryan, LLC approached the Taxpayer about requesting a refund of its gross receipts taxes

on those sales of coal to its customer, with the understanding that the refunded amount

would be returned to the customer.

52. Ryan, LLC proposed that the Taxpayer request a refund under Section 7-9-65 since its

sales of coal were in excess of 18 tons.

53. The Taxpayer agreed to the proposition and filed the request for refund.

54. The Taxpayer operates at least two coalmines in McKinley County, New Mexico.

55. The Taxpayer extracts the coal from the earth, breaks the coal into pieces that are three

inches or less in diameter (the pieces), and then sells the coal to its customers.

56. The quality of the coal is measured by moisture content, BTU content, sulfur content, and

ash content. The price of the coal is adjusted accordingly.

57. The Taxpayer’s refund claim is in reference solely to sales made to a single customer,

which is a power plant in Arizona (the power plant).

58. The coal was sold to the power plant by the trainload between December 1, 2011 and

December 31, 2012.

Peabody Coalsales Company
Letter ID No. L0001503792
page 7 of 18

59. At rail spurs near its coalmines, the Taxpayer loads the pieces onto train cars that are then

shipped to the power plant. The title to the coal transfers to the power plant when it is

loaded onto the train in New Mexico.

60. Each train car carries approximately 25 tons of coal (carload). Each sale of coal to the

power plant includes a full train, which is typically dozens of carloads.

61. This manner of sales and transport has been the norm in the coal industry for at least the

last 40 years.

62. The Taxpayer sold coal to the power plant in lots in excess of 18 tons.

63. The power plant offloads the coal from the train and stores it in large piles.

64. When the power plant needs more fuel, it takes the pieces of coal from the bottom of the

storage pile and sends them to a silo where the pieces are crushed into bits the size of one

and one-quarter inches or smaller (the bits).

65. The bits of coal are then sent to another silo where the bits are pulverized into a fine

powder (coal dust).

66. The coal dust is then blown into a boiler with a stabilizing fuel, such as diesel. The coal

dust and the stabilizing fuel are burned in the boiler.

67. The stabilizing fuel and other measures are necessary to ensure that the coal dust does not

blow back and cause an explosion or burn at the wrong temperature.

68. The boiler is not designed to burn coal unless it is crushed into coal dust, and would not

function properly if larger pieces of coal were used.

69. The burning of the coal generates heat, which is used to heat water in the boiler pipes,

which creates steam. The steam is used to turn steam turbines, which rotate through a

magnetic field, and electricity is produced.

Peabody Coalsales Company
Letter ID No. L0001503792
page 8 of 18

70. The power plant’s purpose in burning the coal is to produce electricity through this

process.

71. The power plant is required to take measures to minimize environmental impacts of

burning coal, which include scrubbing sulfur deposits that occur after the burning.

72. One way to define a chemical is as an assembly of atoms held together by molecular

bonds. Under this technical construction, virtually all substances on earth are chemicals.

73. A chemical reaction occurs when the molecular bonds of a chemical are broken down and

new bonds are formed or reformed to create different chemicals or substances.

74. Burning anything will cause a chemical reaction.

75. In practice, many industries and academics distinguish between fuels and chemicals.

76. Coal does not have a discrete and uniform chemical formula that could be used to

identify it. Examples of things with a discrete and uniform chemical formula that could

be used to identify them are water, H20, carbon dioxide, C02, and hydrochloric acid, HCl.

77. Burning coal causes a chemical reaction as the coal is broken down and forms new

substances. Burning transforms coal from a complex amalgamation into water, carbon

dioxide, sulfur, and other substances.

78. In the right conditions, pieces of coal can spontaneously combust, or begin to burn. The

smaller the pieces, the greater the risk.

79. Many types of fine dust, including flour dust, grain dust, and tire dust can explode under

the right conditions.

80. A violent combustion that produces a damaging pressure wave would be considered an

explosion.

Peabody Coalsales Company
Letter ID No. L0001503792
page 9 of 18

81. Coal dust is an explosion hazard, but is not listed as a regulated explosive by the federal

government.

DISCUSSION AND ANALYSIS

The issue to be decided is whether the Taxpayer is entitled to deduct sales of coal from its

gross receipts when those sales were made in lots in excess of 18 tons to a power plant that used

the coal to produce electricity.

Burden of Proof.

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 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. See also Pittsburgh and Midway

Coal Mining Co. v. Revenue Division, 1983-NMCA-019, 99 N.M. 545.

