Tucson Elec. Power Co. v. N.M. Taxation and Revenue Dep't

                                                Office of Director   New Mexico
                                                       2020.02.04    Compilation
                                                 '00'07- 14:35:31
                                                                     Commission


          IN THE COURT OF APPEALS OF THE STATE OF NEW MEXICO

Opinion Number: 

Filing Date: November 4, 2019

No. A-1-CA-35781

TUCSON ELECTRIC POWER CO.,

      Petitioner-Appellant

v.

TAXATION AND REVENUE
DEPARTMENT OF THE STATE OF
NEW MEXICO,

      Respondent-Appellee.

APPEAL FROM THE ADMINISTRATIVE HEARINGS OFFICE
Monica Ontiveros, Hearings Officer

Released for Publication February 11, 2020.

Sutin, Thayer & Browne
Suzanne W. Bruckner
Christopher A. Holland
Albuquerque, NM

for Appellant

Peifer, Hanson & Mullins, P.A.
Matthew E. Jackson
Mark T. Baker
Albuquerque, NM

New Mexico Taxation & Revenue Department
Marek Grabowski, Staff Attorney
Santa Fe, NM

for Appellee

                                      OPINION

HANISEE, Chief Judge.
{1}    Tucson Electric Power Company (Taxpayer) appeals from the administrative
hearing officer’s (AHO) decision and order denying its protest of the New Mexico
Taxation and Revenue Department’s (the Department) denial of Taxpayer’s request for
a tax refund. We affirm, but on a basis different than that relied on by the AHO.

BACKGROUND

{2}    Taxpayer co-owns Luna Energy Facility, a power plant located near Deming,
New Mexico. Taxpayer purchases natural gas from various third parties, including out-
of-state vendors, for use in producing electricity at the plant. In December 2014
Taxpayer applied to the Department for a refund of $434,860.92 for the tax period July
1, 2011, through December 31, 2011, based on its belief that its purchases of natural
gas qualified for a deduction under the Gross Receipts and Compensating Tax Act (the
Act), NMSA 1978, §§ 7-9-1 to -117 (1966, as amended through 2019). The Department
denied Taxpayer’s refund application, and Taxpayer filed an administrative protest.

{3}     In its protest, Taxpayer argued that it was entitled to a refund “for compensating
taxes paid in error . . . for purchases that are not subject to compensating tax” under the
Act. 1 Taxpayer argued that its purchases of natural gas fell within Section 7-9-65 of the
Act, which provides, inter alia, that “receipts from selling chemicals or reagents in lots in
excess of eighteen tons . . . may be deducted from gross receipts.”2 Section 7-9-65. The
Department responded that Section 7-9-65 is inapplicable to Taxpayer’s purchases of
natural gas for use in generating electricity and that Taxpayer had failed to clearly
establish its entitlement to the deduction.

{4}    Following a hearing, the AHO found that Taxpayer had “paid compensating tax
on the purchase of natural gas during the tax period” from various companies, all of
which the AHO found “have no nexus with New Mexico and are out-of-state
companies.” The AHO’s analysis began with a discussion of the relationship between
New Mexico’s compensating tax and gross receipts tax and included a threshold
determination that “[d]eductions that are applicable to the gross receipts tax may be
used to determine whether compensating tax is due on a transaction.” The AHO cited
Western Electric Co. v. New Mexico Bureau of Revenue, 

, ¶ 14, 

, 

, for the proposition that “the [L]egislature intended to make our
gross receipts tax and our compensating tax correlate[]: a [deduction] from the gross


1A “compensating tax” is the tax imposed on the value of tangible property purchased out of state and brought
into New Mexico for use inside the state. Section 7-9-7(A)(2). It is designed “to prevent the importation of goods
that would have been subject to gross receipts tax had they been produced or designed in New Mexico” and is
considered a “complementary” tax to the gross receipts tax, which taxes in-state sales. Dell Catalog Sales LP v.
N.M. Taxation & Revenue Dep’t, 

, 

, 

.
2Although abandoned on appeal, Taxpayer alternatively argued that it was eligible to claim the deduction provided
in Section 7-9-46(A) for “[r]eceipts from selling tangible personal property . . . if the sale is made to a person
engaged in the business of manufacturing” and provided that the person “incorporate[s] the tangible personal
property as an ingredient or component part of the product that the buyer is in the business of manufacturing.” 

