My out-of-state company provides back-office administration and insurance coverage to independent oilfield contractors who work in New Mexico — do I owe New Mexico gross receipts tax on the fees I earn from them?

Plain-English summary

DTC Energy Group, Inc. — a Colorado corporation headquartered in Bismarck, North Dakota — helped independent oilfield consultants work at New Mexico well sites without maintaining any office, staff, or property in the state. The consultants first landed their own jobs directly with oil-and-gas "Extraction Companies," then came to DTC to get two things they usually couldn't obtain on their own: access to DTC's Master Service Agreements (MSAs) with those companies (which made them "approved vendors") and DTC's liability insurance (often exceeding $1,000,000 per year). DTC invoiced the extraction company, collected payment, kept a negotiated fee that rarely exceeded five percent of the contractor's daily rate, and forwarded the balance to the contractor. It also handled onboarding, insurance compliance, invoicing, and collections — all from offices in Colorado, Wyoming, and North Dakota.

The Department audited DTC for January 2015 through December 2020 and assessed $1,921,116.65 in gross receipts tax, plus $382,619.50 penalty and $236,804.64 interest (total demand $2,540,540.79). The Department's theory: DTC was really a prime contractor selling taxable oilfield consulting services performed in New Mexico.

Hearing Officer Chris Romero granted the protest and abated the assessment as to the disputed receipts. The dispute turned entirely on the out-of-state services exemption in NMSA 1978, Section 7-9-13.1 (pre-2021 version), which exempts "receipts from performing a service outside New Mexico, the product of which is initially used in New Mexico." A taxpayer must prove both elements:

• Service performed outside New Mexico? Yes. DTC's invoicing, collections, fee withholding, contract administration, and insurance/risk-management work were all done from its out-of-state offices; it had no office, staff, or property in New Mexico.
• Product initially used in New Mexico? Yes. Under TPL, Inc. v. Taxation & Revenue Department (2003-NMSC-007), the "product of a service" is the benefit for which the purchaser paid — here, access to DTC's MSAs and administrative/insurance infrastructure. That product was first used in New Mexico when the contractors performed at New Mexico well sites under DTC's approved-vendor status.

Applying substance over form (Rauscher, Pierce, Refnes v. Taxation & Revenue Department, 2000-NMCA-065), the Hearing Officer found the Independent Contractors — not the Extraction Companies — were the true purchasers: they chose DTC over competitors, negotiated the fee, and bore its economic cost. The Department's prime-contractor rule (Regulation 3.2.1.18 NMAC) didn't fit, because DTC never employed, directed, placed, or supervised the contractors and wasn't paid for New Mexico labor.

The Hearing Officer leaned on two recent Court of Appeals decisions to draw the line. In Talbridge Corp. v. Taxation & Revenue Department (2024-NMCA-044), a Texas company employed the workers it supplied to a New Mexico client and marked up their in-state labor — so its receipts were taxable. In Vista Staffing Solutions, Inc. (a non-precedential May 30, 2025 opinion), a Utah firm placed independent physicians and nurses with New Mexico hospitals from out of state — and qualified for the exemption. DTC lined up with Vista, not Talbridge: it provided administrative infrastructure to contractors who had already secured their own work, and did not employ or provide the in-state workforce.

Penalty was independently abated. Any underreporting flowed from DTC's reasonable reliance on its CPA, whose returns inadvertently overstated New Mexico sales factors; under Regulation 3.1.11.11 NMAC, reliance on a qualified professional is inconsistent with negligence (NMSA 1978, Section 7-1-69).

Result: DTC's receipts from Independent Contractor transactions were exempt, and the tax, penalty, and interest on them were abated. Only the uncontested tax on DTC's six W-2 New Mexico employees — which DTC had already conceded and paid ($94,545.77) — remained undisturbed.

What this means for you

Out-of-state service firms with clients who operate in New Mexico

Where you perform a service can matter as much as where the work ends up being used. For the years at issue, Section 7-9-13.1 exempted receipts from a service performed outside New Mexico whose product is first used in New Mexico. If your back-office, staffing-support, or risk-management work genuinely happens out of state, the exemption may reach it even though your customer's ultimate activity occurs at a New Mexico job site. Caution: this decision applies the pre-2021 version of Section 7-9-13.1; the statute was amended effective 2021, so confirm the current rule for periods after 2020.

Identify who actually buys your service — and what they buy

The case turned on substance over form. Even though the extraction companies paid DTC directly (and the MSAs named DTC as "Contractor"), the Hearing Officer found the independent contractors were the real customers because they selected DTC, negotiated the fee, and bore its cost — and what they bought was access to MSAs and insurance, not in-state consulting. Document who chooses you, who negotiates your fee, who bears its economic cost, and precisely what benefit they are paying for.

Staffing and labor-supply businesses: employ-vs-facilitate is the dividing line

Compare Talbridge and Vista. If you employ the workers, administer their payroll, and mark up their in-state labor, your receipts are likely taxable in New Mexico. If you facilitate or place independent professionals who secured their own work — performing your own recruiting, contracting, and billing out of state — you may fall on the exempt side. How you contract, pay, and control the workforce drives the result.

Reasonable reliance on a CPA can defeat the negligence penalty

DTC's CPA overstated its New Mexico sales factors, but the Hearing Officer abated the penalty because DTC reasonably relied on a qualified professional and did not intentionally misstate its activity (Regulation 3.1.11.11 NMAC). Genuine, documented reliance on competent tax advisors — as opposed to willful blindness — is a recognized defense to the New Mexico negligence penalty.

Common questions

Q: I'm based out of state and do all my administrative work there, but my customers use my service in New Mexico. Am I automatically exempt?
A: Not automatically. For the pre-2021 version of Section 7-9-13.1 you must prove both that the service was performed outside New Mexico and that its product was initially used in New Mexico, and exemptions are construed narrowly against the taxpayer. It is a fact-specific inquiry, and the statute was amended for periods after 2020.

Q: The Department says I'm a "prime contractor." Does that make my receipts taxable?
A: Only if the prime-contractor rule (Regulation 3.2.1.18 NMAC) actually fits your facts — that is, you contracted to perform services in New Mexico and then subcontracted the work. Here it did not apply because DTC never employed, directed, or supervised the contractors and wasn't paid based on New Mexico labor.

Q: My paperwork labels me the "Contractor" and my customer pays me directly. Doesn't that decide it?
A: No. New Mexico looks to substance over form. Despite the labels and the payment flow, the Hearing Officer found the independent contractors were the real purchasers because they chose DTC, negotiated the fee, and bore its cost.

Q: My accountant made an error that led to underreporting. Can I still be hit with a penalty?
A: Reasonable reliance on a qualified CPA is inconsistent with negligence under Regulation 3.1.11.11 NMAC, so the penalty was abated here. That reliance must be genuine; it is not a shield for intentional misstatement.

