Does a company that builds a federal hospital on an Indian reservation have to pay New Mexico gross receipts tax, or is the tax preempted by federal law?

Plain-English summary

Centex Bateson Construction won a competitively bid contract with the U.S. Department of Health and Human Services (DHHS) to build the Shiprock Comprehensive Health Care Facility — a 75-bed Indian Health Service hospital located on the Navajo Reservation within New Mexico. The total contract price was $34,531,117, and the contract expressly said New Mexico gross receipts and compensating taxes were not included in the price (DHHS would only make an equitable adjustment if the state ultimately forced the tax).

Centex Bateson paid no gross receipts tax on its receipts and no compensating tax on its use of property for the project (though it did issue nontaxable transaction certificates to its subcontractors and suppliers). In October 1995 the Department assessed Assessment No. 1970786: about $1,830,474 in gross receipts tax, $1,451.98 in compensating tax, and $464,152.19 in interest. Centex Bateson protested, arguing the tax was preempted by federal law.

Hearing Officer Gerald B. Richardson granted the Department summary judgment. The case turned on which of two federal preemption tests applies:

• General federal-contractor rule (United States v. New Mexico). The federal government's tax immunity does not shield its contractors from nondiscriminatory state taxes unless Congress has explicitly preempted the tax. A tax isn't preempted just because it burdens a federal program or because the government bears the economic cost.
• Indian preemption doctrine (Warren Trading Post; Cotton Petroleum). This is a balancing of state, tribal, and federal interests — but the U.S. Supreme Court has applied it only where the contract or business is conducted directly with a tribe or tribal members.

Under the New Mexico Supreme Court's decision in Blaze Construction, a contractor who works for a federal agency (there, the BIA; here, DHHS) rather than for a tribe is subject to state tax "just as any other federal government contractor would be" — the Indian preemption doctrine simply doesn't apply. Because Centex Bateson contracted with DHHS, not the Navajo Nation, the ordinary test governed. Centex Bateson pointed to no explicit congressional direction preempting the tax and alleged no facts showing New Mexico's gross receipts tax discriminates against federal contractors. So the tax was not preempted, and the protest was denied.

What this means for you

Building for the federal government on a reservation doesn't exempt you from GRT

If you contract directly with a federal agency — even to build something on tribal land, and even something serving tribal members — New Mexico gross receipts tax generally applies to your receipts. The favorable "Indian preemption" balancing test is reserved for contracts made directly with a tribe or tribal members, not with the United States.

Who you contract with decides which test applies

The single most important fact here was the identity of the other party to the contract. A contract with the BIA, DHHS, or another federal agency puts you under the ordinary federal-contractor rule; a contract with the tribe itself can open the door to Indian preemption analysis. Structure and document your contracts with that distinction in mind.

"The government bears the cost" is not enough to defeat the tax

Centex Bateson's contract shifted the economic burden and framed the taxes as the government's problem, and the project served a core federal responsibility to provide health care. None of that mattered. A nondiscriminatory state tax on a federal contractor is preempted only when Congress says so explicitly — contractual cost-shifting and general federal interests don't create immunity.

Price your bids with New Mexico tax in it

The contract here deliberately excluded state tax from the price, leaving Centex Bateson exposed to a multimillion-dollar assessment plus interest. If you bid federal construction work in New Mexico, assume gross receipts (and possibly compensating) tax applies unless you have a specific, explicit federal preemption or a documented exemption — and build it into your numbers.

Common questions

Q: I'm building a facility for a federal agency on the Navajo (or other) reservation. Do I owe New Mexico gross receipts tax?
A: Under this decision, yes. Contracting with a federal agency rather than the tribe puts you under the ordinary federal-contractor rule, and the tax is not preempted absent explicit congressional direction or discrimination against federal contractors.

Q: When does the more favorable 'Indian preemption' test apply?
A: The Supreme Court has applied it where the contract or business is directly with a tribe or tribal members. A contract with a federal agency (BIA, DHHS, etc.) does not trigger it, per Blaze Construction.

