If my company performs services (like research) entirely in another state but delivers the finished product — a report — to a customer in New Mexico, does New Mexico get to tax those receipts?

Plain-English summary

Lockheed Missiles & Space Company (LMSC), a subsidiary of Lockheed Corporation, held four U.S. missile-defense contracts (code-named GBFEL, SPICE, LODE, and BIFOCAL) under which it performed research and development largely at its California facilities. Each contract required LMSC to prepare and deliver a final report — and other products of its work — to Army and Air Force installations in New Mexico (White Sands Missile Range and Kirtland Air Force Base).

After auditing LMSC's 1989–1992 gross receipts tax returns, the Department issued a $1,273,680 assessment (plus statutory additions). LMSC accepted $229,404 of tax on services it had performed inside New Mexico and protested the rest — about $1,044,276 — which the Department had based on § 7-9-13.1, the provision that taxes receipts from services performed outside New Mexico when the product of those services is "initially used" in New Mexico.

Hearing Officer Gerald B. Richardson held that the out-of-state R&D receipts were subject to New Mexico gross receipts tax, but in a much smaller amount than assessed:

• Delivering the product in New Mexico is "initial use." Under each contract, LMSC delivered the products of its services — including the final reports — to Army or Air Force installations in New Mexico. That delivery was the "initial use" (as defined in § 7-9-3(O)) of research and development that had been performed out of state.
• Out-of-state services with an in-state initial use are taxable (§ 7-9-13.1). So LMSC realized taxable gross receipts on the qualifying out-of-state R&D, contract by contract: about $110,000 (GBFEL), $175,372 (SPICE), $41,298 (LODE), and $4,633 (BIFOCAL) — $331,303 total.
• The protest was mostly sustained. LMSC won the difference between the Department's original § 7-9-13.1 assessment and the amount actually due — $712,973 — with the remaining $331,303 upheld, plus statutory interest of $303,372 through February 25, 1997.
• The unprotested in-state tax stood. LMSC also remained liable for the unpaid portion of its unprotested tax on services performed in New Mexico — $7,845 in tax, $204,999 in accrued interest, and a $26,690 penalty.

(The decision resolves the case through detailed findings and conclusions of law rather than a narrative discussion, and does not spell out how each contract's taxable figure was computed beyond the amounts stated.)

What this means for you

Where you perform a service isn't the end of the New Mexico question

Businesses often assume that if the work happens in another state, New Mexico has no claim. Not so. Section 7-9-13.1 reaches receipts from services performed outside New Mexico when the product of those services is first used here. A company doing all its actual work elsewhere can still owe New Mexico gross receipts tax if it delivers the result to a New Mexico customer.

Delivering the deliverable here is the trigger — "initial use"

The hook in this case was straightforward: the reports and other products were delivered to New Mexico installations. That delivery was the "initial use" in New Mexico (§ 7-9-3(O)). If your out-of-state work culminates in a report, design, plan, or other product that the customer first receives or uses in New Mexico, that's the fact pattern this statute is built around.

The same contract can be split between in-state and out-of-state receipts

Lockheed's situation shows both halves at once: it conceded tax on the portion of services performed in New Mexico (§ 7-9-4) and litigated the portion performed out of state but used here (§ 7-9-13.1). Multistate service providers should expect to source and report receipts by where the service was performed and where its product is first used, not treat a contract as all-or-nothing.

An overreaching assessment can still be trimmed substantially

Even though Lockheed lost the core legal question, it recovered the large majority of the disputed amount — the Department's initial § 7-9-13.1 figure was far higher than what was actually due. Establishing the correct, contract-by-contract measure of taxable out-of-state receipts cut the protested tax from over a million dollars to about a third of that.

Common questions

Q: I perform my services entirely outside New Mexico. Can New Mexico still tax those receipts?
A: Yes, potentially. Under § 7-9-13.1, receipts from services performed outside New Mexico are taxable if the product of those services is initially used in New Mexico. Doing the work elsewhere doesn't by itself put you outside the tax.

Q: What counts as "initial use" in New Mexico?
A: It's defined in § 7-9-3(O). Here, delivering the products of the services — including the final reports — to Army and Air Force installations in New Mexico was the initial use of research performed out of state.

Q: My contract mixes work done in New Mexico and work done elsewhere. How is that taxed?
A: The two pieces are treated separately. Services performed in New Mexico are taxed under § 7-9-4; services performed out of state whose product is first used in New Mexico are taxed under § 7-9-13.1. Lockheed conceded the first and litigated the second.

Q: If the assessment seems too high, is it worth protesting even when the tax basically applies?
A: It can be. Lockheed lost the legal principle but still recovered $712,973 because the correct, contract-by-contract measure of taxable out-of-state receipts was far lower than the Department's original figure.

