Does an out-of-state company owe New Mexico gross receipts tax on goods it sells and delivers into New Mexico in its own trucks, when it has no office or resident employees in the state?

Plain-English summary

Southwest Gin Service and Supply, Inc., headquartered in Chandler, Arizona, sells cotton gins and gin parts and oversees their installation. For a stretch in the late 1980s and early 1990s the company had no office and no resident employees in New Mexico — after its one New Mexico salesperson quit in 1986, the company checked with the Department and was told it no longer had enough presence to be taxed, so it canceled its New Mexico tax number. It re-registered in late 1991 to do installation work. A 1995 audit assessed roughly $83,700 in gross receipts tax, plus penalty and interest, on sales and installations during January 1988 through October 1993.

By the time of the hearing the Department had abated the penalty entirely and adjusted the tax and interest to drop sales shipped into New Mexico by common carrier. What remained in dispute was the company's receipts from equipment it delivered into New Mexico in its own trucks — chiefly three 1991 contracts (a Four Points Gin job in Las Cruces and a large Mesa Farmer's Coop project in Doña Ana County). The company conceded the construction/installation portions were taxable but argued it lacked enough connection to New Mexico to be taxed on the equipment sales.

The Hearing Officer denied the protest:

• Public Law 86-272 doesn't apply. The company leaned on a 1997 Virginia Supreme Court case (National Private Truck Council) holding that the federal "Drummer Act" (15 U.S.C. § 381) protects out-of-state sellers even when they deliver in their own trucks. But by its own words the Drummer Act limits only a state's power to impose a net income tax — it says nothing about gross receipts or other taxes. New Mexico's gross receipts tax is a privilege tax, not an income tax, so the Act doesn't shield it.
• New Mexico had nexus under the Commerce Clause. When the company delivered goods into New Mexico in its own trucks, title, possession, and risk of loss transferred in New Mexico, so the sale occurred here. Its employees also serviced New Mexico customers by overseeing installation. Under Proficient Food Co. v. New Mexico T&RD (relying on the U.S. Supreme Court's Tyler Pipe decision), that is more than enough in-state activity to support the gross receipts tax.

What this means for you

Out-of-state sellers delivering into New Mexico

If you sell from outside New Mexico but bring the goods in using your own trucks and drivers — or send your own people into the state to install, service, or oversee — you likely have enough presence to owe New Mexico gross receipts tax, even with no office or resident staff here. Own-truck delivery means the sale is completed in New Mexico (title, possession, and risk of loss pass in-state). Delivery by an independent common carrier is treated differently, and here the Department itself dropped those sales from the assessment.

Anyone relying on Public Law 86-272

P.L. 86-272 is a real and useful protection — but only against a state's net income tax, and only where your sole in-state activity is soliciting orders that are approved and filled from outside the state. It does not protect you from a gross receipts, franchise, or other privilege tax, and it doesn't apply once you deliver in your own vehicles or perform installation/service in the state. Don't assume income-tax immunity carries over to New Mexico's gross receipts tax.

Businesses that were once told they don't have nexus

The company had been told years earlier that it no longer needed a New Mexico tax number. That informal guidance didn't prevent a later assessment once the facts changed (own-truck deliveries and in-state installation work). If your in-state activity grows beyond mere solicitation, your tax obligations can change even if the Department previously said you had none.

Accountants and tax professionals

The durable rule: income-tax nexus analysis and P.L. 86-272 immunity do not transfer to the gross receipts tax. For an out-of-state client, separate the question of income-tax protection from gross-receipts exposure, and watch the delivery method — own-vehicle delivery (title/possession/risk passing in-state) plus any in-state service or installation presence generally establishes gross receipts nexus under Proficient Food and Tyler Pipe.

Common questions

Q: I have no office or employees in New Mexico. Can the state still tax my sales?
A: Yes, if you have enough in-state activity. Here the company delivered goods into New Mexico in its own trucks and sent employees to oversee installation, which completed the sale in New Mexico and created nexus for the gross receipts tax.

Q: Doesn't Public Law 86-272 protect me?
A: Only from a state net income tax, and only if your sole in-state activity is soliciting orders filled from outside the state. It does not protect against New Mexico's gross receipts tax, and it doesn't apply once you deliver in your own vehicles or install/service in the state.

Q: Would it matter if I shipped by common carrier instead of my own trucks?
A: It can. In this case the Department itself removed common-carrier sales from the assessment and taxed only the sales the company delivered in its own trucks. How the goods reach the customer can affect where the sale occurs and whether you have nexus.

Q: Does this decision apply to my situation?
A: Not directly. A Decision and Order resolves one taxpayer's protest on its specific facts and the law in effect at the time. It illustrates New Mexico's nexus rules for out-of-state sellers, but your facts may differ.