Citations and references

New Mexico statutes:

• § 7-9-13.1 NMSA 1978 (pre-2021) — exempts receipts from performing a service outside New Mexico, the product of which is initially used in New Mexico (the dispositive exemption)
• § 7-9-4 NMSA 1978 — gross receipts tax imposed on the privilege of engaging in business in New Mexico
• § 7-9-5(A) NMSA 1978 — all receipts of a person engaging in business in New Mexico are presumed taxable unless specifically exempt
• § 7-9-3.3 NMSA 1978 — "engaging in business" defined broadly; physical presence not required
• § 7-1-69 NMSA 1978 — civil negligence penalty; not imposed when failure to pay was not due to negligence
• § 7-1B-8 NMSA 1978 (2019) — 90-day protest-hearing requirement
• § 7-1-24 NMSA 1978 — Administrative Hearings Office jurisdiction
• § 7-1-25 NMSA 1978 (2015) — right to appeal to the New Mexico Court of Appeals within 30 days

New Mexico regulations:

• Regulation 3.1.11.11 NMAC — no penalty when the taxpayer acts as a reasonable taxpayer, including reliance on qualified tax counsel or accountants
• Regulation 3.2.1.18 NMAC — prime-contractor rule (found inapplicable)
• Regulation 3.1.6.12(A) NMAC — burden shifting once the presumption of correctness is overcome
• Regulation 22.600.1.20(C) NMAC — Hearing Officer's independence from the Department

Cases cited:

• TPL, Inc. v. New Mexico Taxation & Revenue Department, 2003-NMSC-007, 133 N.M. 447 — the "product of a service" is the direct result or benefit for which the purchaser paid; taxpayer must prove both elements of Section 7-9-13.1
• Rauscher, Pierce, Refnes, Inc. v. Taxation & Revenue Department, 2000-NMCA-065 — substance over form controls for tax purposes; and Rauscher, 2002-NMSC-013 — the "predominant ingredient" test (found inapplicable, as only a service was involved)
• Vista Staffing Solutions, Inc. v. N.M. Taxation & Revenue Department (non-precedential mem. op., May 30, 2025) — out-of-state placement of independent professionals with New Mexico hospitals qualified for the Section 7-9-13.1 exemption; treated as persuasive authority (Rule 12-405 NMRA); aligned with here
• Talbridge Corp. v. N.M. Taxation & Revenue Department, 2024-NMCA-044, 550 P.3d 901 — a firm that employed the workers it supplied and marked up their in-state labor owed gross receipts tax; distinguished
• Gemini Las Colinas, LLC v. New Mexico Taxation & Revenue Department, 2023-NMCA-039, 531 P.3d 622 — burden of production shifts to the Department once the taxpayer overcomes the presumption of correctness
• Corr. Corp. of Am. v. State of N.M., 2007-NMCA-148, 142 N.M. 779 — Department assessments are presumed correct
• Sutin, Thayer & Browne v. Revenue Div. of Taxation & Revenue Dep't, 1985-NMCA-047, 104 N.M. 633 — deductions and exemptions must be clearly authorized by the Legislature
• Sacred Garden, Inc. v. N.M. Taxation & Revenue Dep't, 2021-NMCA-038, 495 P.3d 576 — exemption provisions receive a fair, unbiased, and reasonable construction
• Sec. Escrow Corp. v. State Taxation & Revenue Dep't, 1988-NMCA-068, 107 N.M. 540, and Wing Pawn Shop v. Taxation & Revenue Dep't, 1991-NMCA-024, 111 N.M. 735 — deductions and exemptions are narrowly construed in favor of taxation

Source

• Listing: New Mexico Decisions & Orders
• Decision post: DTC Energy Group, Inc
• Decision PDF: D&O 25-08

Original ruling text

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

4 DTC ENERGY GROUP, INC.

5 v. AHO Case Number 22.07-038A, D&O # 25-08

6 NEW MEXICO TAXATION AND REVENUE DEPARTMENT

7 DECISION AND ORDER

8 On December 3 and 4, 2024, Hearing Officer Chris Romero, Esq., of the Administrative

9 Hearings Office conducted an administrative hearing on the merits of the tax protest of DTC

10 Energy Group, Inc. (“Taxpayer”) pursuant to the Tax Administration Act and the Administrative

11 Hearings Office Act. The parties were ordered to file written closing arguments and, at their

12 discretion, proposed findings of fact and conclusions of law by January 31, 2025. The record

13 closed upon receipt of these post-hearing submissions.

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

15 impartial adjudication of protests under the Tax Administration Act. See Regulation

16 22.600.1.20(C) NMAC (the Hearing Officer is not “responsible to or subject to the direction of

17 any officer, employee or agent of the taxation and revenue department”).

18 Christopher A. Holland, Esq., and John A. Dragovits, Esq., of Sutin, Thayer & Browne,

19 appeared for Taxpayer. Luke Clausen, Chief Executive Officer, and Andrew Meyers, former

20 Chief Operating Officer, testified for Taxpayer. Cordelia Friedman, Esq., appeared for the

21 Taxation and Revenue Department (“Department”), accompanied by protest auditors Mary

22 Griego and Angelica Rodriguez. Daniel Coleman, protest auditor, observed for training

23 purposes.

24 Except as follows, Taxpayer’s Exhibits 1 through 7 were admitted. Taxpayer withdrew

In the Matter of the Protest of DTC Energy Group, Inc.
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1 Taxpayer Ex. 1.3. The Department’s objection to the admission of Taxpayer Ex. 3.3 was

2 sustained. Department Exhibits A through S were admitted.

3 This protest arises from the Department’s assessment of $1,921,116.65 in gross receipts

4 tax, plus penalty and interest, against Taxpayer for the period January 31, 2015, through

5 December 31, 2020. The central question is whether Taxpayer’s receipts from independent

6 contractor transactions are taxable gross receipts or exempt under NMSA 1978, Section 7-9-13.1

7 (pre-2021) as “receipts from performing a service outside New Mexico, the product of which is

8 initially used in New Mexico.”

9 As explained below, the Hearing Officer concludes that receipts from Independent

10 Contractor transactions are exempt under Section 7-9-13.1 (pre-2021). Accordingly, the

11 Department’s assessment is abated as to those receipts, including associated penalty and interest.

12 The uncontested W-2 employee receipts previously remitted remain undisturbed.

13 IT IS DECIDED AND ORDERED AS FOLLOWS:

14 FINDINGS OF FACT

15 Witnesses

16 1. Andrew Meyers worked for Taxpayer from June 2017 to April 2024. He served

17 first as director of business development and later as chief operating officer beginning about May

18 2021. At the time of the hearing, he resided in Montana and was employed by Alamon, Inc.

19 [Direct Exam. of A. Meyers]

20 2. Meyers’ primary responsibility was to increase revenue by recruiting independent

21 contractors through networking, website inquiries, recruiting trips, and offering superior and

22 lower-cost services or benefits. [Direct Exam. of A. Meyers]

23 3. Luke Clausen resides in Mandan, North Dakota. He is the sole shareholder of

In the Matter of the Protest of DTC Energy Group, Inc.
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1 Taxpayer and also owns other North Dakota businesses, including a restaurant and a bar. [Direct

2 Exam. of L. Clausen]

3 4. Taxpayer was formed in 2011. As of the hearing, it was no longer engaging in

4 business because of non-profitability and competition within the industry. [Direct Exam. of L.

5 Clausen]

6 5. Mary Griego is a Department protest auditor. As of December 2024, she had been

7 with the Department for 16 years and was assigned this protest near the time it was filed. [Direct

8 Exam. of M. Griego]

9 6. As of December 2024, Angelica Rodriguez has been employed by the Department

10 for 20 years and serves as a supervisor in the protest office. [Direct Exam. of A. Rodriguez]

11 Corporate Background

12 7. During the tax period, Taxpayer’s business activities consisted of providing

13 administrative and risk-management services in connection with oilfield consulting

14 engagements, including onboarding, insurance and indemnity compliance, access to MSAs,

15 invoicing, and collections. [Direct Exam. of L. Clausen; Direct Exam. of A. Meyers]

16 8. Taxpayer is a Colorado corporation headquartered in Bismarck, North Dakota.

