Could a New Mexico USPS mail contractor deduct all receipts from routes that crossed into Texas, or was the interstate-commerce deduction limited by scheduled delivery points?

Plain-English summary

A U.S. Postal Service mail contractor earned a 17 percent interstate-commerce deduction—not a deduction for all receipts merely because some routes crossed the Texas-New Mexico border. The Administrative Hearings Office increased the Department's original 12.5 percent allowance after accounting for each trip's annual frequency and all scheduled delivery points.

Diamond T U.S. Mail Services, Inc. was based in Roswell and transported bulk mail under a USPS contract between the processing facility in Lubbock, Texas and locations in southeastern New Mexico. Compensation was fixed by annual contract mileage rather than the quantity of mail carried.

The August 2017 assessment totaled $182,220.25, including $146,687.88 gross receipts tax, $28,206.33 gross receipts tax penalty, $6,778.35 gross receipts tax interest, and smaller withholding-tax amounts.

Border crossing did not make every receipt deductible

Diamond T argued that all receipts were interstate because its trucks crossed state lines. The Department accepted that Section 7-9-55 supplied an interstate-commerce deduction but calculated only 12.5 percent, treating the schedule as eight routes with one Texas delivery point.

The AHO found that method too simple. The schedule contained at least 31 separately numbered trips:

• 12 originated in Lubbock;
• 10 ended in Lubbock; and
• 9 both originated and ended in New Mexico.

Some trips occurred only 20 times per year, while others occurred as often as 365 times. Routes also contained multiple required stops. Counting a rarely traveled route the same as a daily route and looking only at final destinations did not reflect the regulation's definition of a “delivery point” as any contractually required mail-delivery location.

Weighted delivery points produced a 17 percent deduction

Using the HCR schedule's annual frequencies, the AHO calculated:

• 11,461.49 New Mexico delivery points;
• 2,350.03 Texas delivery points; and
• 13,811.52 total delivery points.

New Mexico delivery points divided by total delivery points produced an 83 percent taxable share. The remaining 17 percent represented the Section 7-9-55 interstate-commerce deduction under Regulation 3.2.213.10(B)(2).

The AHO also found the method consistent with the Commerce Clause test because Diamond T was headquartered in New Mexico, the formula fairly apportioned the tax, did not discriminate against interstate commerce, and was related to state services.

A separate transportation deduction was not proved

The decision considered Section 7-9-56, which addressed transporting people or property between New Mexico points while the property moved in interstate commerce under a single contract.

Diamond T was paid according to fixed scheduled mileage whether a truck was empty or full, suggesting that its receipts were for making scheduled trips rather than necessarily transporting property between particular New Mexico points. The company also did not introduce the actual USPS contract; it supplied a document resembling a solicitation with boilerplate terms. Testimony about the routes was vague and conflicted with the detailed schedule.

The AHO therefore held that Section 7-9-56 did not apply and, even if potentially applicable, the evidence did not prove entitlement.

Withholding tax, penalty, and interest remained

Diamond T presented no evidence challenging the withholding-tax portion of the assessment. It also did not rebut the penalty and interest. Interest was mandatory under Section 7-1-67, and the failure to pay gross receipts tax met the negligence definition used under Section 7-1-69.

Result: protest GRANTED IN PART and DENIED IN PART. The Department was ordered to recalculate liability using a 17 percent deduction instead of 12.5 percent. The decision did not state the recalculated dollar amount; all other portions of the protest were denied.

What this means for you

Carriers operating multistate routes

Crossing a state line does not necessarily make every receipt deductible. The governing formula may measure delivery points, mileage, stops, trip frequency, or another activity factor.

USPS highway contractors

Keep the complete route schedule and actual signed contract. The detailed schedule enabled the improved 17 percent calculation, while the missing contract prevented a separate deduction theory.

Businesses contesting an audit formula

Test whether the auditor's model accounts for how often each route operates and every activity point required by the governing rule. Here, weighting those facts changed the deduction from 12.5 percent to 17 percent.

Taxpayers with multiple assessment components

Present evidence for each tax type and each penalty or interest issue. Diamond T's withholding assessment remained because it offered no rebuttal.

Common questions

Q: Why wasn't the entire USPS contract treated as interstate commerce?
A: The operation included thousands of New Mexico delivery points and 2,727.36 scheduled trips per year that began and ended in New Mexico. The regulation apportioned receipts rather than exempting the whole contract.

Q: How did the AHO reach 17 percent?
A: It divided the 2,350.03 annual Texas delivery points by 13,811.52 total delivery points. The complementary 83 percent represented New Mexico delivery points and taxable receipts.

Q: Why was the Department's 12.5 percent calculation changed?
A: The Department treated the work as eight routes with one Texas endpoint. It did not account for annual trip frequency or all required stops along each route.

Q: Did Section 7-9-56 provide another deduction?
A: No. The fixed-mileage compensation, missing signed contract, and insufficient route evidence did not establish that separate single-contract transportation deduction.

Q: What happened to the withholding tax?
A: It remained because Diamond T presented no evidence against the $469 tax, $67.64 penalty, and $11.05 interest assessed for withholding.

