A for-profit company took in a non-profit medical cannabis producer's revenue as 'management fees' — does it owe New Mexico gross receipts tax on that money?

Plain-English summary

The protest was denied — the full assessment stands. Aspen Management Company, Inc. was a for-profit corporation created by Erik Briones, who also ran a non-profit medical cannabis producer. New Mexico's Department of Health requires medical-cannabis producers to be organized as non-profits under the Lynn and Erin Compassionate Use Act, and Mr. Briones set up Aspen to do the things a for-profit could do that the non-profit producer couldn't (or, given cannabis's federal status, found hard) — hold leases, use banking and payroll services, and distribute profits to investors.

In practice, the non-profit producer generated the revenue and transferred it to for-profit Aspen, where it was booked as "management fees." After an audit, the Department found $4,469,697.08 in under-reported gross receipts for June 2013–December 2017 and assessed Aspen $320,359.17 in gross receipts tax, $62,957.91 in penalty, and $31,156.10 in interest — $414,473.18 total.

Aspen made two main arguments, and Hearing Officer Chris Romero rejected both.

1. "We're really one company, so the fees are disguised dividends/wages." Rejected. Aspen argued that it and the producer were "in substance, one self-managed company" and that the management fees were "a mere accounting device, devoid of substance" that, consolidated, would be non-taxable dividends or wages. But Aspen's formal protest, its and the producer's tax filings, its internal accounting, prior sworn statements, and an actual management agreement all described Aspen as earning receipts for management services. At the hearing, Mr. Briones reversed course and testified Aspen never really performed services and the management agreement was meant to create "the illusion that Aspen was a management company" — an admission the Hearing Officer found undercut his credibility rather than helping. There is no New Mexico authority for treating a for-profit and a non-profit as a single "for-profit non-profit" entity, and doing so would collide with the laws governing each. Under TPL, "taxation is the rule," and a taxpayer must show it is clearly entitled to a deduction that is clearly and unambiguously expressed in the statute.

2. The Section 7-9-69 "services to an affiliate at cost" deduction. Rejected on two independent grounds. Section 7-9-69 lets a business deduct receipts for administrative, managerial, accounting, and customer services it performs for an affiliate on a non-profit or cost basis.

• Not an "affiliate." "Affiliate" requires "control," defined as at least 50% equity ownership. A non-profit corporation legally has no equity owners, so the producer could never be Aspen's affiliate. Aspen conceded this but called it "overly technical" form-over-substance. The Hearing Officer disagreed: deductions are construed against the taxpayer (Sutin), and the plain statutory language disqualified Aspen.
• Not shown to be "at cost." Even overlooking the affiliate problem, Aspen never proved the services were provided at cost. Mr. Briones testified there were no costs at all — but if costs were zero, then Aspen's $4.8 million-plus in receipts necessarily exceeded cost, so the services weren't provided "on a non-profit or cost basis." Aspen bore the burden of establishing its true costs (TPL) and didn't.

The Hearing Officer also worked through, and rejected, every other exclusion or exemption Aspen gestured at: the agency-capacity exclusion (Section 7-9-3.5(A)(3)(f)) failed for lack of any disclosure (asked whether the Aspen–producer relationship was disclosed to third parties, Mr. Briones would only say "they never asked"); the wages exemption (Section 7-9-17) doesn't apply because the receipts weren't "receipts of employees"; the interest-and-dividends exemption (Section 7-9-25) doesn't fit; and Section 7-9-75 was abandoned by not being pursued at hearing.

Result: protest DENIED. Aspen remains liable for the tax principal and penalty, plus accrued interest.

What this means for you

Businesses that route another entity's revenue through a "management fee"

Calling a transfer a "management fee" makes it receipts for services, which New Mexico presumes taxable. You can't later recharacterize the same money as non-taxable dividends or wages just because it would be cheaper — especially when your contracts, tax returns, and books all called it management-service income. How you consistently document and report a payment largely determines how it's taxed.

Anyone counting on the Section 7-9-69 affiliate deduction

The 7-9-69 deduction for shared/administrative services is narrow. Two elements are easy to miss: the entities must be "affiliates" (50%+ common equity ownership), and the services must actually be provided at cost (or non-profit basis). A structure involving a non-profit — which has no equity owners — generally can't satisfy the affiliate test at all. And "at cost" requires real cost accounting; claiming there were no costs defeats the deduction, because any positive receipt then exceeds cost.

Cannabis and other heavily regulated operators

Structuring around a regulatory requirement (here, the non-profit-producer rule) has tax consequences you're stuck with. Creating a separate for-profit entity to hold the money means that entity has taxable gross receipts. Substance-over-form arguments cut both ways, and New Mexico applies the plain statute; you don't get to keep the benefits of two separate entities while being taxed as one.

The credibility cost of changing your story

Aspen's case was badly damaged when its principal admitted a long-running arrangement was an "illusion." Prior sworn statements, filings, and contracts that contradict your hearing testimony don't just lose an argument — they undermine the trustworthiness of your whole case.

Common questions

Q: A non-profit sent its revenue to my for-profit company as a "management fee." Is that taxable in New Mexico?
A: Yes — as receipts for services, it's presumed subject to gross receipts tax. You'd need to prove entitlement to a specific deduction or exemption, and here none applied.

Q: Doesn't Section 7-9-69 let affiliates provide management services tax-free?
A: Only on a non-profit or cost basis, and only between "affiliates" — entities with 50%+ common equity ownership. A non-profit has no equity owners, so it usually can't be an affiliate. And you must actually prove the services were provided at cost.

Q: Can I argue that two related entities are really "one company" for tax purposes?
A: Not the way Aspen tried. There's no recognized "for-profit non-profit" hybrid, and New Mexico taxes based on the plain statute and how you documented the transactions — not on a consolidated-substance theory unsupported by authority.

Q: Why did admitting the arrangement was an "illusion" hurt rather than help?
A: Because it contradicted Aspen's own prior filings, sworn statements, and management agreement. That inconsistency reduced the president's credibility and the weight of all the evidence relying on his testimony.

Q: Can I rely on this decision for my own situation?
A: Not directly. A Decision and Order resolves one taxpayer's protest on its specific facts and is not a general ruling or advisory opinion of the Department. It does illustrate how New Mexico treats inter-entity "management fees" and the strict limits of the Section 7-9-69 deduction.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-9-5 (2019) — presumption that all business receipts are taxable
• NMSA 1978, § 7-9-3.3 (2019) — "engaging in business" defined
• NMSA 1978, § 7-9-3.5(A)(1) (2019) — "gross receipts" includes receipts from performing services in New Mexico; § 7-9-3.5(A)(3)(f) — exclusion for amounts received solely on behalf of another in a disclosed agency capacity
• NMSA 1978, § 7-9-69 — deduction for administrative/managerial/accounting/customer services for an affiliate on a non-profit or cost basis (defines "affiliate," "business entity," and "control" = 50%+ equity)
• NMSA 1978, § 7-9-17 — exemption for employees' wages; § 7-9-25 — exemption for interest and dividends; § 7-9-75 — deduction for certain services performed on manufactured product (abandoned)
• NMSA 1978, § 7-1-17(C) (2007) — assessment presumed correct; § 7-1-3(X) (2013) — "tax" includes penalty and interest; § 7-1-8 (2017) — taxpayer confidentiality
• NMSA 1978, § 7-1B-8 (2019) — hearing within 90 days
• NMSA 1978, § 26-2A-2 (2007) — Lynn and Erin Compassionate Use Act purpose; § 53-8-1 et seq. — Nonprofit Corporation Act
• Regulation 7.34.4.8 NMAC — Department of Health rule requiring cannabis producers to be non-profit corporations
• Regulation 3.1.6.13 NMAC — presumption of correctness extends to penalty and interest; 3.2.105.7 NMAC — wage exemption; 22.600.1.20(C) NMAC — independence of hearing officers

Cases:

• TPL, Inc. v. N.M. Taxation & Revenue Dep't, 2003-NMSC-007, 133 N.M. 447 (taxation is the rule; taxpayer must be clearly entitled to a clearly and unambiguously expressed deduction)
• Sutin, Thayer & Browne v. N.M. Taxation & Revenue Dep't, 1985-NMCA-047, 104 N.M. 633 (deductions and exemptions construed against the taxpayer)
• Sacred Garden, Inc. v. N.M. Taxation & Revenue Dep't, 2021-NMCA-038, 495 P.3d 576 (legislative intent behind the Compassionate Use Act and medical-cannabis tax treatment)
• Gemini Las Colinas, LLC v. N.M. Taxation & Revenue Dep't, 2023-NMCA-__, No. A-1-CA-38672 (presumption of correctness and burden framework)
• Archuleta v. O'Cheskey, 1972-NMCA-165, 84 N.M. 428 (taxpayer bears the burden to rebut the presumption)
• Chevron U.S.A., Inc. v. State ex rel. Dep't of Taxation & Revenue, 2006-NMCA-050, 139 N.M. 498 (agency regulations given substantial weight)
• N.M. Taxation & Revenue Dep't v. Casias Trucking, 2014-NMCA-099 (countervailing evidence to rebut the presumption)
• MPC Ltd. v. N.M. Taxation & Revenue Dep't, 2003-NMCA-021, 133 N.M. 217 (receipts include payments received for one's own account)
• Comer v. State Tax Comm'n, 1937-NMSC-032, 41 N.M. 403 (gross receipts reaches all activities for direct or indirect benefit)
• Dell Catalog Sales L.P. v. N.M. Taxation & Revenue Dep't, 2009-NMCA-001, 145 N.M. 419 (statutory interpretation: plain meaning, harmonious whole)
• Curry v. Great Nw. Ins. Co., 2014-NMCA-031 (absence of cited authority implies none exists)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Aspen Management Company Inc.
• Decision PDF: D&O 23-15

Original ruling text

1 STATE OF NEW MEXICO
2 ADMINISTRATIVE HEARINGS OFFICE
3 TAX ADMINISTRATION ACT

4 IN THE MATTER OF THE PROTEST OF
5 ASPEN MANAGEMENT COMPANY INC.
6 TO ASSESSMENT ISSUED UNDER
7 LETTER ID NO. L0899948336

8 v. Case Number 18.12-326A, D&O #23-15

9 NEW MEXICO TAXATION AND REVENUE DEPARTMENT

10 DECISION AND ORDER

11 On July 24, 2023, Hearing Officer Chris Romero, Esq., of the Administrative Hearings

12 Office conducted an administrative hearing on the merits of the tax protest of Aspen

13 Management Company, Inc. (hereinafter “Aspen” or “Taxpayer”) pursuant to the Tax

14 Administration Act and the Administrative Hearings Office Act. The hearing was conducted in

15 person. The record closed on August 23, 2023.

16 The Administrative Hearings Office is an independent agency tasked with the fair and

17 impartial adjudication of protests under the Tax Administration Act. As explained by Regulation

18 22.600.1.20 C NMAC, the Hearing Officer is not “responsible to or subject to the direction of

19 any officer, employee or agent of the taxation and revenue department[.]” See e.g. Regulation

20 22.600.1 NMAC (2018)

21 Mr. Lewis J. Terr, Esq. appeared in person for Aspen along with Mr. Erik Briones. Staff

22 Attorney, Mr. Richard Pener, Esq., appeared in person representing the opposing party in the

23 protest, the Taxation and Revenue Department (“Department”), and was accompanied by Ms.