17 [Direct Exam. of L. Clausen]

18 9. During the tax period, Taxpayer operated primarily from offices in Colorado,

19 Wyoming, and North Dakota. [Direct Exam. of L. Clausen]

20 10. Taxpayer did not own or lease real estate, office space, or business property in

21 New Mexico during the tax period. [Direct Exam. of L. Clausen]

22 11. Prior to 2014, Taxpayer sought business directly from oil and gas exploration and

23 production companies (“Extraction Companies”). Beginning in or after 2014, Taxpayer

In the Matter of the Protest of DTC Energy Group, Inc.
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1 refocused its efforts on recruiting independent contractors as clients who, in turn, performed for

2 Extraction Companies. [Direct Exam. of L. Clausen; Direct Exam. of A. Meyers]

3 12. During the tax period, Taxpayer was registered with the Department to engage in

4 business in New Mexico. The registration materials reflected a classification associated with oil

5 and gas support/technical services. [Direct Exam. of M. Griego; Dept. Ex. B-4 – B-5]

6 13. The post-2014 model benefited consultants by accelerating payments and offering

7 access to group health insurance. [Direct Exam. of L. Clausen]

8 14. Taxpayer invested more than $10,000 in a social media networking platform

9 intended to attract consultants and generate new revenue. [Direct Exam. of L. Clausen]

10 15. Taxpayer viewed itself as working for and representing independent contractor

11 consultants, who did not work for or perform services on behalf of Taxpayer. Taxpayer was not a

12 staffing agency. [Direct Exam. of L. Clausen]

13 Business Model and Contractual Structure

14 16. Taxpayer’s business model centered on simplifying contractual relationships

15 between independent oilfield consultants (“Independent Contractors”) and Extraction

16 Companies. [Direct Exam. of L. Clausen]

17 17. Extraction Companies typically required work to occur under an existing Master

18 Service Agreement (“MSA”), with an approved vendor. Taxpayer maintained more than 100

19 MSAs during the tax period. [Direct Exam. of L. Clausen; Direct Exam. of A. Meyers]

20 18. In each engagement, the Independent Contractor first contracted, often verbally,

21 by email, or by text, with an Extraction Company regarding the scope of work, day rate, location,

22 and duration of work. [Direct Exam. of A. Meyers; Dept. Ex. H-1 (quoting email from

23 Taxpayer’s accounting manager)]

In the Matter of the Protest of DTC Energy Group, Inc.
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1 19. After securing work with an Extraction Company and establishing the terms and

2 conditions of such work, the Independent Contractor would enter into a written Independent

3 Contractor Agreement with Taxpayer (or, at times, elect to contract with a competitor). [Direct

4 Exam. of A. Meyers; Taxpayer Ex. 5; Dept. Ex. H-1 (quoting email from Taxpayer’s accounting

5 manager)]

6 20. The Independent Contractor Agreement enabled the contractor to perform under

7 Taxpayer’s MSA as an approved vendor, which provided certain advantages to the Independent

8 Contractor, including insurance coverage, which was sufficiently expensive that Independent

9 Contractors could not usually obtain comparable coverage on their own. [Direct Exam. of A.

10 Meyers; Direct Exam. of L. Clausen; Taxpayer Ex. 5]

11 21. MSAs were typically prepared by Extraction Companies, were largely non-

12 negotiable, and emphasized the insurance and indemnity requirements needed to achieve

13 approved-vendor status. On at least one occasion, Taxpayer’s attempt to negotiate insurance

14 terms resulted in loss of potential work. [Direct Exam. of A. Meyers; Direct Exam. of L.

15 Clausen; Taxpayer Ex. 4 (pp. 9, 47, 94, 106, 127, 141, 152, 163)]

16 22. MSAs generally omitted any specific scope of work or work location. [Direct

17 Exam. of A. Meyers; Taxpayer Ex. 4]

18 23. When an MSA described “supervision staffing,” that label did not reflect

19 Taxpayer’s role as shown by the record. Taxpayer’s clients and recipients of its services were the

20 Independent Contractors, not the Extraction Companies. [Direct Exam. of A. Meyers; Taxpayer

21 Ex. 4 (p. 95)]

22 24. The parties stipulated that the contracts generally described Taxpayer as an

23 independent contractor and that there was no agency relationship between Taxpayer and any

In the Matter of the Protest of DTC Energy Group, Inc.
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1 Extraction Company. [Hearing Record, Day 2, Part 1]

2 25. It was common for Extraction Companies not to return signed MSAs to Taxpayer

3 and instead informally notify it that it had been given approved-vendor status. [Direct Exam. of

4 A. Meyers]

5 26. Taxpayer’s MSAs identified Taxpayer as “Contractor” and included insurance

6 and indemnity obligations in Taxpayer’s name rather than those of individual consultants.

7 [Taxpayer Ex. 4]

8 27. Extraction Companies, not Taxpayer, controlled the Independent Contractors’

9 scope of work, day rates, and supervision at New Mexico well sites. [Direct Exam. of A. Meyers;

10 Direct Exam. of L. Clausen]

11 28. MSAs generally obligated Taxpayer to comply with any tax obligations arising

12 from compensation under the MSA. [Direct Exam. of M. Griego]

13 Administrative Services and Expenses

14 29. Taxpayer’s services consisted of personnel onboarding, human resources

15 coordination, risk management, and insurance compliance functions, as well as invoicing

16 Extraction Companies, collecting payments, withholding the fee negotiated with the Independent

17 Contractor, and remitting balances to Independent Contractors. [Direct Exam. of A. Meyers;

18 Direct Exam. of L. Clausen; Taxpayer Ex. 2]

19 30. The invoice form utilized by Taxpayer used the term “employee,” but the same

20 form was used for all billing regardless of whether the individual was an employee or an

21 Independent Contractor. [Cross Exam. of A. Meyers; Taxpayer Ex. 2]

22 31. Taxpayer occasionally offered Independent Contractors optional benefits such as

23 access to group health insurance. These benefits helped Taxpayer compete for Independent

In the Matter of the Protest of DTC Energy Group, Inc.
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1 Contractors by making Taxpayer more attractive to Independent Contractors than competitors

2 that did not offer comparable incentives. [Direct Exam. of L. Clausen]

3 32. Taxpayer’s largest expense was liability insurance required by MSAs, often

4 exceeding $1,000,000 per year, and unattainable for Independent Contractors to acquire

5 independently. [Direct Exam. of A. Meyers; Taxpayer Ex. 4 (pp. 6–7, 47–51); Direct Exam. of

6 L. Clausen]

7 33. Taxpayer charged Independent Contractors a negotiated percentage fee that rarely

8 exceeded five percent of the daily rate in exchange for administrative and risk management

9 services. Extraction Companies had no input in determination of the fee. [Direct Exam. of A.

10 Meyers]

11 34. Taxpayer’s administrative activities, including executing agreements, processing

12 invoices, maintaining insurance, and managing accounts, occurred outside New Mexico.

13 Independent Contractors’ consulting work often occurred at New Mexico well sites. [Direct

14 Exam. of L. Clausen]

15 35. Industry competitors provided substantially similar services and operated under

16 comparable models. [Direct Exam of A. Meyers; Direct Exam. of L. Clausen]

17 36. Independent Contractors, not the Extraction Companies, were the purchasers of

18 Taxpayer’s administrative services, as evidenced by their selection of Taxpayer, their negotiation

19 of Taxpayer’s percentage fee, and their bearing of that fee’s economic cost. Extraction

20 Companies were not invoiced for any separately stated fee. [Direct Exam of A. Meyers; Direct

21 Exam. of L. Clausen; See e.g. invoices (Dept. Ex. G)]

22 Employee Transactions (Uncontested)

23 37. During the tax period, Taxpayer employed six W-2 employees in New Mexico

In the Matter of the Protest of DTC Energy Group, Inc.
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1 who performed oilfield consulting services for Extraction Companies. [Direct Exam. of L.

2 Clausen]

3 38. The six W‑2 employees performed on‑site oilfield consulting/supervisory services

4 for Extraction Companies at New Mexico well sites during the Tax Period. [Direct Exam. of L.

5 Clausen; Direct Exam of A. Meyers]

6 39. These W‑2 transactions were administered by Taxpayer as employee‑leasing

7 engagements distinct from the Independent Contractor transactions central to the protest. [Direct

8 Exam. of L. Clausen; Direct Exam of A. Meyers]

9 40. Taxpayer concedes that receipts associated with these W-2 employees

10 (“Uncontested Receipts”) were subject to New Mexico gross receipts tax.