Q: What was the final recalculated liability?
A: The decision ordered the Department to recalculate using 17 percent but did not provide a final dollar figure.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-9-55 — interstate-commerce deduction
• NMSA 1978, § 7-9-56 — single-contract interstate transportation deduction considered but not established
• NMSA 1978, §§ 7-9-4 and 7-9-5 — gross receipts tax and taxable-receipts presumption
• NMSA 1978, § 7-1-17(C) — assessment presumption
• NMSA 1978, §§ 7-1-67 and 7-1-69 — interest and negligence penalty
• Regulation 3.2.213.10(B)(1) and (2) NMAC — U.S. mail contractor deduction and delivery-point formula
• Regulations 3.1.11.10 and 3.1.11.11 NMAC — negligence and non-negligence standards

Cases cited:

• Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977) — four-part Commerce Clause test
• New Mexico Taxation and Revenue Department v. Diamond T US Mail Services, No. A-1-CA-36165 — prior dispute involving the same parties and similar mail routes

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Diamond T U.S. Mail Service Inc
• Decision PDF: D&O 18-28

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
DIAMOND T U.S. MAIL SERVICE INC.
TO ASSESSMENT ISSUED UNDER
LETTER ID NO. L1167412528

v. D&O No. 18-28

NEW MEXICO TAXATION AND REVENUE DEPARTMENT

DECISION AND ORDER

A protest hearing occurred in the above-captioned matter on July 16, 2018 before Chris

Romero, Esq., Hearing Officer, in Santa Fe, New Mexico. At the hearing, Mr. Santiago Juarez,

Esq. (AMPARO Legal Services, LLC), appeared representing Diamond T U.S. Mail Services, Inc.

(“Taxpayer”). Mr. Richard Torrez and Mr. Andrew Perkins, CPA appeared by telephone and

testified as witnesses for the Taxpayer. Mr. Peter Breen, Esq. appeared representing the Taxation

and Revenue Department of the State of New Mexico (“Department”) accompanied by Ms.

Amanda Carlisle, protest auditor, who also testified as a witness for the Department. Taxpayer

Exhibits 1, 2, 3, 4, 5, and 6 and Department Exhibits A and B were admitted into the record without

objection. All exhibits are more thoroughly described in the Administrative Exhibit Coversheet.

Based on the evidence and arguments presented, IT IS DECIDED AND ORDERED AS

FOLLOWS:

FINDINGS OF FACT

1. On August 4, 2017, through Letter ID No. L1167412528, the Department assessed

Taxpayer $146,687.88 in gross receipts tax, $28,206.33 in gross receipts tax penalty, $6,778.35 in

gross receipts tax interest, $469.00 in withholding tax, $67.64 in withholding tax penalty, and
$11.05 in withholding tax interest, for a total assessment in the amount of $182,220.25 for the

reporting periods from April 30, 2013 to December 31, 2016. [See Administrative File].

2. On August 28, 2017, the Department received Taxpayer’s protest of the

Department’s assessment under Letter ID No. L1167412528. [See Administrative File].

3. On September 1, 2017, the Department’s Protest Office acknowledged receipt of

Taxpayer’s valid and timely protest under Letter ID No. L1831005488. [See Administrative File].

4. On October 10, 2017, the Department filed a Hearing Request in which it requested

that the Administrative Hearing Office conduct a scheduling hearing in reference to Taxpayer’s

protest. [See Administrative File].

5. On October 10, 2017, the Administrative Hearings Office issued a Notice of

Telephonic Scheduling Conference, setting this matter for a scheduling hearing on October 27,

2017. [See Administrative File].

2018. On October 27, 2017, Taxpayer’s counsel of record, Mr. Juarez, entered his

appearance on Taxpayer’s behalf. [See Administrative File].

7. On October 27, 2017, a scheduling conference occurred in which the parties agreed

that the hearing satisfied the 90-day hearing requirement established in NMSA 1978, Section 7-

1B-8 (A). [See Administrative File].

8. On October 30, 2017, the Administrative Hearings Office issued a Scheduling

Order and Notice of Administrative Hearing which in addition to establishing various deadlines,

set a hearing on the merits of Taxpayer’s protest for January 11, 2018. [See Administrative File].

9. On December 22, 2017, Taxpayer, by and through its counsel of record, filed a

Motion to Continue Hearing on the Merits Set for January 11, 2018. [See Administrative File].

10. On December 28, 2017, the Administrative Hearings Office entered a Continuance

In the Matter of Diamond T U.S. Mail Services, Inc.
Page 2 of 22
Order and Notice of Administrative Hearing that continued the previously-set hearing on the merits

of Taxpayer’s protest to May 24, 2018. [See Administrative File].

11. On April 26, 2018, Taxpayer, by and through its counsel of record, filed its Motion

to Continue Hearing on the Merits Set for May 24, 2018. [See Administrative File].

12. On May 3, 2018, the Administrative Hearings Office entered an Order Denying

Motion to Continue Hearing on the Merits Set for May 24, 2018. [See Administrative File].

13. On May 7, 2018, Taxpayer, by and through its counsel of record, filed its Motion

to Reconsider on the Motion to Continue Hearing on the Merits Set for May 24, 2018. [See

Administrative File].

14. On May 8, 2017, the Administrative Hearings Office entered a Second Continuance

Order and Notice of Administrative Hearing that continued the previously-set hearing on the merits

of Taxpayer’s protest to July 16, 2018. [See Administrative File].

15. On May 24, 2018, Taxpayer filed correspondence disclosing the names of witnesses

it intended to call and describing the exhibits it contemplated relying upon at the hearing. [See

Administrative File].