24 Mary Griego, protest auditor.

25 Mr. Briones testified for the Taxpayer. Ms. Griego and Ms. Veronica Galewaler testified

26 for the Department. The exhibits in this matter exceed 1,000 pages. Taxpayer Exhibit 1 and

In the Matter of the Protest of Aspen Management Co.
Page 1 of 45
1 Department Exhibits A – AAAA and CCCC – IIII were admitted without objection upon

2 stipulation of the parties. Department Exhibit BBBB was admitted over Taxpayer’s objection.1

3 According to the evidence, which will be subsequently discussed in more detail, Aspen is

4 a for-profit corporation established to assist the operations of a non-profit licensed cannabis

5 producer2 (hereinafter “Producer”). The Producer is licensed by the New Mexico Department of

6 Health under the Lynn and Erin Compassionate Use Act (“CUA”). Aspen argues that as a result

7 of the limitations placed on the licensure and operation of licensed cannabis producers in New

8 Mexico under the CUA and the implementing regulations of the New Mexico Department of

9 Health, Aspen was established “as a separate for-profit entity to perform functions that would

10 have been performed by [the Producer] itself if it had been allowed to organize as a for-profit

11 corporation[.]” See Taxpayer’s Closing Argument, Page 2.

12 Given this brief background, Aspen’s main arguments for abatement of the assessment

13 are that: (1) Aspen and the Producer are “in substance, one self-managed company with no need

14 to pay management fees, and a consolidated financial statement would designate as dividends or

15 wages (both deductible from gross receipts) the transfers to Aspen designated as management

16 fees[;]” and (2) “Aspen is an affiliate of [the Producer] providing management services to [the

17 Producer] at cost and entitled to the deduction provided for in [NMSA, 1978 Section] 7-9-69[.]”

18 As explained in greater detail in the subsequent discussion, the Hearing Officer finds

19 based on the evidence and arguments presented that Aspen’s protest should be DENIED for the

1
A comprehensive examination of all exhibits after the hearing revealed the prospect that discrete portions of
Department Ex. BBBB (consisting of 242 pages) included attorney-client communications on the subject of the
relevant audit. See Department Ex. BBBB-169 – BBBB-184. This was not the basis of Aspen’s objection. In any
event, the communications to which this observation applies have apparently been previously disclosed in the First
Judicial District Court for Santa Fe County in D-0101-CV-2018-01560.
2
The identity of the Producer is contained in the record but will not be disclosed in this publicly available Decision
and Order out of an abundance of caution for the confidentiality of taxpayer information including returns and other
potentially confidential information under NMSA 1978, Section 7-1-8 (2017).

In the Matter of the Protest of Aspen Management Co.
Page 2 of 45
1 reasons stated. IT IS DECIDED AND ORDERED AS FOLLOWS:

2 FINDINGS OF FACT

3 The Assessment

4 1. On July 19, 2018, the Department issued a Notice of Assessment and Demand for

5 Payment of Taxes under Letter ID No. L0899948336 to Aspen in the total amount of

6 $414,473.18 which consisted of $320,359.17 in gross receipts tax principal, $62,957.91 in

7 penalty, and $31,156.10 in interest (“Assessment”). [Department Ex. A; Administrative File]

8 2. The Assessment derived from an audit in which the Department computed an

9 “Under Reported Gross Receipts Exception” in the amount of $4,469,697.08 in the reporting

10 period from June 30, 2013 through December 31, 2017. [Department Ex. B-001; Department C-

11 003]

12 Mr. Briones’ Background

13 3. Mr. Erik Briones is the president and CEO of the Producer and Taxpayer. He

14 resides in Tesuque, New Mexico. [Direct Examination of Mr. Briones]

15 4. Mr. Briones grew up in Santa Fe, New Mexico. He has a horticulture degree from

16 New Mexico State University and a landscape architecture degree from Oregon State University.

17 [Direct Examination of Mr. Briones]

18 5. Mr. Briones began his first business during his junior year of high school. He and

19 a friend dug up pinon trees in Rowe Mesa and sold them to interested buyers. That evolved into a

20 landscaping business that “put [him] through college.” [Direct Examination of Mr. Briones]

21 6. After college, Mr. Briones taught horticulture for three years at Cibola High

22 School in Albuquerque, New Mexico while also operating his landscaping business on the side.

23 [Direct Examination of Mr. Briones]

In the Matter of the Protest of Aspen Management Co.
Page 3 of 45
1 7. Mr. Briones’ landscaping business eventually morphed into ownership of Rio

2 Rancho Garden Center in Rio Rancho, New Mexico which he operated for 13 years. [Direct

3 Examination of Mr. Briones]

4 8. During the Great Recession of 2008 and 2009, Mr. Briones observed that “nobody

5 needed a nursery.” Mr. Briones closed the business in 2009. [Direct Examination of Mr. Briones]

6 The Producer

7 9. In 2009, Mr. Briones began to explore the possibility of business in the new area

8 of medical cannabis which had been decriminalized under the CUA. [Direct Examination of Mr.

9 Briones]

10 10. At the time, uncertainties regarding business in medical cannabis, particularly

11 how it was viewed under federal law were concerning and unknown. [Direct Examination of Mr.

12 Briones]

13 11. Around the same period of time, an acquaintance contacted Mr. Briones about

14 serving on the board of an entity which was similarly contemplating engaging in the business of

15 producing medical cannabis. It required the experience of a horticulturalist on its board, which

16 Mr. Briones agreed to fill. [Direct Examination of Mr. Briones]

17 12. Mr. Briones also decided to pursue the possibility of obtaining his own producer

18 license and for six months, dedicated his time to researching and preparing an application for a

19 license. [Direct Examination of Mr. Briones]

20 13. Mr. Briones incorporated the Producer. The initial Certificate of Incorporation

21 was issued on December 14, 2009. [Cross Examination of Mr. Briones; Department Ex. G-002]

22 14. In December of 2010, the Producer’s license was approved and Mr. Briones has

23 been engaged in the business of producing and selling medical cannabis ever since. [Direct

In the Matter of the Protest of Aspen Management Co.
Page 4 of 45
1 Examination of Mr. Briones]

2 15. At all relevant times, the Producer was incorporated as a New Mexico domestic

3 non-profit corporation as required by the New Mexico Department of Health. [Direct

4 Examination of Mr. Briones; Department Ex. D-019; E-003 (No. 2)]

5 16. In response to Aspen’s request to inspect public records, the Department of Health

6 provided documents suggesting that one of its considerations during the promulgation process was

7 the objective that, “Medical cannabis must be affordable to those in need.” [Taxpayer Ex. 1-014,

8 Para. 8]

9 17. In response to Aspen’s request to inspect public records, the Department of Health

10 provided documents suggesting that one of its considerations during the promulgation process was

11 the opinion that, “In order to ensure that distributors are not accused of profiteering, it is

12 recommended that dispensaries ensure transparency, openness, financial accountability, and

13 mechanisms for client feedback. Non-profit incorporation is one way of meeting these criteria.”

14 [Taxpayer Ex. 1-018, Para. 1]

15 18. Producer’s Articles of Incorporation were prepared by an attorney. [Cross

16 Examination of Mr. Briones]

17 19. Article Three of the Producer’s Articles of Incorporation, among other terms,

18 specified:

19 No part of the net earnings of the corporations [sic] shall inure to
20 the benefit of, or be distributable to members, trustees, officers, or
21 other private persons, except that the corporation shall be
22 authorized and empowered to pay reasonable compensation for
23 services rendered and to make payments and distributions in
24 furtherance of the purposes set forth in Article Three hereof. No
25 substantial part of the activities of the corporation shall be the
26 carrying on of propaganda, of otherwise attempting to influence
27 legislation, and the corporation shall not participate in, or intervene
28 in (including the publishing or distribution of statements) any

In the Matter of the Protest of Aspen Management Co.
Page 5 of 45
1 political campaign on behalf of or in opposition to any candidate
2 for public office. Notwithstanding any other provision of these
3 Articles, the corporation shall not carry on any other activities not
4 permitted to be carried on (a) by a corporation exempt form [sic]
5 federal income tax under Section 501(c) (3) of the Internal
6 Revenue Code, or (b) by a corporation, contributions to which are
7 deductible under Section 170(c)(2) of the Internal Revenue Code,
8 or corresponding section of any future tax code.

9 [Department Ex. G-003 – G-004]

10 20. In Response to Requests for Admission, Aspen admitted that the Producer was

11 “technically registered with the Secretary of State as a nonprofit corporation as required by rules

12 of the New Mexico Department of Health.” But it went on to explain that “[t]he nonprofit status

13 is a legal fiction, as [the Producer], is not treated as a nonprofit corporation by the New Mexico

14 Taxation and Revenue Department or any other agency of the state or the federal government.”

15 [Department Ex. 003 (No. 2)]

16 21. The nonprofit corporation under which the Producer engages in business does not

17 have, nor has it ever had, shareholders or equity owners. [Direct Examination of Mr. Briones;

18 Department Ex. E-003 (No. 3); Department Ex. E-008 (No. 6) (“[The Producer] is technically a

19 nonprofit corporation, it is precluded by law from having equity owners, and therefore it has no

20 shareholders.”]

21 22. The Producer is not, nor has it ever been a corporation exempt from federal

22 income tax under Section 501(c) (3) of the Internal Revenue Code. [Re-Direct Examination of

23 Mr. Briones; Department Ex. E-003]

24 23. Mr. Briones recalled the Producer incurring a startup cost of approximately

25 $100,000, but it may have been closer to $130,000. [Direct Examination of Mr. Briones; Cross

26 Examination of Mr. Briones]

27 24. The Producer’s initial license permitted for the cultivation of 90 plants for a fee of

In the Matter of the Protest of Aspen Management Co.
Page 6 of 45
1 $90,000 per year. [Direct Examination of Mr. Briones]

2 25. Startup costs included acquisition of a facility as well as modifying the facility for

3 the purpose of producing medical cannabis. [Direct Examination of Mr. Briones]

4 26. Mr. Briones raised the startup funds by acquiring investments or loans from

5 family and acquaintances with Mr. Briones making the majority investment or loan. [Direct

6 Examination of Mr. Briones; Cross Examination of Mr. Briones]

7 27. Despite federal income tax return filings that might suggest the loans were paid

8 off, Mr. Briones explained his belief that the loans remained outstanding, and that his CPA

9 would be best situated to explain the significance of any federal filings. [Cross Examination of

10 Mr. Briones]

11 28. Mr. Briones has always been the Producer’s majority investor. [Direct

12 Examination of Mr. Briones]

13 29. The Producer’s first harvest was in June or July of 2011. [Direct Examination of

14 Mr. Briones]

15 30. The Producer’s business has expanded naturally without further investment,

16 meaning there has never been a subsequent need to seek additional investment in that the

17 Producer’s business activities have been self-sustaining and self-funding. [Direct Examination of

18 Mr. Briones]

19 31. The Producer also reinvested revenue as it deemed necessary to satisfy its

20 business goals of becoming or maintaining its status as “one of the top companies in New

21 Mexico within the restraints we were operating.” [Re-Direct Examination of Mr. Briones]

22 Aspen Management Company

23 32. In 2013, Mr. Briones started Aspen management seeking a “legal way to

In the Matter of the Protest of Aspen Management Co.
Page 7 of 45
1 distribute dividends.” Mr. Briones described establishing Aspen to “distribute dividends because

2 you cannot distribute a dividend in a non-profit, and nobody owns any kind of equipment, there

3 is no equity stake in a non-profit.” [Direct Examination of Mr. Briones; Department Ex. G-003 –

4 G-004 (“No part of the net earnings of the corporations [sic] shall inure to the benefit of, or be

5 distributable to members, trustees, officers, or other private persons[…]”)]

6 33. Aspen was also established to acquire services that Producer was not able to

7 acquire for itself, including banking services, credit card processing services, and payroll

8 processing services, because providers of such services refused to provide services for a business

9 engaged in an activity that was prohibited under federal law. [Direct Examination of Mr.