11 41. On December 8, 2021, Taxpayer remitted $94,545.77 in gross receipts tax,

12 penalty, and interest attributable to the Uncontested Receipts.

13 Department Audit and Assessment

14 42. The Department’s assessment for the tax period totaled $1,921,116.65 in gross

15 receipts tax, plus interest and penalty. [Dept. Ex. F]

16 43. Department auditors observed that MSAs listed Taxpayer, rather than

17 Independent Contractors, as the contracting parties and that invoices were issued in Taxpayer’s

18 name, meaning that Extraction Companies paid Taxpayer directly. [Direct Exam. of A.

19 Rodriguez; Direct Exam. of M. Griego]

20 44. Under these circumstances, the Department generally sources receipts to New

21 Mexico when a protest involves out-of-state administrative activity combined with in-state

22 performance. [Direct Exam. of A. Rodriguez]

23 45. The Department determined that Taxpayer had both W-2 employees and

In the Matter of the Protest of DTC Energy Group, Inc.
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1 Independent Contractors performing work in New Mexico during the tax period. [Direct Exam.

2 of A. Rodriguez; Dept. Ex. G]

3 46. The Department’s assessment relied, in part, on Taxpayer’s corporate income-tax

4 filings reporting New Mexico sales-factor percentages for apportionment. [Dept. Ex. F; Direct

5 Exam. of M. Griego]

6 47. Ms. Griego could not reconcile those reported sales factors with Taxpayer’s out-

7 of-state operations. The Department nevertheless used them because it perceived them as the

8 most reliable information available at the time. [Direct Exam. of M. Griego]

9 48. Department Exhibit F reflects New Mexico sales of approximately ten percent of

10 total sales during the years at issue. [Dept. Ex. F]

11 49. In preparation for the protest hearing, Ms. Rodriguez compiled spreadsheets for

12 each relevant year summarizing payments from Extraction Companies to Taxpayer for services

13 provided by Independent Contractors in New Mexico, the locations representing places where

14 the Extraction Companies received the benefit of Independent Contractors’ services. [Dept. Exs.

15 F; M – S; Direct Exam. of A. Rodriguez]

16 50. The spreadsheets concentrated strictly on mathematical computations of gross

17 receipts for services received by Extraction Companies from Independent Contractors in New

18 Mexico. Conversely stated, they did not concern or evaluate the potential application of any tax

19 deductions or exemptions. [Dept. Exs. F; M – S; Direct Exam. of A. Rodriguez; Cross Exam. of

20 A. Rodriguez]

21 51. Ms. Rodriguez’s computations did not reveal identical figures to those previously

22 reported by Taxpayer, but the results were within an acceptable range to conclude they

23 accurately represented payments by Extraction Companies for services performed by

In the Matter of the Protest of DTC Energy Group, Inc.
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1 Independent Contractors in New Mexico. [Dept. Exs. F; M – S; Direct Exam. of A. Rodriguez]

2 Reporting, Returns, and Reliance on CPA

3 52. Taxpayer’s certified public accountant prepared and filed Taxpayer’s corporate

4 income and franchise tax returns for the years at issue. [Direct Exam. of L. Clausen]

5 53. The sales factors reported on those returns attributed a significant percentage of

6 gross receipts to New Mexico. [Direct Exam. of L. Clausen]

7 54. Credible testimony established that these reported factors were erroneous and

8 overstated Taxpayer’s New Mexico activity compared with its actual operations. [Direct Exam.

9 of L. Clausen; Direct Exam. of A. Meyers]

10 55. The Department relied on those sales factor figures in computing the assessment.

11 [Direct Exam. of M. Griego; Dept. Ex. F]

12 56. Taxpayer’s reported New Mexico sales factors included revenue from

13 Independent Contractors’ field work even though such work was performed by the Independent

14 Contractors and not by Taxpayer. [Direct Exam. of L. Clausen; Direct Exam. of A. Meyers]

15 57. Taxpayer’s cost of performance in New Mexico was consistently less than one-

16 half of its total cost of performance nationwide and typically accounted for under ten percent.

17 [Direct Exam. of L. Clausen]

18 58. Since 2011, Taxpayer reasonably relied on a CPA for state tax compliance,

19 including preparing returns and computing the sales factor for corporate income tax purposes.

20 Taxpayer did not intentionally misstate its New Mexico activity, but relied on the expertise of its

21 CPA. [Direct Exam. of L. Clausen; Direct Exam. of A. Meyers]

22 Website and Marketing Materials

23 59. In preparing its position, Ms. Griego reviewed Taxpayer’s website, which

In the Matter of the Protest of DTC Energy Group, Inc.
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1 included statements describing Taxpayer as providing various oil and gas field supervisory and

2 consulting services in New Mexico. The Department cited these website screens as evidence that

3 Taxpayer actively marketed such services in New Mexico. [Direct Exam. of M. Griego; Dept.

4 Ex. I]

5 60. Taxpayer’s website also referenced Taxpayer’s maintenance of insurance

6 coverage meeting client requirements and its provision of administrative support such as

7 invoicing and compliance. [Dept. Ex. I]

8 61. Some website statements reflected aspirations rather than services actually

9 performed. Not all the services described occurred as stated. [Cross Exam. of A. Meyers; Dept.

10 Ex. I]

11 62. The website also contained descriptions consistent with the testimony of Meyers

12 and Clausen, including that oilfield consultants are contracted by operating companies and

13 supervise activities on location, and that completion and production consultants supervise

14 operations on behalf of operators. [Cross Exam. of M. Griego; Dept. Ex. I]

15 63. The website was developed by Taxpayer’s marketing staff and GoDaddy.com

16 prior to the evolution of the business model implemented during the tax period. [Direct Exam. of

17 L. Clausen]

18 Procedural History

19 64. On September 9, 2021, the Department issued a Notice of Assessment of Taxes

20 and Demand for Payment asserting a total amount due of $2,540,540.79 for the periods January

21 31, 2015 to December 31, 2020. The total consisted of $1,921,116.65 in tax, $382,619.50 in

22 penalty, and $236,804.64 in interest. [Administrative File (Letter ID L0797089200)]

23 65. On December 8, 2021, Taxpayer submitted a formal written protest of the

In the Matter of the Protest of DTC Energy Group, Inc.
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1 Department’s assessment. [Administrative File]

2 66. On February 28, 2022, the Department acknowledged Taxpayer’s protest.

3 [Administrative File (Letter ID No. L0529832800)]

4 67. On July 27, 2022, the Department filed a Request for Hearing and its Original

5 Answer to the Protest. [Administrative File]

6 68. On July 29, 2022, the Administrative Hearings Office issued a Notice of

7 Telephonic Scheduling Hearing setting an initial hearing for August 19, 2022. [Administrative

8 File]

9 69. At the initial hearing on August 19, 2022, neither party objected to the hearing as

10 satisfying the 90-day statutory requirement. [Administrative File]

11 70. Subsequent hearings were held on the following dates as the parties agreed that

12 they could benefit from additional time to confer, exchange information, and other activities that

13 might narrow or resolve issues: November 18, 2022; March 3, 2023; June 2, 2023; and March 8,

14 2024. Telephonic scheduling hearings were also set on the following days but were continued

15 upon the unopposed motions of Taxpayer: August 4, 2023; and December 1, 2023.

16 [Administrative File]

17 71. On March 22, 2024, the Administrative Hearings Office entered a Scheduling

18 Order and Notice of Administrative Hearing setting a hearing on the merits of the protest for

19 December 3, 2024. [Administrative File]

20 72. On November 14, 2024, both parties filed their respective prehearing statements.

