CCA of Tennessee v. N.M. Tax'n and Revenue Dep't

Office of the New Mexico
Director Compilation
Commission
2024.05.14
'00'06- 16:02:28
IN THE SUPREME COURT OF THE STATE OF NEW MEXICO

Opinion Number: 2024-NMSC-013

Filing Date: January 16, 2024

No. S-1-SC-38681

CCA OF TENNESSEE, LLC,

Appellant-Respondent,

v.

NEW MEXICO TAXATION AND REVENUE DEPARTMENT,

Appellee-Petitioner.

IN THE MATTER OF THE PROTEST
TO ASSESSMENT ISSUED UNDER
LETTER ID. NO L1081049392

ORIGINAL PROCEEDING ON CERTIORARI
Chris Romero, Hearing Officer

Hector H. Balderas, Attorney General
New Mexico Taxation and Revenue Department
David E. Mittle, Special Assistant Attorney General
Santa Fe, NM

for Petitioner

Sutin, Thayer & Browne, P.C.
Suzanne W. Bruckner
Andrew J. Simons
Wade L. Jackson
Albuquerque, NM

for Respondent

OPINION

ZAMORA, Justice.

{1} The issue on appeal is whether taxpayer CCA of Tennessee, LLC (CCA), a
private prison corporation, accepted in good faith a nontaxable transaction certificate
(NTTC) executed by Torrance County (the County) for CCA’s housing of federal
prisoners at the Torrance County Detention Center (the Detention Center). An NTTC
establishes a taxpayer’s entitlement to claim a deduction for the gross receipts it
receives from the sale of certain licenses or services. NMSA 1978, § 7-9-43(A) (2011,
amended 2018); NMSA 1978, § 7-9-47 (1994, amended 2021); NMSA 1978, § 7-9-48
(2000, amended 2021). 1 The issuance of an NTTC for such sales is predicated on the
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buyer reselling the license or services it purchased from the taxpayer. Section 7-9-47; §
7-9-48. When the taxpayer accepts a properly executed NTTC in good faith, the NTTC
is conclusive evidence that the proceeds are deductible from that taxpayer’s otherwise
taxable gross receipts. Section 7-9-43(A). Generally speaking, this provides the
taxpayer with safe harbor protection from liability for payment of gross receipts tax in
situations where, unbeknownst to the seller, the buyer is not reselling the license or
services in the intended manner. See § 7-9-43(A).

{2} The administrative hearing officer for the New Mexico Taxation and Revenue
Department (the Department) concluded that CCA, as the seller, did not in good faith
accept the NTTC, executed by the County as buyer, and therefore was not entitled to
the deduction from gross receipts it received for housing federal prisoners. See id. The
Court of Appeals came to the opposite conclusion. CCA of Tenn. v. N.M. Tax’n &
Revenue Dep’t, A-1-CA-37548, mem. op. ¶ 27 (N.M. Ct. App. Jan. 21, 2021)
(nonprecedential).

{3} We agree with the conclusion of the hearing officer and hold that under the plain
language of Section 7-9-43(A), CCA did not accept the NTTC in good faith and is
therefore not entitled to safe harbor protection from the payment of gross receipts tax.
We reverse the Court of Appeals.

I. BACKGROUND

{4} CCA owned and operated the Detention Center during the times relevant to this
appeal. CCA incarcerated inmates for the County at the Detention Center pursuant to
the contract it executed with the County in 2010. The contract required CCA to provide
services for booking inmates, safekeeping inmate property, medical care, transporting
inmates, and supervising inmate work programs. Some years earlier, in 2002, the
County had entered into a separate contract with the United States Marshals Service
(Marshals Service) to house federal prisoners. CCA agreed to fulfill the County’s
obligation to the Marshals Service to house and supervise federal prisoners at the
Detention Center. CCA directly invoiced, and directly received payments from, the
Marshals Service for housing federal prisoners.

