If a trucking audit is full of errors — counting Texas miles as New Mexico miles and disallowing a reduced tax rate without support — can the whole assessment be thrown out?

Subject

West Texas Express (D&O 99-06)

Plain-English summary

West Texas Express hauls general freight by truck across Texas and New Mexico. New Mexico taxes trucks under the Weight Distance Tax Act (a tax on miles traveled in-state by heavy trucks) and the Special Fuels Supplier Tax Act. A 1996 audit covering January 1993–March 1996 produced an assessment of $47,161.28 in tax, $4,716.15 penalty, and $13,858.78 interest. The company protested, and Hearing Officer Margaret B. Alcock granted the protest in full, ordering the entire assessment abated. Her decision is a case study in an audit "rife with error."

Problem 1 — Texas miles counted as New Mexico miles. Examining the company's El Paso records, the auditor found gaps between the ending odometer reading of one trip and the start of the next — "breaks in continuity" (BICs). Those gaps were local Texas miles, on which the company already reported and paid tax to Texas. Because the company had no trip records for them (Texas doesn't require odometer records for local Texas miles), the auditor treated a share of the BIC miles as unreported New Mexico miles, which inflated the error rate enormously — removing the BIC miles dropped the 1993 error rate from 55.71% to 2.65%. The owner testified, under oath and credibly, that the BICs were Texas miles taxed in Texas. The Hearing Officer stressed that sworn testimony is evidence: field auditors may not accept oral statements in place of documents, but hearing officers weigh witness credibility, and the auditor had never even asked to see the company's Texas audit to verify the point.

Problem 2 — the reduced one-way-haul rate wrongly disallowed. Section 7-15A-6(B) lets a truck that is customarily used for one-way hauls and runs empty of load for 45% or more of its annual miles pay tax at two-thirds the normal rate. A 1990 audit had told this owner he qualified, and he registered his trucks accordingly. The 1996 auditor stripped the rate for 1993–94 with a blanket 100% disallowance solely because records were missing — even though the Department's own procedures allow extrapolating from other years' records, the owner had a stellar 1.61% error rate in 1990, and there was no fraud (he had fired the manager who destroyed the records and tightened his bookkeeping). For 1995 the auditor ran a mileage test whose narrative said the trucks were empty "41% of the time," yet the worksheets showed 26% and 30.4%, and the method wrongly refused to credit empty miles driven within a delivery area after the last drop-off. The Department's witness could not explain the 41% figure or the methodology.

The result. Under Section 7-1-17(C), an assessment is presumed correct, but the taxpayer easily overcame that presumption and the Department "failed to meet its burden" of supporting the numbers. Ordinary math errors can be corrected, but "given the number and magnitude of errors," the correctness of the entire audit was in doubt — so the only remedy was full abatement. In a pointed footnote, the Hearing Officer wrote the case "never should have come to hearing," faulting the Protest Office for denying the protest without discussion and Department counsel for waiting nearly two years and then failing to call the auditor or prepare the one witness he did call.

What this means for you

• Keep proof that out-of-state miles were taxed elsewhere. The dispute turned on miles driven and taxed in Texas being counted against New Mexico. A copy of your other-state return or audit — not just your own trip logs — can establish where miles belong.
• Your sworn testimony counts as evidence at a hearing. An auditor may be barred from accepting your oral explanation without documents, but a hearing officer can and does weigh your credibility. If records are genuinely unavailable, credible testimony can carry your burden.
• Missing records don't automatically mean a 100% disallowance. The Department's procedures let auditors extrapolate from other periods' records. A blanket disallowance can be unreasonable where you have a clean history, no fraud, and usable records from nearby years.
• The one-way-haul rate rewards trucks that run empty ≥45% of annual miles. If your trucks deliver out and return empty, Section 7-15A-6(B) can cut the weight-distance rate to two-thirds — but the empty-mile calculation must fairly credit miles run empty within the delivery area, not just the trip back to the terminal.
• A pervasively flawed audit can be abated entirely, not just corrected. Isolated math errors get fixed; an audit whose overall reliability is in question can be thrown out in full once you overcome the presumption of correctness and the Department can't back up its numbers.