Citations and references

Federal law:

• 15 U.S.C. § 381 (Public Law 86-272, the "Drummer Act") — bars a state from imposing a net income tax on income from interstate commerce where the only in-state activity is soliciting orders that are sent outside the state for approval and filled by shipment from outside the state; by its terms it limits only net income taxes

Cases cited:

• Proficient Food Company v. New Mexico Taxation and Revenue Department, 107 N.M. 392, 758 P.2d 806 (Ct. App.), cert. denied, 107 N.M. 308, 756 P.2d 1203 (1988) — New Mexico may impose its gross receipts tax on an out-of-state company that services New Mexico customers and delivers goods in its own trucks
• Tyler Pipe Industries, Inc. v. Washington State Department of Revenue, 483 U.S. 232 (1987) — sufficient nexus for a gross receipts tax where an out-of-state company used in-state sales representatives, even with no office, property, or resident employees
• Commonwealth of Virginia, Department of Taxation v. National Private Truck Council, 1997 Va. LEXIS 12 (Jan. 10, 1997) — the taxpayer's authority; a Virginia decision on P.L. 86-272 that the Hearing Officer found inapplicable because it concerned income tax, not gross receipts tax

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Southwest Gin Service and Supply
• Decision PDF: D&O 97-38

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
SOUTHWEST GIN SERVICE AND SUPPLY, INC. NO. 97-38
ID. NO. 02-191418-00 4, PROTEST TO
ASSESSMENT NO. 1974790

DECISION AND ORDER

This matter came on for formal hearing on September 12, 1997, before Gerald B.

Richardson, Hearing Officer. Southwest Gin Service and Supply, Inc., hereinafter, “Taxpayer”,

was represented by Mr. Brent Stewart, CPA. The Taxation and Revenue Department,

hereinafter, “Department”, was represented by Frank D. Katz, Chief Counsel. Following the

hearing the record was held open to allow the Taxpayer to submit additional documentation. The

additional documentation was received on September 29, 1997, and the matter was considered

submitted for determination at that time. Based upon the evidence and the arguments presented,

IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer is in the business of selling cotton gins and cotton gin parts, and

installs them or oversees the installation of those items.

2. The Taxpayer is headquartered in Chandler, Arizona.

3. During 1986, the Taxpayer had an employee who resided in New Mexico and

made sales calls to establish business for the Taxpayer in New Mexico. The Taxpayer obtained a

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tax identification number from the Department in order to report and pay gross receipts taxes and

the Taxpayer paid taxes on its sales in New Mexico.

4. The Taxpayer’s New Mexico employee quit his employment with the Taxpayer

after about six months. Mrs. Fredna Watson, Secretary-Treasurer of the Taxpayer then contacted

the Department and spoke with Department employees in the Las Cruces and Santa Fe offices of

the Department concerning the Taxpayer’s need to continue to keep its New Mexico tax number

and pay taxes. Mrs. Watson explained that the Taxpayer no longer had a resident salesperson in

New Mexico, and had no offices in New Mexico. She explained that the Taxpayer would

continue to service its customers in New Mexico by shipping to them from the Taxpayer’s

Arizona office, but there was no discussion as to whether that shipping would be accomplished

by common carrier or by the Taxpayer’s own employees and vehicles.

5. Based upon her discussion with the Department’s employees, the Taxpayer was

informed that it no longer had sufficient presence in New Mexico for it to be required to report

and pay taxes on its sales into New Mexico and the Taxpayer canceled its tax identification

number.

6. The Taxpayer re-established its tax account with the Department in late 1991

when it had a qualifying party obtain a New Mexico contractor’s license in order to perform

construction services in connection with the installation of cotton gins in New Mexico. The

Taxpayer resumed paying taxes on its sales in New Mexico.

7. During 1995 the Taxpayer was audited by the Department for the reporting

periods of January, 1988 through October, 1993.

8. As a result of the audit, on November 9, 1995 the Department issued Assessment

No. 1974790 to the Taxpayer assessing $83,663.69 in gross receipts taxes, $8,422.53 in penalty

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and $53,033.73 in interest with respect to sales and installation of cotton gins and cotton gin

parts in New Mexico during the audit period.

9. On November 29, 1995 the Taxpayer wrote to the Department and requested an

extension of time in which to file a protest to the Department’s assessment.

10. On January 16, 1996 the Department granted the Taxpayer until February 3, 1996

to file its protest.

11. On February 1, 1996 the Taxpayer filed a written protest to Assessment no.

1974790.

12. Since issuing the assessment, the Department has agreed to abate the penalty

assessed in its entirety and has made adjustments to the tax and interest assessed to remove from

the tax calculation the Taxpayer’s receipts from sales into New Mexico where the property sold

was not installed or delivered by the Taxpayer’s employees and was shipped into New Mexico by

common carrier.

