581 F.

2d 803
25 Cont.Cas.Fed. (CCH) 82,544

UNITED STATES of America, Plaintiff-Appellant and CrossAppellee,

v.
STATE OF NEW MEXICO, Bureau of Revenue of the State of
New
Mexico, and Fred L. O'Cheskey, as Commissioner of Revenue
of
and for the State of New Mexico and his successors in
office, Defendants-Appellees and Cross-Appellants.
Nos. 76-1888, 76-1889.

United States Court of Appeals,

Tenth Circuit.
Argued Jan. 27, 1978.
Decided Aug. 7, 1978.

Ann B. Durney, Appellate Section, Tax Division, Dept. of Justice,

Washington, D. C. (Myron C. Baum, Acting Asst. Atty. Gen., Gilbert E.
Andrews and Donald R. Anderson, Tax Division, Dept. of Justice,
Washington, D. C., and Victor R. Ortega, U. S. Atty., Albuquerque, N.
M., with her on brief), for plaintiff-appellant and cross-appellee.
Daniel H. Friedman, Bureau of Revenue, Santa Fe, N. M. (Jan E. Unna,
Sp. Asst. Atty. Gen. and Toney Anaya, Atty. Gen. of New Mexico, Santa
Fe, N. M., with him on briefs), for defendants-appellees and crossappellants.
Before McWILLIAMS, BARRETT and McKAY, Circuit Judges.
McKAY, Circuit Judge.

Lockheed Electronics Company (Lockheed) and RCA Service Company

(RCA) (collectively referred to as "contractors") had cost-plus contracts with

the United States for the performance of research and development services at
the White Sands Missile Range in New Mexico. Because state and local taxes
were included in the definition of reimbursable costs in the contracts, the cost to
the United States was increased by the amount of New Mexico's gross receipts
and compensating taxes which were imposed on the contractors. The
contractors disputed the imposition of the gross receipts tax so far as it applied
to general and administrative (G&A) expenses and to materials and equipment
purchased by the contractors in New Mexico. They also contested the
imposition of the compensating tax for reimbursable out-of-state purchases of
property.
2

New Mexico refused to permit the United States to intervene in the state
administrative contest. The United States then instituted this action seeking a
declaratory judgment that the Constitution and laws of the United States and
the laws of New Mexico prohibit the application of the provisions of the New
Mexico Gross Receipts and Compensating Tax Act (N.M.Stat.Ann. 72-16A1 to -19 (Supp.1975)) (the Act) to the receipts of Lockheed and RCA under
their respective contracts with the United States.

The three judge panel to which the case was assigned concluded that a
judgment by the panel was not required, leaving the decision to the district
judge. The district judge declared that New Mexico has the right to assess and
collect gross receipts and compensating taxes against amounts reimbursed by
the United States for tangible personal property purchased by Lockheed and
RCA to enable them to perform the services specified in their contracts, but that
New Mexico is not entitled to assess its gross receipts tax against
reimbursements for G&A "services" performed by the contractors outside New
Mexico. Both the United States and New Mexico appealed.

According to the stipulated facts, each written agreement between the United
States and a contractor required that the contractor act "as an independent
contractor and not as an agent of the government" and that no employeremployee or master-servant relationship would exist between the United States
and the contractor. Each contract further contained a government property
clause which provided that "(t)itle to all property purchased by the Contractor,
for the cost of which the Contractor is entitled to be reimbursed as a direct item
of cost under this contract, shall pass to and vest in the Government upon
delivery of such property by the vendor." Record, vol. 1, at 48.

Pursuant to provisions of the Armed Service Procurement Regulations, which

were included by reference in the contracts, the contractors were required,
where possible, to utilize government owned property. See 32 CFR 7-203.21

(1976). Before purchasing any materials, supplies or equipment from a

commercial vendor, the contractors were required to resort to all government
sources including the "country store" (a local outlet containing miscellaneous
supplies and materials) and MILSTRIP (a nation-wide computerized purchasing
program). Available government owned property was provided to the
contractors free of charge. If a contractor was unable to obtain government
owned property and the Contracting Officer (a Civil Service employee of the
Department of the Army who acts as the representative of the United States and
is authorized to execute contracts on behalf of the United States) and other
appropriate government officials approved, the contractor could purchase
supplies from private vendors under General Services Administration (GSA)
federal supply schedule contracts at preferred rates. The purchase requisitions
for purchases under GSA contracts declared that the order was being placed on
behalf of the Department of the Army, listed the government contract number
and declared that property delivered under the requisition would vest in the
United States. However, the purchase order that was provided to the vendor
merely referred to the government contract number and did not recite the other
information contained in the requisition. Finally, if needed materials could not
be obtained from government sources or under GSA contracts, a contractor
could receive appropriate authorizations and make purchases from private
vendors.
6

