Talbridge Corp. v. N.M. Tax. & Rev. Dep't

550 P.3d 901

2024-NMCA-044

TALBRIDGE CORPORATION, Protestant-Appellee/Cross-Appellant,

v.NEW MEXICO TAXATION & REVENUE DEPARTMENT, Respondent-Appellant/Cross-Appellee,

In the Matter of the Protest of the Assessment Issued Under Letter ID No. L0479267504.

No. A-1-CA-40686

Court of Appeals of New Mexico.

Filing Date: April 29, 2024

APPEAL FROM THE ADMINISTRATIVE HEARINGS OFFICE, Chris Romero, Hearing Officer

Modrall Sperling Roehl Harris & Sisk, P.A., Zachary L. McCormick, Albuquerque, NM, for Appellee

Raúl Torrez, Attorney General, David Mittle, Special Assistant Attorney General, Santa Fe, NM, for Appellant

OPINION

BOGARDUS, Judge.

{1} This appeal and cross-appeal arise in response to a decision and order of the Administrative Hearing Officer affirming in part and denying in part the New Mexico Taxation and Revenue Department’s (the Department) assessment of unpaid gross receipts tax (GRT), pursuant to the New Mexico Gross Receipts and Compensating Tax Act, NMSA 1978, §§ 7-9-1 to -117 (1966, as amended through 2023), against Talbridge Corporation (Taxpayer) in the amount of-$484,974.10.¹ The hearing officer determined that Taxpayer failed to establish it was a disclosed agent under Section 7-9-3.5(A)(3)(f) and thus not exempt from paying GRT on the reimbursement it received from Chevron, but nevertheless found that Taxpayer was exempt from paying GRT on the markup fee it received for the payroll services it performed solely out of state.

{2} On appeal, the Department argues that the hearing officer erred in determining that Taxpayer was entitled to an exemption from GRT on the markup fee it received because the markup fee was for out of state services ancillary to Taxpayer’s employment of Area 52 members in New Mexico. Taxpayer cross-appeals arguing that the hearing officer erred in using the incorrect definition of "agent" in finding that it had failed to establish that it was entitled to an exemption as a disclosed agent under Section 7-9-3.5(A)(3)(f). For the following reasons, we reverse in part and affirm in part.

BACKGROUND

{3} Taxpayer is an employment agency based in Houston, Texas, whose sole owner also resides in Texas. Taxpayer has no physical office in New Mexico. Taxpayer formed a relationship with Chevron, formalized by a professional service agreement, under which it would identify, recruit, screen, and hire individuals as contract workers for Chevron. Eventually, Taxpayer’s work for Chevron informally expanded to providing payroll services for certain members of a group called Area 52.² All Area 52 members worked in New Mexico, for Chevron. The payroll services performed by Taxpayer for the group were beyond the scope of the professional service agreement Taxpayer had with Chevron.

{4} The services Taxpayer provided to certain Area 52 members were limited to placing the members on Taxpayer’s payroll, paying their salaries, withholding taxes, and providing benefits for them. Taxpayer was not the sole payroll service provider available to Area 52 members and Area 52 members individually selected Taxpayer as their payroll service provider. Taxpayer did not recruit, select, hire, or set the rate of compensation for those members who chose it to provide payroll services for them. Instead, Taxpayer would pay and provide its other payroll services to Area 52 members based on data it received from Chevron and Chevron, in turn, would reimburse Taxpayer for Area 52 members’ compensation and pay Taxpayer a markup fee. Chevron recruited and hired all Area 52 members according to its own terms and conditions, had control of and set their rates of compensation and approved time for all Area 52 members. Chevron had control of all work performed by Area 52 members.

{5} Eventually, Chevron decided to consolidate its payroll services with a single provid- er and notified Taxpayer that it must send a mandatory form letter informing the Area 52 members on its payroll that payroll services would be moved to another provider. Taxpayer lacked any authority to act on behalf of Chevron to address any Area 52 member’s concerns about the payroll transition and Chevron alone determined if any member could remain on Taxpayer’s payroll.

{6} In 2019, the Department selected Taxpayer for an audit and assessed Taxpayer for approximately $350,000 of unpaid GRT plus interest amounting to $68,300 and a penalty of $69,350 for the period from January 31, 2013, to April 30, 2019. Taxpayer filed a formal protest and an administrative hearing was held on July 22, 2021. Taxpayer had reported its taxable income for the audit period but had deducted 100 percent of that income. Taxpayer asserted that the receipts for which the Department assessed GRT against it were funds paid to Taxpayer for one of two purposes: they were either reimbursement for the compensation of Area 52 members employed in Santa Fe, or a markup fee for the payroll services Taxpayer performed solely in Houston. Taxpayer argued that the receipts received as reimbursement were received solely on behalf of another in a disclosed agency capacity under Section 7-9-3.5(A)(3)(f), and thus exempt from GRT. Taxpayer further argued that the markup fee it received for its payroll services was compensation for services performed solely out of state and thus exempt from GRT. The hearing officer determined that Taxpayer had failed to establish that it was acting as a disclosed agent of Chevron, and thus was responsible for GRT assessed against it for the reimbursement it received from Chevron. Nevertheless, the hearing officer determined that Taxpayer was entitled to abatement of the portion of the tax principal corresponding with the sum of receipts received from solely out of state services—the markup fee. This appeal and cross-appeal followed.

