Discover Bank



On May 13, 2016, the Taxpayer filed a claim for refund of $233,950.59 for corporate income tax for two filing periods in 2011 and 2012. These years had been converted by the Taxpayer from calendar year reporting to fiscal year. The Department took no action on the claims and so on December 8, 2016, the Taxpayer protested the Department’s failure to act. Later, on November 6, 2017, before the Hearing on the Taxpayers protest, the Department sent a letter notifying the Taxpayer that their claim for refund had been denied. The main issue in this protest was whether the Department’s elimination of the payroll factor from the special regulatory apportionment formula for financial institutions was justified. This formula allowed the Taxpayer to arrive at a percentage to be allocated to New Mexico by comparing its payroll, property, and sales factors. Regulation NMAC provides that a financial company operating inside and outside the state may apportion using this formula, but it also provides that one of these factors may be excluded if they do not fairly represent its business activities in the state. For the two periods in question the Department adjusted the returns eliminating the payroll factor. This factor had reduced the amount of income being allocated to the state creating the refunds that were denied. The Department had determined the percentages allocated to the state for this factor was de minimis and therefore should be eliminated. However, in examining previous decisions where factors had been eliminated because of distortion, the Hearing Officer observed that the amounts had been proportionally much smaller. The Taxpayer argued that it was following the allocation allowed and that disallowing the payroll factor unfairly misrepresented its earnings so that it was being taxed partially on income earned in a different state. The Department explained that the elimination of the payroll factor was initiated because the percentage allocated was so small. The extreme numerical difference, the Department argued, made the percentages distortive. The Hearing Officer, however, found the Department’s argument insufficient to overcome the regulation allowing the Taxpayer to allocate the payroll factor. The Department, the Hearing Officer concluded, could provide no evidence that the Taxpayer had made the allocation improperly, and so decided the overpayments were valid and ordered the claims for refund approved.