Unless the requirement was waived in writing, the contractor had to obtain the
written approval of the Contracting Officer before purchasing any materials,
supplies or equipment for a purchase price exceeding $500. Orders for supplies
purchased from a private vendor, whether or not pursuant to a GSA contract,
were placed by the contractor and vendors delivered the property directly to the
contractor. The contractor paid the vendor from his own funds and the
purchase price was reimbursed by the United States.

New Mexico assessed no gross receipts or compensating taxes against the

contractors on the value of government owned property provided to the
contractors but did assess such taxes on reimbursements for tangible personal
property acquired by the contractors from private vendors, whether or not
pursuant to GSA contracts.

G&A expenses were incurred by Lockheed at its headquarters in New Jersey

and in Arizona and by RCA at its headquarters in New Jersey. G&A costs were
reimbursable under a contract "pool" ratio formula, the G&A reimbursement
being a percentage of the direct reimbursement for work performed in New
Mexico. The stipulated facts list "the cost of services or items such as
management, personnel, financial, marketing, contracting, industrial relations,

legal, accounting, payroll, computer and administration" as allowable G&A

expenses. Any G&A costs incurred in New Mexico were billed as direct costs
under the contract rather than as indirect G&A expenses. It is further stipulated
that none of the items which make up G&A costs involved the performance of
direct services for the United States or its personnel.
9

* The government contends the New Mexico gross receipts statute

unconstitutionally places the incidence of the tax on the United States. The Act
provides that:

10 For the privilege of engaging in business, an excise tax equal to four per cent
A.
(4%) of gross receipts is imposed on any person engaging in business in New
Mexico.
B. The tax imposed by this section shall be referred to as the "gross receipts tax."
11
12

N.M.Stat.Ann. 72-16A-4 (Supp.1975). "Gross receipts" means Inter alia "the

total amount of money or the value of other consideration, received from
selling property in New Mexico . . . or from performing services in New
Mexico." Id. 72-16A-3(F). The New Mexico Supreme Court has construed
that statutory language as placing the legal incidence of the gross receipts tax
on the seller. First Nat'l Bank v. Commissioner of Revenue, 80 N.M. 699, 705,
460 P.2d 64, 70 (Ct.App.), Cert. denied, 80 N.M. 707, 460 P.2d 72 (1969),
Appeal dismissed, 397 U.S. 661, 90 S.Ct. 1407, 25 L.Ed.2d 643 (1970). Noting
that "(t)he act in plain language levies the tax upon the privilege of engaging in
business within the state and is measured by a percentage of a business's gross
receipts" the court below concluded that the language of the Act placed the
legal incidence of the gross receipts tax on the contractors. His view is
supported by the express language of First Nat'l Bank even though the result in
that case casts some shadow over the principle it declares. See Bradbury &
Stamm Constr. Co. v. Bureau of Revenue, 70 N.M. 226, 236, 372 P.2d 808,
815 (1962).

13

"States may not impose taxes directly on the Federal Government, nor may
they impose taxes the legal incidence of which falls on the Federal
Government." United States v. County of Fresno, 429 U.S. 452, 459, 97 S.Ct.
699, 703, 50 L.Ed.2d 683 (1977). Thus, the decisive issue in this case is
whether the legal incidence of the challenged New Mexico taxes falls on the
United States, regardless of where the economic burden ultimately rests. See id.
at 462, 97 S.Ct. 699. Where, as here, federal rights and immunities are
involved, we are not bound by the state court's characterization of that issue. E.
g., Diamond Nat'l Corp. v. State Bd. of Equalization, 425 U.S. 268, 96 S.Ct.