{5} CCA sought a refund of gross receipts taxes from the Department that it had
purportedly overpaid from January 1, 2010, through December 31, 2012, on the gross
receipts it received from the Marshals Service. To secure that refund, CCA needed the

1 The relevant activity in this case occurred before Sections 7-9-43, 7-9-47 and 7-9-48 were amended in
2018, 2021, and 2021, respectively. Further reference to Section 7-9-43 is to the 2011 version of the
statute; further reference to Section 7-9-47 is to the 1994 version of the statute; further reference to
Section 7-9-48 is to the 2000 version of the statute.
Department to issue an NTTC to the County, which the County would then execute with
CCA. See Section 7-9-43(D). CCA’s tax advisor communicated with an audit bureau
chief in the Department about the NTTC. In email correspondence with the
Department’s audit bureau chief, CCA’s tax advisor wrote: “Just to clarify, the NTTC
relates to the portion of Torrance County receipts derived from housing [Marshals
Service] inmates. The receipts are not coming directly from the [Marshals Service] to
CCA.” CCA concedes that this was a misstatement because the Marshals Service was
sending payments directly to CCA. In reliance on CCA’s assertion that the receipts were
not coming directly from the Marshals Service to CCA, the Department’s audit bureau
chief informed CCA’s tax advisor that CCA could accept an NTTC for the receipts
derived from housing the Marshals Service inmates.

{6} The Department issued the requested NTTC and the County executed an NTTC
to CCA in August 2013 for the gross receipts from CCA’s purported sale of a license for
housing federal prisoners at the Detention Center. CCA then filed for a tax refund for the
years 2010-2012 asserting it was entitled to a deduction under Section 7-9-47 for the
sale of a license to the County to use the Detention Center, which the County resold to
the Marshals Service to house federal prisoners. In April 2014, CCA received the
requested refund.

{7} In August 2016, the Department conducted an audit of CCA for 2010 through
September 30, 2015. The auditor concluded that CCA was not entitled to the refund it
had received for gross receipts tax paid on the 2010-2012 receipts from the Marshals
Service and that it was liable for gross receipts tax in the amount of $2,686,632.18, plus
penalties and interest. The auditor found that there was no resale of the license and that
CCA was not entitled to a tax deduction because CCA was selling services, not a
license. CCA protested the audit. The hearing officer held a hearing on CCA’s protest
and issued a decision and order denying the protest. In the decision and order, the
hearing officer first determined that CCA was not entitled to a tax deduction under
Section 7-9-47, which was predicated on the County reselling a license to use the
Detention Center to the Marshals Service in the ordinary course of the County’s
business. 2 The hearing officer found that the predominant feature of the transaction—to
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house federal prisoners—was not the licensing of an interest in real property. Instead,
the predominant feature was the provision of services within the building, such as
providing adequate food, clothing, shelter, and medical care for inmates. The hearing
officer found that there was not an agreement between the County and the Marshals
Service for the resale of the license, and that there was no evidence that the County
was reselling licenses in the ordinary course of its business. Therefore, the hearing
officer concluded CCA was not entitled to its claimed deduction.

{8} The hearing officer next analyzed whether CCA was nonetheless entitled to safe
harbor protection under Section 7-9-43(A). Section 7-9-43(A) provides in relevant part

2 Section 7-9-47 states in relevant part:
Receipts from selling . . . licenses may be deducted from gross receipts . . . if the sale is
made to a person who delivers a nontaxable transaction certificate to the seller. The
buyer delivering the nontaxable transaction certificate must resell the . . . license . . . in
the ordinary course of business.
that when a seller or lessor accepts a properly executed NTTC “in good faith that the
buyer or lessee will employ the property or service transferred in a nontaxable manner,”
the NTTC is “conclusive evidence” that the proceeds from that transaction can be
deducted from the seller’s gross receipts. To support its position, CCA relied on the
email it received from the Department agreeing that CCA could accept an NTTC “for the
receipts derived from hous[ing] the inmates.” The hearing officer rejected as
unreasonable CCA’s reliance on this email because the facts the Department relied
upon “were undeniably and undisputedly incorrect.” The hearing officer observed that
“safe harbor protection only applies when the underlying transaction is covered by a
recognized deduction.” He then concluded that because CCA’s underlying transaction
was taxable, “mere possession of an NTTC” did not transform it into a nontaxable
transaction.