21 [Administrative File]

22 73. On November 22, 2024, the Department filed an Emergency Motion for

23 Expedited Production of Documents. [Administrative File]

In the Matter of the Protest of DTC Energy Group, Inc.
Page 12 of 31
1 74. On November 22, 2024, Taxpayer filed a Stipulated Joint Amendment to the

2 Parties’ Pre-Hearing Statements with Respect to the Designation and Admission of Hearing

3 Exhibits. [Administrative File]

4 75. On November 25, 2024, Taxpayer filed Taxpayer’s Response in Opposition to the

5 Department’s Emergency Motion for Expedited Production of Documents. On the same day, the

6 Department filed its Reply to Taxpayer Response and Notice that the Department’s Emergency

7 Motion for Expedited Production of Documents is Ripe for Ruling. [Administrative File]

8 76. On November 26, 2024, the Administrative Hearings Office entered an Order

9 Denying Emergency Motion for Expedited Production of Documents. [Administrative File]

10 77. On November 27, 2024, Taxpayer filed Taxpayer’s Motion to Permit the

11 Testimony of Witness Andrew Meyers Via Zoom or Other Video Platform. [Administrative File]

12 78. On November 27, 2024, the Department filed its Response to Taxpayer’s Motion

13 to Permit Remote Testimony. [Administrative File]

14 79. On November 27, 2024, the Administrative Hearings Office entered an Order

15 Granting Motion to Permit the Testimony of Witness Andrew Meyers Via Zoom or Other Video

16 Platform. [Administrative File]

17 80. On December 3 – 4, 2024, the Administrative Hearings Office conducted a merits

18 hearing. [Administrative File]

19 81. On December 9, 2024, the Administrative Hearings Office entered a post-hearing

20 scheduling order directing the parties to file written closing arguments by January 31, 2025, and

21 permitting the parties, at their discretion, to include with their closing arguments proposed

22 findings of fact and conclusions of law. [Administrative File]

23 82. On January 31, 2025, the Department filed its closing argument, and the Taxpayer

In the Matter of the Protest of DTC Energy Group, Inc.
Page 13 of 31
1 filed its closing argument along with proposed findings of fact and proposed conclusions of law.

2 [Administrative File]

3 DISCUSSION

4 This protest concerns whether receipts that Taxpayer derived from its Independent

5 Contractor transactions are subject to New Mexico gross receipts tax or whether they are exempt

6 under NMSA 1978, Section 7-9-13.1 (pre-2021 version). Under that statute, receipts from

7 performing a service are exempt only if the taxpayer proves both that (1) the service was performed

8 outside New Mexico, and (2) the product of the service was initially used in New Mexico.

9 The Department contends Taxpayer acted as a prime contractor providing taxable oilfield

10 consulting services to Extraction Companies in New Mexico. Taxpayer maintains that it provided

11 administrative and risk-management services to Independent Contractors from offices outside the

12 state, and that the product of those services qualifies for exemption under Section 7-9-13.1.

13 The record also reflects a discrete category of transactions in which Taxpayer’s own W-2

14 employees performed on-site oilfield consulting/supervisory work in New Mexico. Taxpayer has

15 conceded and remitted the tax due on those receipts, and the Department did not advance the W-2

16 activity as a basis to establish taxability of the Independent Contractor receipts at issue in this

17 protest. Accordingly, this Decision addresses only the Independent Contractor receipts.

18 In evaluating these conflicting characterizations, the Hearing Officer affords limited weight

19 to marketing language contained in Taxpayer’s website. The website is considered for context but is

20 not dispositive of the substance of Taxpayer’s operations. See Rauscher, Pierce, Refnes, Inc. v.

21 Taxation & Revenue Department, 2000-NMCA-065, ¶ 22 (substance over form).

22 Taxpayer’s Position

23 Taxpayer argues that it did not provide oilfield consulting or management services to

In the Matter of the Protest of DTC Energy Group, Inc.
Page 14 of 31
1 Extraction Companies in New Mexico. Rather, it provided administrative and risk-management

2 services to Independent Contractors from outside New Mexico. These services included

3 invoicing, collecting payments, maintaining liability insurance coverage, and remitting payment

4 to Independent Contractors after deducting the fee negotiated by Taxpayer and the Independent

5 Contractor. Taxpayer maintains that Independent Contractors, not Extraction Companies, were

6 its clients and that treating Taxpayer as a prime contractor elevates form over substance.

7 Taxpayer further asserts that each Independent Contractor transaction involved three

8 distinct agreements: (1) a contract between the Independent Contractor and the Extraction

9 Company; (2) a contract between the Independent Contractor and Taxpayer; and (3) a pre-

10 existing Master Service Agreement between Taxpayer and the Extraction Company. Independent

11 Contractors first secured work directly from Extraction Companies and only afterward

12 approached Taxpayer to obtain access to its insurance coverage and MSAs. Taxpayer argues that

13 the administrative services it performed under this structure occurred outside New Mexico and

14 that the product of those services, enabling Independent Contractors to operate under Taxpayer’s

15 MSAs and insurance, qualifies for the exemption under Section 7-9-13.1.

16 Taxpayer also contends that the Department’s reliance on sales factor data from its

17 corporate income tax returns in computing its New Mexico gross receipts was misplaced.

18 Testimony established that the sales factor figures were erroneously reported by its accountant

19 and overstated New Mexico activity, which never exceeded ten percent of Taxpayer’s national

20 operations. Finally, Taxpayer asserts that even if some portion of tax liability were sustained,

21 penalties should be abated because it reasonably relied on a CPA for state tax compliance,

22 demonstrating non-negligence under Regulation 3.1.11.11 NMAC.

23 Department’s Position

In the Matter of the Protest of DTC Energy Group, Inc.
Page 15 of 31
1 The Department argues that Taxpayer functioned as a prime contractor providing taxable

2 consulting services to Extraction Companies in New Mexico. It notes that Extraction Companies

3 paid Taxpayer directly, and Taxpayer then paid Independent Contractors after withholding its

4 fee. The Department further maintains that the Master Service Agreements show that Taxpayer

5 was the vendor of record for the Extraction Companies and that Independent Contractors

6 operated under Taxpayer within those contracts.

7 The Department rejects Taxpayer’s claim that its receipts qualify for exemption under

8 Section 7-9-13.1, contending that the product of Taxpayer’s services was the provision of skilled

9 consultants at New Mexico well sites, rendering the receipts taxable where the services were

10 performed and consumed.

11 Finally, the Department defends its reliance on Taxpayer’s corporate income-tax returns,

12 noting that those filings were prepared by Taxpayer’s own accountant and reflected Taxpayer’s

13 reported business activity.

14 Burdens of Production and Persuasion

15 Assessments issued by the Department are presumed to be correct. See Corr. Corp. of

16 Am. v. State of N.M., 2007-NMCA-148, ¶ 17, 142 N.M. 779, 782, 170 P.3d 1017, 1020; TPL,

17 Inc. v. New Mexico Taxation & Revenue Dep’t, 2003-NMSC-007, ¶ 10, 133 N.M. 447, 451, 64

18 P.3d 474, 478.

19 Overcoming the presumption is a legal threshold that requires a taxpayer to present some

20 countervailing evidence, which need not be persuasive at that stage. Whether the presumption

21 has been overcome is a legal question for the Hearing Officer. Once overcome, the Department

22 assumes a burden of production to support the assessment, while the taxpayer retains the ultimate

23 burden of persuasion. See Gemini Las Colinas, LLC v. New Mexico Taxation & Revenue Dep’t,

In the Matter of the Protest of DTC Energy Group, Inc.
Page 16 of 31
1 2023-NMCA-039, 531 P.3d 622; Regulation 3.1.6.12(A) NMAC.