1530, 47 L.Ed.2d 780 (1976); First Agricultural Nat'l Bank v. State Tax
Comm'n, 392 U.S. 339, 347, 88 S.Ct. 2173, 20 L.Ed.2d 1138 (1968); Society
for Savings v. Bowers, 349 U.S. 143, 151, 75 S.Ct. 607, 99 L.Ed. 950 (1955);
United States v. Allegheny County, 322 U.S. 174, 184, 64 S.Ct. 908, 88 L.Ed.
1209 (1944). We must, however, "give (the state court's) finding great weight in
determining the natural effect of a statute, and if it is consistent with the
statute's reasonable interpretation it will be deemed conclusive." Gurley v.
Rhoden, 421 U.S. 200, 208, 95 S.Ct. 1605, 1610, 44 L.Ed.2d 110 (1975)
(Quoting American Oil Co. v. Neill, 380 U.S. 451, 455-56, 85 S.Ct. 1130, 14
L.Ed.2d 1 (1965)); See Diamond Nat'l Corp. v. State Bd. of Equalization, 425
U.S. at 269, 96 S.Ct. 1530 (Stevens, J., dissenting).
14

The abstraction "legal incidence" has never been explicitly formulated by the
Supreme Court. In confronting this issue on a case-by-case basis, however, the
Court has upheld state taxes which were levied against those doing business
with the United States where the tax: (1) was nondiscriminatory; (2) did not
substantially interfere with the performance of federal functions; (3) was not
required to be passed on to and was not otherwise directly imposed on the
United States or its duly appointed agents; (4) was not precluded by Congress;
and (5) was an otherwise valid exaction. E. g., United States v. County of
Fresno, 429 U.S. at 462-65, 97 S.Ct. 699; City of Detroit v. Murray Corp. of
America, 355 U.S. 489, 494, 78 S.Ct. 458, 2 L.Ed.2d 441 (1958); United States
v. Township of Muskegon, 355 U.S. 484, 486-87, 78 S.Ct. 483, 2 L.Ed.2d 436
(1958); United States v. City of Detroit, 355 U.S. 466, 472-75, 78 S.Ct. 474, 2
L.Ed.2d 424 (1958); Curry v. United States, 314 U.S. 14, 17-18, 62 S.Ct. 48, 86
L.Ed. 9 (1941); Alabama v. King & Boozer, 314 U.S. 1, 13-14, 62 S.Ct. 43, 86
L.Ed. 3 (1941); Colorado Nat'l Bank v. Bedford, 310 U.S. 41, 52-53, 60 S.Ct.
800, 84 L.Ed. 1067 (1940).

15

The Act specifically makes the gross receipts tax applicable to the doing of
business in New Mexico without reference to whether that business is with the
United States and, with uniformly applied exceptions, assesses the tax upon
anyone receiving compensation. There is no evidence that the tax interferes
with the performance of federal functions. The tax is not directly imposed on
the United States and, although the contractors pass the tax on to the United
States they are not required by the Act to do so. Furthermore, the contracts
specifically provide that the contractors are not acting as agents of the United
States. Finally, Congress has not spoken to preclude this tax and there is no
evidence demonstrating that the challenged New Mexico taxing scheme is
otherwise invalid. As such, we must agree with the district court and the New
Mexico courts that the legal incidence of the New Mexico gross receipts tax is
on the contractors as sellers of services to the United States.

16

The fact that during the period covered by the challenged assessments New
Mexico law contained a provision which made it unlawful to advertise that the
gross receipts tax was not part of the sale price (N.M.Laws 1966, ch. 47, 17
(repealed 1975)) does not require a different result. The seller was not required
to collect the tax from the purchaser and the statutory provision did not indicate
an intent to place the legal incidence of the tax on the purchaser. If the tax, by
its terms, were required to be passed on to the purchaser, the result would be
different. United States v. Tax Comm'n of Mississippi, 421 U.S. 599, 607-08,
95 S.Ct. 1872, 44 L.Ed.2d 404 (1975); First Agricultural Nat'l Bank v. State
Tax Comm'n, 392 U.S. at 347, 88 S.Ct. 2173. However, the Supreme Court has
laid to rest any doubts regarding the legal incidence of a tax where, as here, the
taxing scheme does not require that the tax be passed on to the purchaser. In
such cases, the legal incidence is on the contractors as sellers. Gurley v.
Rhoden, 421 U.S. at 204-06, 95 S.Ct. 1605.