16. On July 10, 2018, Taxpayer filed its Motion for Telephonic Appearance of Expert

Witness and Taxpayer for Hearing on the Merits Set for July 16, 2018. [See Administrative File].

17. On July 12, 2018, the Administrative Hearings Office entered an Order Allowing

Telephonic Testimony. [See Administrative File].

18. Mr. Richard Torrez resides in Lubbock, Texas where he manages Taxpayer’s

business operations. [Testimony of Mr. Torrez].

19. Taxpayer has been owned and operated by Mr. Torrez’ family for more than 20

years. [Testimony of Mr. Torrez].

In the Matter of Diamond T U.S. Mail Services, Inc.
Page 3 of 22

20. During all periods relevant to the protest, Taxpayer was based in Roswell, New

Mexico. [See Taxpayer Exhibit 2; Taxpayer Exhibit 3; Taxpayer Exhibit 4; Taxpayer Exhibit 5;

Taxpayer Exhibit 6].

21. Since May of 2013, Taxpayer has been engaged in transporting bulk mail between

the U.S. Mail processing facility in Lubbock, Texas and various locations in southeast New

Mexico. [Testimony of Mr. Torrez; See Department Exhibit A].

22. Services are provided in accordance with a contract with the U.S. Postal Service.

Taxpayer did not produce a copy of the contract, but the terms and conditions are similar to those

provided in the Processing Network Transportation Terms and Conditions 1. [Testimony of Mr.

Torrez; See Taxpayer Exhibit 1, Part 3, Page 16].

23. The HCR Schedule Information, referencing contract number 793A2 specifies

Taxpayer’s routes, establishing the origin and final destination for each trip, the locations of

scheduled stops 2, if any, occurring between a location of origin and final destination, and specific

departure and arrival times for each scheduled stop. [Testimony of Mr. Torrez; See Taxpayer

Exhibit 2].

24. Taxpayer’s compensation under the contract is fixed, meaning that the U.S. Postal

Service compensates Taxpayer based on annual mileage established per trip rather than by the

quantity of mail transported between locations. [Testimony of Mr. Torrez].

25. With regard for trips originating in Lubbock, Texas, Taxpayer’s vehicles are loaded

at the U.S. Postal Service processing facility, and subsequently unloaded and loaded at various

1
Although referred to as “the contract,” Taxpayer Exhibit 1 more closely resembles a governmental solicitation for
services. It establishes the procedure for preparing and evaluating proposals (Part 2), and contains what appears to be
notice of boilerplate contract terms (Part 3). Unlike a proper contract, it does not identify the parties to the contract,
the term of the contract, including the statement of work (Part I), the dates on which it was executed, or the individuals
executing any contract, just to name a few apparent deficiencies.
2
References to “stops” are intended to be synonymous with the term “delivery points.” The Hearing Officer’s selection
of terms will depend on the context in which it is used, but the meanings shall not vary.

In the Matter of Diamond T U.S. Mail Services, Inc.
Page 4 of 22
locations in southeast New Mexico, before traveling back to Lubbock, Texas. [Testimony of Mr.

Torrez].

26. An in-depth review of Taxpayer Exhibit 2 illustrated a more complex operation

than that described. Upon review of the HCR Schedule Information, no less than 31 individual

trips 3 were identified, some of which originated or concluded in Lubbock, Texas, and some of

which did not. Each trip is assigned a trip number. [See Taxpayer Exhibit 2]:

a. Twelve trips originate in Lubbock, Texas (Trip Numbers 601, 605, 603,

619, 609, 621, 611, 607, 617, 613, 504, and 506).

b. Ten trips conclude in Lubbock, Texas (Trip Numbers 602, 604, 606, 610,

622, 608, 612, 614, 505, and 503).

c. Nine trips originate and conclude in New Mexico (Trip Numbers 3, 1, 2, 4,

5, 6, 615, 501, and 502).

d. The frequencies of each trip per year determine the actual number of trips

traveled, and associated stops made along the route of each trip.

e. Some trips are traveled as little as 20 times per year (Trip Numbers 505,

503, 504, and 506) while other routes were traveled as many as 365 days per year (Trip Number

608). The majority of trips were scheduled to occur no less than six days per week, except for

specified holidays (Trip Numbers 3, 1, 2, 4, 601, 5, 6, 602, 603, 604, 606, 615, 609, 610, 621, 622,

611, 607, 612, 501, and 502).

f. Multiplying the trip by the annual frequency reveals the number of times

per year Taxpayer is scheduled to complete a particular trip, along with the number of stops

3
Even if a route eventually results in a round-trip, the schedule assigns separate trip numbers for the outgoing and
incoming legs of the route. The various stops along each route are displayed in the center column. It is also worth
noting that each route may call for multiple trips with different departure and arrival times, and scheduled stops made
during an outgoing trip may not be the same as scheduled stops made during the incoming trip along the same route.