{9} The Court of Appeals reversed the hearing officer, holding that “[a]bsent
evidence that [CCA] did not accept the NTTC from the County in good faith,” CCA was
entitled to safe harbor protection under Section 7-9-43(A). CCA of Tenn., A-1-CA-
37548, mem. op. ¶ 27. We granted the Department’s petition for certiorari to decide
whether CCA accepted the NTTC in good faith and was therefore entitled to safe harbor
protection under Section 7-9-43(A). 3 2F

II. DISCUSSION

A. Standard of Review

{10} We will set aside a decision and order of an administrative hearing officer only if
it is “(1) arbitrary, capricious or an abuse of discretion; (2) not supported by substantial
evidence in the record; or (3) otherwise not in accordance with the law.” NMSA 1978, §
7-1-25(C) (2015). Within that framework, we review issues of statutory interpretation de
novo. High Desert Recovery, LLC v. N.M. Tax’n & Revenue Dep’t, 2022-NMCA-048, ¶
7, 517 P.3d 258. In reviewing the administrative hearing officer’s decision “we apply a
whole-record standard of review.” Gemini Las Colinas, LLC v. N.M Tax’n & Revenue
Dep’t, 2023-NMCA-039, ¶ 11, 531 P.3d 622 (internal quotation marks and citation
omitted); Section 7-1-25(A). We view the evidence in the light most favorable to the
hearing officer’s decision to determine whether that decision is supported by substantial
evidence. Vigil v. N.M. Tax’n & Revenue Dep’t, 2022-NMCA-032, ¶ 9, 514 P.3d 15.

B. The Plain Meaning of the Term “Good Faith” in Section 7-9-43(A) Includes
the Facts and Circumstances Reasonably Known to the Seller When It
Accepts an NTTC

{11} The Department argues that the plain meaning of Section 7-9-43(A) “provides a
clear answer to legislative intent—a seller must accept the NTTC in good faith—
therefore, the statutory analysis begins and ends there.” Based on its interpretation of

3 Neither party appeals the determination that CCA was selling services, not a license, and our analysis
of the issue on appeal does not depend on this distinction. For ease of reference, we refer primarily to
sales of goods and services and refer to sellers and buyers, though NTTCs can also be issued for license
sales. See § 7-9-47.
the plain language of the statute, CCA counters that the good faith requirement of
Section 7-9-43(A) requires only “‘the absence of intent to defraud or to seek
unconscionable advantage’” (citation omitted). Under either party’s formulation of the
issue presented, we must first determine the meaning of “good faith” as it is used in
Section 7-9-43(A). 4 This determination will guide our analysis of whether CCA has met
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its burden to overcome the presumption that the Department’s assessment of gross
receipts tax on the receipts CCA received from the Marshals Service for housing federal
prisoners was correct. NMSA 1978, § 7-1-17(C) (2007); Holt v. N.M. Dep’t of Tax’n &
Revenue, 2002-NMSC-034, ¶ 4, 133 N.M. 11, 59 P.3d 491.