10 Briones]

11 34. For example, prior to the establishment of Aspen, the Producer was banned by

12 several banking institutions (approximately nine). At the time, Mr. Briones observed that banks

13 did not initially inquire regarding the nature of the Producer’s business, but once it became

14 known to the institution that the Producer was engaging in the business of producing medical

15 cannabis, the bank would “shut [the Producer] down.” [Cross Examination of Mr. Briones]

16 35. Aspen was incorporated on May 3, 2013 as a for-profit corporation. “The purpose

17 of forming the Corporation [was] for all lawful purposes permitted under the laws of the State of

18 New Mexico, including but not limited to, acquiring and investing in real and personal property

19 and other related assets and providing administrative and operational services to other business

20 entities and all matters ancillary thereto.” [Department Ex. E-119; F-003]

21 36. Aspen was the entity that allowed the Producer to exist as a normal business, and

22 which enabled the Producer to avoid operating as a cash-only endeavor. It was able to acquire

23 bank accounts, payroll services, credit card processing services, enter into leases and perform

In the Matter of the Protest of Aspen Management Co.
Page 8 of 45
1 other business activities that had been difficult for the Producer in its area of business. [Direct

2 Examination of Mr. Briones]

3 37. In contrast to previous experience, when Aspen assumed the responsibility of

4 establishing bank accounts, it only disclosed that it was a “management” company. It never

5 disclosed it was a management company for an entity engaged in producing cannabis or that

6 banking services concerned revenue derived by Producer because “they (the banks) never

7 asked.” [Cross Examination of Mr. Briones]

8 38. The Producer and Aspen were parties to a “zero sum” management agreement in

9 which Aspen did not assertedly charge fees to the Producer. [Direct Examination of Mr. Briones;

10 Department Ex. E-053]

11 39. The management agreement provides that, “Aspen is an independent contractor.

12 Nothing herein shall be deemed to be an employment, partnership, joint venture or other similar

13 relationship between [the Producer] and Aspen. Aspen shall be responsible for all income and

14 other taxes, fees and expenses imposed directly or indirectly for its services pursuant to this

15 Agreement and all compensation received hereunder. Aspen is responsible for all licensing

16 required to provide the services contemplated under this Agreement.” [Department Ex. E-053 –

17 E-054 (Para. 3.1)]

18 40. Despite Mr. Briones’ denial that Aspen received any fees for its services, Aspen

19 previously described its relationship with the Producer as follows:

20 Because Aspen and [the Producer] operate functionally as one
21 company, Aspen Management, Inc. did not receive funds from [the
22 Producer] in the same way as would a service-providing company
23 that was unrelated to [the Producer]. Aspen has at all times been
24 primarily responsible for paying expenses incurred by [the
25 Producer], and it pays those expenses with funds derived from
26 sales by [the Producer]. Therefore, fund “transfers” from [the
27 Producer] to Aspen are not properly classified as “payments” to

In the Matter of the Protest of Aspen Management Co.
Page 9 of 45
1 Aspen. Aside from monies “received” by Aspen to pay expenses of
2 [the Producer], payments by [the Producer] to Aspen are for
3 managerial and accounting services provided by Aspen and are
4 based upon Aspen’s cost of providing such services. Aspen’s costs
5 consist of the salaries of the employees of Aspen and a return to
6 Aspen’s equity owners for the money they provided to start [the
7 Producer].

8 [Department Ex. E-010 (Answer to Int. No. 10 (Emphasis Added);
9 Department E-0176]

10 41. Mr. Briones explained, “the management agreement was the documentation of the

11 vehicle to put in place the illusion that Aspen was a management company overseeing the

12 operations of [the Producer].” He denied that the management agreement was a “sham” but

13 acknowledged it was a necessary aspect of engaging in the business of producing cannabis.

14 [Direct Examination of Mr. Briones; Cross Examination of Mr. Briones; Department Ex. E-053]

15 42. Mr. Briones explained his perception that the non-profit Producer and for-profit

16 Aspen were always one business. “[The Producer] would technically make the money, but then

17 all the money would get shifted to Aspen to make payroll, pay bills, because Aspen had the bank

18 account.” [Direct Examination of Mr. Briones]

19 43. All receipts, except for cash consumed by the Producer for business expenses,

20 was transferred to Aspen. [Direct Examination of Mr. Briones]

21 44. Transfers from the Producer to Aspen occurred on a daily basis. [Direct

22 Examination of Mr. Briones]

23 Relationships Among the Producer, Aspen, and the Investors

24 45. At no relevant time has Aspen provided services for any other entities, except the

25 Producer. [Department Ex. E-012 (No. 12)]

26 46. Although Aspen is a separate and distinct entity from the Producer, Mr. Briones

27 emphasized that the non-profit corporation and the for-profit corporation operated in unison.

In the Matter of the Protest of Aspen Management Co.
Page 10 of 45
1 [Department Exs. H; D-017; Cross Examination of Mr. Briones]

2 47. Despite the views of the Producer or Aspen that their structures and relationship

3 were required by law, and that Mr. Briones had no other choice about how to structure his

4 businesses, other similarly situated businesses have employed other strategies for their operation.

5 [Department Ex. BBBB-044 – BBBB-046]

6 48. At no relevant time during the audit period did Aspen have an equity ownership in

7 the Producer that: (a) represented at least 50 percent of the total voting power of the Producer;

8 (2) that had a value equal to at least 50 percent of the total equity of the Producer. [Department

9 Ex. E-004; Nos. 5 - 6)]

10 49. At no relevant time during the audit period did the Producer have an equity

11 ownership in Aspen that: (a) represented at least 50 percent of the total voting power of Aspen;

12 (2) that had a value equal to at least 50 percent of the total equity of Aspen. [Department Ex. E-

13 004; Nos. 7 – 8)]

14 50. At no relevant time during the audit were Aspen and the Producer under the

15 common control of another business entity that had and equity ownership: (1) in both entities

16 that represented at least 50 percent of the total voting power of Aspen and 50 percent of the total

17 voting power of the Producer; (2) in both entities that had a value equal to at least 50 percent of

18 the total equity of Aspen and 50 percent of the total equity of the Producer. [Department Ex. E-

19 005; No. 9 – 10)]

20 51. Aspen acknowledges its relationship with the Producer precludes it from

21 complying “with the ownership requirement of [Section 7-9-69] and regulation notwithstanding

22 the degree of mutual control or any other factors showing the two companies are inextricably

23 intertwined.” [Department Ex. E-013 – E-014 (No. 16)]

In the Matter of the Protest of Aspen Management Co.
Page 11 of 45
1 52. Certain limitations placed on Producer as a non-profit were undesirable. For

2 example, it was prohibited from paying dividends to “satisfy the investors.” [Direct Examination

3 of Mr. Briones]

4 53. Because Producer was not permitted to distribute profits in any form, it

5 transferred a portion of its net earnings to Aspen so that Aspen could distribute the Producer’s

6 profit to private individuals who invested in establishing the Producer. [Direct Examination of

7 Mr. Briones; Cross Examination of Mr. Briones]

8 54. The total shareholder distributions were intended to provide a reasonable return

9 on investment. Typical investors want a maximum return on their investment. [Cross

10 Examination of Mr. Briones]

11 55. Despite the occasional reference to “shareholders” or “equity,” as a non-profit, the

12 Producer neither had shareholders nor equity. [Cross Examination of Mr. Briones]

13 56. Total shareholder distributions to the Producer’s investors paid by Aspen from

14 2013 through 2017 totaled approximately $2,488,594 to Mr. Briones and other individuals.

15 [Department Exs. AA – FF; Cross Examination of Mr. Briones]

16 57. Mr. Briones’ personal return on investment paid by Aspen during the audit period

17 was approximately $1,529,035 or a return of 129,479 percent. Investment returns to other

18 contributing individuals ranged from 207 percent to 113,872 percent. [Cross Examination of Mr.

19 Briones; Department Ex. IIII]

20 58. Decreasing the return of money paid to investors would not lower the price paid

21 by patients in need of medical cannabis. [Cross Examination of Mr. Briones]

22 59. Despite previous statements that “payments by [the Producer] to Aspen are for

23 managerial and accounting services provided by Aspen and are based upon Aspen’s cost of

In the Matter of the Protest of Aspen Management Co.
Page 12 of 45
1 providing such services[,]” Mr. Briones explained there was never an actual cost for the services

2 Aspen provided. For that reason, neither Aspen nor the Producer ever performed a cost analysis

3 of the services Aspen provided to the Producer. [Cross Examination of Mr. Briones; Department

4 Ex. E-010 (Answer to Int. No. 10); Department E-0176]

5 60. Even though Mr. Briones explained there were no costs associated with the

6 services Aspen provided, it previously explained that “Aspen’s costs consist of the salaries of the

7 employees of Aspen and a return to Aspen’s equity owners for the money they provided to start

8 [the Producer].” [Cross Examination of Mr. Briones; Department Ex. E-010 (Answer to Int. No.

9 10); Department E-0176]

10 61. There is no satisfactory evidence in the record to establish for the purposes of the

11 deduction provided by Section 7-9-69, that Aspen provided managerial or administrative services

12 “at cost.” [Cross Examination of Ms. Griego]

13 Aspen’s Bookkeeping, Tax Reporting Methods, and Reporting History

14 62. Between 2013 and 2017, Aspen recorded income from “management fees” in the

15 amount of $4,850,070.34 on its Profit & Loss statements, although Mr. Briones rejected the

16 accuracy of their characterization as “management fees.” [Department Exs. NN – RR; E-082 –

17 118; Cross Examination of Mr. Briones]

Tax Year Aspen P&L Exhibit
2013 $312,000.00 NN-001
2014 $813,076.00 OO-001
2015 $1,685,147.00 PP-001
2016 $575,322.00 QQ-001
2017 $1,464,525.34 RR-001
Total $4,850,070.34

18 63. Between 2013 and 2017, Aspen’s Income Tax Return for an S Corporation (Form

19 1120-S (Line 1a)) reported total income of $4,845,796.00 from gross receipts or sales although

In the Matter of the Protest of Aspen Management Co.
Page 13 of 45
1 Mr. Briones disagreed that the reported income should be characterized as “gross receipts or

2 sales.” [Cross Examination of Mr. Briones; Department Exs. VVV – ZZZ]

3 64. The Producer’s Forms 1125-A in tax years 2013 through 2016 reported amounts

4 paid for managerial services which correspond closely to the amounts Aspen reported receiving

5 as gross receipts or sales on its Forms 1120-S (Line 1a) in the same periods. Tax year 2017 is

6 excluded from comparison because the Producer’s Form 1125-A is not contained in the record

7 for that year.