Key questions answered

Why was counting the "BIC" miles as New Mexico miles wrong?
The breaks-in-continuity were local Texas miles the company had already reported and paid tax on to Texas. The only reason the auditor treated them as unreported New Mexico miles was the absence of trip documents — but the owner credibly testified they were Texas miles, and the auditor never checked the available Texas audit to confirm it. Removing them cut the 1993 error rate from 55.71% to 2.65%.

What is the one-way-haul rate, and why was disallowing it improper?
Section 7-15A-6(B) allows two-thirds of the normal weight-distance rate for a truck customarily used for one-way hauls that runs empty for at least 45% of its annual miles. The auditor disallowed it for 1993–94 based only on missing records (contrary to the Department's own extrapolation procedures) and for 1995 based on a mileage test that contradicted its own worksheets and refused to credit empty miles within the delivery area.

Why full abatement instead of just fixing the math?
A single calculation error is usually correctable. Here the audit contained so many errors — including assessing $2,651.22 more fuel tax than the auditor's own worksheets showed — that the correctness of the whole audit was in question. Once the taxpayer overcame the presumption of correctness (Section 7-1-17(C)) and the Department offered no supporting evidence, the only fair remedy was to abate the entire assessment.

Did it matter that the taxpayer's records had been destroyed?
Not fatally. The records were thrown out by a manager the owner later fired, with no intent to conceal anything, and the owner had an exemplary reporting history. The Department could and should have used alternative records (as its own reviewing auditor testified she would have) rather than imposing a blanket disallowance.

Verbatim citations

The one-way-haul reduced rate (as described by the Hearing Officer, Section 7-15A-6(B)):

This section allows truck owners to qualify a truck that is customarily used for one-way hauls and that travels empty of all load for 45 percent or more of its annual miles to pay tax at a rate which is two-thirds the usual tax rate set out in Section 7-15A-6(A).

Sworn testimony is evidence:

Department counsel argued that the auditor was required to include a portion of the BIC miles in calculating the New Mexico percentage of error because field auditors are not permitted to accept a taxpayer's oral statements in lieu of documentary evidence. The Department's hearing officers are not so constrained. It is part of the hearing officer's function to hear testimony and draw conclusions based on the credibility of witnesses.

Why the whole audit had to be abated:

An error in the methodology or mathematical calculations used in an audit is usually subject to correction and not fatal to the assessment. That is not the case here. Given the number and magnitude of errors even a casual review of the audit report reveals, the correctness of the entire audit is in question. In these circumstances, the only remedy that can be fashioned is a full abatement of the Department's assessment against the Taxpayer.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: West Texas Express
• Decision PDF: D&O 99-06

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 WEST TEXAS EXPRESS No. 99-06
MTD NO. 36966-0
HIGHWAY USE AUDIT

DECISION AND ORDER

A formal hearing on the taxpayer's protest was held January 13, 1999 before Margaret B.

Alcock, Hearing Officer. West Texas Express ("Taxpayer") was represented by its attorney, Lorri

Krehbiel, who is with the law firm Madison, Harbour, Mroz & Brennan, P.A. The Taxation and

Revenue Department ("Department") was represented by Javier Lopez, Special Assistant Attorney

General. 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 delivering general commodities by truck in both

Texas and New Mexico.

2. The Taxpayer began business in El Paso, Texas, in April 1980. Initially, most of the

Taxpayer's business consisted of deliveries between El Paso and Las Cruces, New Mexico.

3. As the Taxpayer's business grew, it opened another facility in Albuquerque, New

Mexico. During the last five years, the Taxpayer has entered into contracts for cross-country

deliveries, mainly to Detroit and the east coast.

4. Most of the Taxpayer's deliveries in New Mexico are to small towns where there is

no opportunity to pick up a new load for the return trip to the Taxpayer's terminal in El Paso or
Albuquerque. In most cases, the Taxpayer's trucks leave the terminal loaded, unload freight at each

designated stop, and make the return trip to the terminal empty.

5. Each trip is carefully plotted so that deliveries are made in the most efficient manner

possible. If a driver has five deliveries in one town or area, the deliveries are generally made from

the nearest point to the farthest point. The trip plan is designed to avoid criss-crossing routes and

retracing miles that would unnecessarily increase the trip time and the fuel used.

