My company does most of the work for its service out of state — are my receipts from New Mexico customers still subject to gross receipts tax?

Plain-English summary

Entertainment Publications was a Michigan company that sold a discount-membership service: for a fee, a member got a book of coupons and discounts good for about a year at restaurants, movie theaters, hotels, car-rental companies, and other businesses. The company didn't sell the meals or services themselves and didn't pay the participating establishments — the establishments agreed to honor the discounts in exchange for the promotional exposure.

Most of the company's people and work were outside New Mexico: 500–900 employees elsewhere recruited and approved establishments, assembled and printed the book, wrote the newsletter, and answered an 800 line. Only four to eight employees were in New Mexico, mainly to contact merchants, distribute the books, and handle payments. The Department assessed $107,968.69 in gross receipts tax (plus $10,796.89 penalty and $30,848.86 interest) on the New Mexico membership sales for July 1988 through December 1993. The company protested.

The company's core argument: gross receipts tax applies only to services performed in New Mexico, and Section 7-9-13.1(A) exempts receipts from services performed out of state whose product is first used here — so because it did most of the work out of state, the receipts weren't taxable. Hearing Officer Gerald B. Richardson denied the protest:

• The service is the discounts, and it happens where they're used. What a member pays for is the right to obtain the discounts. That benefit is delivered at the establishments — stipulated to be mostly in New Mexico — so the service is performed in New Mexico.
• Preparation isn't the service. Assembling and printing the book and negotiating with establishments are just the company's preparations to offer the service. Where those happen doesn't matter to the member — "no more consequence... than it is to me to know where my plumber bought his tools."
• The correspondence-school case is different. In Advance Schools, the actual services to students (grading, counseling) were performed out of state, so the receipts were exempt. Here, the service the member buys is provided where the discounts are honored.
• The burden was on the taxpayer, and it offered no apportionment proof. The Section 7-1-17 presumption of correctness attaches to an assessment's factual basis (the New Mexico membership receipts), not to the auditor's legal theory — so the Department's abandoned "advertising service" rationale didn't shift the burden. Section 7-9-5 separately presumes all business receipts are taxable. The company never showed what portion of discounts were used outside New Mexico, so the full assessment stood.

What this means for you

Services are taxed where the customer gets the benefit, not where you do the work

If you sell a service to New Mexico customers, doing the production, administration, or fulfillment out of state does not automatically move the receipts out of the gross receipts tax. New Mexico looks at where the service the customer actually paid for is delivered. A national or multistate operation can still have New Mexico-taxable receipts on its New Mexico sales.

Separate your "preparation" from the service the customer buys

The company lost partly because it framed its out-of-state back-office work as "the service." New Mexico distinguished the preparation (building the product) from the service delivered (the discounts members use). Identify what your customer is really buying and where that benefit lands before assuming an out-of-state exemption.

The out-of-state services exemption requires proof — and apportionment

Section 7-9-13.1(A) can exempt receipts for services genuinely performed out of state, but you have to prove it and, where a service is partly in-state and partly out, prove how to split it. Vague assertions that "most of our work is elsewhere" won't do. Keep records that let you quantify the in-state versus out-of-state portion.

A wrong reason in the audit doesn't flip the burden onto the Department

Even after the Department conceded its original "advertising service" theory was wrong, the taxpayer still bore the burden of proof. The presumption of correctness attaches to the facts of the assessment (here, the amount of New Mexico membership receipts), not to the auditor's legal label. Don't count on a flawed audit rationale to shift the burden.

Common questions

Q: I run my business from another state but sell to New Mexico customers. Are those receipts taxable here?
A: They can be. New Mexico taxes services performed in the state, and it looks at where the customer receives the benefit of what they bought. If that benefit is delivered in New Mexico, the receipts are generally subject to gross receipts tax regardless of where your staff or facilities are.

Q: Doesn't Section 7-9-13.1(A) exempt out-of-state services?
A: It exempts receipts from services actually performed out of state whose product is first used in New Mexico. The key is where the service is performed. Here the service — providing usable discounts — was performed where the discounts were honored (mostly New Mexico), so the exemption didn't apply.