2 Here, the Hearing Officer finds that Taxpayer presented countervailing evidence sufficient

3 to overcome the presumption of correctness, including testimony regarding the nature and locus of

4 its administrative services, the contractual structure of the Independent Contractor transactions, the

5 acknowledged errors in reported sales factor data, and the finding that Independent Contractors, not

6 Extraction Companies, were the purchasers of Taxpayer’s services. The Department met its burden

7 of production by offering documentary evidence, audit testimony, and argument in support of the

8 assessment. The remaining question is whether Taxpayer has met its ultimate burden of persuasion

9 to prove that its receipts qualify for exemption under Section 7-9-13.1 (pre-2021).

10 Background: Taxpayer’s Operations and Business Model

11 Taxpayer, headquartered in Bismarck, North Dakota, is a Colorado corporation that

12 provides administrative and risk-management services in connection with oil and gas consulting

13 engagements. During the period at issue (January 31, 2015, through December 31, 2020), Taxpayer

14 operated primarily from Colorado, Wyoming, and North Dakota and did not maintain an office or

15 property in New Mexico.

16 Taxpayer’s business model centered on assisting work arrangements between Independent

17 Contractors and Extraction Companies. Extraction Companies typically required work to be

18 performed under an existing MSA with an approved vendor such as Taxpayer. Independent

19 Contractors generally lacked the insurance coverage and contractual infrastructure needed to obtain

20 their own MSAs and therefore partnered with companies like Taxpayer, who provided those

21 administrative and risk-management services for a negotiated fee.

22 A typical transaction involved three separate agreements: (1) the Independent Contractor

23 first contracted directly with an Extraction Company to perform well-site consulting or management

In the Matter of the Protest of DTC Energy Group, Inc.
Page 17 of 31
1 services; (2) the Independent Contractor then entered into an Independent Contractor Agreement

2 with Taxpayer; and (3) the work was performed under Taxpayer’s pre-existing MSA with the

3 Extraction Company. Taxpayer maintained more than 100 MSAs with Extraction Companies

4 during the tax period.

5 In exchange for permitting Independent Contractors under its MSA and providing

6 administrative support, Taxpayer charged Independent Contractors a negotiated percentage of the

7 daily rate the Independent Contractor earned from the Extraction Company. Taxpayer invoiced the

8 Extraction Company, collected full payment, retained its fee (often around five percent), and

9 remitted the balance to the Independent Contractor. In consideration of the fee, which was borne

10 solely by Independent Contractors, they benefited from Taxpayer’s insurance, one of its largest

11 expenses exceeding $1,000,000 per year, and from other benefits, including access to group health

12 insurance and related administrative services.

13 Taxpayer did not direct, place, or supervise Independent Contractors’ work in New Mexico.

14 Testimony established that only the Extraction Companies, not Taxpayer, controlled the scope of

15 work, location, and supervision of Independent Contractors at New Mexico well sites.

16 Taxpayer also employed a small number of W-2 employees in New Mexico during the tax

17 period. Taxpayer concedes that receipts derived from those employees’ services were subject to

18 gross receipts tax and the associated tax was paid. The remaining assessment at issue involves only

19 receipts associated with Independent Contractor transactions.

20 The New Mexico Gross Receipts and Compensating Tax Act

21 The Gross Receipts and Compensating Tax Act imposes an excise tax on the privilege of

22 engaging in business in New Mexico. The tax applies to the gross receipts of any person

23 engaging in business in the state, subject only to specifically authorized deductions and

In the Matter of the Protest of DTC Energy Group, Inc.
Page 18 of 31
1 exemptions. See NMSA 1978, Section 7-9-4 (2010, amended 2022).

2 To facilitate enforcement, the Act presumes that all receipts of persons engaging in

3 business in New Mexico are taxable. See NMSA 1978, Section 7-9-5(A) (2019). As the New

4 Mexico Supreme Court has explained, the claimant must show that their demand “is within the

5 letter as well as the spirit of the law.” See TPL, 2003-NMSC-007, ¶ 9 (quoting Rauscher, 2002-

6 NMSC-013, ¶ 11).

7 “Engaging in business” is defined broadly to include “carrying on or causing to be carried

8 on any activity with the purpose of direct or indirect benefit.” See NMSA 1978, Section 7-9-3.3.

9 Physical presence in New Mexico is not required. The record confirms that Taxpayer engaged in

10 business in New Mexico during the tax period by facilitating contractual arrangements under

11 which Independent Contractors performed oilfield consulting services in the state.

12 Although the gross receipts tax applies broadly, taxpayers may reduce their liability only

13 through deductions or exemptions clearly expressed by the Legislature. See Sutin, Thayer &

14 Browne v. Revenue Div. of Taxation & Revenue Dep’t, 1985-NMCA-047, ¶ 17, 104 N.M. 633,

15 636, 725 P.2d 833, 836. New Mexico courts have consistently held that tax deductions and

16 exemptions are to be narrowly construed in favor of taxation and must be clearly established by

17 the taxpayer. Sec. Escrow Corp. v. State Taxation & Revenue Dep’t, 1988-NMCA-068, ¶ 8, 107

18 N.M. 540, 543, 760 P.2d 1306, 1309; Wing Pawn Shop v. Taxation & Revenue Dep’t, 1991-

19 NMCA-024, ¶ 16, 111 N.M. 735, 741, 809 P.2d 649, 655; Pittsburgh & Midway Coal Mining

20 Co. v. Revenue Div., 1983-NMCA-019.

21 At the same time, courts recognize that statutory provisions must be given a fair and

22 reasonable construction consistent with legislative intent. As the Court of Appeals stated in

23 Sacred Garden, Inc. v. N.M. Taxation & Revenue Dep’t, 2021-NMCA-038, ¶ 6, 495 P.3d 576,

In the Matter of the Protest of DTC Energy Group, Inc.
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1 578, “The right to a deduction must be clearly and unambiguously expressed, and the taxpayer

2 bears the burden of establishing that it is entitled to the statutory deduction. Nevertheless, these

3 provisions must also be given fair, unbiased, and reasonable construction, without favor or

4 prejudice to either the taxpayer or the [s]tate.”

5 Accordingly, absent clear legislative authority for an exemption or deduction, it must be

6 denied. See Sutin, 1985-NMCA-047, ¶ 18.

7 The Out-of-State Services Exemption under NMSA 1978, Section 7-9-13.1

8 For the period at issue, Section 7-9-13.1 (pre-2021) exempted “receipts from performing a

9 service outside New Mexico, the product of which is initially used in New Mexico.” Taxpayer must

10 prove both elements: (1) the service was performed outside the state and (2) the product of that

11 service was initially used here. See TPL, 2003-NMSC-007, ¶¶ 9, 12–13. “Product of a service”

12 means the direct result purchased, the benefit for which the purchaser paid. Id. When labels do not

13 reflect reality, substance controls. See Rauscher, 2000-NMCA-065, ¶ 22.

14 The Department characterizes the receipts as consideration for in-state consulting services.

15 Taxpayer contends the receipts were paid by Independent Contractors for out-of-state administrative

16 and risk-management services (e.g., access to MSAs and insurance).

17 The determination turns on identifying the service actually sold and its product under TPL,

18 applying substance-over-form principles from Rauscher.

19 Application of Section 7-9-13.1 to the Facts

20 To qualify for the exemption under NMSA 1978, Section 7-9-13.1 (pre-2021), Taxpayer

21 must prove both that (1) the services it performed were conducted outside New Mexico, and (2) the

22 product of those services was initially used in New Mexico.

23 1. Where the services were performed

In the Matter of the Protest of DTC Energy Group, Inc.
Page 20 of 31
1 The Hearing Officer finds that Taxpayer’s services, including invoicing, collection, fee

2 withholding, contract administration, and provision of insurance coverage and risk-management

3 infrastructure, were performed from its offices outside New Mexico. This finding is supported by

4 the credible testimony of Clausen and Meyers and by documentary evidence showing that Taxpayer

5 did not maintain an office, staff, or business property in New Mexico and did not conduct

6 administrative functions from this state. Accordingly, the first statutory element is satisfied.