6. The Taxpayer maintains a pick up and delivery manifest for each trip that identifies

the deliveries by freight bill number, name of customer, time in and out, and odometer reading at

each stop. Using the trip manifest and the freight bills, it is possible to determine the exact location

at which a truck would complete its deliveries and become empty of all load.

7. The Taxpayer was audited by the Department in 1990. This audit determined an

error rate of only 1.61% in the Taxpayer's reporting of highway use taxes to New Mexico. The audit

report noted the excellent cooperation of the Taxpayer's owner, Joe Roberts.

8. During the 1990 audit, Mr. Roberts spent a substantial amount of time with the

auditor, including time going over trip manifests to show the auditor the route taken by the driver

and the point at which the driver made his last delivery and began the return trip to the terminal

empty of load.

9. After examining the Taxpayer's records, the auditor told Mr. Roberts the company

would qualify for the reduced one-way haul rate set out in Section 7-15A-6(B) of the Weight

Distance Tax Act. This section allows truck owners to qualify a truck that is customarily used for

one-way hauls and that travels empty of all load for 45 percent or more of its annual miles to pay tax

at a rate which is two-thirds the usual tax rate set out in Section 7-15A-6(A).

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10. Following the auditor's advice, Mr. Roberts applied to the Department and registered

certain of his trucks for the reduced one-way haul rate.

11. In 1995 or early 1996, the Taxpayer received another notice of audit from the

Department.

12. At that time, the Taxpayer was experiencing various personnel and administrative

problems. Mr. Roberts' general manager retired after being with the company for many years. Two

new supervisors were hired and required training in the El Paso office. In addition, Mr. Roberts had

recently fired the manager of the Albuquerque office after discovering that consistent records were

not being maintained. As part of this problem, Mr. Roberts discovered that after the Taxpayer's

regular tax returns were filed, the manager simply threw out the driver trip records and other

documentation used to prepare the returns. When he received the Department's audit notice, Mr.

Roberts was in the process of instituting new procedures to tighten up and computerize the

company's record keeping.

13. Mr. Roberts explained the situation to the Department's auditor and asked him to

postpone the audit until Mr. Roberts would be available to explain the company's operations and

answer any questions that might come up during the audit. The auditor refused to change the start

date of the audit.

14. The audit covered tax periods January 1993 through March 1996. Because the

Albuquerque records for 1993 and 1994 had been thrown out by the Taxpayer's former manager, the

auditor examined the records for trucks operating out of the Taxpayer's El Paso terminal.

15. When examining the El Paso records, the auditor discovered gaps in the odometer

readings, i.e., the mileage reported at the end of one trip did not match the mileage reported for the

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beginning of the next trip by the same truck. The audit report refers to these gaps as "breaks in

continuity" or "BICs".

16. The BICs noted by the auditor represent local miles the Taxpayer's trucks traveled in

Texas. The Taxpayer reported and paid tax on all of these miles to the State of Texas.

17. Since starting business in 1980, the Taxpayer has calculated taxes due to Texas by

taking all miles traveled by its trucks, subtracting the miles traveled in other states, such as New

Mexico, and reporting all remaining miles to Texas. Based on this method of reporting, Texas does

not require the Taxpayer to keep odometer readings on local Texas miles.

18. When the Department's auditor asked Mr. Roberts to provide trip records to prove the

BIC miles were traveled in Texas, Mr. Roberts explained that he had no record of these miles

because Texas did not require such records to be kept.

19. Mr. Roberts told the auditor that tax on all of these miles had been reported and paid

to Texas. Mr. Roberts also told the auditor the Taxpayer had been audited by Texas and Texas had

accepted the Taxpayer's reporting of the BIC miles.

20. The auditor refused to accept Mr. Robert's explanation and included a percentage of

the BIC miles as unreported miles traveled in New Mexico. The auditor did not ask to see a copy of

the Texas audit, nor is there any indication the auditor contacted anyone in Texas to verify Mr.

Roberts' reporting of the BIC miles to Texas.