Q: The Department's auditor gave the wrong legal reason. Doesn't that void the assessment?
A: No. The presumption of correctness attaches to the assessment's factual basis, not the legal theory in the audit narrative. Even setting that presumption aside, Section 7-9-5 presumes all business receipts are taxable, so the taxpayer still has to prove otherwise.

Q: If part of my service really is out of state, how do I get that part exempted?
A: You have to present evidence apportioning your receipts between in-state and out-of-state performance. The taxpayer here offered none, so the entire amount was treated as taxable New Mexico receipts. Keep records that support a defensible split.

Citations and references

Statutes:

• § 7-9-13.1(A) NMSA 1978 — receipts from performing a service outside New Mexico, the product of which is initially used in New Mexico, are exempt from gross receipts tax
• § 7-1-17 NMSA 1978 — an assessment of tax by the Department is presumed correct; the presumption attaches to the factual basis of the assessment, and the taxpayer must present evidence disputing that factual correctness
• § 7-9-5 NMSA 1978 — to prevent evasion and aid administration, all receipts of a person engaging in business are presumed subject to gross receipts tax

Cases cited:

• Advance Schools, Inc. v. Bureau of Revenue, 89 N.M. 79, 547 P.2d 562 (1976) — a correspondence school's receipts were exempt because the services to students (grading, counseling) were performed out of state; distinguished here
• Champion International Corp. v. Bureau of Revenue, 88 N.M. 411, 540 P.2d 1300 (Ct. App. 1975) — an assessment is presumed correct and the taxpayer must present evidence tending to dispute the factual correctness of the assessment
• McConnell v. State ex rel. Bureau of Revenue, 83 N.M. 836 — the taxpayer bears the duty to present evidence disputing the factual correctness of an assessment

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Entertainment Publications, Inc.
• Decision PDF: D&O 96-12

Original ruling text

BEFORE THE HEARING OFFICER
OF THE TAXATION AND REVENUE DEPARTMENT
OF THE STATE OF NEW MEXICO

IN THE MATTER OF THE PROTEST OF
ENTERTAINMENT PUBLICATIONS, INC.,
ID. NO. 02-099853-00 8, PROTEST
TO ASSESSMENT NO. 1821350. No. 96-12

DECISION AND ORDER

This matter comes on for determination before Gerald B. Richardson, Hearing Officer.

Entertainment Publications, Inc. (hereinafter "Taxpayer") was represented by David A.

Fruchtman, Esq. The Taxation and Revenue Department (hereinafter "Department") was

represented by Frank D. Katz, Chief Counsel. In lieu of a formal hearing, the matter was

submitted for decision upon a stipulation of facts and briefs of the parties.

Based upon the evidence and arguments submitted IT IS DECIDED AND ORDERED as

follows:

FINDINGS OF FACT

1. The Taxpayer is a Michigan corporation with its principal place of business in

Troy, Michigan.

2. The Taxpayer sells a membership service which provides to its members a book of

discounts and coupons for use at restaurants, for recreational activities, at movie theaters, hotels,
with rental car companies and with certain other identified business establishments (collectively,

the "establishments").

3. The discount membership book contains information provided by the participating

establishments.

4. The Taxpayer does not provide to its members a critique or any discussion of the

merits and demerits of the food, services or activities described in the discount membership book.

5. The Taxpayer does not sell or provide any of the food, services or activities
   described in the discount membership book.

6. The Taxpayer does not receive any commission or other compensation from

participating establishments.

7. The Taxpayer does not pay any of the establishments for including their menus or

coupons in the discount membership book.