17

It is argued that the contracts between the United States and the contractors in
the case before us shift the economic burden of the tax to the United States. In
James v. Dravo Contracting Co., 302 U.S. 134, 137, 58 S.Ct. 208, 210, 82
L.Ed. 155 (1937), the Supreme Court considered the same issue as the one now
before us: "the constitutional validity of a tax imposed by the state . . . upon the
gross receipts . . . under contracts with the United States." In addressing that
issue, the Court concluded that the fact "that the gross receipts tax may
increase the cost to the government . . . would not invalidate the tax" where its
legal incidence falls elsewhere. Id. at 160, 58 S.Ct. at 221.

18

Alabama v. King & Boozer, 314 U.S. at 1, 62 S.Ct. 43, 86 L.Ed. 3, which
involved an Alabama use tax, appears to be the case most closely analogous to
the case before us. The terms of the cost-plus contract with the United States in
King & Boozer were strikingly similar to those in the instant case: (1) the
contractors ordered and paid for materials and were in turn reimbursed by the
United States; (2) the United States reimbursed the contractors for state and
local taxes; (3) title to all supplies and materials purchased by the contractors
vested in the United States upon delivery to the work or storage site; (4) the
United States reserved the right to furnish any and all necessary materials and
to pay directly to vendors the sums due from the contractors; (5) upon
termination of the contract by the United States the government assumed the
good faith obligations of the contractor; (6) the contractor was to make all
contracts in excess of $2,000 with vendors in its own name and not bind or
purport to bind the United States; (7) the decision of whether to buy and what
to buy was reserved to government officers; and (8) the advance approval of the
Contracting Officer was required for purchases of materials costing $500 or
more. The Court rejected the government's argument that the United States was

the purchaser of the materials and, consequently, that the legal incidence of the
tax fell on the United States. It concluded instead that the above provisions,
"read together, plainly contemplate that the contractors were to purchase in their
own names and on their own credit all the materials required, unless the
Government should elect to furnish them; that the Government was not to be
bound by their purchase contracts, but was obligated only to reimburse the
contractors when the materials purchased should be delivered, inspected and
accepted at the site." 314 U.S. at 11, 62 S.Ct. at 46.
19

Carson v. Roane-Anderson Co., 342 U.S. 232, 72 S.Ct. 257, 96 L.Ed. 257
(1952) and Kern-Limerick, Inc. v. Scurlock, 347 U.S. 110, 74 S.Ct. 403, 98
L.Ed. 546 (1954) do not lead to a contrary result. In Carson, Congress
exempted the involved activities from taxation through specific legislation.
Here an express or even implied congressional declaration of immunity is
lacking. In Kern-Limerick, private contractors procured two tractors in
Arkansas for use in performing a cost-plus contract with the United States
Navy. The contract provided that the contractors were to act as purchasing
agents for the United States, that title to the materials was to pass directly from
the vendor to the United States and that the United States would be directly
liable to the vendor for the purchase price. The Supreme Court held the
Arkansas Gross Receipts Tax Law unconstitutional as applied to the involved
transactions because the legal incidence of the tax fell on the United States as
the actual purchaser of the tractors. The instant case is distinguished by the fact
that here the contracts did not authorize the contractors to act as agents of the
United States in purchasing supplies and materials and the United States was
not directly liable to vendors for the purchase price of supplies and materials
purchased by the contractors. In fact, each contract specifically provided that
the contractor was to act "as an independent contractor and not as an agent of
the government" regardless of whether the contractor was dealing with a
vendor pursuant to a GSA supply schedule contract or otherwise.1 See United
States v. Township of Muskegon, 355 U.S. at 486, 78 S.Ct. 483. The KernLimerick court recognized this distinction by acknowledging that "purchases
by independent contractors of supplies for Government construction or other
activities do not have federal immunity from taxation." 347 U.S. at 122, 74
S.Ct. at 411.

20

In the wake of clear and time-honored authority, we conclude that an

application of the New Mexico gross receipts tax to the contractual transactions
in this case was not unconstitutional. We therefore affirm the determination and
judgment of the trial court on this issue.