21. Although the audit worksheets state that the percentage of BIC miles apportioned to

New Mexico was determined by dividing the total miles traveled in New Mexico over the total miles

traveled in all states, this methodology was not consistently applied. The 1993 trip sample states that

42.17% of BIC miles were apportioned to New Mexico. In fact, 100% of several 1993 BIC entries

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were apportioned to New Mexico; in other instances no BIC miles were apportioned to New Mexico.

22. The inclusion of BIC miles as unreported miles traveled in New Mexico greatly

increased the error rate in the auditor's report. The error rate for each individual year was 55.71% for

1993; 47.24% for 1994; and 14.19% for 1995. No sampling was done for 1996.

23. The auditor combined the test months for the entire three-year audit period to arrive

at a 37.37% overall error rate. This combined error rate was then used to calculate the Taxpayer's

underpayment of both the weight distance tax and the special fuel tax for the entire three year period.

24. The Audit Assessment Summary in the audit report states that the Taxpayer's

underreporting of fuel tax resulting from application of the 37.37% error rate, as shown on

supporting Schedule I, is $13,672.36, and this was the figure used in calculating the final assessment.

Schedule I shows a fuel tax liability of only $11,021.14, with corresponding differences in the

calculation of penalty and interest.

25. In addition to determining underreported tax based on the 37.37% error rate, the

auditor determined that the Taxpayer had improperly claimed the reduced one-way haul rate

provided in Section 7-15A-6(B) of the Weight Distance Tax Act and recomputed the Taxpayer's

liability for the weight distance tax using the full tax rate set out in Section 7-15A-6(A).

26. The auditor disallowed the one-way haul rate for 1993 and 1994 based solely on the

absence of Albuquerque records for those periods.

27. The Department's audit procedures do not require auditors to make a 100 percent

disallowance in the absence of records, but allows auditors to exercise their judgment in determining

whether it is possible to use other records and extrapolate the information in those records to the

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period for which records are missing. The audit report does not indicate whether the auditor

considered using alternative records or what factors led him to conclude that the use of alternative

records was not feasible in this case.

28. The auditor disallowed the one-way haul rate for 1995 based on a one-way haul

mileage test the auditor conducted using 1995 records.

29. In conducting the test, the auditor determined that 26% of miles traveled during April

1995 were traveled empty. He then conducted a test for the two-month period May-June 1995 and

determined that 30.4% of miles traveled during that combined two-month period were traveled

empty. The audit report does not explain why the auditor conducted a separate test for April 1995

and a combined test for May-June 1995.

30. The audit narrative states that this one-way haul mileage test "concluded that during

the test period West Texas Express was empty 41% of the time, rather than the necessary 45% or

greater." The worksheets of the mileage test do not match the finding of 41% in the audit narrative.

31. After reviewing the worksheets of the one-way haul mileage tests, Mr. Roberts

determined that the auditor calculated miles traveled empty during each trip by using a chart of map

miles between the Taxpayer's terminal and the town where deliveries were made. The auditor

treated miles from the terminal to the town as loaded miles. The auditor also treated all miles

traveled within the town and the surrounding area making deliveries as loaded miles. The only miles

credited as empty miles were the map miles from the delivery area back to the terminal.

32. Mr. Roberts objected to the methodology used on the one-way haul mileage test. Mr.

Roberts told the auditor the Taxpayer should be given credit for empty miles traveled within the

delivery area after the point at which the Taxpayer's truck made its last delivery and became empty

of freight. The auditor declined to make any adjustments to the audit.

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33. On September 17, 1996, the Department issued an audit assessment against the

Taxpayer for the period January 1993 through March 1996 in the amount of $47,161.28 tax

principal, $4,716.15 penalty and $13,858.78 interest.

34. On October 17, 1996, the Taxpayer filed a formal protest to the assessment. The

Taxpayer based its protest on the "many inaccuracies in the audit", attached documentation to

illustrate a few of the errors, and requested an opportunity to meet with the Department to present

further supporting documentation.

35. The protest was assigned to Debbie Martinez, a Tax Accounts Auditor III in the

Protest Office. After receiving the protest, Ms. Martinez discussed the audit with the audit

supervisor. Ms. Martinez did not speak with the auditor, nor did she contact Mr. Roberts or his

attorney to discuss the case or determine what additional documentation the Taxpayer had to support

its protest.

