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State Appeals Court rejects ‘chemical’ refund case

Copyright © 2019 Albuquerque Journal

SANTA FE – The New Mexico Court of Appeals has rejected a tax protest from a coal company that – along with various other companies – had sought to claim a hefty refund under a rarely used tax deduction on the state’s books.

A flood of more than 30 refund claims filed in the last four-plus years under the tax incentive could have cost the state and local governments more than $100 million annually in lost tax revenue, if they had been uniformly granted.

That’s according to a fiscal analysis of legislation passed during this year’s 60-day session that was aimed at tightening the tax incentive’s language.

Sen. John Arthur Smith, D-Deming

“We thought we’d successfully tightened it, and apparently we have,” said Sen. John Arthur Smith, D-Deming, the Senate Finance Committee chairman, in response to the Court of Appeals’ ruling.

The refund claims were filed under a 1966 tax deduction that allows companies to be reimbursed for receipts from selling large amounts of chemicals.

But the definition of “chemical” isn’t specifically defined in the law, and a range of companies – including coal, natural gas and oil producers – began targeting it in late 2014 in an attempt to reduce their tax liability under New Mexico’s gross receipts tax system.

By last year, top state officials in the Taxation and Revenue Department told lawmakers that the chemical tax deduction was the state’s “single largest risk category” from a financial perspective and that total refund claims could reach $250 million – or even higher.

One of the companies that sought a tax break under the deduction was Peabody Coalsales Co., a Delaware-based firm that sells coal to an Arizona power plant.

Peabody in 2015 filed an application with the state Taxation and Revenue Department for a tax refund of more than $6.4 million and, according to court records, claimed the coal it sells was a chemical because the power plant subsequently used it to generate electricity.

The company even brought in a chemist as an expert witness, who testified during an administrative hearing that “everything in this room is a chemical.”

But the state agency disputed that claim and denied the company’s tax refund claim, and the company filed an appeal. An administrative hearing officer ultimately ruled in the agency’s favor, saying coal sales were not intended to be covered by the chemical tax incentive.

The case was then taken to the Court of Appeals, where a three-judge panel last week upheld the hearing officer’s original decision.

“The Taxation and Revenue Department strives to ensure that the state’s tax laws are applied in a fair and consistent manner to protect taxpayers as well as state revenues,” Taxation and Revenue Secretary Stephanie Schardin Clarke said Monday. “We are gratified that the Court of Appeals upheld the department’s interpretation of the law.”

In announcing its decision, the Court of Appeals said the Legislature’s approval of the bill aimed at tightening the tax deduction’s language sheds light on how the deduction should be used – even though the bill won’t take effect until next month.

“By qualifying the sale of chemicals and reagents in this specific manner, the Legislature has further clarified its intent that (the tax deduction in question) should not apply to the sale of coal to power plants for production of electricity,” Court of Appeals Judge Briana Zamora wrote in the 11-page order.

Meanwhile, Smith said the state’s broad range of tax incentives – there are more than 100 on the books – often lead to revenue uncertainty for the state, because of the varying number of tax claims in any given year.

“It seems to be very fluid – and I don’t think (this incentive) is unique in that regard,” Smith told the Journal.

Contract attorneys for Peabody did not respond to questions Monday about whether the company might appeal the ruling to New Mexico’s Supreme Court.