II

21

The United States also contends that New Mexico's "compensating tax" is
unconstitutional. The Act provides that a compensating or use tax is payable on
property acquired outside New Mexico but used within the state as a result of a
transaction that would have been subject to a gross receipts tax had it occurred
in New Mexico. N.M.Stat.Ann. 72-16A-7 (Supp.1975). Under the Act, "(a)ny
person in New Mexico using property on the value of which compensating tax
is payable but has not been paid is liable to the state for payment of the
compensating tax but this liability is discharged if the buyer has paid the
compensating tax to his seller for payment over to the bureau." Id. 72-16A-9.
The tax is clearly nondiscriminatory, does not interfere with the performance of
federal functions, was not imposed on the United States either directly or
indirectly, has not been precluded by Congress and appears to otherwise be
valid. As such, we agree with the district court's conclusion that this provision
placed the legal incidence of the compensating tax on the contractors as the
purchasers who brought materials and supplies into New Mexico. Accordingly,
the application of the compensating tax to reimbursements for property
purchased out-of-state and brought into New Mexico for use under the
government contracts was valid. See Mountain States Advertising, Inc. v.
Bureau of Revenue, 89 N.M. 331, 333, 552 P.2d 233, 235 (Ct.App.), Cert.
denied, 90 N.M. 8, 558 P.2d 620 (1976).

III
22

The United States contends that if the government were the purchaser of the
property from the vendor (an argument which we have already rejected) New
Mexico would be prevented from collecting its gross receipts or compensating
tax from the vendor under a provision of the Act stating that "(r)eceipts from
selling tangible personal property . . . to the United States . . . may be deducted
from gross receipts." N.M.Stat.Ann. 72-16A-14.9 (Supp.1975). The
government further argues that, even if the contractors were deemed to be the
purchasers, New Mexico could not tax the receipts of the vendors under
Section 72-16A-14.2, which provides that "(r)eceipts from selling tangible
personal property may be deducted from gross receipts if the sale is made to a
person who delivers a nontaxable transaction certificate to the seller." Under
this theory the buyer who delivers the nontaxable transaction certificate must
resell the property "in the ordinary course of business." Id. 72-16A-14.2.
Assuming these requirements were met, vendors would not be required to pay a
gross receipts tax because the property was intended for resale and contractors
would not be liable for the gross receipts tax because the resale was to the
United States.

23

The district court found that neither of the above exemptions applied to the

contractors because:
24 contracts between them and the Army are not for the sale to the Army of
The
tangible personal property. . . . (E)ach contract as a whole reflects the intention of
the Army to receive and RCA and Lockheed to furnish certain services. Under such
circumstances, the personal property acquired by the contractors and either
incorporated into Army systems or consumed in performing the engineering and
other services called for by the contracts was only incidental to the services rendered
under the contracts, Hamm v. Boeing Co. (283 Ala. 310), 216 So.2d 288 (Ala.1968);
Olson Construction Co. v. Tax Commission (12 Utah 2d 42), 361 P.2d 1112 (Utah
1961); United Aricraft (sic) Corp. v. O'Connor (141 Conn. 530), 107 A.2d 398
(Conn. 1954); and no sale by RCA and Lockheed of tangible personal property to
the United States took place.
25

Record, vol. 1, at 123. We agree with the district court that reimbursements for
materials and supplies consumed in performing services under the contracts are
merely reimbursements for those services. However, a more troublesome
question is presented regarding reimbursements for capital equipment which is
not expended in performing the services. Although the district court appears to
have placed undue emphasis on the characterization in the contracts that they
were executed for the performance of services, the district court's opinion, read
as a whole, clearly indicates that the court also considered pertinent factual
realities such as the passage of title to the United States upon delivery of
property by the vendor, government control over purchasing, the risk of loss
generally being borne by the United States, and accounting and inventory
practices under the contracts.

26

The district court's opinion does not contain a recitation regarding amounts
reimbursed to the contractors for nonexpendable materials, supplies and
equipment used in fulfilling their obligations under the contracts. However, the
stipulation executed by the parties contains the following information:

27 ($4,099,000 paid to RCA by the United States under one contract) $139,125
Of
represented the cost of tangible personal property purchased from third parties by
RCA and of this amount $5504 was for the purchase of non-expendable items. . . .
Equivalent figures are not available for the calibration contract. In performance of its
contracts, an estimated 15% To 20% Of the total dollar value of the Lockheed
contracts represented the cost of tangible personal property purchased by Lockheed.
28

Record, vol. 1, at 54. The stipulation further declares:

Under the Lockheed contracts, 87% Of all property purchased was for non29

expendable or capital equipment. All tangible personal property purchased by

Lockheed was used in performing the contract. As to the RCA contract, generally
any capital equipment that was purchased was used in the performing of services
under the contract. All non-capital items would ultimately be consumed in the
performance of services under the contract except for the inventory on the last day of
operation.
30

Id. at 59. It is apparent that the information before the district court was
incomplete. Available information reveals, however, that reimbursements for
capital items under one RCA contract accounted for only a fraction of one
percent of total payments under the contract and Lockheed's reimbursements for
capital items amounted to between 13 percent and 17.4 percent of total
payments. Thus, the procurement of capital items appears to be "incidental" to
the performance of services under the contracts.