{12} When construing statutes, we must determine and give effect to legislative intent.
Baker v. Hedstrom, 2013-NMSC-043, ¶ 11, 309 P.3d 1047. “Under the rules of statutory
construction, we first turn to the plain meaning of the words at issue, often using the
dictionary for guidance.” Griego v. Oliver, 2014-NMSC-003, ¶ 21, 316 P.3d 865 (internal
quotation marks and citation omitted); see also NMSA 1978, § 12-2A-2 (1997) (stating
that the meaning of an undefined phrase in a statute is determined by its context, the
rules of grammar, and common usage). When the language of a statute is clear and
unambiguous, we give effect to that language and refrain from further statutory
interpretation. See State v. Barela, 2021-NMSC-001, ¶ 6, 478 P.3d 875. The statute’s
text is “the primary, essential source of its meaning.” NMSA 1978, § 12-2A-19 (1997).
“However, if the plain meaning of the statute is doubtful or ambiguous, or if an
adherence to the literal meaning of the words would lead to injustice, absurdity or
contradiction, we will construe the statute according to its obvious spirit or reason.”
Baker, 2013-NMSC-043, ¶ 11 (brackets, internal quotation marks, and citation omitted).
Tax statutes are “construed strictly in favor of the taxing authority.” Pub. Serv. Co. of
N.M. v. N.M. Tax’n & Revenue Dep’t, 2007-NMCA-050, ¶ 32, 141 N.M. 520, 157 P.3d
85 (internal quotation marks and citation omitted).

{13} Section 7-9-43(A) states:

When the seller or lessor accepts a[n] [NTTC] within the required time and
in good faith that the buyer or lessee will employ the property or service
transferred in a nontaxable manner, the properly executed [NTTC] shall be
conclusive evidence, and the only material evidence, that the proceeds
from the transaction are deductible from the seller’s or lessor’s gross
receipts.

4 No New Mexico appellate court has previously addressed the definition of “good faith” in Section 7-9-
43(A). Below, the Court of Appeals reversed in part the hearing officer’s decision and order without
analyzing the meaning of the term “good faith” in Section 7-9-43(A) and without considering how CCA’s
own actions affected whether CCA accepted the NTTC in good faith. The Court of Appeals has observed
that “the good faith belief of the seller may rest solely upon the representations made by the buyer in the
exemption certificate, as such reliance fulfills the function of exemption certificates.” Siemens Energy &
Automation v. N.M. Tax’n & Revenue Dep’t, 1994-NMCA-173, ¶ 15, 119 N.M. 316, 889 P.2d 1238 (text
only) (emphasis added) (citation omitted). But that general observation does not preclude inquiry into
whether a seller’s own actions comport with the good faith requirement of Section 7-9-43 (A).
(Emphasis added.) This section conditions safe harbor protection from taxation on the
seller’s good faith belief that the buyer will employ the property or service transferred in
a nontaxable manner when the seller accepts an NTTC. In this context, the phrase “in a
nontaxable manner” means that the buyer or lessee will resell the property, services, or
license in a manner that will subject the second transaction to gross receipts tax. See §
7-9-47; § 7-9-48; 3.2.206.8(A) NMAC; 3.2.208.8(A) NMAC. If there is no resale, tax is
due on the value of the services at the time they were initially rendered. See, e.g.,
3.2.206.8(A) NMAC.

{14} The task at hand is construing the plain meaning of the statutory term “good
faith” in a manner that gives effect to legislative intent. This term has been defined in an
analogous taxation context by at least one other jurisdiction. See, e.g., 12 Mo. Code of
State Regulations § 10-101.500(2)(B) (2006) (defining good faith objectively as
“[h]onesty of intention and freedom from knowledge of circumstances which ought to put
the holder [of an exemption certificate] upon inquiry”); Blevins Asphalt Const. Co. v. Dir.
of Revenue, 938 S.W.2d 899, 902 (Mo. 1997) (en banc) (affirming a company’s sales
tax liability on purchases for which it lacked evidence of a good faith belief in its holding
of a state exemption). However, “good faith” is not defined in our Gross Receipts and
Compensating Tax Act, NMSA 1978, §§ 7-9-1 to 120 (1966, as amended through
2023), or the Act’s administrative regulations. Accordingly, we apply the ordinary
meaning of the term “good faith” in a manner that makes sense as to the statute as
written. See Pub. Serv. Co. v. N.M. Pub. Util. Comm’n, 1999-NMSC-040, ¶¶ 16, 18, 128
N.M. 309, 992 P.2d 860.