8. The Taxpayer enters into a contract, entitled "participation agreement" with the

various establishments who provide discount offers for listing in the Taxpayer's membership book

in return for the promotional benefits of the exposure to potential customers through the

Taxpayer's membership program. Under the terms of the participation agreement, the

establishments agree to provide the discounts described in the agreement to the Taxpayer's

members during the term of the agreement. Additionally, the establishments agree that the

Taxpayer may seek injunctive relief, including specific performance, if they breach their promise

to honor the discounts and agree to pay the Taxpayer's reasonable attorney's fees in the event of a

breach of the agreement by the establishments.

9. Memberships are valid for a period not exceeding 14 months and are

non-transferrable.

10. When a membership expires the discounts and coupons associated with the

membership expire and are no longer of any effect.

11. The Taxpayer makes new discount memberships available annually.

12. The Taxpayer does not sell expired memberships nor does it sell discount coupon

books for expired years.

13. The Taxpayer does not sell the discount coupon book separately from the

membership.

14. The Taxpayer has between 500 and 900 employees located outside of New

Mexico.

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15. The Taxpayer has between four and eight employees located within New Mexico.

16. The Taxpayer's employees located outside of New Mexico continually evaluate the

type and number of establishments participating in the discount membership program to maintain

a variety and quantity of participating establishments.

17. Taxpayer employees located outside of New Mexico work with printers located

outside of New Mexico to organize and prepare the discount membership book. The Taxpayer

employees located outside of New Mexico review proofs of the book, make changes as necessary,

and engage in general quality control of the discount membership book.

18 . Taxpayer employees located outside of New Mexico receive payments directly

from some of the organizations selling its discount membership service.

19. Taxpayer employees located within New Mexico contact non-participating

merchants to describe the discount membership service and explain the benefits of participation in

the service.

20. Taxpayer employees located outside of New Mexico approve or reject all requests

by establishments to participate in the Taxpayer's discount membership service.

21. Taxpayer employees located within New Mexico contact charitable organizations

to describe the Taxpayer's discount membership service and explain the benefits of selling the

membership service.

22. Taxpayer employees located within New Mexico distribute the discount

membership cards and books to New Mexico members.

23. Taxpayer employees located within New Mexico receive payments from some of

the organizations selling the Taxpayer's discount membership service, which payments are in turn

transferred to Taxpayer employees located outside of New Mexico.

24. Members request movie tickets by contacting Taxpayer employees located outside

of New Mexico. The contacted Taxpayer employees respond to members' requests by mailing

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the requested movie tickets from outside of New Mexico. The movie tickets may be used at

movie theaters located throughout the United States.

25. The Taxpayer maintains an "800" toll free telephone number for members'

convenience. The Taxpayer employees answering the toll free number are located outside of

New Mexico. The Taxpayer's membership book also advertises two local (Albuquerque)

telephone numbers where members may call with comments or questions and may receive

updates of new merchant discounts. Additionally, the membership book lists a local fax number

and the address of the Taxpayer's Albuquerque office.

26. The Taxpayer publishes a newsletter advising its members of new discounts

available as part of the membership. The newsletter is written by Taxpayer employees located

outside of New Mexico, is printed outside of New Mexico and is mailed from outside of New

Mexico.

27. Members of the Taxpayer's New Mexico membership program use their

memberships for discounts on purchases mostly but not exclusively, from establishments located

in New Mexico.

28. New Mexico members are not eligible for discounts and coupons not listed in the

New Mexico discount membership book but listed in discount membership books sent to

members in other locations.

29. On July 5, 1994, the Department issued Assessment No. 1821350 to the Taxpayer

assessing $107,968.69 in gross receipts tax, $10,796.89 in penalty and $30,848.86 in interest for

the tax periods July 1, 1988 through December 31, 1993.

30. On August 2, 1994, the Taxpayer filed a written protest to Assessment No.

1821350.

31. The Department's audit had concluded that the Taxpayer was providing an

advertising service for New Mexico merchants as the basis for concluding that the Taxpayer's

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receipts from the sale of memberships was subject to gross receipts tax. The Department later

agreed that the Taxpayer was not providing an advertising service.