31

Were we to view the evidence as factfinders in the first instance we might find
that, in addition to performing services, the contractors sold property to the
United States. Nevertheless, there is support for the trial court's conclusion, See
Department of Treasury of Indiana v. Ingram-Richardson Mfg. Co., 313 U.S.
252, 254, 61 S.Ct. 866, 85 L.Ed. 1313 (1941), and we cannot say that it is
clearly erroneous. 2 But see Goodyear Aircraft Corp. v. Arizona State Tax
Comm'n, 1 Ariz.App. 302, 402 P.2d 423, 427-28 (1965). In addition, we have
found no evidence in the record that the contractors provided "nontaxable
transaction certificates" to their vendors when they purchased property to be
used in fulfilling their government contracts. Even if we were to reject the
district court's conclusion that the personal property was not "resold" to the
government but was utilized in providing services for the government, we could
not find that gross receipts taxes were improperly collected from the vendors
since technical requirements of Section 72-16A-14.2 have not been met.3 The
contractors must bear the burden of establishing their entitlement to an
exemption under the New Mexico taxing scheme. General Motors Corp. v.
Washington, 377 U.S. 436, 441, 84 S.Ct. 1564, 12 L.Ed.2d 430 (1964). The
United States, in assuming the position and burdens of the contractors in this
proceeding, has failed to demonstrate such entitlement under either proffered
exemption.

IV
32

The district court excluded reimbursements for G&A expenses from the
application of the New Mexico gross receipts tax. The court's rationale was that
such expenses were incurred outside the state of New Mexico and the New
Mexico Bureau of Revenue could only collect a gross receipts tax on money

received from services performed in New Mexico. N.M.Stat.Ann. 72-16A3(F) (Supp.1975). New Mexico contends that the district court erred because
certain of the elements which make up G&A expenses could not be
characterized as services and because G&A, as a cost item, does not have an
existence apart from the performance of direct services in New Mexico.
Although G&A is separately stated on the invoices and is a separate element in
each contract, it is computed as a percentage of direct contract costs incurred in
New Mexico.
33

Assuming that, when they received reimbursements for G&A expenses, the
contractors were being reimbursed for work (whether called "services" or by
any other name) performed outside New Mexico, it is clear that New Mexico
taxing authorities would lack authority to tax those transactions. See American
Oil Co. v. Neill, 380 U.S. at 457, 85 S.Ct. 1130. However, a different problem
is presented where, as here, the G&A expenses arise from contracts which are
generally performed in New Mexico:

34 where income arising from a contract performed within the state accrues upon
Only
a separable out-of-state transaction should it be excluded, as not being income
arising from contracting within the state.
35

Dravo Contracting Co. v. James, 114 F.2d 242, 247 (4th Cir. 1940), Cert.
denied, 312 U.S. 678, 61 S.Ct. 450, 85 L.Ed. 1117 (1941). We are unable to
identify such a separable out-of-state transaction. The government did not
contract separately for the G&A "services." They were merely incidental to the
general operation of each contractor and are similar to expenses which are
generally built into the pricing structure of most commodities.