In the Matter of Diamond T U.S. Mail Services, Inc.
Page 5 of 22
scheduled along the route of each trip.

g. Taxpayer is scheduled to complete a total of 4,711.20 trips to and from

Lubbock, Texas per year.

h. For trips originating in Texas and concluding in New Mexico, Taxpayer is

scheduled to make no less than 4,998.84 stops per year in New Mexico, including its final New

Mexico destination.

i. For trips originating in New Mexico and concluding in Lubbock, Texas,

Taxpayer is scheduled to make no less than 2,522.74 stops per year in New Mexico, not including

its New Mexico point of origin 4.

j. The total number of stops per trip per year in New Mexico, for trips both

originating and concluding in Lubbock Texas, is 7,521.58.

k. The difference between the total number of trips traveled per year and the

sum of the number of trips originating and concluding in Lubbock, Texas, reveals the total number

of trips that are completed entirely within New Mexico, or 2,727.36.

l. For intrastate trips both originating and concluding in New Mexico,

Taxpayer is scheduled to make no less than 3,939.91 stops per year in New Mexico, not including

its point of origin, but including its final destination.

m. The total number of stops occurring in New Mexico, regardless of the trips

place of origin, and including the final destination of that location if it is within New Mexico, is

11,461.49.

n. Lubbock, Texas is the final destination for 2,350.03 trips per year, meaning

4
The Hearing Officer has omitted from the calculations New Mexico points of origin because those points have
already been counted as a final destinations attributed to another trip. Counting it again would incorrectly inflate the
number of stops per trip by counting it as both a point of origin and a destination.

In the Matter of Diamond T U.S. Mail Services, Inc.
Page 6 of 22
that it also serves as a delivery point for that number of trips per year.

o. If the total number of delivery points in New Mexico is 11,461.49 and the

total number of delivery point in Texas is 2,350.03, then the sum of all delivery points per year is

13,811.52.

p. The physical locations of each scheduled stop within New Mexico are

contained at Pages 7 – 9 of Taxpayer Exhibit 2. The New Mexico delivery points consist

exclusively of U.S. post office facilities in Jal, Dexter, Eunice, Artesia, Tatum, Hobbs, Lake

Arthur, Lakewood, Hagerman, Lovington, and two facilities each in both Carlsbad and Roswell.

Accordingly, the total number of New Mexico locations served is 14.

q. Taxpayer’s only stop in Texas is at the U.S. Postal Service processing

facility in Lubbock.

27. The Department’s audit makes reference to a second contract bearing number

88265 in which the auditor concluded that the services performed under that contract were entirely

within New Mexico. Taxpayer did not reference that contract or seek to introduce evidence to

dispute the auditor’s conclusions with respect to that contract. [See Department Exhibit A, Page

2].

28. With respect to contract 793A2, the auditor identified 8 separate routes and

concluded that only one route had a Texas delivery point. The auditor thereafter allowed a

deduction from gross receipts in the amount of 12.5 percent representing 1/8 of Taxpayer’s gross

receipts. The denominator presumably represented the total number of routes contained on

Taxpayer Exhibit 2 and the numerator correspondingly represented the single route the auditor

perceived as having a Texas delivery point. [See Department Exhibit A].

29. The auditor’s evaluation did not appear to consider the frequency with which trips

In the Matter of Diamond T U.S. Mail Services, Inc.
Page 7 of 22
were traveled or stops made within each trip such that a trip conducted 20 times per year was

regarded as equivalent to a trip that was completed 365 days per year. [See Department Exhibit

A].

30. The auditor’s evaluation also did not appear to consider the number of stops, or

delivery points, per route of each trip, instead focusing on the final destination of the route.

31. Taxpayer Exhibit 2 reveals that the same calculation utilized by the auditor, but

reflecting consideration of the frequency of each trip and its corresponding stops results in a

slightly higher deduction of 17 percent, rather than 12.5 percent. The formula utilized in both

instances requires dividing the total number of delivery points in New Mexico and Texas by the

total number of delivery points in Texas (2,350.03/13,811.52=.17).

32. Taxpayer did not present any evidence to dispute the imposition of withholding tax,

withholding tax penalty, or withholding tax interest. [See Record of Hearing].

DISCUSSION

This protest involves the question of whether Taxpayer is entitled to a deduction from gross

receipts for delivery of U.S. mail transported between Lubbock, Texas and various delivery points

in New Mexico under a contract with the United States Postal Service. Taxpayer relies on the

application of NMSA 1978, Section 7-9-55 which provides that “[r]eceipts from transactions in

interstate commerce may be deducted from gross receipts to the extent that the imposition of the

gross receipts tax would be unlawful under the United States constitution.”

This protest represents a sequel to a prior protest involving the same parties and addressing

similar facts and issues of law. The previous protest was filed in 2016 and was the subject of

Decision and Order 17-02, entered on January 4, 2017, well before the Department issued the

assessment giving rise to the present protest. On February 1, 2018, the Court of Appeals in the

In the Matter of Diamond T U.S. Mail Services, Inc.
Page 8 of 22
matter of N.M. Taxation and Revenue Dep’t v. Diamond T US Mail Services, Inc. affirmed the

decision of the Hearing Officer in that matter. See New Mexico Taxation and Revenue Dep’t. v.

Diamond T US Mail Services, No. A-1-CA-36165 (N.M. Ct. App. September 20, 2017) (non-

precedential).

Presumption of Correctness and Burden of Proof.

Under NMSA 1978, Section 7-1-17 (C) (2007), the assessment from which this protest

arises is presumed correct and the burden is on Taxpayer to overcome the presumption. See

Archuleta v. O’Cheskey, 1972-NMCA-165, ¶11, 84 N.M. 428, 504 P.2d 638. Unless otherwise

specified, for the purposes of the Tax Administration Act, “tax” is defined to include interest and

civil penalty. See NMSA 1978, Section 7-1-3 (X) (2013). Under Regulation 3.1.6.13 NMAC, the

presumption of correctness under Section 7-1-17 (C) extends to the Department’s assessment of

penalty and interest. See Chevron U.S.A., Inc. v. State ex rel. Dep’t of Taxation & Revenue, 2006-

NMCA-50, ¶16, 139 N.M. 498, 503, 134 P.3d 785, 791 (agency regulations interpreting a statute

are presumed proper and are to be given substantial weight).

