Opinion ID: 2571605
Heading Depth: 1
Heading Rank: 4

Heading: Initial Use

Text: {17} NMSA 1978, § 7-9-3(O) (2002), defines initial use as the first employment for the intended purpose. Under the plain language of the statute, we must focus on the activities of the buyeror its employees or agentsin determining whether the buyer made initial use or took delivery of the seller's services in New Mexico or elsewhere. See § 7-9-57(C). TPL argues that IOC had no presence in New Mexico throughout the relevant period, and therefore neither initial use nor delivery could have taken place within this state. The Department argues that buyer's physical presence within the state is not necessary for the buyer to make use or take delivery of the product of service within the state. {18} The Department notes that the legislature provided the deduction in Section 7-9-57 out of concerns about competition with business from other states. Unlike New Mexico, the vast majority of states do not impose taxes on services. See 2 Jerome R. Hellerstein & Walter Hellerstein, State Taxation II, Table 12.10 (3d ed. 2000) New Mexico businesses providing services to out-of-state customers would therefore be at a competitive disadvantage with firms from other states if required to pay gross receipts tax on its income from those services. For example, a New York magazine seeking an article on new car models could hire an automotive writer in any state. Since most states do not tax services, a New Mexico writer would be at a five percent price disadvantage compared with writers in other states. Section 7-9-57 allows the writer to claim a deduction for the fees he or she earns from writing the article if the article is delivered to the publisher in New York, by mail or otherwise. Section 7-9-57 puts the New Mexico writer on a level playing field with writers in other states. {19} TPL's other military contracts, those with the Naval Surface Warfare Center, also provide a relevant example. For those contracts, TPL conducted research in New Mexico, and sent monthly reports to the Center in Indiana. The hearing officer concluded that there was no initial use or delivery in New Mexico. In contrast, in TASC, the taxpayer, who was conducting research and developing software, sent monthly reports to Phillips Laboratory in Albuquerque. TASC, No. 97-31, at 11-12. There, the hearing officer easily found that delivery took place in New Mexico. Id. While the latter example dealt with delivery, not use, we think both of these examples represent a straightforward application of the statutory language, providing that receipts from services provided to out-of-state buyers are only taxable when the buyer makes initial use or takes delivery of the product of the service in New Mexico. {20} By imposing the requirement that initial use or delivery cannot take place in New Mexico, the legislature restricted the deduction to situations where competition with firms from other states is of paramount concern because the service could be performed equally well in any state. On the other hand, those businesses that provide services to customers within the state will not suffer the same competitive disadvantage when required to pay the gross receipts tax. For example, many businesses in New Mexico provide services primarily to out-of-state tourists, who could be considered out-of-state buyers. Because those tourists have already come to New Mexico, however, there is no concern about competition with businesses from other states. A Santa Fe business that provides massages, for example, is primarily in competition with other massage businesses within Santa Fe. Accordingly, the statute would not provide a deduction for that business simply because a customer was from out of state. In such a situation, the buyer is personally present in New Mexico to make use and take delivery of the services in New Mexico. In addition, a buyer who is not physically present within this state can make use or accept delivery of a service through agents within the state. See Phillips Mercantile Co. v. Taxation & Revenue Dep't, 109 N.M. 487, 488-89, 786 P.2d 1221, 1222-23 (Ct.App.1990) (holding that taxpayer exercised control over catalogs and inserts distributed in New Mexico through its contractual relationship with a mailing service and New Mexico newspapers.) {21} The Department argues that a buyer who is not personally present within the state and has no employees or agents within the state can still make initial use or take delivery of the product of service within the state. It presents the hypothetical example of a nonresident property owner who hires a New Mexico company to provide lawn mowing services on its New Mexico property. The Department posits a number of other hypothetical examples involving similar improvements to real property where the service provider is hired to remove, rather than create, something. The examples include a plumber hired to remove a clog from a sink, a carpet cleaning service hired to remove dirt, a landscaping service hired to remove a tree from outside a home, or a crew hired to remove asbestos from a building. We think the key factor in any of these scenarios is the necessity that the services be performed upon the real property within New Mexico. The property owner, even if not personally present in New Mexico, would take delivery of the service at his or her real property within New Mexico, and would make use of the service, either personally or through an agent, at the real property in New Mexico. As the Department itself indicated, [a] vacation home owner uses the product of its house-cleaner's services (a clean house) when it rents the house to others, without ever entering the state. {22} We do not think the same is necessarily true when services are performed on movable, personal property that is not located within New Mexico before the contract is initiated. The Department seeks support for its position in Reed v. Jones, 81 N.M. 481, 468 P.2d 882 (Ct.App.1970). In Reed, a Texas bakery sent its bread delivery truck to a Roswell, New Mexico, garage for repairs. Id. at 481-82, 468 P.2d at 882-83. Upon