The AHO found that the deduction provided by Section 7-9-46 “cannot apply” here because there was no evidence
that the nontaxable transaction certificate required by Section 7-9-46 existed.
receipts tax must also be treated as a [deduction] from the compensating tax.”3 The
AHO nonetheless determined Taxpayer’s transactions did not qualify for the deduction
because Taxpayer failed to present sufficient evidence that it purchased and received
natural gas in “lots” greater than eighteen tons as required by Section 7-9-65. Ultimately
concluding that Taxpayer had failed to meet its burden of establishing its right to the
deduction, the AHO denied Taxpayer’s protest. Taxpayer appeals.

DISCUSSION

{5}     On appeal, Taxpayer argues that the AHO made two errors of law: first,
determining that “natural gas delivered by pipe to a power plant is not sold or delivered
by ‘lots’ because gas is a ‘good’ ” and “ ‘goods’ and ‘lots’ are mutually-exclusive”; and
second, that “the statute mandates that gas must be both sold and delivered in lots
greater than [eighteen] tons to qualify for the deduction.” Taxpayer contends that the
AHO’s ruling “flies in the face of the statute’s plain language.” The Department argues
that the AHO’s “decision should be affirmed because the Legislature did not intend
Section 7-9-65 to apply to the sale or use of natural gas” and that Taxpayer “failed to
meet its burden to show that the natural gas it purchased was sold in lots of eighteen
tons.” We agree that the statute’s plain language controls here, and that Section 7-9-
65—permitting deduction for “receipts from selling chemicals or reagents in lots in
excess of eighteen tons”—is inapplicable to receipts for natural gas, and that the AHO
erred in applying it. Because Section 7-9-65 does not apply, we affirm denial of
Taxpayer’s protest.

Standard of Review

{6}    This Court will only set aside an AHO’s decision if the decision 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); Stockton v. N.M. Taxation & Revenue Dep’t, 

, 

, 

. The issue presented requires us to interpret Section 7-9-65. We are
not bound by the AHO’s interpretation as the interpretation of statutes presents a
question of law that we review de novo. See In re Final Order in Alta Vista Subdivision
DP No. 1498 WQCC 07-11(A), 

, 

, 

(“We are not bound by the [Water Quality Control] Commission’s interpretation of the
statute, as this is a matter of law that we review de novo.”). We may affirm the AHO’s
ruling on a ground not relied upon by the AHO if reliance on the new ground would not
be unfair to Taxpayer. See Cordova v. World Fin. Corp. of N.M., 

,

, 

 (“Even if the issue had not been preserved below, it is
established law that our appellate courts will affirm a district court’s decision if it is right

3Well after Western Electric Co., 

, the Legislature amended Section 7-9-12 in 1984 to state
“[e]xemptions from either the gross receipts tax or the compensating tax are not exemptions from both taxes
unless explicitly stated otherwise by law.” NMSA 1978, § 7-9-12 (1984) (emphasis added). While the case at bar
does not require that we reconcile the conflict between Western Electric Co. and Section 7-9-12, we note the
incompatibility of each approach with the other and the fact that the AHO’s order referred exclusively to Western
Electric Co. as applicable precedent.
for any reason, so long as the circumstances do not make it unfair to the appellant to
affirm.”).

{7}     In reviewing the AHO’s decision, we presume that the “assessment of taxes or
demand for payment made by the [D]epartment is . . . correct.” NMSA 1978, Section 7-
1-17(C) (2007). Moreover, we presume that all property bought by any person for
delivery into New Mexico is subject to a compensating tax on the value of the property.
Section 7-9-8. As such, “deductions are construed strictly against the taxpayer.” TPL,
Inc. v. N.M. Taxation & Revenue Dep’t, 

, 

, 

. The taxpayer bears the burden of proving that it is eligible for the deduction. Id.
¶ 31.

Applicable Rules of Statutory Construction

{8}     “The guiding principle in statutory construction requires that we look to the
wording of the statute and attempt to apply the plain meaning rule, recognizing that
when a statute contains language which is clear and unambiguous, we must give effect
to that language and refrain from further statutory interpretation.” City of Santa Fe ex rel.
Santa Fe Police Dep’t v. One (1) Black 2006 Jeep, 

, 

 (internal quotation marks and citation omitted). “In interpreting statutes, we seek to
give effect to the Legislature’s intent, and in determining intent we look to the language
used and consider the statute’s history and background.” Valenzuela v. Snyder, 2014-
NMCA-061, ¶ 16, 

 (internal quotation marks and citation omitted).
“[W]here the language of the legislative act is doubtful or an adherence to the literal use
of words would lead to injustice, absurdity or contradiction, the statute will be construed
according to its obvious spirit or reason, even though this requires the rejection of words
or the substitution of others.” N.M. Real Estate Comm’n v. Barger, 

, 

 (internal quotation marks and citation omitted). Moreover, “[w]e
consider all parts of the statute together, reading the statute in its entirety and
construing each part in connection with every other part to produce a harmonious
whole.” Dep’t of Game & Fish v. Rawlings, 

, ¶ 6, 

(alterations, internal quotation marks, and citation omitted).