For these reasons, Taxpayer carries the burden of presenting countervailing evidence or

legal argument to show that it is entitled to an abatement of the assessment. See N.M. Taxation &

Revenue Dep’t v. Casias Trucking, 2014-NMCA-099, ¶8, 336 P.3d 436. “Unsubstantiated

statements that the assessment is incorrect cannot overcome the presumption of correctness.” See

MPC Ltd. v. N.M. Taxation & Revenue Dep’t, 2003-NMCA-021, ¶13, 133 N.M. 217, 62 P.3d 308;

See also Regulation 3.1.6.12 NMAC. If a taxpayer presents sufficient evidence to rebut the

presumption, then the burden shifts to the Department to re-establish the correctness of the

assessment. See MPC, 2003-NMCA-021, ¶13.

Withholding Tax, Penalty, and Interest.

In the Matter of Diamond T U.S. Mail Services, Inc.
Page 9 of 22
Although the underlying assessment imposed a nominal amount of withholding tax and

associated interest and penalty, Taxpayer did not present any evidence intended to rebut the

presumption of correctness of that portion of the assessment. To the extent Taxpayer intended to

protest that part of the assessment, its protest should be denied.

Gross Receipts Tax.

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

receipts of any person engaged in business. See NMSA 1978, Section 7-9-4 (2017). The Gross

Receipts and Compensating Tax Act establishes a presumption that all receipts of a person

engaged in business are taxable. See NMSA 1978, Section 7-9-5 (2002). “Engaging in business”

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

indirect benefit.” See NMSA 1978, Section 7-9-3.3 (2003). The term “gross receipts” is defined at

NMSA 1978, Section 7-9-3.5 (A) (1) (2007) to mean:

the total amount of money or the value of other consideration
received from selling property in New Mexico, from leasing or
licensing property employed in New Mexico, from granting a right
to use a franchise employed in New Mexico, from selling services
performed outside New Mexico, the product of which is initially
used in New Mexico, or from performing services in New Mexico.

The term “service” is defined to mean “all activities engaged in for other persons for a

consideration, which activities involve predominantly the performance of a service as

distinguished from selling or leasing property.” See NMSA 1978, Section 7-9-3 (M). The evidence

in this protest established that Taxpayer was providing services in New Mexico and for that reason,

receipts derived from providing those services were taxable as gross receipts.

However, a taxpayer may also avail itself of any number of potentially applicable

exemptions or deductions. If a taxpayer asserts entitlement to an exemption or deduction from

gross receipts, then the burden is on the taxpayer to prove the entitlement. See Pub. Serv. Co. v.

In the Matter of Diamond T U.S. Mail Services, Inc.
Page 10 of 22
N.M. Taxation & Revenue Dep’t, 2007-NMCA-050, ¶32, 141 N.M. 520, 157 P.3d 85. See also

Till v. Jones, 1972-NMCA-046, 83 N.M. 743, 497 P.2d 745. “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.” See Sec. Escrow Corp. v. State Taxation &

Revenue Dep’t, 1988-NMCA-068, ¶8, 107 N.M. 540, 760 P.2d 1306; See also Wing Pawn Shop

v. Taxation & Revenue Dep’t, 1991-NMCA-024, ¶16, 111 N.M. 735, 809 P.2d 649; See also

Chavez v. Comm’r of Revenue, 1970-NMCA-116, ¶7, 82 N.M. 97, 476 P.2d 67.

Easing Taxpayer’s burden in this protest was the fact that the Department did not contest

the deductibility of receipts under NMSA 1978, Section 7-9-55. Rather, the primary dispute

revolved around the breadth of the deduction. In other words, Taxpayer argued that all of its

receipts were in interstate commerce because its trucks crossed state boundaries to and from New

Mexico. The Department argued that the amount of the deduction should be measured by

employing Regulation 3.2.213.10 B NMAC, consistent with the prior ruling in Decision and Order

17-02.

Regulation 3.2.213.10 B (1) NMAC provides that a person who holds a contract for the

transportation of United States mail from points within New Mexico to other points outside of

New Mexico may deduct a portion of gross receipts which were derived from transactions in

interstate commerce. Regulation 3.2.213.10 B (2) NMAC goes on to establish the method by which

the deduction should be calculated. The total receipts from the contract are to be multiplied by a

fraction, the numerator of which is the total number of delivery points in New Mexico and the

denominator of which is the total number of delivery points. The term “delivery point” is used to

denote any point where mail is required to be delivered under the contract.

In the Matter of Diamond T U.S. Mail Services, Inc.
Page 11 of 22
Taxpayer presented the testimony of an expert witness to establish that all of Taxpayer’s

receipts were in interstate commerce. However, the Hearing Officer did not find the expert’s

testimony to be particularly helpful or enlightening to the issues at hand. Instead, the most

informative piece of evidence consisted of the HCR Schedule Information admitted as Taxpayer

Exhibit 2, which although unassuming at first glance, is bursting with all the information necessary

to calculate the amount of the deduction to which Taxpayer might be entitled under NMSA 1978,

Section 7-9-55 and Regulation 3.2.213.10 NMAC.

