United States

New Mexico: MTC Audit Uncovers Evidence that Corporations Were Not Protected Under Public Law 86-272

Jun 12, 2017
From KPMG TaxWatch

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A New Mexico Hearing Officer recently determined that two pharmaceutical companies were not protected from corporate income tax by virtue of Public Law 86-272 in part because of their own activities (through ownership of an LLC) and in part because of activities attributed to them from another affiliate. The taxpayers at issue were two corporations formed to hold interests in an LLC. The LLC was the selling entity for the North America branch of a major French pharmaceutical company. The LLC had salespeople in New Mexico soliciting sales of drugs, but did not accept orders in the state and did not maintain any inventory in the state. The Multistate Tax Commission (MTC) conducted an audit of the U.S subsidiaries and determined that the LLC’s activities in New Mexico exceeded Public Law 86-272 and therefore the corporations were subject to New Mexico corporate income tax on their flow-through income.

The Hearing Officer noted that although the taxpayers (through the LLC) exhibited some of the “classic hallmarks” of Public Law 86-272 protection, they engaged in certain activities that were not entirely ancillary to sales of pharmaceuticals. Notably the LLC’s “detailers” provided ongoing education training courses and materials to New Mexico doctors and medical staff. While providing training opportunities inured goodwill to the selling entity, the Hearing Officer determined that these activities also served the independent function of informing the medical profession of advancements and developments in the treatment of patients. This was something that, in the Hearing Officer’s view, the taxpayers would do regardless of having a sales motive. Furthermore, the U.S. Headquarters entity sponsored ongoing clinical research at two New Mexico hospitals. These activities, which the Hearing Officer determined were attributable to the taxpayers under attributional nexus caselaw, increased the taxpayers’ market and potential market in New Mexico and likewise exceeded 86-272 protection. The Hearing Officer next addressed an issue with respect to the taxpayers’ filing methodology. It appeared that the taxpayers had argued that they should be allowed to select a particular reporting method to reduce the Department’s assessments, which were based on filing separately. However, the taxpayers did not present returns selecting a reporting method and the Hearing Officer held that they did not overcome the presumption that the Department’s assessments were correct. However, because the taxpayers relied on an opinion from a national law firm that they were protected under Public Law 86-272, the Hearing Officer abated the civil negligence penalties. Please contact Nick Palmos at 214-840-4076 with questions on this decision.


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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.