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Transportation Company Allowed Alternative Apportionment in New Mexico

Tax Development Jun 29, 2023

Transportation Company Allowed Alternative Apportionment in New Mexico

The New Mexico Court of Appeals recently affirmed a New Mexico Administrative Hearings Officer’s decision that a subsidiary of UPS, United Parcel Services Inc. (Ohio) & Affiliates, can use an apportionment method other than the statutory mileage method for determining sales.1

In this case, the taxpayer was the New Mexico local package delivery unit of UPS. The standard apportionment method in New Mexico for the years at issue was a three-factor formula consisting of payroll, property, and sales. Under the formula, sales were determined by miles driven in New Mexico over total miles driven by the carrier multiplied by total sales. The taxpayer asserted that this formula did not properly reflect the sales in the state as the mileage factor grossly distorted the revenue generated by the taxpayer in the state. The court agreed.

The Department of Revenue (DOR) argued that the mileage methodology had been approved as constitutional by the U.S. Supreme Court. However, the New Mexico Court of Appeals determined that the DOR has misconstrued the Supreme Court’s position. While in general the mileage methodology is an appropriate method to determine revenue for interstate carriers for the most part, there are instances where “one size may not fit all.” Citing Hans Rees’ Sons, Inc. v. North Carolina, 283 U.S. 123 (1931), the New Mexico court held that applying the mileage formula resulted “in an unfair representation of the taxpayer’s business activities in New Mexico.”

The taxpayer presented clear and cogent proof that the application of the statutory method resulted in gross distortion. The alternative method proposed by the taxpayer was a state-to-state volume-based percentage. The court found this method to be reasonable.

The takeaway from this decision is that taxpayers can challenge statutory apportionment methods and win the fight if they can present evidence that the method results in gross distortion and the alternative method is reasonable. Despite a Supreme Court ruling that a method is constitutional, should you find that apportioning your income under the statutory method results in a grossly distorted result of income being apportioned to a state, taxpayers should advocate for a reasonable alternative utilizing the director’s discretionary alternative apportionment rules. We are finding that gross distortion occurs more and more under the pervasive single sales factor formula adopted by many states. The experts at Ryan are here to assist you in making the appropriate arguments to win an alternative apportionment battle with the state.

Contact one of our experts listed below now.


Mark L. Nachbar

Greg Rottjakob

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1 United Parcel Serv. Inc. (Ohio) & Affiliates v. Tax’n & Revenue Dep’t, N.M> CT App., No. A-1-CA-38585, 6/23/23