13. The Taxpayer primarily disputes the inclusion of its receipts from three contracts

entered into in 1991. The first was a contract in the amount of $139,500 with Four Points Gin in

Las Cruces, N.M. The contract was broken into two components, $125,000 for equipment which

the Taxpayer delivered in its own trucks and $14,500 which represented the contractual

compensation for an employee of the Taxpayer to oversee the installation of the equipment. The

second and third contracts were part of the same transaction with the Mesa Farmer’s Coop in

Dona Ana County, New Mexico. The transaction was broken down into a contract for the

purchase of the cotton gin equipment in the amount of $700,000 and a contract for the

construction of a building to house the gin equipment and installation of the equipment for

$425,000. The equipment was delivered into New Mexico by the Taxpayer on its own vehicles.

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The Taxpayer does not dispute the taxability of the portion of the contract for construction and

installation of the equipment, but disputes the taxability of the sale of the equipment itself.

DISCUSSION

The Taxpayer disputes the Department’s assessment of taxes for the time period prior to

its reapplication for a New Mexico tax identification number in late 1991 on the basis that it had

insufficient nexus with New Mexico for it to be subject to tax. During that period of time it had

no office or resident employees in New Mexico, and its sales in New Mexico were made from

its Arizona offices. It did, however, make deliveries to its New Mexico customers from its

Arizona offices using its own employees and trucks.

The Taxpayer relies upon a recent Virginia case, Commonwealth of Virginia,

Department of Taxation v. National Private Truck Council, 1997 Va. LEXIS 12, (January 10,

1997). In that case, the Virginia Supreme Court struck down a regulation issued by the Virginia

Department of Taxation which purported to restrict the immunity from income taxation provided

under Public Law 86-272, the “Drummer Act”, codified at 15 U.S.C. §381. The Drummer Act

specifies that no state shall have the power to impose an income tax on income derived within

the state from interstate commerce if the only activity of the person in the state is the solicitation

of orders which are sent outside the state for approval or rejection and are filled by shipment or

delivery from outside the state. Virginia’s regulation interpreted the Drummer Act to immunize

only solicitations and deliveries which were accomplished by common carrier and purported to

subject to tax income sales in which the goods were delivered by a taxpayer’s own vehicles. The

Virginia Supreme Court struck down the regulation on the basis that the Drummer Act did not

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draw the distinction between deliveries by common carrier and by a person’s own delivery

trucks.

The Department argues that this case has no applicability to the situation presented

because by its own wording, the Drummer Act applies to restrict a state’s power to tax with

respect to income taxes only. Additionally, the Department argues that in the absence of an act

of Congress similar to the Drummer Act which would apply to the power of states to impose

taxes other than income taxes, that under existing precedent, the state has the power to impose its

taxes under the circumstances of this case.

The Department is correct on both counts. The Drummer Act, as written, applies only to

the power of states to impose “a net income tax on the income derived within such State...” and

contains no restriction with respect to other taxes. Additionally, New Mexico’s courts have

upheld the imposition of New Mexico’s gross receipts tax upon a company which sent sales

representatives to service its New Mexico customers and delivered its goods to its New Mexico

customers in its own trucks. See, Proficient Food Company v. New Mexico Taxation and

Revenue Department, 107 N.M. 392, 758 P.2d 806, cert. denied, 107 N.M. 308, 756 P.2d 1203

(1988). In upholding New Mexico’s ability to impose its gross receipts tax in Proficient Food,

the New Mexico Court of Appeals relied upon the Supreme Court’s decision in Tyler Pipe

Industries, Inc. v. Washington State Department of Revenue, 483 U.S.232 (1987). In that case

the Supreme Court found that Washington state had sufficient nexus to impose its gross receipts

tax upon a corporation which had no offices, owned no property and had no employees residing

in Washington but it had independent contractor sales representatives soliciting orders and

calling on customers in the state.

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This case is indistinguishable from Proficient Food, supra. The Taxpayer made

deliveries into New Mexico using its own trucks and employees. In such circumstances the sale

by the Taxpayer clearly occurred in New Mexico because the transfer of title, possession and risk

of loss of the property occurred in New Mexico. Additionally, the Taxpayer’s employees

serviced its New Mexico customers by such activities as overseeing the installation of the

products it sold. Thus, the Taxpayer had sufficient contacts with New Mexico to allow the

imposition of the tax at issue.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment No. 1974790 and

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

2. The Taxpayer had sufficient nexus, under the Commerce Clause of the United

States Constitution for the Department to properly impose its gross receipts tax upon the

Taxpayer for sales in New Mexico which were delivered by the Taxpayer in its own trucks.

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

DONE, this 22nd day of October, 1997.

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