Taxpayer Exhibit 2 revealed that Taxpayer is scheduled to complete a total of 4,711.20

trips per year to and from Lubbock, Texas, as well as 3,939.91 intrastate trips which originate and

conclude in New Mexico. During its performance of those trips, Taxpayer will make no less than

11,461.49 stops in New Mexico, and 2,350.03 stops in Texas. The total number of stops is

13,811.52.

Applying a variation of the formula contained in Regulation 3.2.213.10 NMAC, the

Department identified a deductible percentage by multiplying Taxpayer’s total receipts by a

fraction, in which it concluded that the total number of delivery points in Texas should be the

denominator, and the total number of delivery points in New Mexico and Texas would represent

the numerator. Accordingly, it multiplied Taxpayer’s receipts by 1/8 or 12.5 percent.

However, the Hearing Officer observed that the Department’s evaluation of Taxpayer

Exhibit 2 was oversimplified because it did not consider the frequencies of the various trips or the

individual stops that each trip required. Considering stops along each trip is significant because

those represent “delivery points” which according to the regulation denote “any point at which

mail is required, by contract, to be delivered.”

Reevaluating Taxpayer Exhibit 2 with these factors in mind, and employing the formula

In the Matter of Diamond T U.S. Mail Services, Inc.
Page 12 of 22
provided in Regulation 3.2.213.10 B (2) NMAC, the Hearing Officer determined that the taxable

portions of receipts derived from Taxpayer’s services should be calculated by multiplying its

receipts by a fraction, the numerator of which is the total number of delivery points in New Mexico

(11,461.49) and the denominator of which is the total number of delivery points (13,811.52). The

result of 11,461.49/13,811.52 is .83, or 83 percent. See Regulation 3.2.213.10 B (2) NMAC. The

difference, or 17 percent, represents the amount of the deduction from receipts in interstate

commerce under NMSA 1978, Section 7-9-55.

Taxpayer argued in Decision and Order 17-02 that Regulation 3.2.213.10 NMAC did not

apply because the regulation makes specific reference to “star route contractors[,]” and because

Taxpayer provided service under a HCR contract or a Highway Contract Route, the regulation was

not applicable. Taxpayer does not raise that argument in the current protest, but argues instead that

the same regulation is only applicable to the delivery of mail from points within New Mexico to

points outside New Mexico. Taxpayer’s perception of the rule is nonsensical because the end result

of that interpretation might be that mail transported from New Mexico to Texas is deductible in

interstate commerce, with the Department remaining silent with respect to the transportation of

mail from Texas to New Mexico, implying a policy that perhaps such receipts are not deductible

in interstate commerce. Not only does that interpretation defy logic and common sense, but it also

tends to contradict the result that Taxpayer seeks in its protest.

Rather, NMSA 1978, Section 7-9-55, the statute which Regulation 3.2.213.10 B (2) NMAC

implements, simply makes reference to interstate commerce, and does not distinguish commerce

departing New Mexico from commerce entering New Mexico. Although the Court of Appeals did

not engage in an in-depth comprehensive analysis of the regulation, it had some opportunity to

consider its application in similar facts involving the same parties, and did not disapprove of its

In the Matter of Diamond T U.S. Mail Services, Inc.
Page 13 of 22
application in the manner described herein. See New Mexico Taxation and Revenue Dep’t. v.

Diamond T US Mail Services, No. A-1-CA-36165 (N.M. Ct. App. September 20, 2017) (non-

precedential). The relevant facts establishing the applicability of Regulation 3.2.213.10 B (2)

NMAC remain unchanged since entry of Decision and Order 17-02 and the Court’s summary

disposition in No. A-1-CA-36165.

Nevertheless, in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977), the United

States Supreme Court established a four-part test to determine whether a state’s attempts at

taxation of multijurisdictional corporations conducting business and generating income in multiple

states impermissibly interferes with the Commerce Clause. That four part test is (1) whether there

is a substantial nexus between a taxpayer and the taxing State; (2) whether the tax is fairly

apportioned; (3) whether the tax discriminates against interstate commerce; and (4) whether the

tax is fairly related to the services provided by the State. Id.

Taxpayer did not address Complete Auto. However, the Hearing Officer was persuaded

that the evidence clearly establishes that Taxpayer had substantial nexus in New Mexico because

it was headquartered in New Mexico. See Taxpayer Exhibits 2 – 6 (each providing Taxpayer’s

address in Roswell, New Mexico). Moreover, the formula provided at Regulation 3.2.213.10 B (2)

NMAC fairly apportions tax in a manner that does not discriminate against foreign commerce, and

it is fairly related to the services provided by the state.

As previously recognized, this is the second time addressing this issue involving these

parties in this forum. The significant difference this time around is that Taxpayer has provided

sufficient information to apply the formula in Regulation 3.2.213.10 B (2) NMAC. In doing so,

the Hearing Officer finds that Taxpayer’s deduction from receipts should be 17 percent, rather than

12.5 percent as originally calculated by the Department.

In the Matter of Diamond T U.S. Mail Services, Inc.
Page 14 of 22
The Hearing Officer also considered whether the deduction provided at NMSA 1978,

Section 7-9-56 might be applicable. Taxpayer did not specifically address the potential relevance

of this deduction, but the Hearing Officer will address several concerns with regard for its usage,

and the evidence that could be pertinent to its hypothetical application. Section 7-9-56 provides

that “[r]eceipts from transporting persons or property from one point to another in this state may

be deducted from gross receipts when such persons or property, including any special or extra

service reasonably necessary in connection therewith, is being transported in interstate or foreign

commerce under a single contract.”