Tax Year Aspen Form 1120-S (1a) Exhibit Form 1125-A – Line 5 Exhibit
2013 $312,000.00 VVV-003 $312,000.00 D-010
2014 $813,076.00 WWW-003 $797,834.00 D-008
2015 $1,683,647.00 XXX-001 $1,672,247.00 D-006
2016 $1,023,322.00 YYY-001 $1,009,298.00 D-004
2017 $1,013,751.00 ZZZ-001 Unavailable
Total $4,845,796.00 $3,791,379.00

8 65. Producer, although incorporated as a non-profit under state law, has never been

9 tax-exempt under federal law due to the federal government’s treatment of cannabis. [Direct

10 Examination of Mr. Briones]

11 66. The Producer and Aspen filed federal income tax returns with the assistance of a

12 certified public accountant (CPA). [Direct Examination of Mr. Briones]

13 67. Mr. Briones has no knowledge or understanding of why the CPA for the Producer

14 and Aspen reported income to Aspen when, according to Mr. Briones, Aspen did not generate

15 revenue. He elaborated that “how the [CPA] dealt with the tax returns is really a better question

16 for him3 than for me.” [Direct Examination of Mr. Briones]

17 68. Taxpayers submitting Form 1120 are required to declare under penalty of perjury,

3
Although Mr. Briones deferred to the expertise of Aspen’s CPA, Aspen did not call its CPA to testify at the
hearing, nor was Aspen’s CPA identified as a potential witness in any prehearing statement or other notice filed with
the Administrative Hearings Office.

In the Matter of the Protest of Aspen Management Co.
Page 14 of 45
1 that they have “examined [the] return, including accompanying schedules and statements, and to

2 the best of [their] knowledge and belief, it is true, correct, and complete.” It goes on to provide,

3 “[d]eclaration of preparer (other than taxpayer) is based on all information of which preparer has

4 any knowledge.” [Department Ex. D-003; D-005; D-007; D-013]

5 69. The Producer reported New Mexico gross receipts and paid the resulting tax due

6 through an employee bookkeeper. [Direct Examination of Mr. Briones]

7 70. Aspen’s CRS-1 filings in the relevant reporting periods never reported gross

8 receipts because Mr. Briones did not perceive Aspen as generating any taxable receipts. He

9 elaborated, “[Aspen] shouldn’t have to pay gross receipts tax on zero income.” [Direct

10 Examination of Ms. Griego; Department Exs. SS – UUU (Line 2 of CRS-1 Long Forms);

11 Department Ex. E-005 (No. 11); Direct Examination of Mr. Briones]

12 71. The Department processed Aspen’s tax returns consistent with the information

13 reported therein, including its payment of franchise tax. [Direct Examination of Ms. Galewaler;

14 Cross Examination of Ms. Galewaler; Re-Direct Examination of Ms. Galewaler]

15 The Audit and the Department’s Conclusions

16 72. Ms. Veronica Galewaler is a Corporate Income Tax supervisor employed by the

17 Department. She has been with the Department for about 16 years. In that capacity, she regularly

18 reviews the work product of her subordinates. [Direct Examination of Ms. Galewaler]

19 73. Ms. Galewaler reviewed the work product that generated the Assessment and

20 perceived no substantive errors. [Direct Examination of Ms. Galewaler]

21 74. A non-profit corporation is taxed in a similar manner to a for-profit corporation

22 unless the corporation receives tax exempt status under the Internal Revenue Code as determined

23 by the Internal Revenue Service. [Direct Examination of Ms. Galewaler]

In the Matter of the Protest of Aspen Management Co.
Page 15 of 45
1 75. The terms “non-profit” and “tax exempt” are not analogous. A non-profit is not

2 perceived as tax-exempt without a determination from the Internal Revenue Code. Absent tax-

3 exempt status as determined by the Internal Revenue Service, a non-profit corporation is liable

4 for New Mexico income tax and franchise tax in similar manner to a for-profit corporation.

5 [Direct Examination of Ms. Galewaler; Cross Examination of Ms. Galewaler]

6 76. Mary Griego is a tax auditor with the Department. [Direct Examination of Ms.

7 Griego]

8 77. The audit narrative and its accompanying work papers reveal no defects in the

9 audit that affect the Assessment. [Direct Examination of Ms. Griego; Department Exs. B – C]

10 78. Despite some inartful terminology in the narrative which tended to conflate the

11 terms “non-profit” and “tax-exempt,” there are no material defects in the audit or its conclusions.

12 [Direct Examination of Ms. Griego; Department Exs. B – C]

13 79. Aspen reported and paid corporate income tax on those amounts that it reported as

14 gross receipts on its Forms 1120 [Direct Examination of Ms. Griego; Department Exs. VVV-

15 003; WWW-003; XXX-001; YYY-001; ZZZ-001 (Lines 1a)]

16 80. Aspen’s payment of a franchise fee was correct because the only exception

17 available is for tax exempt corporations as certified by the Internal Revenue Service. [Direct

18 Examination of Ms. Griego; Re-Direct Examination of Ms. Griego]

19 81. To the extent Aspen failed to provide documents requested by the Department

20 during the audit, Mr. Briones attributes the failure to a former employee who he characterized as

21 a “disaster.” Mr. Briones expressed his belief that all requested documents were provided.

22 [Direct Examination of Mr. Briones]

23 Procedural History of the Protest

In the Matter of the Protest of Aspen Management Co.
Page 16 of 45
1 82. Aspen executed a formal written protest of the Assessment on October 15, 2018

2 which was filed in the Department’s Protest Office on October 22, 2018. [Administrative File

3 (attachment to Hearing Request filed December 20, 2018)]

4 83. Taxpayer’s formal protest, in part, claimed, “[N]ot all transfers of money from

5 [the Producer] to Aspen are ‘gross receipts’ as defined by statute. While some are for

6 management services rendered, some are transfers to Aspen as an agent for obligations of [the

7 Producer], for example, for payment of rent on facilities utilized by [the Producer]. As to these

8 funds, Aspen receives them and expends them as a disclosed agent for [the Producer].

9 [Administrative File (Formal Protest attachment to Hearing Request filed December 20, 2018)]

10 84. To the extent Aspen might come within the meaning of agent, neither Aspen nor

11 the Producer would disclose Aspen’s relationship with the Producer unless asked. [Cross

12 Examination of Mr. Briones]

13 85. On November 7, 2018, the Department acknowledged Aspen’s protest under

14 Letter ID. No. L1161670832. [Administrative File (attachment to Hearing Request filed

15 December 20, 2018)]

16 86. On December 20, 2018, the Department submitted a Hearing Request.

17 [Administrative File (attachment to Hearing Request filed December 20, 2018)]

18 87. On December 20, 2018, the Administrative Hearings Office entered a Notice of

19 Telephonic Scheduling Hearing which set an initial hearing in the matter for January 11, 2019.

20 [Administrative File]

21 88. A telephonic scheduling hearing occurred on January 14, 2019 at which time the

22 parties agreed that the hearing satisfied the 90-day hearing deadline and agreed that the matter

23 was ready to proceed to a hearing on the merits of the protest. [Administrative File]

In the Matter of the Protest of Aspen Management Co.
Page 17 of 45
1 89. A Scheduling Order and Notice of Administrative Hearing was entered on

2 January 14, 2019 which set a hearing on the merits of the protest to occur on July 15, 2019.

3 [Administrative File]

4 90. On May 8. 2019, the Department filed an unopposed motion to continue the

5 hearing set for July 15, 2019. [Administrative File]

6 91. On May 15, 2019, the Administrative Hearings Office entered an order continuing

7 the hearing on the merits of the protest and set a scheduling hearing for June 3, 2019.

8 [Administrative File]

9 92. On June 3, 2019, the parties agreed that they were unprepared to proceed with

10 scheduling because discovery was ongoing. The parties with the Hearing Officer’s concurrence

11 agreed to continue scheduling. A Notice of Second Telephonic Scheduling Hearing was entered

12 on June 3, 2019 that set a scheduling hearing to occur on August 16, 2019. [Administrative File]

13 93. On August 15, 2019, Aspen filed an unopposed Motion to Vacate and Continue

14 Telephonic Scheduling Hearing. [Administrative File]

15 94. On August 16, 2019, the Administrative Hearings Office entered an Order

16 Continuing Telephonic Scheduling Hearing for September 29, 2019. [Administrative File]

17 95. On September 29, 2019, the Department requested an additional 4 – 6 weeks to

18 permit additional opportunity to review Aspen’s discovery responses. Taxpayer did not object.

19 [Administrative File]

20 96. On September 30, 2019, the Administrative Hearings Office entered a Notice of

21 Scheduling Hearing which set the matter to be heard for that purpose on November 7, 2019.

22 [Administrative File]

23 97. On November 7, 2019, the Department requested another scheduling hearing in

In the Matter of the Protest of Aspen Management Co.
Page 18 of 45
1 early 2020 in order to permit additional time for review of discovery and additional discussions

2 with Aspen, which did not object. [Administrative File]

3 98. On November 7, 2019, the Administrative Hearings Office entered a Notice of

4 Scheduling Hearing that set a scheduling hearing to occur on January 28, 2020. [Administrative

5 File]

6 99. On January 28, 2020, the Department requested another scheduling hearing in

7 April of 2020 in order to permit additional time for review of discovery and additional

8 discussions with Aspen, which did not object. [Administrative File]

9 100. On January 29, 2020, the Administrative Hearings Office entered a Notice of

10 Scheduling Hearing that set a scheduling hearing for April 16, 2020. [Administrative File]

11 101. On July 13, 2020, the Department requested another scheduling hearing in 30

12 days in order to permit additional time for review of discovery and additional discussions with

13 Aspen, which did not object. [Administrative File]

14 102. On July 21, 2020, the Administrative Hearings Office entered a Notice of

15 Scheduling Hearing that set a scheduling hearing to occur on August 17, 2020. [Administrative

16 File]

17 103. On August 17, 2020, the Department requested another scheduling hearing in 60

18 days in order to permit additional time for review of discovery and additional discussions with

19 Aspen, which did not object. [Administrative File]

20 104. On August 27, 2020, the Administrative Hearings Office entered a Notice of

21 Scheduling Hearing that set a scheduling hearing to occur on October 13, 2020. [Administrative

22 File]

23 105. On October 13, 2020, the Department requested another scheduling hearing in 60

In the Matter of the Protest of Aspen Management Co.
Page 19 of 45
1 days in order to permit additional time for review of discovery and additional discussions with

2 Aspen, which did not object. [Administrative File]

3 106. On October 16, 2020, the Administrative Hearings Office entered a Notice of

4 Scheduling Hearing that set a scheduling hearing to occur on December 10, 2020.

5 [Administrative File]

6 107. On December 10, 2020, the parties agreed that they were prepared to proceed

7 with filing dispositive motions. On December 16, 2020, the Administrative Hearings Office

8 entered an Order Setting Briefing Schedule. [Administrative File]

9 108. Aspen filed Taxpayer’s Motion for Summary Judgment on January 13, 2021.

10 [Administrative File]

11 109. On January 26, 2021, Aspen filed Taxpayer’s Motion to Supplement Filed Motion

12 for Summary Judgment with Additional Exhibit. [Administrative File]

13 110. On March 1, 2021, the Department filed its response to Aspen’s motion for

14 summary judgment and its own cross motion. [Administrative File]

15 111. On April 13, 2021, Aspen filed Taxpayer’s response to the Department’s cross

16 motion and its reply to the Department’s response. [Administrative File]

17 112. The Hearing Officer deferred decision on the motions anticipating that a final

18 decision in Sacred Garden, Inc. v. New Mexico Taxation & Revenue Dep't, 2021-NMCA-038,

19 ¶17, 495 P.3d 576, 580, cert. quashed Sacred Garden v. Taxation, No. S-1-SC-38164 (Feb. 23,

20 2022) would be informative to issues under consideration.