{15} Black’s Law Dictionary (11th ed. 2019) defines “good faith” as a “state of mind
consisting in (1) honesty in belief or purpose, (2) faithfulness to one’s duty or obligation,
(3) observance of reasonable commercial standards of fair dealing in a given trade or
business, or (4) absence of intent to defraud or to seek unconscionable advantage.” It
has been described as a term that is used in various contexts, with its meaning varying
somewhat depending on the context. See id. (quoting Restatement (Second) of
Contracts, § 205 cmt. a (1979)); see also ERICA, Inc. v. N.M. Regul. & Licensing Dep’t,
2008-NMCA-065, ¶¶ 16, 18, 144 N.M. 132, 184 P.3d 444 (describing “good faith” as a
“broad term” and relying on the same dictionary definition to determine whether a liquor
licensee could avail itself of a statutory good faith defense when alcohol was served to a
minor). To apply the ordinary meaning of “good faith,” we first determine whether the
inquiry into good faith is limited to an assessment of the seller’s subjective belief that it
acted in good faith or whether that inquiry can include an objective assessment of the
relevant facts and circumstances reasonably known to the seller when it accepts an
NTTC. Cf. J.R. Hale Contracting Co. v. United N.M. Bank, 1990-NMSC-089, ¶¶ 36-39,
110 N.M. 712, 799 P.2d 581 (reviewing subjective and objective standards to define the
statutory term “good faith” in a section of the Uniform Commercial Code).

{16} The first clause of Section 7-9-43(A) provides context as to the kind of belief the
safe harbor provision is intended to protect: the belief “that the buyer or lessee will
employ the property or service transferred in a nontaxable manner.” The corresponding
regulation similarly focuses on the way the buyer employs the property or services sold
to it:
Acceptance of [NTTCs] in good faith that the . . . service sold thereunder
will be employed by the purchaser in a nontaxable manner is determined
at the time of each transaction. The taxpayer claiming the protection of a
certificate continues to be responsible that the goods delivered or services
performed thereafter are of the type covered by the certificate.

3.2.201.14(A) NMAC (emphasis added). Collectively, Section 7-9-43(A) and
3.2.201.14(A) NMAC indicate the purpose of the safe harbor provision: to protect sellers
whose products or services are initially sold to buyers for a nontaxable purpose but
where, unbeknownst to the seller, the buyers do not actually use those products or
services in the required manner.

{17} Additional gross receipts tax regulations indicate that the assessment of a seller’s
good faith belief is not a purely subjective standard, which we have described as “the
pure heart and the empty head standard.” J.R. Hale, 1990-NMSC-089, ¶ 30 (internal
quotation marks and citation omitted). In the context of sales of construction materials, a
seller may not claim it accepted an NTTC in good faith pursuant to Section 7-9-43(A)
“when the seller can reasonably determine that the tangible personal property sold will
be incorporated into a construction project which will not be subject to gross receipts tax
upon completion because it is located outside New Mexico.” 3.2.209.23(A) NMAC
(2000) (emphasis added). Reasonableness is an objective standard, Est. of Gutierrez
ex rel. Jaramillo v. Meteor Monument, LLC, 2012-NMSC-004, ¶ 9, 274 P.3d 97, 5 and 4F