DISCUSSION
In this case, the Taxpayer has receipts from selling memberships to members in New

Mexico. Members receive a book listing discounts and containing coupons for use at various

restaurants, movie theaters, hotels, rental car companies, airlines and other establishments in the

entertainment industry (hereinafter "establishments"). The establishments are mostly located in

New Mexico, but some, such as national airlines, car rental companies and hotels are located

throughout the country and discounts are available at their locations around the country.

Memberships are non-transferrable and the benefit of membership is the entitlement to the various

discounts advertised in the membership book and any supplemental listings which are added

during the approximately one year duration of the membership. The Taxpayer does not pay any

of the establishments for the discounts provided. Rather, the establishments provide discounts in

order to receive the promotional benefits of being listed in the membership book and the exposure

to potential customers. The Taxpayer does not sell or provide any of the food, services or

activities described in the membership book.

The parties have characterized the Taxpayer's activities as the sale of a "membership

service" and the issue posed by this protest is whether the Taxpayer's receipts from the sale of

these membership services is subject to New Mexico gross receipts tax. The Taxpayer argues

that it performs the vast majority of the services related to its membership program from outside

of New Mexico and that since the gross receipts tax is imposed upon the performance of services

in New Mexico, it is therefore not subject to tax. Additionally, it argues that Section 7-1-13.1(A),

which exempts the receipts from services performed out of state where the product of the service

is initially used in New Mexico would operate to prohibit the tax at issue. Finally, it argues that

New Mexico law requires that services be taxed where they are performed, rather than where the

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product or benefit of those services is received. It asserts that it confuses its receipts from

membership services with the receipts from performing services of the participating business

establishments which grant the discounts, where the discounts are granted by the participating

business establishments and not by the Taxpayer.

In response, the Department states that the Taxpayer is confusing its preparations to

provide a service with the provision of the service itself. The Department argues that the service

being provided is not the details of arranging for the discounts from establishments or listing them

in an attractive book, but the provision of those discounts to its members, and that this service is

performed at the place where the members utilize the discounts. The Department contends that

since the Taxpayer has stipulated that its members utilize their discounts mostly with

establishments located in New Mexico, that this establishes that in general, the membership

services are performed in state and that the Taxpayer bears the burden of establishing the portion

of its services being performed out of state.

To properly analyze the tax consequences of the Taxpayer's sale of membership services,

it is necessary to analyze the various business relationships created by the Taxpayer's activities

with respect to the memberships sold in New Mexico. Essentially, the Taxpayer has two

categories of business relationships. First, it has its contractual relationship with the participating

business establishments who grant the various discounts. The Taxpayer does not pay these

establishments to receive the benefit of being able to advertise these discounts and the

establishments do not pay the Taxpayer for the benefit of being advertised in the Taxpayer's

membership book. Rather, the quid pro quo of this relationship is that the establishments receive

the promotional benefits of exposure to potential customers who buy memberships and receive the

membership discount book in return for their agreement to provide various discounts to the

Taxpayer's members. The Taxpayer's members who receive the benefit of this relationship, the

discounts offered, are not parties to this contractual relationship and have no role in determining

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the terms or conditions of the discounts offered.

The other category of business relationship created by the Taxpayer's activities is the

membership relationship between the Taxpayer and the members in New Mexico who purchase

memberships. The membership entitles a member to the membership discount book containing

coupons and information about how to obtain the various discounts offered by the establishments

advertised in the membership book as well as periodic newsletters containing information about

additional business establishments now offering discounts.

The crux of the matter to be determined is what services are being performed by the

Taxpayer and where are those services being performed. The Department has assessed gross

receipts tax based upon the Taxpayer's receipts from selling memberships in New Mexico, not

upon any value attributed to the promotional benefits received by the establishments offering the

discounts. Thus, it is the business relationship between the Taxpayer and the members which

must be examined to determine this matter.

What is the reasonable expectation of a person who is approached to purchase such a

membership? What does that person obtain in return for the price paid for a membership?