completion of the repairs, the truck was returned to Texas. Id. The garage argued that it was entitled to the tax deduction because the bakery used the truck in Texas, not New Mexico. The Court of Appeals held that the services were taxable because initial use occurred in New Mexico. Id. at 482, 468 P.2d at 883. In its factual discussion, the court noted that once repaired, the truck was driven back to Amarillo, Texas. Id. The court's use of passive voice is unfortunate because the question under the statute is whether the buyer made initial use of the service in New Mexico. {23} The Department argues that it is irrelevant whether or not the buyer in that case came to New Mexico to retrieve the truck. It was sufficient, the Department argues, that the buyer had the benefit of a functioning vehicle, and the vehicle was rendered fit for driving in New Mexico. We do not agree that a buyer's use within the state can be imputed from the presence of personal property shipped into the state, as it can when real property is located within the state. An out-of-state buyer does not automatically make initial use or take delivery of services within New Mexico when services are performed upon its personal property sent to New Mexico. To the extent that Reed suggests otherwise, we now clarify that the buyer must perform some identifiable activity within the state that constitutes initial use or acceptance of delivery. {24} The dissent also argues that we erroneously focus on the policy behind the statute in reaching our conclusion. In interpreting a statute, however, we search for and effectuate the legislative intentthe purpose or objectunderlying the statute. Bd. of Comm'rs v. Greacen, 2000-NMSC-016, ¶ 4, 129 N.M. 177, 3 P.3d 672 (quoting State ex rel. Helman v. Gallegos, 117 N.M. 346, 353, 871 P.2d 1352, 1359 (1994)); see also Rauscher, 2002-NMSC-013, ¶ 32, 132 N.M. 226, 46 P.3d 687 ([T]he ultimate goal is a determination of what the Legislature intended....). Thus, where there are compelling reasons to believe the legislature intended to allow a deduction, we think it is inappropriate to adhere rigidly to the presumption that the legislature intends to tax all business transactions and to stretch the statutory language beyond its intended purpose. {25} The personal property involved herethe energeticswas not present in New Mexico before TPL won the demilitarization contract. The munitions were sent to TPL so the company could perform the contracted services. If TPL received the energetics, demilitarized them, then shipped them back to IOC in Illinois, we think it would be clear that IOC both made initial use and took delivery in Illinois. The only difference here is that IOC did not want the munitions returned, but wanted TPL to dispose of them. {26} Both the hearing officer and the Court of Appeals determined that initial use took place in New Mexico because transfer of title to the munitions took place in New Mexico. The Court of Appeals concluded that initial use occurred when title was exchanged, because at that point IOC no longer had responsibility for the munitions that had been shipped to TPL. Id. TPL argues that IOC was in fact free from responsibility earlier, when it shipped the munitions to TPL, even though title had not yet transferred. We note that there was no finding of fact from the hearing officer establishing that IOC maintained responsibility until title was transferred, and thus the Court of Appeals' determination is not entitled to any deference. Nonetheless, even if the transfer of title represented the point at which IOC received the benefit of the contract, and therefore initial use occurred at that point, we still do not agree that IOC's initial use occurred in New Mexico. To reach that conclusion, the Court of Appeals erroneously applied the rules governing the sale of goods to this transaction, which instead involved the provision of services and the transfer of an intangible benefit. Transfer of title occurred in New Mexico because the inert munitions were in New Mexico at the time the transfer of title took place. See Pittsburgh & Midway Coal Mining Co. v. Revenue Div., Taxation & Revenue Dep't, 99 N.M. 545, 554, 660 P.2d 1027, 1036 (Ct.App.1983) (citing State Tax Comm'n of Utah v. Pac. States Cast Iron Pipe Co., 372 U.S. 605, 83 S.Ct. 925, 10 L.Ed.2d 8 (1963)). In cases involving the sale of goods, the place of transfer of title determines where the transaction is taxable. Id. ([W]here a vendor sells property, and passage of title and delivery occurs in the vendor state, that state can levy and collect the sales tax on that transaction.). Thus, if this case involved the sale of goods, New Mexico would have taxing authority. This case does not, however, involve the sale of goods, and we do not think the fact that the munitions were in New Mexico at the time title was transferred means that IOC received its intangible benefit, the freedom from responsibility for the munitions, in New Mexico. When IOC received that benefit, it was in Illinois. When TPL completed its services, IOC was in Illinois. As TPL has pointed out repeatedly, IOC was never in New Mexico. It conducted no identifiable activity within the state that constitutes initial use here. Thus, we do not agree that the place where title is transferred determines where initial use occurred in this case. [2] {27} Like the Court of Appeals, the dissent focuses on the tangible objectsthe inert munitionsas the product of service in this case. From that conclusion, the dissent reasons that IOC used the inert munitions by having them recycled by TPL. Even if we accepted this formulation of initial use, we note that the record does not show where the munitions were recycled or where other means of disposal took place. TPL asserts that most of the disposal took place outside of New Mexico. Instead, the munitions were readied for recyclingand disposalin New Mexico. The dissent's theoryyet another new theory proposed to explain why taxation is appropriate in this casestill does not explain how TPL's actions in performing its demilitarization service in New Mexico constituted use by IOC in New Mexico.