this regulation specifically includes it as a component of the good faith requirement of
Section 7-9-43(A). We give deference to an agency’s reasonable interpretation of its
own regulation, see Jicarilla Apache Nation v. Rodarte, 2004-NMSC-035, ¶ 25, 136
N.M. 630, 103 P.3d 554, and our Legislature has specifically acknowledged that the
administrative construction of a statute may be considered when determining the
meaning of statutory text, NMSA 1978, § 12-2A-20(B)(4) (1997). The administrative
regulations for gross receipts taxes support the inference that the Department
understands that the term “good faith” in Section 7-9-43(A) requires an objective review
of the facts and circumstances known to the seller at the time it accepted the NTTC.
This approach is consistent with prior case law, where facts and circumstances
reasonably known to the taxpayer were part of the good faith analysis under Section 7-
9-43(A). Cf. Arco Materials, Inc. v. N.M. Tax’n & Revenue Dep’t, 1994-NMCA-062, ¶¶
10-11, 118 N.M. 12, 878 P.2d 330 (rejecting a taxpayer’s Section 7-9-43(A) good faith
claim that it had no continuing duty to assess validity of deductions made in reliance on
an NTTC and holding that the taxpayer has affirmative duty to stay informed about tax
changes that might affect its liability), rev’d on other grounds by Blaze Constr. Co. v.
N.M. Tax’n & Revenue Dep’t, 1994-NMSC-110, ¶ 22, 118 N.M 647, 884 P.2d 803.

5 Gutierrez references instances where we have contrasted the subjective “good faith” standard with the
objective “reasonable” standard. 2012-NMSC-004, ¶ 9 (citing Shull v. N.M. Potash Corp., 1990-NMSC-
110, ¶ 8, 111 N.M. 132, 802 P.2d 641, and Kestenbaum v. Pennzoil Co., 1988-NMSC-092, ¶ 27, 108
N.M. 20, 766 P.2d 280). Neither Shull nor Kestenbaum are contrary to our analysis here. Shull and
Kestenbaum concerned contractual wrongful termination claims. Neither case involved statutory
construction or engaged in any analysis of the meaning of “good faith.”
{18} Cases from another jurisdiction interpreting similar safe harbor protections from
tax liability offer additional support that the plain meaning of good faith in Section 7-9-
43(A) requires an objective analysis based on the facts and circumstances known to the
seller. See § 12-2A-20(B)(2) (1997) (stating that judicial construction of a similar statute
by another jurisdiction may be used to determine the common usage of a phrase in a
statute). The Missouri Supreme Court described the purpose of exemption certificates
when it determined that a seller did not accept an exemption certificate in good faith:

Exemption certificates, received and accepted in good faith, protect
sellers, who may know little or nothing about the facts upon which an
exemption is claimed, from the obligation to investigate all buyers who
may claim exemption because of their status or because of the intended
use for purchases. Buyers, by signing the certificate, are alerted that they
must be prepared to prove claims of exemption, because buyers are
secondarily liable for the tax if the claim of exemption is improper.

Conagra Poultry Co. v. Dir. of Revenue, 862 S.W.2d 915, 918 (Mo. 1993). Noting
Missouri’s adoption of a relevant part of the Multistate Tax Compact and citing Conagra,
id., the Missouri Supreme Court stated further that “good faith receipt of an exemption
certificate requires that a seller honestly believe that the buyer is exempt from paying
the sales tax.” All Star Amusement, Inc. v. Dir. of Revenue, 873 S.W.2d 843, 844-45
(Mo. 1994). 6 To provide safe harbor protection to a seller in Missouri, the transaction
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must be nontaxable based on the facts reasonably known to the seller at the time of the
transaction. See id. at 845 (if the seller has information or knowledge that should raise
doubts, “the seller must investigate to the point that it is honestly convinced that the
buyer or the transaction is exempt.”)

{19} The Missouri Supreme Court looked to the plain language of the statute at issue,
which similarly required that exemption certificates be accepted in good faith by the
seller. Conagra, 862 S.W.2d at 917-18. There, as here, the burden was on the taxpayer
to prove that its sale was exempt from taxation. See Holt, 2002-NMSC-034, ¶ 4 (stating
that the taxpayer bears the burden to overcome the presumption that Department’s
assessment or demand for payment was correct).