Clearly, that person expects to obtain the benefit of the right to avail himself of the discounts

offered through the Taxpayer's membership program. This is the service purchased, regardless of

the fact that the Taxpayer has a separate contractual relationship with the establishments who

actually provide the discount offered which allows the Taxpayer to advertise and offer the

discounts to its members. The member wasn't privy to that contractual relationship and did not

determine the terms of that relationship, but once those terms were agreed to by the Taxpayer and

the establishments and offered as part of the Taxpayer's membership program, the member can

reasonably expect that those terms will be honored. 1 Thus, it is not relevant that the actual
1
The Taxpayer's Reply Brief cites to the extremely fine print on page two of the membership book whereby the Taxpayer
eschews responsibility if any establishment fails to comply with the terms of any offered discounts as evidence that it is not liable
for any failure of the discounts offered as part of its membership program. The enforceability of such a disclaimer is highly
questionable, but is not an issue herein. If it were printed in such a manner that a member would reasonably be aware of it in

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discounts, if availed of, are granted by the establishments. The discounts remain the essential

element of the membership service offered by the Taxpayer which is purchased by the member.

Having determined the nature of the membership service, it remains to be determined

where that membership service is performed because the gross receipts tax is not imposed on

services which are performed outside of New Mexico. See, Section 7-9-13.1(A), which exempts

from gross receipts tax the receipts from performing services outside of New Mexico, the product

of which is initially used in New Mexico. The Taxpayer argues that since the majority2 of its

efforts with respect to its membership program, such as accepting establishments into the program

and the creation of the membership book occur out of state, that it should be considered to be

performing services out of state. This argument confuses the services being performed with the

Taxpayer's preparations to offer the services to its members. It is of no consequence to the

member where the membership book is assembled and printed or where or how the negotiations

between the Taxpayer and the establishments were conducted. Where those activities occurred

has no bearing on what the member is looking to gain from the membership relationship, the

availability of the discounts. The location of those activities is of no more consequence to

members than it is to me to know where my plumber bought his tools and supplies when I hire

him to fix my toilet. What is relevant is where those discounts are available. The New Mexico

membership book, sold only to New Mexico members, offers discounts, which are mostly

determining whether to purchase a membership, its effect would be relevant to the determination of the reasonable expectation
of the members as to what service was being purchased when a membership is purchased.
2
The factual record herein is not very well developed with respect to evaluating the portion of the activities with respect to
the Taxpayer's membership program which are performed in state versus out of state. The actual contact and recruitment of
establishments in New Mexico for potential listing in the membership discount book is performed by New Mexico employees,
although the approval of an establishment for listing in the book, and the copy to be printed are finalized out of state. While
the Taxpayer has an out of state "800" number for membership inquiries, the membership book only advertises the local
(Albuquerque) numbers prominently and solicits comments and questions at those numbers. Although the clear majority of
Taxpayer employees are located out of state, it is not at all clear how many of those out of state employees work out of the
Taxpayer headquarters and how many are located in the various other venues where the Taxpayer's membership program
operates. Thus, at this point, it is merely the Taxpayer's allegation that the majority of its membership services are performed
out of state, but because the factual record is insufficient to form a conclusion on this issue there has been is no finding of fact
on that matter.

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available in New Mexico. Thus, it is the locations where members may avail themselves of the

discounts offered which determines the locus of the service performed.

The Taxpayer relies upon Advance Schools, Inc. v. Bureau of Revenue, 89 N.M. 79, 547

P.2d 562 (1976), the only New Mexico case where the imposition of gross receipts tax turned

upon the determination of where the service was performed. In that case, the supreme court

determined that the receipts of a correspondence school, were exempt from gross receipts tax as

the services were performed out of state. That case is distinguishable from the instant case,

however, because there, the services directly provided to students, the correction and grading of

work and exams, and the consulting with and counseling of students were performed out of state.

The service in this case, the providing of discounts through third party contractors, takes place

where those discounts are provided.

Having determined that a large portion of the Taxpayer's membership services are

performed in New Mexico where the discounts are provided, it remains to be determined which

portion of the gross receipts assessed can be attributed to services performed in New Mexico.