Establishing an entitlement to a deduction under Section 7-9-56 (A), required that Taxpayer

prove three elements: 1) the receipts must be from transporting persons or property from one point

to another in New Mexico; 2) the transportation must have been in interstate commerce; and 3) the

transportation must have been under a single contract. See McKinnley Ambulance Serv. v. Bureau

of Revenue, 92 N.M. 599, 592 P.2d 515 (Ct.App.1979). Since the evidence required to establish

entitlement to a deduction under Section 7-9-56 and McKinnley differs from the evidence required

to establish a deduction under Section 7-9-55 and Regulation 3.2.213.10 B (2) NMAC, evidence

viewed as sufficient for establishing entitlement to one may not necessarily be sufficient for

establishing entitlement to the other.

Mr. Torrez and his expert witness emphasized that Taxpayer’s compensation under the

contract was “fixed rate”, meaning Taxpayer was compensated solely on the number of miles it

traveled. This distinction is significant for the purpose of evaluating Section 7-9-56 because it

demonstrates that Taxpayer’s receipts were not necessarily derived from delivering property

between points in New Mexico, but rather, for making trips at regularly scheduled intervals. In

other words, Taxpayer would be compensated whether its trucks were empty or chockfull of mail

In the Matter of Diamond T U.S. Mail Services, Inc.
Page 15 of 22
suggesting that NMSA 1978, Section 7-9-56 is not applicable.

Even if Section 7-9-56 were potentially applicable, despite the foregoing observation, the

Hearing Officer is nevertheless unpersuaded that Taxpayer’s evidence establishes entitlement to

the deduction, thereby rebutting the statutory presumption of correctness.

Unlike consideration of Section 7-9-55, which refers generally to interstate commerce,

Section 7-9-56 specifically references a contract, which the Hearing Officer considers to be an

essential component for establishing entitlement to the deduction. However, the actual contract

was not admitted. Rather, the document that the parties referred to as “the contract” appeared to

derive from a solicitation for proposals to provide services to the U.S. Postal Service. [See

Taxpayer Exhibit 1]. Although Mr. Torrez testified that the terms and conditions contained in

Taxpayer Exhibit 1 were the same as those contained in the actual contract, the Hearing Officer

was not persuaded that it was reasonable to rely on that exhibit to surmise the material terms of

the actual contract.

If a taxpayer asserts that the terms of a contract are material to the protest, then the best

evidence of those terms is the contract itself, and it is incumbent on a taxpayer to present its best

evidence. Otherwise, relying on Taxpayer Exhibit 1 to surmise the terms of the contract would

require some degree of speculation and conjecture, in which the Hearing Officer declines to

engage.

Moreover, the Hearing Officer found Taxpayer’s testimonial evidence on points potentially

relevant to this deduction to be fairly vague, and even contradictory. Mr. Torrez seemed to

emphasize that Taxpayer was in the business of transporting mail from Lubbock to New Mexico

only, and he did not specifically address whether Taxpayer transported mail between locations in

New Mexico or from New Mexico back to Texas. Meanwhile, the HCR Schedule Information

In the Matter of Diamond T U.S. Mail Services, Inc.
Page 16 of 22
suggests that Taxpayer did engage in intrastate transportation of mail in New Mexico, in addition

to the transportation of mail from New Mexico back to Texas. For example, refer to Trip Numbers

1, 2, 3, 4, 5, 6, 501, 502, and 615 which originate and conclude in New Mexico, suggesting that

Taxpayer’s business involved more than what Mr. Torrez described. There are also a number of

trips in which Taxpayer makes scheduled stops in New Mexico on its way back to Lubbock,

suggesting that it was picking up cargo for delivery back to Texas, which Mr. Torrez’s testimony

seemed to refute. For example, refer to Trip Numbers 505, 602, 604, 606, 610, and 622. See

Taxpayer Exhibit 2.

However, it is again worth noting that Taxpayer did not raise Section 7-9-56 as applicable

in this protest, and for that reason, probably did not concentrate its evidence on establishing an

entitlement to that deduction. Accordingly, this observation is not intended, nor should it be

perceived as criticizing Taxpayer. In contrast, it is intended to clarify that the Hearing Officer

considered the potential application of Section 7-9-56 in light of the evidence on the record, but

remained unpersuaded that it should apply, especially in light of the general rule that deductions

must be narrowly construed. See Corr. Corp. of Am. of Tenn. v. State, 2007-NMCA-148, ¶17 & ¶29,

142 N.M. 779

In conclusion, the Hearing Officer finds that the deduction provided at Section 7-9-56 is

not applicable, and even if it were, Taxpayer’s evidence was insufficient to establish entitlement

to it.

Penalty and Interest.

Although Taxpayer devoted no effort to disputing interest and penalties, they should

nevertheless be acknowledged. When a taxpayer fails to make timely payment of taxes due to the

state, “interest shall be paid to the state on that amount from the first day following the day on

In the Matter of Diamond T U.S. Mail Services, Inc.
Page 17 of 22
which the tax becomes due...until it is paid.” See NMSA 1978, Section 7-1-67 (2007). Under the

statute, regardless of the reason for non-payment of the tax, the Department has no discretion in

the imposition of interest, as the statutory use of the word “shall” makes the imposition of interest

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

146 N.M. 24, 206 P.3d 135 (statutory use of the word shall indicates mandatory requirement). The

language of Section 7-1-67 also makes it clear that interest begins to run from the original due date

of the tax until the tax principal is paid in full. The Department has no discretion under Section 7-

1-67 and must assess interest against Taxpayer.