21 113. The New Mexico Court of Appeals published its formal opinion in Sacred

22 Garden, Inc. v. New Mexico Taxation & Revenue Dep't, 2021-NMCA-038, 495 P.3d 576 on

23 January 28, 2020. The New Mexico Supreme Court granted a writ of certiorari on March 29,

In the Matter of the Protest of Aspen Management Co.
Page 20 of 45
1 2021 in No. S-1-SC-38164. On February 23, 2022, the New Mexico Supreme Court quashed its

2 writ of certiorari as improvidently granted and ordered that a mandate immediately issue.

3 114. Taxpayer’s Motion to Supplement Filed Motion for Summary Judgment with

4 Additional Exhibit was accompanied by the Exhibit C (Affidavit of Erik Briones) from which

5 additional facts are derived from the following sworn statements:

6 a. “Establishing the infrastructure to satisfy application requirements

7 required a significant investment of capital that could not be obtained by financing available

8 from any known financial institution due to the unwillingness of such lending institutions to loan

9 money for a business that was illegal under federal law.” [Affidavit of Erik Briones, Para. 6]

10 b. “Because startup capital was not available from traditional lenders, [the

11 Producer] obtained it from several individuals who agreed to provide the capital in exchange for

12 a return on their investment.” [Affidavit of Erik Briones, Para. 7]

13 c. “As a nonprofit corporation, [the Producer] is prohibited from having

14 equity owners.” [Affidavit of Erik Briones, Para. 8]

15 d. “As a means of addressing the issues of providing a return on investment

16 to those who had provided startup capital for [the Producer] and providing professional

17 accounting services and management for [the Producer], [Mr. Briones] created an entity called

18 Aspen Management, Inc[.]” [Affidavit of Erik Briones, Para. 11]

19 e. “In order to honor the fiction that [the Producer] is a nonprofit company,

20 the receipts of [the Producer] flowing through Aspen are designated as management fees.”

21 [Affidavit of Erik Briones, Para. 14]

22 f. “The fees are meant to represent the cost of creating, operating, and

23 managing [the Producer].” [Affidavit of Erik Briones, Para. 15]

In the Matter of the Protest of Aspen Management Co.
Page 21 of 45
1 115. Having considered arguments on the competing motions for summary judgment

2 on November 1, 2022, the Administrative Hearings Office entered an Order for Additional

3 Briefing with respect for questions that arose at the hearing which the parties had not anticipated.

4 [Administrative File]

5 116. On December 15, 2022, Aspen filed Taxpayer’s Brief on Applicability of

6 Administrative Gloss. [Administrative File]

7 117. On January20, 2023, the Department filed its response to Taxpayer’s Brief on

8 Applicability of Administrative Gloss. [Administrative File]

9 118. Determining that resolution of the issues would be assisted by the live testimony

10 of witnesses, the Administrative Hearings Office entered an Order Denying Motions for

11 Summary Judgment, Scheduling Order and Notice of Hearing on the merits on April 27, 2023

12 and an in-person hearing on the merits of the protest was set for July 24, 2023. [Administrative

13 File]

14 119. On June 29, 2023, Aspen filed Taxpayer’s Witness and Exhibit List.

15 [Administrative File]

16 120. On June 30, 3023, the Department filed its witness and exhibit list.

17 [Administrative File]

18 121. On August 17, 2023, Aspen filed Taxpayer’s Closing Argument. [Administrative

19 File]

20 122. On August 23, 2023, the Department filed the Department’s Closing Argument

21 and Brief. [Administrative File]

22 DISCUSSION

23 At all relevant times, the Producer was engaged in the business of producing, packaging,

In the Matter of the Protest of Aspen Management Co.
Page 22 of 45
1 and dispensing medical cannabis under the Lynn and Erin Compassionate Use Act, NMSA 1978,

2 Chapter 26, Article 2B (“CUA”). The purpose of CUA is to “make medical marijuana accessible to

3 those with debilitating medical conditions who might benefit from the use thereof.” See NMSA

4 1978, Section 26-2A-2 (2007).

5 In Sacred Garden, Inc. v. New Mexico Taxation & Revenue Dep't, 2021-NMCA-038, ¶ 17,

6 495 P.3d 576, 580, the Court of Appeals observed with respect to medical cannabis, “[i]t is

7 reasonably self-evident that the deduction from gross receipts for prescription drugs was similarly

8 intended to make medical treatment more accessible, by lessening the expense to those who require

9 it.” Id. (Emphasis Added). Thus, according to Sacred Garden, the legislature’s underlying intent for

10 the CUA was not only to make medical cannabis accessible, but to do so in a way that promoted

11 affordability for those who might benefit from its use. Although the deduction central to Sacred

12 Garden is not applicable to this protest, Sacred Garden’s extraction and discussion of the

13 Legislature’s broader policy goals and intentions underlying enactment of the CUA is germane to

14 Taxpayer’s principal argument which centers on the alleged absence of any “rational business

15 reason” for the requirement that producers incorporate as non-profits.

16 The non-profit condition derives from the rules of the New Mexico Department of Health

17 requiring producers to operate as “non-profit corporation[s] … pursuant to Section 53-8-1 et seq.,

18 NMSA 1978[.]” See Regulation 7.34.4.8 NMAC. However, because the non-profit entity required

19 by the Department of Health’s rules had certain limitations which to Mr. Briones were undesirable,

20 Mr. Briones also established Aspen “as a separate for-profit entity to perform functions that would

21 have been performed by [the Producer] itself if it had been allowed to organize as a for-profit

22 corporation[.]” See Taxpayer’s Closing Argument, Page 2 (Emphasis Added).

23 Thus, according to Mr. Briones, the non-profit Producer generated all receipts and then

In the Matter of the Protest of Aspen Management Co.
Page 23 of 45
1 transferred those receipts to for-profit Aspen. From the transfer onward, according to Mr. Briones,

2 Aspen would perform various tasks which the Producer could not perform for itself, either because

3 of its non-profit status, or because its tenuous status under federal law made it difficult, or

4 sometimes impossible, to conduct commonplace business activities like entering into leases,

5 maintaining bank accounts, or using banking services, securing payroll services, and obtaining

6 credit card processing services.

7 Another of Aspen’s functions included distributing the non-profit Producer’s profits to its

8 investors, a task that according to Mr. Briones, the Producer was not permitted to do as a New

9 Mexico non-profit corporation. Aspen acknowledged that “[the Producer] did comply with the

10 regulatory requirement that it be registered with the Secretary of State as a nonprofit corporation,

11 but there [was] no explicit regulatory requirement that it be operated as a nonprofit.” See Taxpayer’s

12 Closing Argument, Page 5 (Emphasis in Original).

13 With this setting in mind, Aspen argues that the assessment should be abated because

14 “Aspen and [the Producer] are, in substance, one self-managed company with no need to pay

15 management fees, and a consolidated financial statement would designate as dividends or wages

16 (both deductible from gross receipts) the transfers to Aspen designated as management fees” or in

17 the alternative, “Aspen is an affiliate of [the Producer] providing management services to [the

18 Producer] at cost and entitled to the deduction provided for in [Section] 7-9-69.” See Taxpayer’s

19 Closing Argument, Page 2.

20 The Hearing Officer notes that Aspen does not assert entitlement to any deductions or

21 exemptions which the Producer might potentially claim if the Producer were the object of the

22 Department’s assessment. See e.g. NMSA 1978, Section 7-9-73.2. The Hearing Officer further

23 notes that Aspen had previously suggested the potential application of NMSA 1978, Section 7-9-75

In the Matter of the Protest of Aspen Management Co.
Page 24 of 45
1 (deduction for receipts deriving from sale of certain services performed directly on product

2 manufactured), but Aspen did not present evidence or explicitly assert entitlement to that deduction

3 at the hearing or in its closing argument. Without producing such evidence or argument, Aspen

4 abandoned and waived that specific claim.

5 Moreover, to the extent the facts presented herein might suggest potential applicability of

6 the gross receipts exclusion for “amounts received solely on behalf of another in a disclosed agency

7 capacity” under NMSA 1978, Section 7-9-3.5 A (3) (f), Aspen did not present evidence or argument

8 in support of that potential defense. Because the evidence in the record is inadequate to establish

9 applicability of the exclusion for “amounts received solely on behalf of another in a disclosed

10 agency capacity,” the Hearing Officer finds the exclusion to be unsupported by the evidence

11 presented and inapplicable to the facts underlying the protest. For example, when asked several

12 times during cross examination if Aspen’s relationship with the Producer was disclosed to entities

13 with which Aspen or the Producer sought to do business, Mr. Briones refrained from responding

14 with a “yes” or “no” answer, choosing instead to explain, “they never asked.” This response fails

15 to establish the necessary element of disclosure under Section 7-9-3.5 A (3) (f).

16 Presumption of Correctness.

17 NMSA 1978, Section 7-1-17 (C) (2007) requires that the assessment issued in this case

18 be presumed correct. Consequently, Taxpayer has the burden of rebutting the presumption. See

19 Archuleta v. O'Cheskey, 1972-NMCA-165, ¶ 11, 84 N.M. 428. Unless otherwise specified, for the

20 purposes of the Tax Administration Act, “tax” is defined to include interest and civil penalty. See

21 NMSA 1978, Section 7-1-3 (X) (2013). Under Regulation 3.1.6.13 NMAC, the presumption of

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

23 interest. See Chevron U.S.A., Inc. v. State ex rel. Dep't of Taxation & Revenue, 2006-NMCA-50, ¶

In the Matter of the Protest of Aspen Management Co.
Page 25 of 45
1 16, 139 N.M. 498, 503 (agency regulations interpreting a statute are presumed proper and are to be

2 given substantial weight).

3 Therefore, it is Taxpayer’s burden to present some countervailing evidence or legal

4 argument to rebut the presumption of correctness. See N.M. Taxation & Revenue Dep't v. Casias

5 Trucking, 2014-NMCA-099, ¶8; Gemini Las Colinas, LLC v. N.M. Taxation & Revenue Dep’t,

6 2023-NMCA-__, ¶ 27, No. A-1-CA-38672 (March 13, 2023)

7 Whether a taxpayer has satisfied the initial burden of production is a threshold legal

8 determination in which the Hearing Officer decides whether a taxpayer has produced some

9 countervailing evidence tending to dispute the correctness of the assessment. See Gemini, 2023-

10 NMCA-__, ¶¶ 21 – 23; 25. The Hearing Officer was persuaded in this protest that Taxpayer

11 satisfied its initial burden of production.

12 If a taxpayer satisfies the initial burden of production, then the burden of production shifts to

13 the Department to present evidence showing the correctness of its assessment beyond mere

14 assertions that a taxpayer’s evidence is unreliable or not credible. See Gemini, 2023-NMCA-__, ¶

15 29. The Hearing Officer is then to weigh the evidence presented from both parties under the

16 preponderance standard and ultimately determine whether a taxpayer has carried its burden of

17 persuasion in the protest. Id.

18 Because the Hearing Officer is persuaded that both parties satisfied their respective burdens

19 of production, the remainder of this Decision and Order will concentrate on weighing the evidence

20 presented from both parties under the preponderance standard and ultimately determine whether the

21 taxpayer carried its burden of persuasion.

22 Gross Receipts Tax.

23 For the privilege of engaging in business in New Mexico, a gross receipts tax is imposed

In the Matter of the Protest of Aspen Management Co.
Page 26 of 45
1 on the receipts of any person engaged in business. See NMSA 1978, Section 7-9-4 (2010). The

2 term “gross receipts” is defined to mean:

3 [T]he total amount of money or the value of other consideration
4 received from selling property in New Mexico, from leasing or
5 licensing property employed in New Mexico, from granting a right to
6 use a franchise employed in New Mexico, from selling services
7 performed outside New Mexico, the product of which is initially used
8 in New Mexico, or from performing services in New Mexico.