Citations and references

Statutes:

• § 7-9-13.1 NMSA 1978 — gross receipts tax on receipts from services performed outside New Mexico the product of which is initially used in New Mexico
• § 7-9-3(O) NMSA 1978 — definition of "initial use"
• § 7-9-4 NMSA 1978 — gross receipts tax on services performed in New Mexico (the unprotested portion of the assessment)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Lockheed Missles & Space Company
• Decision PDF: D&O 97-07

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
LOCKHEED MISSILES & SPACE COMPANY No. 97-07
ID NO. 02-011388-00 9, PROTEST
TO ASSESSMENT NO. 1992593

DECISION AND ORDER

This matter came on for hearing on February 19, 1997, before Gerald B. Richardson,

Hearing Officer. Lockheed Missiles & Space Company, hereinafter, "LMSC", was represented by

Fred W. Schwendimann, Esq., The Taxation and Revenue Department, hereinafter, "Department",

was represented by Frank D. Katz, Chief Counsel. Based upon the evidence and arguments

presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. At all relevant times with respect to this matter, LMSC was a wholly-owned

subsidiary of the Lockheed Corporation doing business in New Mexico under taxpayer

identification number 02-011388-00 9.

2. The Department audited LMSC's gross receipts tax returns (Forms CRS-1) for

taxable periods beginning on January 1, 1989 and ending on December 31, 1992.

3. On January 25, 1996, the Department issued gross receipts tax assessment no.

1992593 against LMSC in the principal tax amount of $1,273,680.00, plus statutory additions.

4. On April 23, 1996, LMSC filed a timely protest of a portion of the foregoing

assessment in the amount of $1,044,276.00, plus statutory additions.

5. LMSC's protest of assessment no. 1992593 pertained to tax base exceptions taken

by the Department's auditors under the provisions of Section 7-9-13.1 NMSA 1978; however,

LMSC did not protest the assessment to the extent of $229,404.00, plus statutory additions,
Decision and Order

Lockheed Missiles & Space Co.

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representing gross receipts tax attributable to services performed in New Mexico by LMSC during

the audit period, under the provisions of Section 7-9-4 NMSA.

6. The protested portion of assessment no. 1992593 was attributable to four military

contracts, under the terms of which LMSC had agreed to perform research and development

services outside of the State of New Mexico.

7. In 1988, LMSC had entered into Contract No. DASG60-88-C-0015, denominated

as the Ground Based Free Electron Laser Technology Integration Experiment Beam Control

Subsystem Basic Program (the "GBFEL" contract), to perform research and development services

for the U.S. Army Strategic Defense Command, Huntsville, Alabama, in an effort to demonstrate

the feasibility of a fully integrated and operational ground based laser system, as a component of the

United States' ballistic missile defense.

8. At inception, the GBFEL contract contemplated that its basic program would be

completed and a baseline technical description document would be approved by April 29, 1992;
however, effective as of December 21, 1989, the GBFEL contract was substantially terminated for

the convenience of the Army, and LMSC was directed to continue working only on the
development of a directed energy antisatellite system.

9. As of February 18, 1991, the GBFEL contract was completely terminated for the
   convenience of the Army, and LMSC was subsequently directed to complete and deliver a final

report.

10. On August 23, 1991, LMSC delivered its final report to the Army's GBFEL project

office on White Sands Missile Range, Alamogordo, New Mexico, as well as to Huntsville, Alabama,
and other specified locations.
Decision and Order

Lockheed Missiles & Space Co.

Page -3-

11. From December 21, 1989 through August 23, 1991, LMSC accrued gross receipts

totalling $2,087,512.00 from research and development services performed outside of New Mexico,

but initially used in New Mexico under the GBFEL contract.

12. In 1989, LMSC had entered into Contract No. F29601-89-C-0015, denominated as

the Space Integrated Controls Experiment (the "SPICE contract"), to provide technical,

administrative and facility support to the Force Weapons Laboratory ("AFWL"), Kirtland Air Force

Base ("KAFB"), Albuquerque, New Mexico, in connection with the United States' ballistic missile

defense.

13. The SPICE contract's period of performance was initially intended to terminate on

or about September 23, 1993; subsequently, that date was extended until March 31, 1995.

14. LMSC's services involving program management and facility support were generally

performed in Albuquerque, New Mexico or on KAFB.

15. LMSC's services in connection with the planning of experiments, the collection and
    analysis of data therefrom and the reporting of data and test results were supported at LMSC

facilities in Sunnyvale and Palo Alto, California, Honeywell facilities in Phoenix, Arizona and CTA
Engineering facilities in Palo Alto, California.