DISCUSSION

{7} On appeal, the Department argues that the hearing officer erred by determining that the markup fee was exempt from GRT because although it was received for services performed out of state, those services were ancillary to the services Taxpayer performed in New Mexico and thus subject to GRT under 3.2.1.18(D)(1) NMAC (12/14/2012). Taxpayer cross-appeals arguing that the hearing officer erred by applying the definition of agency described in 3.2.1.19(C) NMAC (9/30/2010) in determining that Taxpayer failed to establish it was a disclosed agent under Section 7-9-3.5(A)(3)(f). We begin by setting forth our standard of review and relevant presumptions. We then address each argument in turn.

I. Standard of Review and Relevant Presumptions

[1–4] {8} This Court will only set aside the hearing officer’s decision if it is: "(1) arbitrary, capricious or an abuse of discretion; (2) not supported by substantial evidence in the record; or (3) otherwise not in accordance with the law." NMSA 1978, § 7-1-25(C) (2015). A hearing officer’s decision is arbitrary and capricious when "it is unreasonable or without a rational basis, when viewed in light of the whole record." Process Equip. & Sew. Co. v. N.M. Tax’n Revenue Dep’t, 2023-NMCA-060, ¶ 23, 534 P.3d 1043 (internal quotation marks and citation omitted). Moreover, a decision is not supported by substantial evidence, if, when viewing the evidence in the light most favorable to the agency’s decision, the evidence does not support the result reached. See Vigil v. N.M. Tax’n & Revenue Dep’t, 2022-NMCA-032, ¶ 9, 514 P.3d 15. Finally, a decision is not in accordance with the law "if the hearing officer unreasonably or unlawfully misinterprets or misapplies the law." Process Equip. & Sew. Co., Inc., 2023-NMCA-060, ¶ 23, 534 P.3d 1043 (text only) (citation omitted). We review questions of law and the application of the law to the facts, de novo. Robison Med. Rsch. Grp., LLC v. N.M. Tax’n & Revenue Dep’t, 2023-NMCA-065, ¶ 4, 535 P.3d 709.

[5–7] {9} "[I]t is presumed that all receipts of a person engaging in business are subject to [GRT]." Section 7-9-5(A). Moreover, "[a]ny assessment of taxes or demand for payment made by the department is presumed to be correct." NMSA 1978, § 7-1-17(C) (2023). "[T]he taxpayer has the burden of overcoming this presumption." ITT Educ. Servs., Inc. v. N.M. Tax’n & Revenue Dep’t, 1998-NMCA-078, ¶ 5, 125 N.M. 244, 959 P.2d 969. "Where an exemption or deduction from tax is claimed, the statute must be construed strictly in favor of the taxing authority, the right to the exemption or deduction must be clearly and unambiguously expressed in the statute, and the right must be clearly established by the taxpayer." Wing Pawn Shop v. N.M. Tax’n & Revenue Dep’t, 1991-NMCA-024, ¶ 16, 111 N.M. 735, 809 P.2d 649 (internal quotation marks and citation omitted). "If the taxpayer rebuts the presumption of correctness, the burden shifts to the department to demonstrate the correctness of the tax assessment." Vigil, 2022-NMCA-032, ¶ 8, 514 P.3d 15 (alteration, internal quotation marks, and citation omitted).

II. The Hearing Officer Erred in Determining That Taxpayer Was Exempt From Paying GRT on the Markup Fee

[8] {10} The hearing officer found that Taxpayer was exempt from paying GRT on the markup fee they received because under the unique facts of this case, the fee was compensation solely for payroll services performed exclusively out of state. On appeal, the Department argues that the hearing officer erred because, although the payroll services were performed out of state, those services were incidental to the service Taxpayer performed in state—employing Area 52 members in New Mexico—and therefore taxable. In response, Taxpayer argues that the hearing officer was correct in determining that the payroll services Taxpayer performed were exempt from GRT because the payroll services were the true service for which Chevron engaged Taxpayer and those services were performed solely out of state. We agree with the Department that the payroll services Taxpayer performed out of state were incidental to Taxpayer’s employment of Area 52 members in New Mexico and therefore conclude the hearing...