9 See NMSA 1978, Section 7-9-3.5 (A) (1) (2019)

10 There is a statutory presumption that all receipts of a person engaged in business are taxable.

11 See NMSA 1978, Section 7-9-5 (2019). “Receipts include payments received for one’s own

12 account and then expended to meet one’s own responsibilities.” See MPC Ltd. v. New Mexico

13 Taxation & Revenue Dept., 2003-NMCA-021, ¶ 14, 133 N.M. 217, 220, 62 P.3d 308, 311.

14 “Engaging in business” is defined as “carrying on or causing to be carried on any activity with

15 the purpose of direct or indirect benefit.” See NMSA 1978, Section 7-9-3.3 (2019). See also

16 Comer v. State Tax Comm'n, 1937-NMSC-032, ¶37, 41 N.M. 403 (gross receipts applies to “all

17 activities or acts engaged in (personal, professional and corporate) or caused to be engaged in

18 with the object of gain, benefit[,] or advantage either direct or indirect.”)

19 As a practical matter, the initial step in an audit is to compute the amount of gross receipts at

20 issue with reference to Section 7-9-3.5, the sum of which is presumed taxable under Section 7-9-5.

21 Subsequent steps allow a taxpayer to reduce its total gross receipts by those amounts which are

22 deductible or exempt with specific reference to the applicable deductions or exemptions provided in

23 the Gross Receipts and Compensating Tax Act. The difference between total gross receipts and any

24 applicable deductions or exemptions is the amount of taxable gross receipts.

25 In this protest, the evidence demonstrated how the Department conducted its audit and

26 ultimately identified and assessed a gross receipts tax liability of $320,359.17, plus interest and

In the Matter of the Protest of Aspen Management Co.
Page 27 of 45
1 penalty. See Department Ex. B. Despite the occasional use of imprecise or inartful language in the

2 Audit Narrative, the Hearing Officer does not perceive those areas with which Aspen takes issue as

3 material to the computations that produced the Assessment. Any conflation or misuse of the terms

4 “non-profit” and “tax exempt” do not affect the computations of gross receipts which are presumed

5 taxable under Section 7-9-5. It is undisputed that the Producer is a non-profit corporation, it has

6 never been tax-exempt, and Aspen is a for-profit corporation.

7 “The Crux of the Problem”

8 Taxpayer argues that “[t]he crux of the problem faced by the [T]axpayer in this case is

9 that its very existence would never have been necessary but for the enactment of a questionable

10 regulation of the Department of Health requiring applicants for a license to produce medical

11 cannabis to be organized as nonprofit corporations.” See Taxpayer’s Closing Argument, Page 1.

12 The manner in which Aspen frames the issue suggests that the Administrative Hearings

13 Office has the ability to disregard, or perhaps invalidate, a Department of Health regulation in

14 the context of a tax protest under the Administrative Hearings Office Act. See NMSA 1978,

15 Section 7-1B-6 C. Aspen cites no authority in support of such proposal. In any event, the

16 Administrative Hearings Office need not consider the bounds of its authority because the

17 Hearing Officer does not perceive the regulation which Taxpayer argued to be the crux of the

18 issue as questionable.

19 “Agency regulations that interpret statutes and are promulgated under statutory authority are

20 presumed proper, ‘[a]nd, of course, it is hornbook law that an interpretation of a statute by the

21 agency charged with its administration is to be given substantial weight.’” See Chevron U.S.A., Inc.

22 v. State of N.M. ex rel. Taxation & Rev. Dept., 2006-NMCA-050, ¶ 16, 139 N.M. 498, 503, 134

23 P.3d 785, 790.

In the Matter of the Protest of Aspen Management Co.
Page 28 of 45
1 “A party challenging a rule adopted by an administrative agency has the burden of

2 showing the invalidity of the rule or regulation. The reasonableness of an administrative rule or

3 regulation is not purely a legal question; a factual basis must appear. To successfully challenge a

4 rule promulgated by an agency exercising its delegated legislative authority, the challenger must

5 show, in part, that the rule’s requirements are not reasonably related to the legislative purpose

6 but are arbitrary and capricious.” See Old Abe Co. v. New Mexico Min. Comm’n, 1995-NMCA-

7 134, ¶ 10, 121 N.M. 83, 88, 908 P.2d 776, 781 (Emphasis Added). “A party challenging a rule

8 adopted by an administrative agency has the burden of establishing the invalidity of the rule or

9 proposed regulation.” See New Mexico Mining Ass’n v. New Mexico Mining Comm’n, 1996-

10 NMCA-098, ¶ 8, 122 N.M. 332, 335, 924 P.2d 741, 744.

11 Based on the evidence and argument presented, the rule’s requirements are reasonably

12 related to the legislative purpose underlying the CUA and are not arbitrary and capricious. As

13 explained by Sacred Garden, “the Compassionate Use Act was intended to make medical

14 marijuana accessible to those with debilitating medical conditions who might benefit from the

15 use thereof.” See Sacred Garden, Inc., 2021-NMCA-038, ¶17. In evaluating whether a taxpayer

16 could obtain the benefit of a gross receipts tax deduction reserved for prescription drugs, Sacred

17 Garden observed, “[i]t is reasonably self-evident that the deduction from gross receipts for

18 prescription drugs was similarly intended to make medical treatment more accessible, by

19 lessening the expense to those who require it. These statutes should be read harmoniously, to

20 give effect to their commonality of purpose.” Id. (Emphasis Added)

21 In this case, the Legislature required the secretary of the New Mexico Department of Health

22 to promulgate rules to implement the CUA. See NMSA 1978, Section 26-2B-6 – 7 (2007). Specific

23 areas of relevance for rulemaking included establishing, “requirements for the licensure of

In the Matter of the Protest of Aspen Management Co.
Page 29 of 45
1 producers and cannabis production facilities and set forth procedures to obtain licenses[.]” See

2 Section 26-2B-7 A (5) (2007) (Emphasis Added). The Legislature then specified that “licensed

3 producer” meant “any person or association of persons within New Mexico that the department

4 determines to be qualified to produce, possess, distribute and dispense cannabis pursuant to the

5 Lynn and Erin Compassionate Use Act and that is licensed by the department[.]” See NMSA 1978,

6 Section 26-2B-3 D (2007) (Emphasis Added). Conversely stated, the Legislature provided explicit

7 and exclusive authority to the Department of Health to determine qualifications of licensure

8 eligibility.

9 Although Aspen asserts that the requirement that licensed producers be established as

10 nonprofit corporations has no “rational business reason,” the record of the rulemaking process

11 suggests that the nonprofit requirement was consistent with the Legislature’s intentions, as

12 expressed in the CUA. See Sacred Garden. In response to Aspen’s request to inspect public records,

13 the Department of Health produced records revealing that, “[m]edical cannabis must be affordable

14 to those in need.” See Taxpayer Ex. 1-014, Para. 8. It also considered the point that, “[i]n order to

15 ensure that distributors are not accused of profiteering, it is recommended that dispensaries ensure

16 transparency, openness, financial accountability, and mechanisms for client feedback. Non-profit

17 incorporation is one way of meeting these criteria.” See Taxpayer Ex. 1-018, Para. 1.

18 The Hearing Officer perceives the Department of Health’s rules, requiring licensed

19 producers to be incorporated as non-profits, to be consistent with, implementing, and

20 exemplifying the policy of establishing a system that discourages profiteering and promoting

21 affordability for those who might benefit from the use of medical cannabis, consistent with

22 Sacred Garden’s observations that affordability was a goal of the Legislature’s policy.

23 To the extent Taxpayer asserts that the non-profit corporation requirement was not

In the Matter of the Protest of Aspen Management Co.
Page 30 of 45
1 considered by the Department of Health’s advisory board, contrary to Section 26-2B-7, but simply

2 included in the rules absent any meaningful consultation and advice, the argument is unpersuasive

3 based on a lack of evidence presented in support of such assertion. See New Mexico Mining, 1996-

4 NMCA-098, ¶ 8.

5 To the extent Aspen could have argued that taxation in this protest would reduce

6 affordability by increasing expenses to patients in need, it made no such argument, and presented

7 no such evidence. In fact, when asked during cross examination if reducing payments to private

8 party investors could have decreased the cost of products for patients in need, Mr. Briones

9 enthusiastically denied that affordability was a component of the CUA and told Mr. Pener, “You

10 sound like a medical patient who’s on welfare who wants everything for free.” Tr. Pt. 1, 2:16:15 –

11 2:16:31. After some more discussion, Mr. Pener, on cross examination said, “You didn’t answer my

12 question. My question was: If this money did not go to shareholders of Aspen, it could have been

13 used to reduce the price of the product that [the Producer] sold? That’s a ‘yes’ or a ‘no[,]’” to which

14 Mr. Briones answered, “No.” Tr. Pt. 1, 2:17:05 – 2:17:22.

15 These observations are relevant to Sacred Garden’s regard for affordability and

16 consideration of whether a tax imposed on Aspen for management services could undercut the

17 Legislature’s policy favoring affordability for patients in need. On the whole, if a reduction in

18 disbursements to private individuals has no effect on costs of cannabis products for eligible patients,

19 as expressed by Mr. Briones, then a tax representing a fraction of those disbursements should be

20 similarly unoffending.

21 Accordingly, the Assessment of tax in this protest does not offend the policy of the

22 Legislature intending “to make medical treatment more accessible, by lessening the expense to

23 those who require it.” See Sacred Garden, Inc. v. New Mexico Taxation & Revenue Dep't, 2021-

In the Matter of the Protest of Aspen Management Co.
Page 31 of 45
1 NMCA-038, ¶ 17, 495 P.3d 576, 580.

2 For these reasons, the Hearing Officer does not perceive the referenced regulation as

3 “questionable” in light of Sacred Garden’s thorough discussion of the Legislature’s objectives in

4 enacting the CUA. Although the Hearing Officer is mindful of Taxpayer’s frustration, the

5 Department of Health’s rule that licensed producers engage in business as nonprofit corporations is

6 presumed proper and there is no basis in the record with which to establish that the non-profit

7 requirement contradicts the Legislature’s purpose when it enacted the CUA. The Department of

8 Health was cognizant of the Legislature’s intentions in making affordable medical cannabis

9 available to those in need and implemented rules to advance that purpose consistent with the

10 authority granted by the Legislature.

11 When, as in this case, the Legislature grants agencies the discretion of promulgating rules

12 and regulations, those rules and regulations have “the force of law.” See Duke City Lumber Co. v.

13 New Mexico Envtl. Improvement Bd., 1984-NMSC-042, ¶ 7, 101 N.M. 291, 292, 681 P.2d 717, 718.

14 As a final observation before proceeding with the discussion of Aspen’s other arguments,

15 there is no evidence that the Producer’s non-profit status alone precluded it from conducting most

16 ordinary business activities. The obstacles it encountered arose from the fact that it was engaged in

17 the business of producing medical cannabis. In other words, the isolated fact that it was required to

18 incorporate as a non-profit did not contribute to its inability to procure banking services, credit card

19 processing services, payroll services, or other necessary and ordinary business services. Thus, the

20 primary disadvantage to the Producer, by virtue of the non-profit corporation requirement was that

21 “you cannot distribute a dividend in a non-profit” and the Producer’s investors wanted a

22 maximum return on their investment. [Direct Examination of Mr. Briones]

23 Should Aspen and the Producer be taxed as “one self-managed company?”

In the Matter of the Protest of Aspen Management Co.
Page 32 of 45
1 Aspen argues that “established law justifies – if not compels – that the [Producer] –

2 Aspen relationship should be taxed based on its substance rather than its form.” See Taxpayer’s

3 Closing Argument, Page 2. Therefore, it argues Aspen and the Producer should be perceived as

4 “one self-managed company with no need to pay management fees, and a consolidated financial

5 statement would designate as dividends or wages (both deductible from gross receipts) the transfers

6 to Aspen designated as management fees[.]” See Taxpayer’s Closing Argument, Pages 2 – 3.