Taxpayer’s Purchases of Natural Gas Do Not Qualify for Section 7-9-65’s
Deduction

{9}    In full, the previous version of Section 7-9-65 provides:

               Receipts from selling chemicals or reagents to any mining, milling
       or oil company for use in processing ores or oil in a mill, smelter or refinery
       or in acidizing oil wells, and receipts from selling chemicals or reagents in
       lots in excess of eighteen tons may be deducted from gross receipts.
       Receipts from selling explosives, blasting powder or dynamite may not be
       deducted from gross receipts.
NMSA 1978, § 7-9-65 (1969) (emphasis added). The question, then, is whether natural
gas is a category of chemical or reagent under the Act. “Chemical” as defined by the
Department’s regulations is “a substance used for producing a chemical reaction.”
3.2.223.7(B) NMAC. Taxpayer argues that based on parties’ stipulations, and
specifically the Department’s concession, the AHO correctly found that the natural gas
purchased and used by Taxpayer was a “chemical” within the meaning of Section 7-9-
65. Relying on the right-for-any-reason doctrine, the Department now contends—
despite its past stipulation to the contrary—that the Legislature did not intend for the
statutory deduction for chemicals or reagents to apply to natural gas.

{10} We apply the principles of statutory construction to determine whether
Taxpayer’s receipts for the purchase of natural gas falls under “chemicals or reagents”
in the statute. Section 7-9-65. At the outset, we note that while we generally look to
parties’ stipulations with favor, “we [are] not . . . bound by parties’ stipulations [or the
Department’s concessions] as to applicable law[,]” Williams v. Mann, 

, 

, because we must conduct our own analysis; and we also will not
enforce stipulations if they are “unreasonable, . . . against good morals or sound public
policy[.]” S. Union Gas Co. v. Cantrell, 

, ¶ 6, 

, 

 (internal quotation marks and citation omitted); DeMichele v. N.M. Taxation &
Revenue Dep’t., 

, 

 (“[T]his Court is not bound by the
[s]tate’s concession.”). Here, the question of whether “natural gas” is a “chemical or
reagent” is a question of law, which we review de novo and independent of the parties’
stipulation before the AHO that natural gas is used to produce a chemical reaction and
therefore is a chemical for purposes of Section 7-9-65.

{11} First, because Taxpayer is claiming a tax deduction under Section 7-9-65, we
must strictly construe the statute in favor of the Department and “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.” Sec. Escrow Corp. v. N.M.
Taxation & Revenue Dep’t, 

, ¶ 8, 

, 

. In light
of this framework, we must determine whether the plain meaning of the statute clearly
and unambiguously allows for a deduction for the receipts from the purchase of natural
gas. We conclude that it does not.

{12} Second, we recently addressed, in a memorandum opinion, a markedly similar
question regarding the applicability of Section 7-9-65 to the sale of coal. See Peabody
Coalsales Co. v. N.M. Taxation & Revenue Dep’t, No.A-1-CA-36632, mem. op. ¶ 8
(N.M. Ct. App. May 31, 2019) (non-precedential). 4 In Peabody Coalsales, Co., we
determined that the word “chemical” in Section 7-9-65 is ambiguous, and ultimately
decided that in enacting the provision the Legislature did not intend to create a separate
deduction for receipts from the sale of coal. Peabody Coalsales Co., No. A-1-CA-36632,
mem. op. ¶¶ 13, 15. We, therefore, denied the taxpayer’s claim that it was entitled to a
tax deduction from gross receipts of its sale of coal to an Arizona power plant. Peabody
Coalsales Co., No. A-1-CA-36632, mem. op. ¶¶ 1-2. Applying the same rationale we

4Despite our citation and adherence to the rationale employed in Peabody, it continues to be the practice of this
Court to only rely on published cases as precedent.
applied in Peabody Coalsales Co. here, we similarly determine Section 7-9-65 to be
ambiguous as to its applicability to natural gas and emphasize that both Section 7-9-65
and its corresponding regulations fail to mention the words “natural gas” or “fuels.” See
Peabody Coalsales Co., No. A-1-CA-36632, mem. op. ¶ 12. As with coal, had the
Legislature intended to provide a deduction for receipts from the sale or use of natural
gas, it could have specified the inclusion of natural gas within the statutory language
establishing the deduction, as in the enactment of other legislation applicable to natural
gas. See, e.g., NMSA 1978, § 7-29B-6 (1999) (discussing a tax incentive regime for the
production of natural gas and crude oil). 5 Where the Legislature has elected to extend a
deduction, we must presume it did so intentionally. See State v. Jade G., 2007-NMSC-
010, ¶ 28, 