16. The SPICE contract required LMSC to prepare and deliver a final report
    documenting its technical studies and experiments.

17. LMSC's final report under the SPICE contract was delivered to and received by
    AFWL at KAFB on April 3, 1995.

18. From July 1, 1989 through December 31, 1992, LMSC accrued gross receipts
    totalling $3,208,949.00 from research and development services performed outside of New Mexico
    Decision and Order

Lockheed Missiles & Space Co.

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but initially used in New Mexico under the SPICE contract.

19. In 1985, LMSC entered into Contract No. F29601-85-C-0130, denominated as

Phase III of the Large Optics Demonstration Experiment (the "LODE contract"), to perform

research and development services, together with certain administrative services, for AFWL,

KAFB, Albuquerque, New Mexico, in connection with the United States' ballistic missile defense.

20. The LODE contract originally contemplated that its work would be completed by

April 29, 1988; subsequently, as of February 17, 1988, the LODE contract was substantially

modified to add three follow-on brassboard beam control demonstration experiments, to be

substantially performed at LMSC facilities in Sunnyvale and Palo Alto, California.

21. As modified, the LODE contract required LMSC to prepare and deliver a draft

final report within 30 days after the completion of technical performance, and a final report within

30 days after receiving back an edited draft.

22. LMSC's final report documenting work on the three follow-on experiments was
    delivered to AFWL on or before July 1, 1990.

23. From July 1, 1989 through July 31, 1991, LMSC accrued gross receipts totalling
    $787,343.00 from research and development services performed outside of New Mexico but

initially used in New Mexico under the LODE contract.

24. In 1986, LMSC entered into Contract No. F29601-86-C-0236, denominated as the

Bifocal Integrated Brassboard Experiment (the "BIFOCAL contract"), to perform research and
development services, together with certain administrative services, for AFWL, KAFB,

Albuquerque, New Mexico, in connection with the United States' ballistic missile defense.

25. The BIFOCAL contract contemplated that its work would be substantially
    Decision and Order

Lockheed Missiles & Space Co.

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performed at LMSC facilities in Sunnyvale and Palo Alto, California, but required LMSC to

prepare and deliver to AFWL a final report documenting the results of its work.

26. From July 1, 1989 through March 31, 1992, LMSC accrued gross receipts totalling

$87,867.00 from research and development services performed outside of New Mexico but initially

used in New Mexico under the BIFOCAL contract.
Decision and Order

Lockheed Missiles & Space Co.

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CONCLUSIONS OF LAW

1. Lockheed Missiles and Space Company has complied with the provisions of the

New Mexico Tax Administration Act (Chapter 7, Article 1, NMSA 1978) in its protest of

Assessment No. 1992593.

2. Under each of the GBFEL, SPICE, LODE and BIFOCAL contracts, LMSC was

required to prepare and deliver to Army or Air Force installations in New Mexico the products of

its services including a final report of those research and development services that LMSC had

performed outside of New Mexico on or after July 1, 1989 and on or before December 31, 1992.

3. The delivery in New Mexico of the products of LMSC's services, including a final

report, under each of the GBFEL, SPICE, LODE and BIFOCAL contracts constituted initial use,

as defined in Section 7-9-3(O) NMSA 1978, of products of LMSC's research and development

services performed outside of New Mexico on or after July 1, 1989 and on or before December 31,

1992.

4. Taking account of the findings of fact set forth above, and pursuant to the provisions

of Section 9-7-13.1 NMSA 1978, LMSC has realized taxable gross receipts from its sales of research
and development services that were performed outside of New Mexico between July 1, 1989 and

December 31, 1992, and has incurred gross receipts tax liabilities on out of state services as follow:
A. With respect to the GBFEL contract, $110,000.00 in gross receipts taxes;

B. With respect to the SPICE contract, $175,372.00 in gross receipts taxes;
C. With respect to the LODE contract, $41,298.00 in gross receipts taxes;

and
D. With respect to the BIFOCAL contract, $4,633.00 in gross receipts taxes.
Decision and Order

Lockheed Missiles & Space Co.

Page -7-

5. LMSC's protest of Assessment No. 1992593 is sustained to the extent of

$712,973.00 (i.e., the difference between the original assessment under Section 7-9-13.1 NMSA

1978 and the amount held to be due herein) but LMSC's protest is denied to the extent of

$331,303.00, plus statutory interest of $303,372.00 through February 25, 1997.

6. Additionally, LMSC is liable for the unpaid portion of its unprotested gross receipts

tax in the amount of $ 7,845.00, together with accrued and unpaid interest in the amount of

$204,999.00, and penalty in the amount of $26,690.00.

DONE, this 6th day of March, 1997.