7 In support, Aspen cited Feldman v. C.I.R., 779 F.3d 448 (7th Cir. 2015) for the proposition

8 that the manner in which Aspen and the Producer characterize the funds should not be deemed

9 conclusive when the receipts upon which the assessment was founded were not really management

10 fees paid for management services. Instead, Aspen explained that “[t]he designation in the

11 bookkeeping records of [the Producer] and Aspen of funds appearing to flow from [the Producer] to

12 Aspen as ‘management fees’ is likewise ‘a mere accounting device, devoid of substance.’” See

13 Taxpayer’s Closing Argument, Page 7.

14 However, characterizations that Aspen did not provide management services or that it did

15 not generate receipts from such services is inconsistent with how Aspen kept its records, reported its

16 income for tax purposes, or even explained its operations during the pre-hearing phases of the

17 protest.

18 In its formal protest, Aspen stated that it derived receipts from “management services

19 rendered” which was consistent with how the Producer reported its income and expenses for tax

20 purposes, how Aspen reported its own federal income and expenses for tax purposes, and how it

21 maintained internal accounting records. Aspen and the Producer were even parties to a management

22 agreement in which Aspen agreed to provide management services. See Department Ex. E-053 –

23 E057. Prior sworn statements also confirmed Aspen’s position that it generated receipts from

In the Matter of the Protest of Aspen Management Co.
Page 33 of 45
1 providing management services for the Producer. See e.g. Department Ex. E-009 – E-010 (No. 9);

2 E-010 (No. 10); E-012 (No. 12).

3 Yet, Mr. Briones explained at the hearing that despite previous representations to the

4 contrary, Aspen never actually performed management services, and that even the management

5 agreement was intended to perpetrate “the illusion that Aspen was a management company

6 overseeing the operations of [the Producer].” Tr. Pt. 1, 59:54 – 1:01:25 (Emphasis Added).

7 When asked about the costs of such services, Mr. Briones denied there was any cost at all,

8 contrary to prior sworn statements that services were provided and supposedly compensated on a

9 cost basis. See Department Ex. E-010 (“…managerial and accounting services provided by Aspen

10 and are based upon Aspen’s cost of providing such services.”). The Hearing Officer appreciates Mr.

11 Briones’ candor, but the admission that Aspen and the Producer engaged in activity intended to

12 perpetrate an “illusion,” coupled with other contradictions about the sort of services provided and

13 the costs of those services diminish Mr. Briones’ overall credibility, the trustworthiness of Aspen’s

14 evidence, and the sway of arguments that rely on them.

15 Nevertheless, Taxpayer asserts that the substance of its relationship with the Producer

16 should determine how it is taxed instead of its form. See Taxpayer’s Closing Argument, Page 2. The

17 Department counters that this argument is futile under existing law which explains that “taxation is

18 the rule and the claimant must show that his demand is within the letter as well as the spirit of the

19 law.” See TPL, Inc. v. New Mexico Taxation & Revenue Dept., 2003-NMSC-007, ¶ 9, 133 N.M.

20 447, 451, 64 P.3d 474, 478. The Hearing Officer agrees with the Department that the rule explained

21 more than 20 years ago in TPL establishes the footing for further evaluation.

22 Aspen’s receipts are presumed taxable under Section 7-9-5 and it bears the burden of

23 establishing entitlement to any applicable deductions or exemptions consistent with the guidance of

In the Matter of the Protest of Aspen Management Co.
Page 34 of 45
1 TPL, Inc., 2003-NMSC-007, ¶9 which instructs that: (1) “[t]he right to a deduction must be clearly

2 and unambiguously expressed in the statute[;]” and (2) “[t]he taxpayer must show that it is

3 clearly entitled to the statutory deduction.”

4 Under the evidence and arguments presented, Aspen’s receipts are taxable unless or until it

5 can prove entitlement to an applicable deduction or exemption. Taxpayer cites no New Mexico

6 authority for the proposition that Aspen’s relief from the Assessment can derive from the

7 recognition of a fictional oxymoronic entity that is one-half for-profit and one-half non-profit, but

8 still a single unified entity for tax purposes (i.e. a non-profit for profit or a for-profit non-profit).

9 “Where a party cites no authority to support an argument, we may assume no such authority exists.”

10 See Curry v. Great Nw. Ins. Co., 2014-NMCA-031, ¶ 28, 320 P.3d 482, 489. Moreover,

11 contemplation of Aspen’s suggestion reveals myriad unresolvable conflict among the governing

12 statutes that the Legislature would never intend, for example, how a non-profit corporation (the

13 Producer) can operate as a for-profit corporation without offending the law controlling its creation.

14 Aspen and the Producer are not a “unified entity” under the evidence or the law. Relief from

15 the Assessment must stem from long established law requiring Aspen to show that it is “clearly

16 entitled” to a deduction or exemption that is “clearly and unambiguously expressed in the

17 statute.”

18 Potential Application of Section 7-9-69

19 NMSA 1978, Section 7-9-69 provides a deduction from gross receipts for the receipts “of a

20 business entity for administrative, managerial, accounting and customer services performed by it for

21 an affiliate upon a nonprofit or cost basis and receipts of a business entity from an affiliate for the

22 joint use or sharing of office machines and facilities upon a nonprofit or cost basis[.]”

23 For the purpose of qualifying for the deduction, “affiliate” means a “business entity that

In the Matter of the Protest of Aspen Management Co.
Page 35 of 45
1 directly or indirectly through one or more intermediaries controls, is controlled by or is under

2 common control with another business entity.” The term “business entity” is defined to mean “a

3 corporation, limited liability company, partnership, limited partnership, limited liability partnership

4 or real estate investment trust, but does not mean an individual or a joint venture[.]” Finally, the

5 term “control” means “equity ownership in a business entity that: (a) represents at least fifty percent

6 of the total voting power of that business entity; or (b) has a value equal to at least fifty percent of

7 the total equity of that business entity.”

8 The problem, as Aspen has aptly summarized it, is that Aspen is technically precluded from

9 eligibility for the deduction because its relationship with the Producer fails to satisfy the definition

10 of “control” which in turn fails to satisfy the definition of “affiliate.” Aspen has acknowledged these

11 issues observing that “the only reason it fails to meet the statute’s definition of ‘affiliate’ in NMSA

12 1978, Section 7-9-69 (B) is the fact that although it controls, is controlled by, or is under common

13 control with [the Producer], it’s de facto affiliate, it cannot meet the statutory definition of ‘control’

14 (and hence, ‘affiliate’) because ‘equity ownership’ is a definitional element of ‘control’ and as a

15 nonprofit corporation, [the Producer], Aspen’s only client, is prohibited from having equity

16 owners.” See Taxpayer’s Motion for Summary Judgment, Page 5.

17 However, Aspen does not view this as an obstacle arguing that disqualification from

18 eligibility relies on an “overly technical” construction of “control” in Section 7-9-69 and “unfairly

19 elevates form over substance.” See Taxpayer’s Closing Argument, Pages 3 – 4.

20 The Hearing Officer, once again thoughtful of Aspen’s frustrations, remains unpersuaded by

21 its argument. It has long been recognized that tax exemptions and deductions are matters of

22 legislative grace and ways of achieving policy objectives. They are “construed against the

23 taxpayer.” See Sutin, Thayer & Browne v. N.M. Taxation & Revenue Dep't, 1985-NMCA-047, ¶ 17,

In the Matter of the Protest of Aspen Management Co.
Page 36 of 45
1 104 N.M. 633, 725 P.2d 833. Construing the deduction as Aspen encourages requires that the

2 Hearing Officer disregard Sutin and the plain language of the statutory deduction which Aspen has

3 already acknowledged disqualifies it from eligibility.

4 Even if the Hearing Officer were persuaded that the plain language of the statute could be

5 relaxed in order to permit a construction in favor of Aspen, it would still not qualify for the benefit

6 of the deduction provided by Section 7-9-69 because Aspen’s evidence and arguments fail to

7 persuade that managerial services were provided “at cost.” Aspen explained that “[a]side from

8 monies ‘received’ by Aspen to pay expenses of [the Producer], payments by [the Producer] to

9 Aspen are for managerial and accounting services provided by Aspen and are based upon Aspen’s

10 cost of providing such services.” See Department Ex. E-010. Aspen went on to define its costs to

11 include the “cost of capital” which includes “a return to Aspen’s equity owners for the money they

12 provided to start [the Producer]” in the form of a dividend. See Department Ex. E-010; Taxpayer’s

13 Closing Argument, Page 6.

14 But in terms of the evidence presented, Mr. Briones’ first denied that Aspen provided

15 services, but even if it did, then he acknowledged that there were no costs associated with the

16 services provided, and for that reason, no need to perform a cost accounting analysis to determine

17 the cost of services. Tr. Pt. 2, 16:35 – 19:25.

18 The contradictions are palpable. Aspen claims that payments from the Producer were for

19 managerial and accounting services and that they were “based upon Aspen’s cost of providing such

20 services.” On the other hand, Mr. Briones also explained that there were no costs incurred in

21 providing the services. Yet, Aspen continued to argue, even after Mr. Briones’ testimony that to the

22 extent it provided services, “it provided those services at cost.” See Taxpayer’s Closing Argument,

23 Page 6. It even went on to condemn the Department for its perceived failure to “present any

In the Matter of the Protest of Aspen Management Co.
Page 37 of 45
1 evidence to discredit the taxpayer’s contention that to the extent Aspen - [the Producer] relationship

2 can be analyzed as one involving the sale of services by Aspen to [the Producer], the services were

3 valued at cost.” Aspen’s argument is unpersuasive. Aspen has the burden of establishing entitlement

4 to the deduction. See TPL, Inc., 2003-NMSC-007, ¶ 31.

5 However, if Mr. Briones’ testimony is accurate, that there were no actual costs associated

6 with the services provided, then Aspen fails to qualify for the deduction under Section 7-9-69. To

7 illustrate, in the simplest terms, if Aspen’s costs were zero, then receipts in excess of zero exceed

8 Aspen’s costs and would preclude it from qualifying for the deduction under Section 7-9-69, since

9 the deduction is only available for services provided “upon a non-profit or cost basis.” The evidence

10 established that Aspen’s receipts from providing services exceeded $4.8 million. If Mr. Briones’

11 testimony is accurate, then the receipts for those services exceeded Aspen’s costs in excess of $4.8

12 million. If that is not correct, then Aspen, not the Department, bears the burden of establishing its

13 true costs under TPL. Aspen did not meet this burden.

14 As previously stated, Aspen has acknowledged it does not qualify for the deduction

15 provided by Section 7-9-69, as written, because it fails to satisfy the element that the Producer and

16 Aspen be affiliates. But even if the definition of “affiliate” could be relaxed, Aspen’s claim still fails

17 for lack of evidence to show that the services were provided on a non-profit or cost basis. Aspen did

18 not establish entitlement to a deduction under Section 7-9-69.

