Opinion ID: 2571605
Heading Depth: 1
Heading Rank: 3

Heading: `Product of the Service'

Text: {12} TPL asserts that there was nothing left when its services were completed, and therefore it created no product of service for IOC to either use or receive. With no product of service, TPL argues, the deduction automatically applies so long as there is an out-of-state buyer because there can be no use or delivery when there is no product of service. We reject the argument that there was no product of service in this case. Section 7-9-57 is structured so as to create a presumption that any service will have a product. We are invited by the language of the statute to search for the product of the service in this case. We agree with the Court of Appeals that the product is the direct result or consequence flowing from the service. TPL, 2000-NMCA-083, ¶ 13, 129 N.M. 539, 10 P.3d 863 (citations omitted). Our task, in identifying the product of service, is to determine what benefit the buyer receivedwhat the buyer paid for. See ITT Educ. Servs., Inc. v. Taxation & Revenue Dep't, 1998-NMCA-078, ¶ 11, 125 N.M. 244, 959 P.2d 969. Such benefits can be tangible. An automobile mechanic for example, provides a tangible product of service. See, e.g. Reed v. Jones, 81 N.M. 481, 468 P.2d 882 (Ct.App.1970). Other services provide only intangible results. For example, there would be no tangible product of service resulting from a patient's visit to a psychiatrist. Yet, under this statute, we believe those services would result in a product that is both used by and delivered to the patient. In other cases, the distinction between tangible and intangible results might be less clear. {13} The hearing officer concluded that the  `product' of TPL's demilitarization services was the transformation of formerly dangerous munitions into components and materials suitable to be recycled and reused for other purposes. We agree with TPL that this language merely describes the service rendered, not the product of service. The hearing officer drew this distinction in discussing TPL's other contracts. For those contracts, TPL designed and constructed a prototype plant to determine whether the manufacture of a precision blasting agent could be achieved on a commercial scale. The Department argued that the product of service for those contracts was the construction and operation of the pilot plant. The hearing officer explained that the Department was confusing the performance of the service with the product of the service. The hearing officer found that the product of service was data generated by TPL's research efforts. We think it is necessary to draw the same distinction between the service performed and the product of service for the IOC contracts. TPL was paid to transform the munitions into components. This transformation did not constitute the product of the service, but the service itself. {14} The Court of Appeals offered a different description of the product of service in this case. The Court of Appeals explained that the term product refers not only to tangible objects that have been assembled, but also to results or consequences that might yield lesser objects, whether in terms of weight, quantity, or chemical composition, than existed prior to any action having been initiated. TPL, 2000-NMCA-083, ¶ 13, 129 N.M. 539, 10 P.3d 863. That court then concluded that the product of the service was not only neutralized materials but, more importantly, the ability to dispose of the inert munitions in an environmentally reasonable way. Id. ¶ 14. {15} We believe that neither of these was the product of the service. First, IOC did not pay for the mere ability to dispose of the munitions. IOC had the ability to dispose of the munitions as soon as it accepted a bid for this contract, if not earlier. It paid to have the service complete. More importantly, we think the Court of Appeals erred in focusing on tangible objectsneutralized materials as the product of service. The Court of Appeals believed, and the dissent continues to argue, that IOC paid for inert munitions. The dissent postulates that IOC used those munitions by having TPL recycle them. One problem with this construction is that recycling and disposal were components of the services TPL provided. The contracts called for TPL to not only demilitarize the munitions, but to dispose of them, either by recycling, by resale or through hazardous waste disposal. We therefore do not agree that we can reasonably infer from the facts presented to the hearing officer that the undisposed, demilitarized munitions constituted a product of the service that was used by or delivered to IOC in order to support the hearing officer's conclusions. Both the Court of Appeals and the dissent arbitrarily divided the services required under the contracts, even though the Department made no effort to sever the components of the contracts. The Department sought to tax all of TPL's receipts from these contracts, not the demilitarization portion alone. Nor do we think this case is analogous to In re Protest of TASC, Inc., No. 97-31 (N.M. Taxation & Revenue Dep't Aug. 22, 1997), available at http://www.state.nm.us/tax, where a hearing officer held that a product of service could result from services even where those services were not completed. In that case, the taxpayer was conducting research experiments. Id. at 11-12. The experiments failed. The hearing officer concluded that the buyer received benefits from the failed experiment, even though the services were only partially performed Id. Here, there is no need to apply the same reasoning. TPL completed both its demilitarization and disposal services, as required under its contracts. We think there is a difference between finding a benefit from partially completed services and examining only part of the completed services in order to identify a product of service that fits the Department's construction of the statute. There is no need to examine a product of service resulting from the demilitarization alone when the entire service was performed. {16} Interestingly, we think the Department offers the most appropriate description of the product of TPL's services. The Department notes that the ultimate benefit IOC received from TPL's services was the freedom from responsibility for dangerous munitions. We agree that this is the benefit that IOC sought when hiring contractors to demilitarize and dispose of its unwanted munitions. Contrary to the Court of Appeals' and the dissent's views, this product was wholly intangible. The question remains, however, whether TPL met its burden to establish that IOC neither made initial use nor took delivery of that product in New Mexico.