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 not disputed that the Taxpayer

is subject to the gross receipts tax, and the Taxpayer paid the gross receipts taxes. The Taxpayer

Peabody Coalsales Company
Letter ID No. L0001503792
page 10 of 18
is now claiming a refund of the gross receipts taxes that it paid and arguing that it was entitled to

deduct its sales of coal to the power plant from its gross receipts.

The deduction.

“Receipts from selling chemicals or reagents to any mining, milling or oil company for

use in processing ores or oil in a mill, smelter or refinery or in acidizing oil well, and receipts

from selling chemicals or reagents in lots in excess of eighteen tons may be deducted from gross

receipts. Receipts from selling explosives, blasting powder or dynamite may not be deducted

from gross receipts.” NMSA 1978, § 7-9-65. The regulation defines chemical as “a substance

used for producing a chemical reaction.” 3.2.223.7 (B) NMAC (2001).

The Taxpayer argues that a plain reading of the statute and regulation leads to the

conclusion that coal is a chemical and should be deductible under the statute. The Taxpayer

argues that the coal is used for producing a chemical reaction when it is burned at the power

plant, which satisfies the regulatory definition of a “chemical”. The Taxpayer also argues that

the regulatory definition of chemical altered the traditional meaning of the term in the statute,

and that the repealed deduction for coal sales is irrelevant given the altered meaning. The

Department argues that a plain reading would lead to a ridiculous result because anything sold in

lots in excess of 18 tons and burned would be subject to the deduction. The Department argues

that this result would contradict the well-established principle that deductions should be

construed narrowly. The Department also argues that the regulation should not be read to

expand the statute, but to narrow and interpret it.

Based on the premise that everything on earth is technically a chemical, it therefore

follows that coal is a chemical. It would be contrary to well-established principles of tax law to

conclude that the Legislature intended for a deduction to be so broad as to encompass everything

Peabody Coalsales Company
Letter ID No. L0001503792
page 11 of 18
on earth, even with the limitation that the sales be in lots in excess of 18 tons. See Sec. Escrow

Corp., 1988-NMCA-068, ¶ 8. See also Wing Pawn Shop, 1991-NMCA-024, ¶ 16. See also

Chavez, 1970-NMCA-116, ¶ 7. Reading the statute in such a way would lead to an absurd result.

Statutes are to be interpreted in accordance with legislative intent and in a manner that does not

lead to an absurd, unreasonable, or unjust result. See Amoco Production Co. v. N.M. Taxation

and Revenue Dep’t., 1994-NMCA-086, ¶ 8, 118 N.M. 72. See also Hess Corp. v. N.M. Taxation

and Revenue Dep’t., 2011-NMCA-043, 149 N.M. 527. Therefore, the issue becomes what the

Legislature intended to allow as a deduction under this statute.

The legislative intent of the gross receipts tax “is to provide revenue for public purposes

by levying a tax on the privilege of engaging in certain activities within New Mexico[.]” NMSA

1978, § 7-9-2. Not only must the deduction be clear and unambiguous in statute, but also “the

intention of the legislature to grant the immunity must be clear beyond a reasonable doubt.”

Pittsburgh and Midway Coal, 1983-NMCA-019, at ¶ 35. Any doubts must be resolved in favor

of the state. See id.

The first step in statutory interpretation is to look at the plain language of the statute and

to refrain from further interpretation if the plain language is not ambiguous. See Marbob Energy

Corp. v. N.M. Oil Conservation Comm’n., 2009-NMSC-013, 146 N.M. 24. Statutes are to be

applied as written unless a literal use of the words would lead to an absurd result. See New

Mexico Real Estate Comm’n. v. Barger, 2012-NMCA-081, ¶ 7. If a statute is ambiguous or

would lead to an absurd result, then it should be construed in accordance with the legislative

intent or spirit and reason for the statute, even though it may require a substitution or addition of

words. See id. See also State ex rel. Helman v. Gallegos, 1994-NMSC-023, 117 N.M. 346. See

also Kewanee Indus., Inc. v. Reese, 1993-NMSC-006, 114 N.M. 784. When a statute is

Peabody Coalsales Company
Letter ID No. L0001503792
page 12 of 18
ambiguous or would lead to an absurd result, it should be construed according to its obvious

purpose. See T-N-T Taxi Co. v. N.M. Pub. Regulation Comm’n, 2006-NMSC-016, ¶ 5, 139 N.M.