19 Other Potential Deductions or Exemptions

20 As previously observed, Aspen initially asserted potential application of Section 7-9-75, but

21 did not advance that claim at hearing. Aspen also suggested in its closing argument the possibility

22 that other deductions and exemptions could potentially apply if the Hearing Officer determined that

23 the non-profit Producer and for-profit Aspen should be perceived as a single unified business entity.

In the Matter of the Protest of Aspen Management Co.
Page 38 of 45
1 The Hearing Officer declined the request to recognize the unified business entity for the reasons

2 discussed but will nevertheless address the potential application of other deductions or exemptions.

3 It asserted that if the entities were unified, then fees previously categorized as management

4 fees would instead be categorized as dividends or wages, both of which it asserts are deductible

5 under the Gross Receipts and Compensating Tax Act. Taxpayer does not cite the deductions it

6 claims should apply or explain how it satisfies the elements of eligibility for such deduction.

7 Lack of citation requires the Hearing Officer to infer that Aspen’s reference to wages and

8 dividends is intended to refer to exemptions under Section 7-9-17 (exemption for wages) and

9 Section 7-9-25 (exemption for interest and dividends). The Hearing Officer did not identify any

10 other deductions or exemptions under the Gross Receipts and Compensating Tax Act4 that

11 corresponded with Aspen’s description or which might otherwise apply.

12 Section 7-9-17 provides an exemption for wages. It states, “[e]xempted from the gross

13 receipts tax are the receipts of employees from wages, salaries, commissions or from other form of

14 renumeration for personal services.” (Emphasis Added). This exemption is not applicable to the

15 Producer or Aspen, either individually or collectively because the receipts at issue would not

16 constitute “receipts of employees” for personal services. See also Regulation 3.2.105.7 NMAC.

17 Instead, the receipts are those of Aspen, which is not an employee.

18 Section 7-9-25 provides an exemption for “receipts received as interest on money loaned or

19 deposited, receipts received as dividends or interest from stocks, bonds or securities or receipts from

20 the sale of stocks, bonds or securities.” Again, this exemption is not applicable to the Producer or

21 Aspen, either individually or collectively. The receipts at issue do not represent: (1) interest on

22 money loaned by Aspen or deposited with Aspen. Aspen, the juridical entity never loaned money to

4
Although other tax programs may allow a deduction for wages or dividends paid, those various deductions would
not apply to an assessment arising under the Gross Receipts and Compensating Tax Act.

In the Matter of the Protest of Aspen Management Co.
Page 39 of 45
1 the Producer, and neither entity asserted that the receipts represented interest on a loan or deposits.

2 The receipts at issue do not represent: (2) receipts received by Aspen as dividends or interest from

3 stocks, bonds, or securities. There is a lack of evidence to suggest that Aspen, the juridical entity,

4 owned stocks, bonds or securities from which dividends could be derived. The receipts at issue also

5 do not represent: (3) receipts of Aspen from the sale of stocks, bonds or securities. The receipts at

6 issue represent money derived from the Producer’s business activities and transferred in whole to

7 Aspen, with the exception of some cash, which the parties designated as “management fees” for all

8 intents and purposes. Receipts did not derive from the sale of any interest in the Producer.

9 Aspen readily acknowledged the Producer was prohibited from making distributions to

10 investors. That was one, if not the primary reason, why Aspen was established in the first place.

11 The Hearing Officer is not persuaded based on the evidence presented that Aspen is entitled to a

12 deduction under Section 7-9-25.

13 Aspen has not established the right to any deduction or exemption under the evidence

14 presented, including deductions under Section 7-9-17 (exemption for wages) and Section 7-9-25

15 (exemption for interest and dividends).

16 For the reasons stated, Taxpayer’s protest is DENIED.

17 CONCLUSIONS OF LAW

18 A. Taxpayer filed a timely, written protest to the Assessment. Jurisdiction lies over the

19 parties and the subject matter of this protest.

20 B. The Department made a timely request for hearing and the Administrative Hearings

21 Office conducted a hearing within 90 days of Taxpayer’s protest under NMSA 1978, Section 7-1B-

22 8 (2019). The parties did not object that the hearing satisfied the requirements of Section 7-1B-8.

23 C. Aspen’s receipts from engaging in business in New Mexico are presumed taxable.

In the Matter of the Protest of Aspen Management Co.
Page 40 of 45
1 See NMSA 1978, Section 7-9-5 (2019).

2 D. “Engaging in business” is defined as “carrying on or causing to be carried on any

3 activity with the purpose of direct or indirect benefit.” See NMSA 1978, Section 7-9-3.3 (2019).

4 See also Comer v. State Tax Comm'n, 1937-NMSC-032, ¶37, 41 N.M. 403 (gross receipts applies

5 to “all activities or acts engaged in (personal, professional and corporate) or caused to be

6 engaged in with the object of gain, benefit[,] or advantage either direct or indirect.”)

7 E. “Gross receipts” means “The total amount of money or the value of other

8 consideration received … from performing services in New Mexico.” See NMSA 1978, Section 7-

9 9-3.5 (A) (1) (2019).

10 F. “Receipts include payments received for one’s own account and then expended to

11 meet one’s own responsibilities.” See MPC Ltd. v. New Mexico Taxation & Revenue Dept.,

12 2003-NMCA-021, ¶ 14, 133 N.M. 217, 220, 62 P.3d 308, 311.

13 G. “Taxation is the rule and the claimant must show that his demand is within the letter

14 as well as the spirit of the law.” See TPL, Inc. v. New Mexico Taxation & Revenue Dept., 2003-

15 NMSC-007, ¶ 9, 133 N.M. 447, 451, 64 P.3d 474, 478.

16 H. The primary goal of statutory interpretation is “to give effect to the intent of the

17 [L]egislature.” See Dell Catalog Sales L.P. v. N.M. Taxation & Revenue Dep't, 2009-NMCA-

18 001, ¶19, 145 N.M. 419, 199 P.3d 863.

19 I. Legislative intent is fulfilled “by first looking at the plain meaning of the

20 language of the statute, reading the provisions ... together to produce a harmonious whole.” See

21 Dell Catalog Sales L.P. v. N.M. Taxation & Revenue Dep't, 2009-NMCA-001, ¶19, 145 N.M.

22 419, 199 P.3d 863; Sundance Mech. & Util. Corp. v. Armijo, 1987-NMSC-078, ¶5, 106 N.M.

23 249, 250, 741 P.2d 1370, 1371.

In the Matter of the Protest of Aspen Management Co.
Page 41 of 45
1 J. Tax exemptions and deductions are matters of legislative grace and ways of

2 achieving policy objectives. They are “construed against the taxpayer.” See Sutin, Thayer & Browne

3 v. N.M. Taxation & Revenue Dep't, 1985-NMCA-047, ¶ 17, 104 N.M. 633, 725 P.2d 833.

4 K. The Lynn and Erin Compassionate Use Act, NMSA 1978, Chapter 26, Article 2B

5 “was expressly intended ‘to allow the beneficial use of medical cannabis in a regulated system

6 for alleviating the symptoms caused by debilitating medical conditions and their medical

7 treatments.’” See NMSA 1978, Section 26-2A-2 (2007); Sacred Garden, Inc. v. New Mexico

8 Taxation & Revenue Dep't, 2021-NMCA-038, ¶17, 495 P.3d 576, 580, cert. quashed Sacred

9 Garden v. Taxation, No. S-1-SC-38164 (Feb. 23, 2022).

10 L. “It is reasonably self-evident that the deduction from gross receipts for prescription

11 drugs was similarly intended to make medical treatment more accessible, by lessening the expense

12 to those who require it.” See Sacred Garden, Inc. v. New Mexico Taxation & Revenue Dep't, 2021-

13 NMCA-038, ¶ 17, 495 P.3d 576, 580.

14 M. The New Mexico Department of Health’s rules governing licensure of medical

15 cannabis producers require that producers operate as “non-profit corporation[s] … pursuant to

16 Section 53-8-1 et seq., NMSA 1978[.]” See Regulation 7.34.4.8 NMAC

17 N. “Agency regulations that interpret statutes and are promulgated under statutory

18 authority are presumed proper, ‘[a]nd, of course, it is hornbook law that an interpretation of a statute

19 by the agency charged with its administration is to be given substantial weight.’” See Chevron

20 U.S.A., Inc. v. State of N.M. ex rel. Taxation & Rev. Dept., 2006-NMCA-050, ¶ 16, 139 N.M. 498,

21 503, 134 P.3d 785, 790.

22 O. “A party challenging a rule adopted by an administrative agency has the burden of

23 establishing the invalidity of the rule or proposed regulation.” See New Mexico Mining Ass’n v.

In the Matter of the Protest of Aspen Management Co.
Page 42 of 45
1 New Mexico Mining Comm’n, 1996-NMCA-098, ¶ 8, 122 N.M. 332, 335, 924 P.2d 741, 744.

2 P. When the Legislature grants agencies the discretion of promulgating rules and

3 regulations, those rules and regulations have “the force of law.” See Duke City Lumber Co. v. New

4 Mexico Envtl. Improvement Bd., 1984-NMSC-042, ¶ 7, 101 N.M. 291, 292, 681 P.2d 717, 718.

5 Q. Taxpayer bears the burden of establishing entitlement to a clearly and

6 unambiguously expressed statutory deduction or exemption. See TPL, Inc. v. N.M. Taxation &

7 Revenue Dep't, 2003-NMSC-007, ¶9, 133 N.M. 447, 64 P.3d 474.

8 R. Statutory provisions must be given “fair, unbiased, and reasonable construction,

9 without favor or prejudice to either the taxpayer or the [s]tate, to the end that the legislative

10 intent is effectuated and the public interests to be subserved thereby are furthered.” See Chavez v.

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

12 S. Aspen did not establish entitlement to any statutory deduction or exemption

13 provided by the Gross Receipts and Compensating Tax act, including Section 7-9-17, Section 7-9-

14 25, and Section 7-9-69, nor did it establish that the relevant receipts should be excluded under

15 Section 7-9-3.5.

16 For the reasons stated, Taxpayer’s protest is DENIED. Taxpayer, Aspen Management

17 Company, shall be liable for outstanding principal and penalty under the Assessment, plus

18 accrued interest as permitted by law.

19 DATED: November 7, 2023

20
21 Chris Romero
22 Hearing Officer
23 Administrative Hearings Office
24 P.O. Box 6400
25 Santa Fe, NM 87502

In the Matter of the Protest of Aspen Management Co.
Page 43 of 45
1 NOTICE OF RIGHT TO APPEAL

2 Pursuant to NMSA 1978, Section 7-1-25 (2015), the parties have the right to appeal this

3 decision by filing a notice of appeal with the New Mexico Court of Appeals within 30 days of the

4 date shown above. If an appeal is not timely filed with the Court of Appeals within 30 days, this

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

6 the requirements of perfecting an appeal of an administrative decision with the Court of Appeals.

7 Either party filing an appeal shall file a courtesy copy of the appeal with the Administrative

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

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

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

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

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

13

In the Matter of the Protest of Aspen Management Co.
Page 44 of 45
1 CERTIFICATE OF SERVICE
2 I hereby certify that I served the foregoing on the parties listed below this 7th day of

3 November, 2023 in the following manner:

4 First Class Mail and Email First Class Mail and Email
5
6
7
8 INTENTIONALLY BLANK

In the Matter of the Protest of Aspen Management Co.
Page 45 of 45