7 2. What was the product of Taxpayer’s services

8 The next factor to evaluate is the “product” of Taxpayer’s services. Under TPL, 2003-

9 NMSC-007, ¶ 12, the product of a service is the “direct result or consequence” of the service for

10 which the client pays. Here, the record shows the purchasers were the Independent Contractors who

11 selected Taxpayer and negotiated their percentage fee in exchange for access to its MSAs, insurance

12 coverage, and back-office administration. That product was later used in New Mexico when

13 Independent Contractors performed services for Extraction Companies at New Mexico well sites

14 under Taxpayer’s approved-vendor status.

15 The Department contends that the product of Taxpayer’s activities was the provision of

16 skilled consultants to Extraction Companies in New Mexico. However, the record shows that

17 Independent Contractors first contracted with Extraction Companies and only then approached

18 Taxpayer to obtain access to its MSAs, insurance coverage, and administrative infrastructure. In

19 exchange, they paid Taxpayer a negotiated percentage of their daily rate and bore the economic cost

20 of that fee. Independent Contractors, not Extraction Companies, chose whether to use Taxpayer or a

21 competitor and negotiated the terms of Taxpayer’s fee, and Independent Contractors paid the fee.

22 Under TPL, 2003-NMSC-007, ¶ 13, the “product of a service” is determined by identifying the

23 benefit for which the purchaser paid. Applying that standard, the benefit purchased here, by

In the Matter of the Protest of DTC Energy Group, Inc.
Page 21 of 31
1 Independent Contractors, was access to Taxpayer’s MSAs and administrative support.

2 3. Initial use in New Mexico

3 The Hearing Officer finds that the product of Taxpayer’s administrative and risk-

4 management services was initially used in New Mexico when Independent Contractors performed

5 services for Extraction Companies at New Mexico well sites under Taxpayer’s MSAs. Accordingly,

6 the second statutory element is satisfied.

7 4. Substance over form

8 New Mexico law requires that the substance of a transaction, not its labels, controls for tax

9 purposes. See Rauscher, 2000-NMCA-065, ¶ 22. The evidence establishes that Taxpayer’s services

10 were administrative and risk-management functions performed for Independent Contractors, rather

11 than oilfield consulting services provided to Extraction Companies. Accordingly, the Department’s

12 reliance on contract forms is unpersuasive when the credible testimony of Taxpayer’s witnesses

13 expands on the actual substance of its business.

14 Recent Guidance from the Court of Appeals

15 Two recent Court of Appeals decisions, Vista Staffing Solutions, Inc. v. N.M. Taxation &

16 Revenue Dep’t (non-precedential, May 30, 2025) (mem. op.) and Talbridge Corp. v. N.M. Taxation

17 & Revenue Dep’t, 2024-NMCA-044, 550 P.3d 901, further inform this analysis. Both interpret

18 Section 7-9-13.1, but they reach different outcomes based on the nature of the taxpayer’s

19 relationship to the in-state work being performed. Taken together, they illustrate the line between

20 taxable in-state services and exempt out-of-state services.

21 But first, the Hearing Officer will acknowledge the Department’s citation of Regulation

22 3.2.1.18 NMAC (the prime-contractor rule). That rule applies when a taxpayer contracts to perform

23 services in New Mexico and then assigns or subcontracts the work to others. The evidence does not

In the Matter of the Protest of DTC Energy Group, Inc.
Page 22 of 31
1 support that characterization here. Taxpayer neither employed nor directed the Independent

2 Contractors, did not negotiate or control their day rates or work locations, and did not receive

3 compensation based on New Mexico labor performed. Its compensation was a separately-negotiated

4 administrative fee paid for access to MSAs, insurance coverage, and back-office services performed

5 outside the state. Accordingly, Regulation 3.2.1.18 NMAC does not apply.

6 1. The Vista Decision

7 The Hearing Officer notes that the Court of Appeals issued its memorandum opinion in

8 Vista after the hearing in this matter. Accordingly, neither party had the benefit of its analysis,

9 which the Hearing Officer treats as persuasive authority under Rule 12-405 NMRA. In Vista, a

10 Utah-based firm placed independent physicians and nurses with New Mexico hospitals. The

11 taxpayer conducted its recruiting, credentialing, contracting, and billing activities entirely outside

12 New Mexico. The Court of Appeals held that the taxpayer’s service, matching qualified

13 professionals with hospitals, was performed outside New Mexico, and that the product of that

14 service was initially used in New Mexico when the hospitals accepted and deployed the

15 placements. Because the taxpayer’s own service was out-of-state and distinct from the in-state

16 medical work, the exemption under Section 7-9-13.1 applied.

17 2. The Talbridge Decision

18 In Talbridge, a Texas company supplied personnel to a New Mexico client and treated

19 those individuals as its own employees, administering their payroll, taxes, and benefits and

20 charging a markup for their in-state labor. The Court of Appeals held that the taxpayer’s

21 administrative work outside New Mexico was merely incidental to its in-state employment of the

22 workers whose services it sold. Because the taxpayer’s compensation arose from employee labor

23 physically performed in New Mexico, the receipts were taxable. Talbridge therefore stands for

In the Matter of the Protest of DTC Energy Group, Inc.
Page 23 of 31
1 the proposition that when a taxpayer employs and provides the workforce performing services in

2 New Mexico, the product of the service is in-state performance, a factual posture materially

3 different from the record here.

4 3. Application to Taxpayer

5 Talbridge does not control because Taxpayer did not employ, direct, or provide the

6 Independent Contractors as its workforce, did not receive compensation based on their in-state

7 labor, and did not sell in-state services to Extraction Companies. To the limited extent Taxpayer

8 had W-2 employees in New Mexico, it concedes and has paid tax on those receipts.

9 By contrast, Taxpayer’s posture aligns with Vista. Like Vista, Taxpayer performed its

10 recruiting, contracting, risk-management, and billing functions entirely outside New Mexico, and

11 its receipts derived from providing administrative infrastructure to Independent Contractors who

12 had already secured work from third parties. The product of those out-of-state services was first

13 used in New Mexico when those Independent Contractors performed under Taxpayer’s MSAs.

14 When read together, Vista and Talbridge delineate the scope of Section 7-9-13.1: the

15 exemption applies when the taxpayer’s service, identified by the benefit for which the purchaser

16 paid, is performed out of state and is not functionally equivalent to in-state performance.

17 The Hearing Officer therefore concludes that Taxpayer’s receipts from Independent

18 Contractor transactions qualify for exemption under Section 7-9-13.1. Those receipts are not

19 subject to New Mexico gross receipts tax.

20 To the extent the Department asserts that the “predominant ingredient” test should apply,

21 the Hearing Officer is not persuaded. “This test is applied when a transaction includes both the

22 performance of services and the sale or lease of property to determine which of these constitutes

23 the predominant ingredient of the transaction.” See Rauscher, 2002-NMSC-013, ¶ 36. The

In the Matter of the Protest of DTC Energy Group, Inc.
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1 transactions at issue here involve only the performance of a service. Accordingly, the controlling

2 inquiry is the two-prong test under Section 7-9-13.1, and it is resolved in Taxpayer’s favor.

3 Sales Factor Reporting and Assessment Errors

4 Ms. Rodriguez testified clearly and professionally regarding the Department’s

5 reconstruction methodology, and Ms. Griego likewise described the Department’s reliance on

6 New Mexico-related payment records and reported sales-factor percentages in the absence of

7 revised figures during the audit. The Hearing Officer appreciates the completeness and candor

8 with which both witnesses described the Department’s approach.