36. In December 1996, Ms. Martinez sent a letter to the Taxpayer stating that no

adjustments could be made to the audit. Ms. Martinez then forwarded the file to the Department's

Legal Services Bureau.

37. On September 30, 1998, the Department's counsel filed a Request for Hearing asking

that a formal hearing be scheduled on the Taxpayer's protest.

38. On October 5, 1998, a notice of hearing was mailed to the Taxpayer setting the

formal hearing for December 18, 1998. The hearing date was subsequently continued to January 13,

1999 at the Taxpayer's request.

39. On October 30, 1998, the Taxpayer filed a Motion to Dismiss based on the two-year

delay between the date the protest was filed and the date a hearing was scheduled on the protest.

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The Taxpayer also objected to the Department's failure to provide the Taxpayer with an opportunity

to present additional evidence in the context of an informal conference.

40. On November 24, 1998, the Motion to Dismiss was denied.

DISCUSSION

The Taxpayer challenges the Department's method of calculating the 37.37% error rate used

to determine the Taxpayer's underreporting of tax during the audit period, as well as the

Department's determination that the Taxpayer's trucks do not qualify for the reduced one-way haul

rate provided in Section 7-15A-6(B) NMSA 1978. The Taxpayer raised an additional argument

concerning certain overpayments of the fuel tax. The parties subsequently agreed to an adjustment

that would credit these overpayments against any taxes due for the same reporting period.

Accordingly, this issue is no longer in dispute and is not addressed in this decision.

I. CALCULATION OF 37.37 PERCENT ERROR RATE.

The Department's assessment is based on a field audit report dated September 9, 1996.

Although the audit narrative does not clearly identify what tax programs were audited, a review of

the worksheets, together with information provided by the Department at the hearing, establish that

the tax acts at issue are the Weight Distance Tax Act, Section 7-15A-1, et seq. NMSA 1978 and the

Special Fuels Supplier Tax Act, Section 7-16A-1, et. seq., NMSA 1978, which was enacted by the

New Mexico Legislature in 1992, effective January 1, 1993, the start date of the audit.

There are two parts to the audit. The first part deals with the calculation of underpayments

of the weight distance tax and the fuel tax based on the application of a percentage of error. The

auditor calculated the error rate by examining the Taxpayer's records for certain test months to

determine whether the Taxpayer accurately reported all miles the Taxpayer's trucks traveled in New

Mexico during the audit period. The auditor divided what he determined to be unreported miles by

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reported miles to obtain the percentage of error for the test months. This percentage of error was

then used to determine total unreported miles for all three years of the audit period. The Taxpayer

raises several objections to the calculation of the 37.37% error rate used in the audit.

The Taxpayer's primary objection is that the auditor included miles the Taxpayer's trucks

traveled in Texas as unreported miles traveled in New Mexico. When examining the Taxpayer's El

Paso records for the three test periods, the auditor discovered gaps ("breaks in continuity or "BICs")

in the odometer readings. Because the Taxpayer could not provide trip documents for these miles,

the auditor included a percentage of the BIC miles as unreported miles traveled in New Mexico.

Inclusion of the BIC miles as unreported miles traveled in New Mexico greatly increased the error

rate in the auditor's report. For example, the audit report shows that 10,385 miles were unreported

during 1993, resulting in an annual error rate of 55.71%. After removing the BIC miles apportioned

to New Mexico from the 1993 mileage trip sample, the unreported miles drop to 494 miles, resulting

in an annual error rate of only 2.65%.

At the hearing, Joe Roberts, the Taxpayer's owner, testified that the BICs represent local

miles the Taxpayer's trucks traveled in Texas and that tax on all BIC miles were reported and paid to

Texas. Mr. Roberts explained that he did not have trip records for these miles because Texas did not

require him to maintain such records. I found Mr. Roberts to be a completely credible witness.

There was nothing inherently implausible in his testimony, nor did the Department present any

evidence that would call Mr. Roberts' explanation of the BIC miles into question.