Q: My federal contract says the government won't reimburse state taxes and directs me to fight them. Doesn't that shield me?
A: No. Cost-allocation language between you and the government doesn't determine whether the state may tax you. Immunity from a nondiscriminatory state tax requires explicit congressional preemption, not a contract clause.

Q: Could I still win by showing the tax is discriminatory or that Congress preempted it?
A: In theory. The Hearing Officer granted summary judgment because Centex Bateson alleged no facts of discrimination and pointed to no explicit congressional preemption. A taxpayer who can actually establish one of those could reach a different result.

Citations and references

Constitutional basis:

• U.S. Const. art. VI, cl. 2 (Supremacy Clause) — the source of federal preemption of state law and taxes

Cases cited:

• United States v. New Mexico, 455 U.S. 720, 102 S. Ct. 1373, 71 L. Ed. 2d 580 (1982) — the federal government's tax immunity does not shield its contractors from nondiscriminatory state taxes unless Congress has made the intent to preempt explicit; immunity isn't conferred merely because the tax burdens the government or falls on a contractor providing services to it
• Warren Trading Post Co. v. Arizona Tax Comm'n, 380 U.S. 685, 85 S. Ct. 1242, 14 L. Ed. 2d 165 (1965) — early decision in the line developing the Indian preemption doctrine
• Cotton Petroleum Corp. v. New Mexico, 490 U.S. 163, 109 S. Ct. 1698, 104 L. Ed. 2d 209 (1989) — later decision applying the Indian preemption balancing of state, tribal, and federal interests
• Blaze Construction Co. v. Taxation and Revenue Department, 118 N.M. 647, 884 P.2d 803, cert. denied, 115 S. Ct. 1359 (1995) — controlling New Mexico authority: a contractor who contracts with a federal agency rather than a tribe is subject to state tax like any other federal contractor, and the Indian preemption doctrine does not apply

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Centex Bateson Construction Co. Inc.
• Decision PDF: D&O 96-14

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
CENTEX BATESON CONSTRUCTION
COMPANY, INC., I.D. NO. 01-188389-00 8,
PROTEST TO ASSESSMENT NO. 1970786 No. 96-14

DECISION AND ORDER

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

upon the Motion for Summary Judgment filed herein on February 20, 1996 by the Taxation and

Revenue Department. Centex Bateson Construction Company, Inc. (hereinafter "Centex

Bateson") was represented by Rodney L. Schlagel, Esq. of Butt, Thornton & Baehr, P.C. and by

its Vice President and General Counsel, Frank J. Iuen III, Esq. The Taxation and Revenue

Department (hereinafter "Department") was represented by Frank D. Katz, Chief Counsel.

Based upon the undisputed facts and the arguments presented, IT IS DECIDED AND

ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. Centex Bateson, through a competitive bidding process, was awarded Contract No.

161-92-0027 ("the contract") by the United States Department of Health and Human Services

(DHHS") on September 23, 1992.

2. Under the contract, Centex Bateson constructed a 75-bed Indian Health Service

hospital, known as the "Shiprock Comprehensive Health Care Facility" ("project") at Shiprock,

New Mexico.

3. The project was constructed within New Mexico and within the Navajo

Reservation.

4. The project was completed as of November 18, 1994.

5. The total contract price paid Centex Bateson by DHHS, including all
   modifications, was $34,531,117.

6. Under the terms of the contract, DHHS did not agree to reimburse Centex Bateson

for the cost of "any New Mexico State gross receipts and compensating use excise taxes" imposed

with respect to the project. The contract specifically stated that "the cost of such taxes shall not

be included in the offer/contract." The contract further stated that the "Contractor shall promptly

notify the contracting officer of any and all matters, correspondence, and/or enforcement efforts

by the State relating to the imposition of any of the above taxes regarding this contract. The

Contractor shall take action to oppose imposition of such taxes, to the extent that the Contracting

Officers specifically directs the actual, necessary, reasonable, and documented costs of such

directed action to be reimbursed by the Government pursuant to an equitable adjustment of the

contract. Should the State of New Mexico be ultimately successful in enforcing compliance by

the Contractor with any of the above taxes regarding this contract, the contract shall be equitably

adjusted to account for such extra cost (and any associated interest or penalty), but without

overhead or profit, provided that the Contractor has complied with the terms of this clause."