The Taxpayer has failed to present any proof on this issue, instead, relying upon its allegation that

the Department would bear the burden of proof on this issue. The basis for the Taxpayer's

position that the Department bears the burden of proof on this issue is that the Department has

since conceded that the legal basis provided by the Department's auditor at the time of the

assessment is not correct.3 The Taxpayer argues that therefore, the presumption of correctness

which would normally attach to an assessment of taxes by the Department pursuant to Section

7-1-17 NMSA 1978 no longer applies and that the burden of proof is now shifted to the

Department.

The Taxpayer's argument is misplaced. The presumption of correctness attaches to the

3
The Department's auditor had assessed the Taxpayer on the basis that its membership sales receipts were the receipts
from providing an advertising service for New Mexico merchants. By letter dated November 2, 1994, the Department
admitted that the Taxpayer was not providing advertising services

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factual basis of an assessment, not the legal basis stated in the audit narrative. As noted by the

court of appeals in Champion International Corp. v. Bureau of Revenue, 88 N.M. 411, 413,

540 P.2d 1300 (Ct. App. 1975), "Any assessment of taxes made by the bureau is presumed correct

. . . . The duty rests on Champion to present 'evidence tending to dispute the factual correctness of

the assessment.' McConnell v. State ex rel. Bureau of Revenue, 83 N.M. 836." (emphasis

added). In this case, the factual basis of the assessment was the treatment of the Taxpayer's

receipts from the sale of memberships in New Mexico as shown on its bank deposits as the

Taxpayer's gross receipts. See, p. 2 of general audit narrative. The Taxpayer has not disputed

the correctness of the amounts picked up by the Department's auditor as reflecting sales of New

Mexico memberships. Rather, the Taxpayer has focused its defense upon only the legal basis for

concluding that those receipts are subject to tax. Additionally, there exists yet another statutory

presumption which the Taxpayer has not addressed. In addition to the presumption of

correctness which attaches to any assessment by the Department, Section 7-9-5 NMSA 1978

provides that:
To prevent evasion of the gross receipts tax and to aid in its administration, it is presumed
that all receipts of a person engaging in business are subject to the gross receipts
tax. Any person engaged solely in transactions specifically exempt under the
provisions of the Gross Receipts and Compensating Tax Act shall not be required
to register or file a return under this act.

Thus, even if the presumption of correctness of Section 7-1-17 did not apply, the Taxpayer would

still bear the burden of proving that its receipts from the sale of memberships in New Mexico

were not gross receipts from engaging in business in New Mexico. It also makes sense for the

Taxpayer to bear this burden of proof. It is the Taxpayer who is in the best position to know the

nature and extent of its business activities within and without New Mexico. The Taxpayer has all

of the information available upon which to base any determination of the proper apportionment of

its receipts between in state and out of state services performed for its members. Having failed to

present any evidence as to what portion of its receipts could reasonably be attributed to the

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provision of discounts outside of New Mexico, the presumption that all of its receipts from the

sale of memberships to New Mexico members are receipts from providing services in New

Mexico stands.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment No. 1821350 and

jurisdiction lies over the parties and the subject matter of this protest.

2. The presumption of correctness which attaches to assessments of tax by the

Department pursuant to Section 7-1-17 NMSA 1978 applies to the factual basis of the assessment

and not the legal basis contained in the Department's audit narrative.

3. The burden of proof was on the Taxpayer to prove that its receipts from the sale of

membership services to New Mexico members was not subject to gross receipts tax.

4. The membership services provided by the Taxpayer is the provision of discounts,

through its third party contractors, to the Taxpayer's members.

5. The Taxpayer's membership services are rendered at the place where the members

avail themselves of the discounts offered as part of the Taxpayer's membership program.

6. The Taxpayer failed to carry its burden of proof herein.

For the foregoing reasons, the Taxpayer's protest IS HEREBY DENIED.

DONE, this 18th day of April, 1996.

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