{20} In Conagra, the taxpayer purchased and delivered wood shavings to turkey
farmers, which the farmers used to absorb turkey droppings. 862 S.W.2d at 916. Once
the shavings absorbed a sufficient amount of droppings, the combined shavings and

6 NTTCs serve the same purpose for intrastate transactions that Multistate Tax Compact Uniform Sales
and Use Tax Certificates serve for interstate transactions. Siemens Energy & Automation v. N.M. Tax’n &
Revenue Dep’t, 1994-NMCA-173, ¶¶ 2, 16, 119 N.M. 316, 889 P.2d 1238. The Multistate Tax Compact’s
safe harbor provision states, “Whenever a vendor receives and accepts in good faith from a purchaser a
resale or other exemption certificate . . . the vendor shall be relieved of liability for a sales or use tax with
respect to the transaction.” NMSA 1978, § 7-5-1, Multistate Tax Compact art. V, part 2 (1967). New
Mexico is one of fifteen states plus the District of Columbia that have enacted the Multistate Tax Compact
into their existing law. Member States, Multistate Tax Commission, https://www.mtc.gov/The-
Commission/Member-States (last visited Jan. 2, 2024). Thus, other member states’ interpretations of the
safe harbor provision of the Multistate Tax Compact’s safe harbor provision can be persuasive.
droppings were used to fertilize the farmers’ crops. Id. The taxpayer claimed that it was
exempt from paying sales tax on the transfer of the shavings to the farmers because it
was providing a component ingredient of fertilizer and fertilizer was exempt from
Missouri sales tax. Id. The Missouri Supreme Court held that the taxpayer was not
entitled to the exemption because components of fertilizer were not included in the tax
deduction for fertilizer. Id. at 917-18. In addition, the Conagra Court held that the
taxpayer had not accepted exemption certificates from the farmers in good faith,
reasoning that the taxpayer was “well aware of the facts underlying the transactions
from the outset,” and the taxpayer—and not the farmers—prepared the exemption
certificates. Id. at 918. The taxpayer in Conagra had all the information necessary to
know that the deduction it claimed was not applicable to the transaction, and a
reasonable taxpayer in the same circumstances would not have believed it qualified for
a deduction. Thus, the taxpayer did not accept the exemption certificate in good faith.

{21} We find the reasoning of the Missouri Supreme Court persuasive. If the buyer,
unbeknownst to the seller, does not use the products or services sold in a nontaxable
manner, the seller is protected by the safe harbor provision from liability for the gross
receipts tax and does not have an obligation to investigate buyers “who may claim
exemption because . . . of the intended use for purchases.” Id. Alternatively, if under all
the facts and circumstances known to the seller, the transaction between the seller and
buyer does not fit the deduction described in an exemption certificate, the seller cannot
accept in good faith a certification for the transaction. Id. (determining that the taxpayer
“was well aware of the facts underlying the transactions from the outset”); cf.
3.2.201.14(A), (C) NMAC (providing that the seller can demonstrate good faith
acceptance of an NTTC with a statement from a responsible employee of the buyer
indicating that the transaction is eligible for the deduction if the seller does not know that
the statement is false).

{22} The clear and unambiguous language of Section 7-9-43(A), the corresponding
gross receipts and compensating tax regulations, and the persuasive interpretation of a
similar safe harbor provision by the Missouri Supreme Court lead us to conclude that in
applying an objective standard to the “good faith” requirement in Section 7-9-43(A), we
are giving proper effect to legislative intent. The good faith standard in the safe harbor
provision in Section 7-9-43(A) protects sellers from tax liability when buyers do not use
goods or services in the intended manner. It does not protect a seller who is fully aware
that the goods or services it sells are not being utilized by the buyer in the manner
justifying the issuance or execution of the NTTC. This is an objective standard, based
on the facts and circumstances reasonably known to the taxpayer at the time of the
transaction. It relies on the ordinary meaning of “good faith,” which here is most simply
expressed as honesty in belief or purpose. 7 6F