550. When statutes and regulations are inconsistent, the statute prevails. See Picket Ranch, LLC

v. Curry, 2006-NMCA-082, ¶ 10, 140 N.M. 49. A regulation cannot overrule a statute. See

Jones v. Employment Servs. Div., 1980-NMSC-120, 95 N.M. 97.

The purpose of the statute seems to be related to the processing of ores or oil. See NMSA

1978, § 7-9-65. Most of the regulations interpreting the statute also have to do with oil wells or

processing oil or ores. See 3.2.223.9 through 3.2.223.11 NMAC (2001). Burning coal to

produce electricity is not an activity related to the processing of ores or oil. The Taxpayer is

seeking to read one phrase in the statute, “receipts from selling chemicals or reagents in lots in

excess of eighteen tons may be deducted”, in isolation from the rest of the statute. NMSA 1978,

§ 7-9-65.

However, each statute should be read in its entirety and each part should be given effect

so that they constitute a harmonious whole. See Amoco, 1994-NMCA-086, ¶ 8. Moreover, one

should “construe the provisions of the Act together to produce a harmonious whole.” Cordova v.

Cline, 2017-NMSC-020, ¶ 13. Although a statute may seem “clear and certain to the point of

mathematical precision, lurking in another part of the enactment,…, or in the history and

background of the legislation,…, there may be one or more provisions giving rise to genuine

uncertainty as to what the legislature was trying to accomplish.” Helman, 1994-NMSC-023, ¶

23.

A statute providing a deduction for sales of coal by the carload was enacted at the same

time as the statutory deduction at issue in this case. See NMSA 1953, § 72-16A-14.21(1966) and

§ 72-16A-14.20 (1966). This is a strong indication that the deduction at issue was not meant to

Peabody Coalsales Company
Letter ID No. L0001503792
page 13 of 18
create a deduction for coal sales in lots in excess of 18 tons. The coal credit later created would

also be unnecessary if this deduction were designed to apply to sales of coal. See NMSA 1978, §

7-9-88.2 (2001). See also Pueblo of Picuris v. N.M. Energy, Minerals, and Natural Res. Dep’t,

2001-NMCA-084, ¶ 15-17, 131 N.M. 166 (finding that two statutes created at the same time

were presumed to have different purposes). See also Cordova, 2017-NMSC-020. See also

Helman, 1994-NMSC-023.

The Taxpayer argues that the carload of coal deduction and the coal credit might have

been necessary for sales of coal in lots less than 18 tons. The argument is not persuasive given

the testimony, as well as the facts contained in the caselaw, about the industry practice regarding

coal sales and transportation for at least the last 40 years. See Pittsburgh and Midway Coal,

1983-NMCA-019 (describing how coal is loaded onto train cars when sold). See also State v.

Davis, 2000-NMCA-105, ¶ 7, 129 N.M. 773 (indicating that statutes enacted at the same time

were obviously designed to protect different interests). It does not appear that the statute’s

purpose was to create a deduction for coal sold to produce electricity even when sold in lots in

excess of 18 tons. See NMSA 1978, § 7-9-65.

Chemical reactions.

The regulation makes it clear that a chemical is something “used for producing a

chemical reaction.” 3.2.223.7 NMAC. The Taxpayer argues that the coal should be treated as a

chemical under the regulation because it is used for producing a chemical reaction when it is

burned by the power plant. Again, burning anything will cause a chemical reaction. Again, it

would be contrary to well-established principles of tax law to conclude that the Legislature

intended for a deduction to be so broad as to encompass everything on earth so long as it is sold

in lots in excess of 18 tons and burned. See Sec. Escrow Corp., 1988-NMCA-068, ¶ 8. See also

Peabody Coalsales Company
Letter ID No. L0001503792
page 14 of 18
Wing Pawn Shop, 1991-NMCA-024, ¶ 16. See also Chavez, 1970-NMCA-116, ¶ 7. Reading the

regulation in such a way would lead to an absurd result. Regulations are also to be interpreted in

accordance with legislative intent and in a manner that does not lead to an absurd, unreasonable,

or unjust result. See Amoco, 1994-NMCA-086. See also Hess Corp., 2011-NMCA-043. See

also Johnson v. NM Oil Conservation Com’n, 1999-NMSC-021, 127 NM 120 (holding that canons

of construction that apply to statutes also apply to rules and regulations). The Department argues

that the coal should not be treated as a chemical under the regulation because it is not used for

producing a chemical reaction. The Department argues that the coal is sold in pieces, but the

coal that is burned is transformed into coal dust. The Taxpayer argues that coal is coal in either

form. The form of the coal is not what decides whether it is used for producing a chemical

reaction. What the coal is used for is what is dispositive.