9 The reconstruction rests on the premise that Independent Contractors’ in-state field work

10 establishes the situs of Taxpayer’s receipts. Section 7-9-13.1 and TPL require determining the

11 location and product of the service for which Taxpayer’s receipts were paid, and the record

12 establishes that those receipts derived from administrative and risk-management services

13 performed outside New Mexico and purchased by Independent Contractors. Ms. Rodriguez’s

14 compilation, though carefully and credibly explained, summarized only payments tied to in-state

15 field work and did not address that statutory inquiry. [Dept. Exs. F, M–S; Direct & Cross of A.

16 Rodriguez.] Thus, although the spreadsheets may support the Department’s burden of production

17 as to amounts paid, they are ultimately unpersuasive on the dispositive issue: whether an

18 exemption applies.

19 Under Gemini, 2023-NMCA-039, once the presumption of correctness is overcome, the

20 Department must produce evidence demonstrating the correctness of the assessment. Although

21 Ms. Rodriguez’s account of the Department’s process was forthright and useful to the record, the

22 legal framework governing situs does not permit sustaining the assessment on the assumptions

23 described. Thus, the reconstruction, standing alone, does not supply a basis to sustain the

In the Matter of the Protest of DTC Energy Group, Inc.
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1 assessment.

2 Penalty Abatement

3 The Department’s assessment included penalty in the amount of $382,619.50. Penalty is

4 imposed when a taxpayer fails to pay tax because of negligence or disregard of rules and

5 regulations, but not when the taxpayer shows that the failure was not the result of negligence. See

6 NMSA 1978, Section 7-1-69. Regulation 3.1.11.11(A) NMAC further provides that penalty is

7 not imposed when the taxpayer’s conduct is consistent with that of a reasonable taxpayer,

8 including reliance on qualified tax counsel or accountants.

9 The Department maintains that penalty was properly imposed because Taxpayer

10 underreported and failed to pay gross receipts tax on substantial amounts of receipts. It argues

11 that Taxpayer’s use of Independent Contractors in New Mexico was not concealed, and that

12 Taxpayer’s corporate income tax returns reflected New Mexico sales factors sufficient to put

13 Taxpayer on notice of potential liability. In the Department’s view, penalty is warranted because

14 Taxpayer should have known its New Mexico activities were taxable.

15 The Hearing Officer finds that any underreporting resulted from Taxpayer’s reasonable

16 reliance on its certified public accountant. Credible testimony established that the CPA prepared

17 the returns and inadvertently miscalculated the New Mexico sales factors, and that Taxpayer

18 relied on the CPA for state tax compliance rather than intentionally misrepresenting its activity in

19 New Mexico. The record further shows that when the Department identified the W-2 employee

20 receipts as taxable, Taxpayer voluntarily remitted the associated tax, penalty, and interest

21 without protest.

22 Although the assessment carries a presumption of correctness, penalty attaches only upon

23 negligence or disregard. Conduct consistent with a reasonable taxpayer, including reliance on a

In the Matter of the Protest of DTC Energy Group, Inc.
Page 26 of 31
1 qualified tax professional, precludes penalty.

2 Even assuming arguendo that any portion of the assessment were sustained, the Hearing

3 Officer concludes that Taxpayer acted reasonably and without negligence in reliance on a

4 qualified tax professional, and therefore the assessed penalty must be abated as an independent

5 ground.

6 Conclusion

7 This protest turns on the situs of the services that produced the receipts at issue. The

8 record establishes that Taxpayer performed administrative and risk-management services outside

9 New Mexico and that the product of those services, namely access to MSAs, insurance, and

10 administrative infrastructure, was initially used in New Mexico when Independent Contractors

11 performed under those agreements. The receipts therefore qualify for exemption under Section 7-

12 9-13.1. For that reason, the assessment is abated as to those receipts, and only the uncontested

13 W-2 employee receipts remain undisturbed.

14 CONCLUSIONS OF LAW

15 A. Taxpayer timely filed a written protest of the Department’s assessment, and the

16 Administrative Hearings Office conducted a hearing on December 3 – 4, 2024, within the time

17 requirements of NMSA 1978, Section 7-1B-8 (2019). Neither party objected to the adequacy of the

18 hearing satisfying the statutory deadline.

19 B. The Administrative Hearings Office has jurisdiction over the parties and the subject

20 matter of this protest pursuant to NMSA 1978, Section 7-1-24 and Regulation 22.600.3 NMAC.

21 C. Taxpayer bears the burden of proving its entitlement to the exemption it claims,

22 subject to the presumption of correctness afforded to the Department’s assessment. See Corr. Corp.

23 of Am. v. State, 2007-NMCA-148, ¶ 17; TPL, Inc. v. N.M. Taxation & Revenue Dep’t, 2003-NMSC-

In the Matter of the Protest of DTC Energy Group, Inc.
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1 007, ¶ 10.

2 D. To overcome the presumption of correctness, a taxpayer must present some

3 countervailing evidence. This threshold does not require the evidence to be persuasive at this stage,

4 and the determination is a question of law. See Gemini Las Colinas, LLC v. N.M. Taxation &

5 Revenue Dep’t, 2023-NMCA-039, ¶ 25, 531 P.3d 622.

6 E. Once the presumption is overcome, the Department must be afforded an opportunity

7 to produce evidence supporting its assessment. The Department bears a burden of production, but

8 the taxpayer retains the ultimate burden of persuasion. See Gemini, ¶¶ 23 – 24, 26, 29.

9 F. All gross receipts of a person engaging in business in New Mexico are presumed

10 taxable unless specifically exempted by statute. See NMSA 1978, Section 7-9-5(A) (2019).

11 G. Tax deductions and exemptions are narrowly construed against the taxpayer and

12 may only be granted when clearly authorized by statute. See Sutin, Thayer & Browne v. Revenue

13 Div. of Taxation & Revenue Dep’t, 1985-NMCA-047, ¶ 17; Sec. Escrow Corp. v. State Taxation &

14 Revenue Dep’t, 1988-NMCA-068, ¶ 8.

15 H. Taxpayer engaged in business in New Mexico during the tax period at issue within

16 the meaning of NMSA 1978, Sections 7-9-3.3 and 7-9-4, by facilitating Independent Contractors

17 who performed consulting services for Extraction Companies in New Mexico.

18 I. NMSA 1978, Section 7-9-13.1 (pre-2021) exempts receipts from performing a

19 service only when both: (a) the service is performed outside New Mexico; and (b) the product of the

20 service is initially used in New Mexico.

21 J. Because Taxpayer’s services were performed outside New Mexico, and the product

22 of those services was initially used in New Mexico, Taxpayer has satisfied both elements of the

23 exemption under Section 7-9-13.1.

In the Matter of the Protest of DTC Energy Group, Inc.
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1 K. Taxpayer reasonably relied on the professional judgment of its CPA. Under

2 Regulation 3.1.11.11 NMAC, such reliance is inconsistent with negligence.

3 L. For the reasons stated above, Taxpayer has met its burden of persuasion to establish

4 its entitlement to the exemption under Section 7-9-13.1 with respect to the receipts at issue. The

5 Department’s assessment should therefore be abated, except for the uncontested tax on W-2

6 employee receipts previously remitted.

7 For the reasons stated, Taxpayer’s protest is GRANTED.

8 DATED: October 27, 2025

9
10 Chris Romero
11 Hearing Officer
12 Administrative Hearings Office
13 P.O. Box 6400
14 Santa Fe, NM 87502

In the Matter of the Protest of DTC Energy Group, Inc.
Page 29 of 31
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 DTC Energy Group, Inc.
Page 30 of 31
1 CERTIFICATE OF SERVICE
2 I hereby certify that I served the foregoing to the parties listed below this 27th day of

3 October 2025 in the following manner:

4 E- Mail and First Class US Mail E- Mail and First Class US Mail

5 INTENTIONALLY BLANK

In the Matter of the Protest of DTC Energy Group, Inc.
Page 31 of 31