, 

; see also §§ 7-9-83(B), -84(B) (providing
deductions from gross receipts and compensating tax, respectively, for jet fuel); §§ 7-9-
101, -102 (providing deductions from gross receipts and compensating tax, respectively,
for equipment for certain electric transmission or storage facilities); §§ 7-9-110.1, -110.2
(providing deductions from gross receipts and compensating tax, respectively, for
locomotive fuel). We are not at liberty to read into unspecific statutory language an
exemption or a deduction that is not expressly provided for by statute. See Sec. Escrow
Corp., 

, ¶ 8. Such is precisely what Taxpayer seeks.

{13} Third, as further support for our conclusion we note that the Legislature has
enacted other provisions that pertain to natural gas, such as the Oil and Gas
Emergency School Tax Act (the Oil & Gas Tax), NMSA 1978, §§ 7-31-1 to -27 (1959, as
amended through 2005). See § 7-31-4(A)(3) (levying a 4 percent tax on the taxable
value of natural gas with limited exceptions); § 7-9-33(A) (providing that “receipts from
the sale of products other than for subsequent resale in the ordinary course of business,
for consumption outside the state, or for use as an ingredient or component part of a
manufactured product are subject to the Gross Receipts and Compensating Tax Act as
well as to the Oil & Gas [Tax]”). Notably under the Oil and Gas Tax, the Legislature
expressly levies a gross receipts tax and compensating tax, with limited exemptions, on
natural gas. See § 7-31-4(A)(3); § 7-9-33. Such express legislative action indicates the
Legislature did not broadly intend for the Section 7-9-65 deduction to apply to receipts
from natural gas sales. See Valenzuela, 

 (noting that a statute’s
history and background can aid in determining legislative intent).

{14} To reiterate: tax exemptions and deductions “are a matter of legislative grace and
a way of achieving policy objectives” and are to be “construed against the taxpayer.”
Sutin, Thayer & Browne v. N.M. Taxation & Revenue Dep’t, 

, ¶ 17, 

, 

; Murphy v. N.M. Taxation & Revenue Dep’t, 

,
¶ 20, 

, 

. It is the taxpayer’s burden to establish that it is entitled
to the deduction. TPL, Inc., 

. Taxpayer has not met its burden to
establish its entitlement here, and we will not construe the word “chemical” in dicta to
encompass natural gas. Since Taxpayer failed to satisfy the threshold question of
whether natural gas is covered by the statute, and we conclude it is not, we decline to
address the parties’ remaining arguments on appeal.

5In NMSA 1978, Section 7-29B-2(F) (1999), “natural gas” is defined as “any combustible vapor composed chiefly of
hydrocarbons occurring naturally”—a term and definition notably more specific than that within Section 7-9-65.
{15} Lastly, we observe that the Legislature further elaborated upon its intent as to
this very topic by recently amending Section 7-9-65, effective July 1, 2019. The
amendment qualified the deduction applicable to receipts from selling chemicals and
reagents in excess of eighteen tons as “to any hard-rock mining or milling company for
use in any combination of extracting, leaching, milling, smelting, refining or processing
ore at a mine site[.]” 

 This clarification—which notably excluded natural gas—
highlights that the Legislature does not intend to bestow a tax deduction to the sale of
natural gas to power plants for the production of electricity, and thus such transactions
do not fall within the purview of Section 7-9-65. While not dispositive as to prior
transactions, the recent change clarifies current legislative intent in a manner that
supports our analysis and conclusion herein.

{16} Because the right to claim a deduction for receipts from the sale and use of
natural gas is not clearly and unambiguously expressed in, or even addressed by,
Section 7-9-65, we conclude it is inapplicable to receipts from the sale and use of
natural gas. Therefore, Taxpayer is not entitled to a deduction under Section 7-9-65.

CONCLUSION

{17}   For the foregoing reasons, we affirm the AHO’s denial of Taxpayer’s protest.

{18}   IT IS SO ORDERED.

J. MILES HANISEE, Chief Judge

WE CONCUR:

BRIANA H. ZAMORA, Judge

RICHARD C. BOSSON, Pro Tempore Judge