Dr. Leclerc gave two very illustrative examples of when a chemical was used for

producing a chemical reaction, both of which occurred at a paper mill. In the first, sodium

sulfate and sodium carbonate were combined with wood chips. This caused the wood chips to

break down their molecular bonds into separate substances, cellulose and lignin. The lignin

would then bond with the sodium compounds and form black liquor. The cellulose was taken

out and further processed into paper, the ultimate product of the paper mill. The black liquor

was then burned in a boiler, similar to how the coal in this case is burned. The boiler was also

used for producing electricity or for supporting other functions at the mill. Although burning the

black liquor produced heat that was used for other purposes, that is not why it was burned.

Rather, the black liquor was burned in order to break down the molecular bonds between the

lignin and the sodium compounds. When those bonds were broken, the sodium compounds

could be reclaimed and used in the process again. The black liquor was burned in order to

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produce a chemical reaction so that the sodium compounds could be recycled and reused. In

both of these examples, the chemicals were used for producing a chemical reaction.

In this case, the coal is not used for producing a chemical reaction, that is to break down

and reform molecular bonds. Rather, the chemical reaction is an unavoidable consequence of the

burning. In fact, the chemical reaction caused by burning the coal is an undesirable consequence

as it forms different substances, such as carbon dioxide and sulfur, that the power plant must take

corrective measures to scrub and minimize. The coal is used for producing heat, a type of

energy, which is then used in the process to make electricity. Therefore, the coal is not a

chemical under the statute or regulation because it is not used for producing a chemical reaction.

Moot issues.

The parties presented arguments about whether coal dust is an explosive within the

meaning of the statute. The parties presented arguments on legislative intent and how the

chemical deduction should be interpreted relating to past Attorney General opinions, proposed

bills, statutes enacted on other types of fuel, and the amendments to the manufacturing

deduction. See NMSA 1978, §§ 7-9-26, 7-9-26.1, 7-9-46, 7-9-83, 7-9-84, 7-9-90, 7-9-98, and 7-

9-113. Given the foregoing conclusions, these issues are moot.

CONCLUSIONS OF LAW

A. The Taxpayer filed a timely written protest to the denial of refund issued under

Letter ID number L0001503792, and jurisdiction lies over the parties and the subject matter of this

protest.

B. The deduction for sales of chemicals in lots in excess of 18 tons was not intended to

apply to sales of coal. See NMSA 1978, § 7-9-65. See NMSA 1953, § 72-16A-14.20 (1966). See

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3.2.223.8 through 3.2.223.11 NMAC. See T-N-T Taxi Co., 2006-NMSC-016. See also Amoco

Production Co., 1994-NMCA-086. See also Hess Corp., 2011-NMCA-043.

C. The coal sold by the Taxpayer was not a chemical for purposes of the statute or

regulation because it was not used for producing a chemical reaction. See NMSA 1978, § 7-9-65.

See 3.2.223.7 NMAC.

D. The Taxpayer failed to establish that it was entitled to the deduction as the right was

not clearly and unambiguously expressed in the statute, and the statute must be construed strictly

in favor of the state. See NMSA 1978, § 7-9-65. See also Sec. Escrow Corp., 1988-NMCA-068.

See also Wing Pawn Shop, 1991-NMCA-024. See also Chavez, 1970-NMCA-116. See also

Pittsburgh and Midway Coal Mining Co., 1983-NMCA-019.

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

DATED: July 31, 2017.

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

NOTICE OF RIGHT TO APPEAL

Pursuant to NMSA 1978, Section 7-1-25 (2015), the parties have 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. If an appeal is not filed with the Court of Appeals within 30 days, this

Decision and Order will become final. Rule of Appellate Procedure 12-601 NMRA articulates

the requirements of perfecting an appeal of an administrative decision with the Court of Appeals.
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Either party filing an appeal shall file a courtesy copy of the appeal with the Administrative

Hearings Office contemporaneous with the Court of Appeals filing so that the Administrative

Hearings Office may begin preparing the record proper. The parties will each be provided with a

copy of the record proper at the time of the filing of the record with the Court of Appeals, which

occurs within 14 days of the Administrative Hearings Office’s receipt of the docketing statement

from the appealing party. See Rule 12-209 NMRA.

CERTIFICATE OF SERVICE (REMOVED IN PUBLIC VERSION)

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