Under NMSA 1978, Section 7-1-69 (2007), when a taxpayer fails to pay taxes due to the

state because of negligence or disregard of rules and regulations, but without intent to evade or

defeat a tax, by its use of the word “shall,” civil penalty must be added to the assessment. As

discussed above, the statute’s use of the word “shall” makes the imposition of penalty mandatory

in all instances where a taxpayer’s actions or inactions meet the legal definition of “negligence.”

Regulation 3.1.11.10 NMAC defines negligence in three separate ways: (A) “failure to

exercise that degree of ordinary business care and prudence which reasonable taxpayers would

exercise under like circumstances;” (B) “inaction by taxpayer where action is required”; or (C)

“inadvertence, indifference, thoughtlessness, carelessness, erroneous belief or inattention.” In this

case, Taxpayer’s failure to pay gross receipts tax meets the legal definition of negligence as defined

under Regulation 3.1.11.10 NMAC and Taxpayer presented no evidence or argument to rebut that

finding. Since the Department’s assessment of penalty and interest is presumed correct, and the

Taxpayer did not offer evidence or argument to rebut that presumption, the Department’s

assessment of penalty and interest was appropriate.

Conclusion.

In the Matter of Diamond T U.S. Mail Services, Inc.
Page 18 of 22
For the reasons stated herein, Taxpayer’s protest is GRANTED to the extent it should be

entitled to a deduction representing 17 percent of its gross receipts derived from providing services

illustrated in the HCR Schedule Information, in lieu of 12.5 percent. The remainder of Taxpayer’s

protest is DENIED.

CONCLUSIONS OF LAW

A. Taxpayer filed a timely, written protest to the Department’s Notice of Assessment of

Taxes and Demand for Payment issued under Letter ID No. L1167412528, and jurisdiction lies over

the parties and the subject matter of this protest.

B. A hearing was timely set and held within 90-days of the Department’s

acknowledgment of receipt of a valid protest under NMSA 1978, Section 7-1B-8 (2015).

C. Under NMSA 1978, Section 7-9-5 (2002), Taxpayer’s gross receipts derived from

engaging in business in New Mexico are presumed taxable.

D. Except as provided in the discussion above, pertinent to the percentage of the

Taxpayer’s deduction, Taxpayer did not overcome the presumption of correctness that attached to the

assessment under NMSA 1978, Section 7-1-17 (C) (2007) and Archuleta v. O'Cheskey, 1972-

NMCA-165, 84 N.M. 428, 504 P.2d 638.

E. Taxpayer had the burden to establish entitlement to a deduction under NMSA 1978,

Section 7-9-55 or Section 7-9-56.

F. Deductions must be narrowly construed. See Corr. Corp. of Am. of Tenn. v. State,

2007-NMCA-148, ¶17 & ¶29, 142 N.M. 779.

G. Taxpayer is entitled to a deduction from gross receipts under NMSA 1978, Section 7-

9-55, as calculated pursuant to Regulation 3.2.213.10 B (2) NMAC.

H. Taxpayer is not entitled to a deduction from gross receipts under NMSA 1978, Section

In the Matter of Diamond T U.S. Mail Services, Inc.
Page 19 of 22
9-9-56.

I. Under NMSA 1978, Sec. 7-1-67 (2007), Taxpayer is liable for accrued interest under

the assessment. Interest continues to accrue until the tax principal is satisfied.

J. Under NMSA 1978, Sec. 7-1-69 (2007), Taxpayer is liable for civil negligence

penalty under the negligence definition found under Regulation 3.1.11.10 (C) NMAC

K. Taxpayer did not establish non-negligence under Regulation 3.1.11.11 NMAC.

For the foregoing reasons, Taxpayer’s protest is GRANTED in part and DENIED in part.

Taxpayer is entitled to a deduction equivalent to 17 percent instead of 12.5 percent of its gross

receipts from services provided pursuant to Taxpayer Exhibit 2. The remainder of Taxpayer’s

protest is denied. IT IS THEREFORE ORDERED that the Department recalculate Taxpayer’s

liability based on the percentage indicated herein (17%). IT IS FURTHER ORDERED that

Taxpayer be liable for, and remit payment to the Department in that amount.

DATED: September 4, 2018.

Chris Romero
Hearing Officer
Administrative Hearings Office
Post Office Box 6400
Santa Fe, NM 87502

In the Matter of Diamond T U.S. Mail Services, Inc.
Page 20 of 22
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 timely 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.

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 proper with the Court of Appeals,

which occurs within 14-days of the Administrative Hearings Office receipt of the docketing

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

In the Matter of Diamond T U.S. Mail Services, Inc.
Page 21 of 22
CERTIFICATE OF SERVICE

On September 4, 2018, a copy of the foregoing Decision and Order was submitted to the

parties listed below in the following manner:

First Class Mail Interagency Mail

INTENTIONALLY BLANK

John D. Griego
Legal Assistant
Administrative Hearings Office
P.O. Box 6400
Santa Fe, NM 87502

In the Matter of Diamond T U.S. Mail Services, Inc.
Page 22 of 22