On December 23, 2013 the Taxpayer filed an application for refund for the tax periods December 2009 through November 2010 in the amount of $13,331,708.48. On December 19, 2014, Taxpayer filed an application for refund for tax periods December 2010 through September 2011 in the amount of $3,351,289.93. Later the Taxpayer filed protests of the Department’s failure to act on these claims and both were consolidated into one. This protest centered around the question of whether the Taxpayer could take a deduction for services provided to an out-of-state buyer. The Taxpayer worked on many different projects during these periods for various federal agencies. By mutual agreement the Department and Taxpayer settled on 65 projects that exemplified the question at issue. The Taxpayer sought to take deductions under Section 7-9-57 NMSA 1978 which provides that services sold to an out-of-state buyer may be deducted if the buyer does not make initial use or take delivery of the product of the service in New Mexico. The Department maintained that Section 7-9-57 did not apply in this case because the services sold were to the federal government and there was no statute that clearly and unambiguously set out a deduction for the sale of services to a governmental agency. The Department used Section 7-9-54 NMSA 1978 in arguing that the receipts from the sale to a government entity are deductible only for tangible personal property and not the sale of services. But the Hearing Officer could not agree that this statute invalidated Section 7-9-57. After reviewing similar cases, the Hearing Officer could not find an example where the Department had even argued this position before. Long standing precedent had been established in previous decisions, including one by the New Mexico Supreme Court, which allowed the deduction of the sale of services to a government agency when the initial use was made out-of-state. The Hearing Officer further reasoned that when the legislature wrote into Section 7-9-54 a series of exclusions, among them the sale of services, all of these exclusions were intended only for this deduction. Additionally, the guidance the Department provides in its publications concerning the deduction makes no exceptions for services sold to an agency of the federal government. Instead they detail only how the initial use of the product must be outside New Mexico and the buyer must take use of the product of the service outside the state. The Department also argued that the Taxpayer had defined the product of the services sold too narrowly and that, because the product might have national or global benefits, the product could be considered to have been initially used in New Mexico. The Hearing Officer found all of this far too broad and unreasonable. The term “initial use” is defined in statute as “the first employment for the intended purpose.” Using this definition and applying it to one example, a project to engineer and manufacture a system enabling NASA to inspect a spacecraft’s heatshield while in orbit, the intended purpose would appear to be protection of spacecraft in future missions more than a broader purpose of the success of the national space program which might benefit New Mexico. The Department also disputed that an agency of the federal government could be considered an out-of-state buyer because the federal government has presence in the state. But again the Hearing Officer disagreed, explaining how the Department had decided in the past to allow the deduction for services for other federal entities such at United States Air Force which has substantial presence in New Mexico. Regulation 18.104.22.168 NMAC states that if the buyer has presence in the state but the initial use of the product of the services occurs outside the state, the deduction may still be taken. This having been determined, the Hearing Officer granted the protest and ordered the refund approved.