The only apparent basis for the Department's inclusion of BIC miles as unreported New

Mexico miles is that the Taxpayer failed to provide trip documents covering those miles. While trip

records would have been one way of establishing the source of the BIC miles, there was other

evidence available. To start, the Department could have looked at the Taxpayer's Texas audit to

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confirm that the BIC miles had been reported to Texas. Debbie Martinez, the reviewing auditor who

testified on behalf of the Department, gave her opinion that the Texas audit would have been

sufficient to establish the BIC miles as miles traveled in Texas. In this case, the auditor never asked

to see the Texas audit. Nor is there any indication the auditor attempted to contact tax officials in

Texas to verify Mr. Roberts' reporting of the BIC miles.

Finally, it must be understood that a witness' sworn testimony is evidence. Department

counsel argued that the auditor was required to include a portion of the BIC miles in calculating the

New Mexico percentage of error because field auditors are not permitted to accept a taxpayer's oral

statements in lieu of documentary evidence. The Department's hearing officers are not so

constrained. It is part of the hearing officer's function to hear testimony and draw conclusions based

on the credibility of witnesses. In this case, Mr. Roberts testified, under penalty of perjury, that the

BICs represented local miles traveled in Texas and that tax on those miles was paid to Texas. In the

absence of any evidence to the contrary, I find that Mr. Roberts has met his burden of establishing

that the Department's treatment of a portion of the BIC miles as unreported miles traveled in New

Mexico was incorrect.

II. DISALLOWANCE OF ONE-WAY HAUL RATE.

The first part of the audit involves the determination of the error rate discussed in Part I. The

second part of the audit involves the Taxpayer's use of the one-way haul rate provided in Section 7-

15A-6(B) of the Weight Distance Tax Act. This section allows truck owners to qualify a truck that is

customarily used for one-way hauls and that travels empty of all load for 45 percent or more of its

annual miles to pay tax at a rate which is two-thirds the usual tax rate set out in Section 7-15A-6(A).

Mr. Roberts first learned of the one-way haul rate when he was audited by the Department in 1990.

After examining the Taxpayer's records, the auditor told Mr. Roberts the company would qualify for

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the one-way haul rate and advised him to apply to the Department to take advantage of the reduced

rate. The auditor for the 1996 audit determined that the Taxpayer's trucks did not meet the 45%

requirement set out in Section 7-15A-6(B) and disallowed the Taxpayer's use of the one-way haul

rate for the 1993-1996 audit period.

1993 and 1994 Years. The disallowance of the one-way haul rate for 1993 and 1994 was

based solely on the absence of records for those periods. Debbie Martinez, who has been with the

Department for 23 years as a field auditor and a reviewing auditor in the protest office, testified that

the Department's audit procedures do not require this blanket disallowance. Ms. Martinez testified

that in the absence of taxpayer records, auditors are expected to use their judgment to determine

whether it is possible to use alternative records, including records from other time periods, and

extrapolate that information to the period for which records are missing. Ms. Martinez said that a

blanket disallowance generally occurs when no other records are available or when the auditor has

reason to believe the taxpayer has acted fraudulently. When asked how she would have handled the

absence of records in this case, Ms. Martinez said she would have used the Taxpayer's 1995 records

to determine whether the Taxpayer qualified for the one-way haul rate in 1993 and 1994. Under

questioning by the Department's counsel on redirect, Ms. Martinez reiterated her position that use of

alternative records would have been possible in this case.

There is nothing in the audit report to indicate whether the field auditor considered using

alternative records or what factors led him to conclude that the use of alternative records was not a

viable option. In closing, Department counsel argued that because the auditor had discretion to

decide how to deal with an absence of records, the 100% disallowance of the Taxpayer's one-way

haul rate must be accepted as proper. I cannot agree. The exercise of discretion must be reasonable.

Here, it was the opinion of an experienced Department auditor that the facts justified use of

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alternative records. It is worth noting that at the time of the 1996 audit, the Taxpayer had established

an exemplary reporting history, as evidenced by the 1.61% error rate in the Department's 1990 audit.