7. Centex Bateson did not pay gross receipts tax upon its receipts from constructing

the project nor did it pay compensating tax on its use of property in New Mexico with regard to

the project.

8. Centex Bateson did execute nontaxable transaction certificates (NTTCs) to

subcontractors and suppliers during construction of the project.

9. The Department issued Assessment No. 1970786 on October 18, 1995 in the

amount of $1,830,474.43 in gross receipts tax, $1,451.98 in compensating tax and $464,152.19 in

interest accrued to that date. Additional interest has continued to accrue at the statutory rate.

10. Centex Bateson requested and received a sixty day extension of time, through

January 16, 1996 to file a protest to Assessment No. 1970786.

11. Centex Bateson filed its protest to Assessment No. 1970786 on January 11, 1996.

-2-
DISCUSSION
The issue presented herein is whether the imposition of state taxes upon the construction

of the Shiprock Comprehensive Health Care Facility on the Navajo Reservation within New

Mexico is preempted by federal law. Centex Bateson contracted directly with the United States

Department of Health and Human Services to build the facility. There are two lines of federal

preemption authority. The general rule with regard to state taxation of federal contractors is that

the federal government's immunity from state taxation does not shield it from the economic

burden of nondiscriminatory state taxes applied to its contractors unless the intention to preempt

the taxes has been made explicit in federal legislation. United States v. New Mexico, 455 U.S.

720, 102 S.Ct. 1373, 71 L.Ed.2d 580 (1982). A distinct rule of federal preemption, which will be

referred to as the Indian preemption doctrine, has evolved in cases involving state taxes imposed

upon non-tribal entities for activities engaged in on Indian reservations. This doctrine can be

traced from a series of Supreme Court decisions beginning with Warren Trading Post Co. v.

Arizona Tax Comm'n, 380 U.S.685, 85 S.Ct. 1242, 14 L.Ed.2d 165 (1965), through Cotton

Petroleum Corp. v. New Mexico, 490 U.S. 163, 109 S.Ct. 1698, 104 L.Ed.2d 209 (1989). The

Indian preemption doctrine requires an analysis and balancing of the various state, tribal and

federal interests to determine whether a state tax is preempted. See, Blaze Construction Co. v.

Taxation and Revenue Department, 118 N.M. 647, 651-652, 884 P.2d 803, 807-808 (1984), cert.

denied, 115 S.Ct 1359 (1995) for a discussion of the evolution of the Indian preemption test.

The Department's Motion for Summary Judgment presents the issue of whether the

general federal preemption test should be applied or whether the special Indian preemption test

should be applied. The Department concedes that if the Indian preemption test is appropriate that

significant additional factual development would be necessary and summary judgment would

therefore be inappropriate at this juncture. The Department argues, however, that the general

federal preemption test should be applied and that therefore summary judgment in the

-3-
Department's favor is required.

The New Mexico Supreme Court has definitively ruled on the issue of which preemption

test applies to the receipts of a federal contractor from activities occurring on Indian reservation

lands within New Mexico in Blaze Construction, supra. Blaze Construction Company had gross

receipts from constructing roads on Indian reservation lands within New Mexico pursuant to

contracts with a federal agency, the Bureau of Indian Affairs. In its ruling on this issue the court

stated:
As the department correctly points out, the U.S. Supreme Court has only applied
the Indian Preemption doctrine in cases where contracts were made or business
was conducted directly with Indian tribes or tribal members. [Citations omitted.]
In the cases at bar, Blaze and Arco contracted directly with the BIA, an agency of
the federal government, rather than with an Indian tribe or with individual tribal
members. Because Blaze and Arco contracted with a federal government agency
rather than with Indian tribes or tribal members, the Indian preemption doctrine
is inapplicable, and Blaze and Arco are subject to state taxes, just as any other
federal government contractor would be. See New Mexico, 455 U.S. at 735 &
741, 102 S.Ct at 1383 & 1386. (emphasis added) 118 N.M. at 649-650.

