Process Equipment & Service Company Inc

20-02

On February 3, 2017, and then on May 31, 2018, the Department denied the Taxpayer’s claim for a Technology Jobs and Research and Development Tax Credit for 2014 and 2016 respectively, which the Taxpayer later protested. The Department denied the claims because it determined that Taxpayer’s methodology of demonstrating qualified expenditures was inadequate under the statutory language and the evidence presented. The primary issue in this case was the meaning of qualified expenditures for the credit and whether the Taxpayer demonstrated adequate proof through its method. The Taxpayer argued since the New Mexico Technology Jobs and Research Development Credit is very similar to the federal research and development credit, the proof of the credit, routinely accepted by the IRS, should also be accepted by the state. Taxpayer contended that there is no requirement for project timekeeping system in order to claim the state credit, as that is not a requirement of federal law. The Department argued that if the legislature had intended the state credit requirements to be exactly the same as the federal credit, it would have stated so. Instead, the state required that a cost accounting method to support the credit must be the same as a methodology relied on in the Taxpayer’s other business activities. The Department contended that the methodology chosen by the Taxpayer was not relied on in any of its business activities and only used in this case to qualify for the New Mexico credit. The Taxpayer argued that the intent of the requirement in the statute was simply to prevent distortion and that it had consistently employed its method in order to demonstrate it qualified for the credit. The Taxpayer also stated that it did use the method in question for other business purposes. The Hearing Office agreed with the Department that the state credit intends different qualifications from the federal credit, however, found the Department applied the state provisions too narrowly and that, in determining qualification for a tax credit, the statute should be interpreted in a reasonable manner consistent with the legislative intent. Through testimony the Taxpayer was able to demonstrate that the system it used to track how much work was being committed to new research and development projects in its regular business activities was also used in its method to support the credit. Since the method employed supported the qualified expenditures, the Hearing Officer determined that the credit must be allowed and ordered the protest granted.