In addition, there is nothing to indicate that the destruction of records for 1993 and 1994 was done

with the intent of concealing improper activity or was in any way sanctioned by the Taxpayer's

owner, Mr. Roberts. To the contrary, as soon as he discovered the failure to maintain company

records, Mr. Roberts fired the Albuquerque manager and instituted new record keeping procedures.

Given this evidence, the Department had an obligation to provide some rationale for the

auditor's decision not to use alternative records to determine whether the Taxpayer qualified for the

one-way haul rate. As noted above, there is no explanation given in the audit report itself. The

Department did not present testimony from the auditor, the auditor's supervisor, or anyone else who

had personal knowledge of the audit. The only evidence the Department did present, in the form of

testimony from Ms. Martinez, supports the conclusion that the auditor did not act reasonably in

disallowing the Taxpayer's use of the one-way haul rate for the years 1993 and 1994.

1995 Year. In order to determine whether the Taxpayer qualified for the one-way haul rate

during 1995, the auditor conducted a one-way haul mileage test using the Taxpayer's 1995 records. A

review of the audit raises several questions concerning the methodology employed by the auditor.

The audit narrative states that tests were performed "for the months of April-June 1995." A

review of the auditor's worksheets shows that one test was conducted for the month of April and a

second test was conducted for the months of May and June combined. The weight distance tax is

reported on a quarterly basis. All other percentage of error tests performed during the audit were

performed by reporting period. In other words, the mileage for all three months of a quarter were

combined to determine the error rate for that reporting period. There is no explanation in the audit

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report, nor does any logical explanation come to mind, for the auditor's decision to break the test

period into one and two-month segments when conducting the one-way haul mileage test.

The worksheets of the one-way mileage tests show that the Taxpayer's trucks traveled 26%

of New Mexico miles empty of load during April 1995 and 30.4% of New Mexico miles empty of

load during May-June 1995. The audit narrative states: "during the test period West Texas Express

was empty 41% of the time, rather than the necessary 45% or greater." The discrepancy between the

percentages shown in the auditor's worksheets and the percentage in the audit narrative is a mystery.

At the hearing, the following exchange took place between the Department's counsel and his

witness, Debbie Martinez:

Q: So, can anybody tell from his worksheets exactly how he calculated
the 41% empty mile rate?

A: No.

Q: Should you be able to tell from this?

A: Yes.

On cross-examination, the Taxpayer's attorney asked Ms. Martinez whether the discrepancy

indicated the auditor had relied on other records or information not made part of the audit report.

Ms. Martinez was unable to answer this question.

Ms. Martinez was also unable to answer the Taxpayer's questions concerning the auditor's

method of calculating empty miles. After reviewing the worksheets of the one-way haul mileage

tests, Mr. Roberts determined that the auditor treated the miles from the Taxpayer's terminal to the

town where deliveries were made as loaded miles and also treated miles traveled within the delivery

area as loaded miles. The only miles credited as empty miles were the map miles from the town

back to the terminal. Ms. Martinez confirmed that the Department's auditors generally use map

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miles when computing miles traveled for purposes of the weight distance tax. She said she could not

determine how the auditor treated miles traveled within a delivery area, but acknowledged that the

worksheet entries relating to deliveries between cities such as Albuquerque and Santa Fe seemed to

confirm that the auditor consistently limited the number of empty miles credited to the Taxpayer to

the standard map miles between the two cities.

The Taxpayer objected to the auditor's failure to credit the Taxpayer with empty miles

traveled within the delivery area after the point at which the Taxpayer's truck made its last delivery

and became empty of freight. Mr. Roberts testified that the trip manifests were available for every

trip the auditor examined. Mr. Roberts maintained that using the trip manifests and other driver

records, he could have shown the auditor the exact location where each delivery was made. This

was the procedure followed by the auditor in the 1990 audit. Mr. Roberts said the auditor in the

1996 audit showed no interest in working with Mr. Roberts and simply excluded all miles within

each delivery area when calculating the number of empty miles traveled by the Taxpayer's trucks.

At the hearing, the Taxpayer's attorney asked Ms. Martinez whether it would have been

important for the auditor to use all available information to determine the point at which the

Taxpayer's trucks became empty within a delivery area. Ms. Martinez agreed that it would have

been important to do this. The following exchange then took place:

Q: If you had been doing the audit of Mr. Roberts and trying to determine
the empty haul rate, would you have taken the time to go and see the
trip records to determine where the vehicles were unloaded?