It is noteworthy that the federal contractors in Blaze Construction had raised an argument

very similar to the argument being made herein by Centex Bateson. Blaze had argued that the

United States was fulfilling its responsibilities to the Indian people with whom it had a special

relationship, and as such was a sort of partner in performing integral government functions, such

as road building. Centex Bateson has adopted the arguments of the United States being posited

in a separate federal lawsuit wherein the United States argues that the state tax interferes with the
federal government's obligation to provide health care to the Navajo Nation. The New Mexico

Supreme Court rejected the argument that the BIA was a partner or agent of the Indian Tribes.

Id., 118 N.M. at 650. Similar arguments about the state taxes interfering with the federal

government's sovereign functioning in U.S. v. New Mexico were soundly rejected by the Court,

which noted:
Thus, immunity may not be conferred simply because the tax has an effect on the United

-4-
States, or even because the Federal Government shoulders the entire economic
burden of the levy.

Id., 102 S. Ct at 1382. The Court went on to note that:

Similarly, immunity cannot be conferred simply because the state tax falls on the earnings
of a contractor providing services to the Government.

Id.,102 S.Ct. at 1383. In essence, the Court found that in balancing the competing interests of

state and federal government's sovereign taxing authority, the fact that the state tax burdens a

federal program is simply insufficient to immunize the federal contractor from a

non-discriminatory state tax. It found that the political process was uniquely adapted to striking
the appropriate balance in accommodating the competing state and federal interests implicated by

state imposition of taxes on federal contractors, and in the absence of explicit direction from

Congress, immunity from state taxation would not be implied.

Centex Bateson's response to the Department's Motion for Summary Judgment is

somewhat puzzling. It argues that this case is controlled by federal law, not state law, in apparent

reference to the Blaze Construction decision by the New Mexico Supreme Court. While Blaze

Construction is a state case, it applies only federal law. The issue in that case was what federal

law applied, the standard federal preemption test or the Indian preemption test. Centex Bateson

also adopted the arguments of the United States being made in separate litigation that the Indian

preemption argument should be applied. This argument has been considered and addressed in the

Blaze Construction case which governs its determination herein. Having determined that the

federal preemption standard enunciated in United States v. New Mexico, supra, applies, that

standard would dictate that no federal preemption exists unless Centex Bateson can allege

material facts which would establish either evidence of explicit congressional preemption or of a

discriminatory effect of New Mexico's tax. Centex Bateson has pointed to no such explicit

statutory direction from Congress which would prohibit the imposition of the tax at issue herein.

-5-
Nor has Centex Bateson alleged any material facts to demonstrate that New Mexico's gross

receipts tax is discriminatory in its application to federal contractors.1 Having concluded that the

standard federal preemption test is applicable herein and there being no explicit congressional

directive upon which to base a conclusion that the Department's tax is preempted, it is concluded

that summary judgment in favor of the Department is required and the Centex Bateson's protest to

the imposition of state taxes should be denied.

CONCLUSIONS OF LAW

1. Centex Bateson filed a timely, written protest to Assessment No. 1970786 and

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

2. Because New Mexico's gross receipts tax has been imposed upon the receipts of a

contractor who was directly under contract with an agency of the federal government and not with

a tribe, tribal entity or tribal member, the Indian preemption doctrine is inapplicable and the

standard federal preemption argument set forth in United States v. New Mexico, 455 U.S. 720

(1982) should be applied.

3. Centex Bateson has failed to allege material facts which would establish that New

Mexico's gross receipts tax is either discriminatory, or in contravention of an express

congressional enactment and therefore the tax is not preempted under the Supremacy Clause of

the United States Constitution.

4. Summary judgment in favor of the Department is appropriate in this case.

1
Presumably, if New Mexico's gross receipts tax discriminated in any way against federal contractors, that would have been
established in U.S. v. New Mexico, supra, and an entirely different result would have occurred in that case.

-6-
For the foregoing reasons, Centex Bateson's protest IS HEREBY DENIED.

DONE, this 26th day of April, 1996.

-7-