36

The validity of the application of New Mexico's gross receipts tax to G&A
expense reimbursements depends on whether the tax was "laid upon the gross
receipts of (the contractors) derived from (their) activities within the borders of
the state." James v. Dravo Contracting Co., 302 U.S. at 161, 58 S.Ct. at 221.
The Court of Appeals of New Mexico confronted a similar question in
Mountain States Advertising, Inc. v. Bureau of Revenue, 89 N.M. at 331, 552
P.2d at 233. In Mountain States, the taxpayer, a Colorado corporation, appealed
from a Decision and Order of the Commissioner of Revenue which imposed the
gross receipts tax on income derived from displaying advertising messages on
outdoor signs located in New Mexico. All of the taxpayer's employees resided
in Colorado, it had no office or other facility in New Mexico, conducted no
sales solicitations in New Mexico, did not bill in New Mexico, received no
sums there, did not purchase materials for the signs in New Mexico or employ
New Mexico residents to erect or service the signs and only ten percent of the

money expended on any given sign was expended in New Mexico. In rejecting
the taxpayer's contention that only ten percent of its gross receipts from the
New Mexico signs was subject to the tax, the court declared that the taxpayer
was confused in relating cost accounting to the performance of a service in New
Mexico. 552 P.2d at 235. The court reasoned that "(a) pportionment between
in-state and out-of-state activity does not arise where the tax is levied only upon
receipts resulting from the taxpayer's activities in New Mexico." Id. In the
instant case, all receipts under the New Mexico contracts result solely from the
contractor's activities in New Mexico and the G&A expense category appears
merely to be a cost accounting device.
37

Although a superficial examination of Advance Schools, Inc. v. Bureau of

Revenue, 89 N.M. 79, 547 P.2d 562 (1976), may appear to be contrary to our
conclusion that G&A reimbursements may be taxed by New Mexico, we
believe that a closer reading shows the case to be distinguishable. In Advance
Schools, the Commissioner sought to tax the entire tuition paid to the taxpayer
by New Mexico mail order students. The court found that the taxpayer was
selling personal property (course materials) in New Mexico and services
(grading, placement, etc.) which were performed outside New Mexico. Based
on the facts, the court held that New Mexico could not tax services performed
outside the state and that the Commissioner could only apply the gross receipts
tax to the value of property entering the state. Id. at 82, 547 P.2d at 565. In this
case, the United States has not demonstrated that the G&A reimbursements are
for services performed for the United States out-of-state. On the contrary, G&
A expenses appear merely to be a component of the price for services
performed under the contracts in New Mexico.

38

Those portions of the district court's judgment which declare that New Mexico
has the right to assess and collect gross receipts and compensating taxes against
amounts the contractors were reimbursed by the United States for tangible
personal property purchased in the performance of services under the contract
are affirmed. That portion of the district court's judgment which declares that
New Mexico is not entitled to assess its gross receipts tax against
reimbursements received by the contracts from the United States for G&A
expenses is reversed. The case is remanded with instructions to enter an order
consistent with this opinion.

Our conclusion that the contractors were not acting as servants or agents of the
United States when they purchased supplies and materials is bolstered by the
fact, as found by the trial court, "that, at least since 1955, it has been the policy

of the Department of Defense not to include in its contracts agency-creating

clauses to avoid state and local taxes otherwise payable by its contractors."
Record, vol. 1, at 119. If the United States desires to avoid enriching state
coffers with federal funds, it can easily do so by changing the terms of its
contracts. See Kern-Limerick, Inc. v. Scurlock, 347 U.S. at 122-23, 74 S.Ct.
403
2

Each of the contracts provide that "(t)he Government and the Contractor
understand and agree that the services to be delivered under this contract by the
Contractor to the Government are nonpersonal services." Record, vol. 1, at 115.
Various contracts also provide that the contractor shall provide "nonpersonal
services required in operating and maintaining the White Sands Missile Range
Calibration Laboratory" including the "management, administrative,
supervisory and technical support, transportation and other resources necessary
and incident to the furnishing of calibration and repair services;" "Non-Personal
Technical Radar Services for the Operation; Maintenance, Repair, Relocation,
and modification of Radar Systems, Target Acquisition Systems, Chain and
Radar Systems, and associated subsystems;" and "nonpersonal services
including engineering and technical services to design, assemble, test, install
and modify range instrumentation, communication, control, and support
systems." Id. at 114 n. 1

New Mexico contends that inasmuch as the United States made no specific
request for relief regarding gross receipts tax payments by vendors and did not
present evidence on or request a determination of this issue below, it may not
be raised on appeal. The court below specifically found that "those provisions
of the state act that grant an exclusion from the gross receipts tax for sales to
the United States (Section 72-16A-14.9) or for sales for resale (Section 72-16A14.2) do not apply to RCA and Lockheed." Record, vol. 1, at 122-23. The court
below specifically addressed Section 72-16A-14.2 and the United States' appeal
has properly raised issues regarding that determination