A: Personally? Yes.

While far from clear, the evidence indicates that the auditor's method of determining the

number of New Mexico miles the Taxpayer's trucks traveled empty was incorrect because it failed to

give the Taxpayer credit for empty miles traveled within a delivery area. Even assuming the

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auditor's methodology were correct, however, the basis for his conclusion that the Taxpayer's trucks

traveled empty only 41% of the time remains a mystery and is in direct conflict with the auditor's

own worksheets. Neither the audit report nor the testimony presented at the hearing supports the

Department's disallowance of the Taxpayer's use of the one-way haul rate provided in Section 7-

15A-6(B).

III AUDIT ERRORS AND THE PRESUMPTION OF CORRECTNESS.

Section 7-1-17(C) NMSA 1978 states that any assessment of taxes by the Department is

presumed to be correct. In this case, the Taxpayer easily met its burden of presenting evidence to

overcome the presumption of correctness. It was then up to the Department to come forward with

evidence to establish the accuracy of the taxes assessed against the Taxpayer. The Department failed

to meet its burden.1

The audit report supporting the Department's assessment against the Taxpayer is rife with

error. In addition to the errors and discrepancies detailed in the preceding sections, I briefly note the

following:

Conflict Between Audit Summary and Worksheet: The Audit Assessment Summary in the

audit report states that the Taxpayer's underreporting of fuel tax resulting from application of the

37.37% error rate, as shown on supporting Schedule I, is $13,672.36, and this was the figure used in

calculating the final assessment. Schedule I shows a fuel tax liability of only $11,021.14, with

1
This case never should have come to hearing. Had the Department responded to the Taxpayer's request for an
informal conference, the problems with the audit would have come to light and appropriate adjustments could have
been made. Instead, the Protest Office denied the protest without even attempting to discuss the matter with the
Taxpayer. Department counsel's handling of the case was equally slipshod. After waiting almost two years to
schedule a hearing, Mr. Lopez failed to call the auditor, his supervisor, or anyone else with personal knowledge of
the audit as a witness. Mr. Lopez failed to prepare—or apparently even talk to—the only witness he did call, since
Ms. Martinez's testimony directly contradicted several of the positions taken by the Department.

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corresponding differences in the calculation of penalty and interest. In effect, the Taxpayer has been

assessed $2,651.22 more tax than the auditor's own worksheets show is due.

Inconsistent Apportionment of BIC Miles: The audit worksheets state that the percentage of

BIC miles apportioned to New Mexico was determined by dividing the total miles traveled in New

Mexico over the total miles traveled in all states. As Mr. Roberts pointed out in his testimony, this

methodology was not consistently applied. The 1993 trip sample states that 42.17% of BIC miles

were apportioned to New Mexico. In fact, 100% of several 1993 BIC entries were apportioned to

New Mexico; in other instances no BIC miles were apportioned to New Mexico. Although these

errors could be seen as irrelevant in light of the determination that all BIC miles must be excluded in

determining the percentage of error, I believe they are relevant to illustrate the general unreliability

of the auditor's work.

An error in the methodology or mathematical calculations used in an audit is usually subject

to correction and not fatal to the assessment. That is not the case here. Given the number and

magnitude of errors even a casual review of the audit report reveals, the correctness of the entire

audit is in question. In these circumstances, the only remedy that can be fashioned is a full

abatement of the Department's assessment against the Taxpayer.

CONCLUSIONS OF LAW

1. West Texas Express filed a timely, written protest to the Department's September 17,

1996 assessment for the period January 1, 1993 through March 31, 1996, and jurisdiction lies over the

parties and the subject matter of this protest.

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2. The Taxpayer presented sufficient evidence to overcome the presumption of

correctness that attaches to the Department's assessment of taxes.

3. The Department failed to come forward with evidence to support its assessment of

taxes against the Taxpayer.

For the foregoing reasons, the Taxpayer's protest IS GRANTED. The Department is ordered to

abate the 1996 assessment issued against the Taxpayer in full.

Dated February 2, 1999.

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