7 In the current statute, the good faith language is simplified and placed in its own, separate subdivision.
That subdivision states in its entirety, “When a person accepts in good faith a properly executed
nontaxable transaction certificate from the purchaser, the properly executed nontaxable transaction
certificate shall be conclusive evidence that the proceeds from the transaction are deductible from the
person’s gross receipts.” Section 7-9-43(D) (2018).
C. CCA Is Not Entitled to Section 7-9-43(A) Safe Harbor Protection

{23} We review whether CCA accepted the NTTC in good faith given its misstatement
to the Department that the receipts from housing federal prisoners did not come directly
to CCA from the Marshals Service. CCA acknowledges that “[t]he question now is
whether CCA’s misstatement precluded CCA from accepting the County’s NTTC in
good faith under Section 7-9-43(A)” and argues that it accepted the NTTC in good faith
because “there is no evidence that CCA’s misstatement was either knowing or
otherwise intentional.”

{24} We apply an objective standard based on the facts and circumstances
reasonably known to CCA at the time it accepted the NTTC and assess whether the
hearing officer’s conclusion that CCA is not entitled to safe harbor protection of Section
7-9-43(A) was (1) arbitrary, capricious, or an abuse of discretion; (2) not supported by
substantial evidence; or (3) otherwise not in accordance with the law. Section 7-1-25(C).
The Department argues that the Court of Appeals misapplied the law and that
substantial evidence supports the hearing officer’s conclusion that CCA did not accept
the NTTC in good faith. CCA argues that the Court of Appeals’ legal analysis was
correct and that the hearing officer’s conclusion is contrary to law and conflicts with the
plain meaning of Section 7-9-43(A).

{25} Relying on the plain language of the statute, the parties looked only to the fourth
common definition of “good faith”—the “absence of intent to defraud or to seek
unconscionable advantage” 8—and confined most of their arguments on this point to the
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alleged subjective state of mind of CCA. But as we have just determined, the applicable
legal standard is an objective one, where the determination of whether a taxpayer
accepts an NTTC in good faith is based on the facts and circumstances reasonably
known to the taxpayer at the time it accepted the NTTC. On the facts of this case, our
focus is on whether CCA accepted the NTTC with a good faith belief that the County
was reselling to the Marshals Service the services CCA provided.

{26} The analysis here is straightforward. To help facilitate the issuance of an NTTC
by the Department, CCA’s tax advisor, just “to clarify,” explained that “the NTTC relates
to the portion of Torrance County receipts derived from housing [Marshals Service]
inmates. The receipts are not coming directly from the [Marshals Service] to CCA.” In
reliance on CCA’s assertion that the receipts were not coming directly from the
Marshals Service to CCA, the audit bureau chief responded to CCA’s tax advisor that
an NTTC would be appropriate. CCA made these representations despite the fact it

Though the language has been streamlined, the Legislature still conditions the safe harbor
protection of Section 7-9-43 (2018) on the taxpayer’s good faith acceptance of a properly executed
NTTC. The determination that the proper standard of review to determine good faith under Section 7-9-
43(A) (2011) is an objective one is not affected by the more streamlined language of Section 7-9-43(D)
(2018). Even without the specific language of Section 7-9-43(A) (2011), the analysis leading to the
adoption of an objective standard to determine whether a taxpayer accepted an NTTC in good faith is
supported by the plain meaning of the term “good faith,” without additional explanatory language, as well
as by the case law and regulations discussed in the body of this opinion.
8 Good faith, Black’s Law Dictionary (11th ed. 2019).
directly invoiced the Marshals Service for the housing of federal prisoners and received
payment directly from the Marshals Service for the provision of those services. These
facts are supported by the evidence and testimony presented at the hearing before the
hearing officer, who issued findings of fact on each of these points. CCA conceded that
its tax advisor made a misstatement of fact to the Department because the Marshals
Service was sending payments directly to CCA. These facts were known to CCA when
it accepted the NTTC and preclude any honest belief by CCA that its services were
being resold.

{27} Based on the foregoing, we conclude that the hearing officer’s determination that
CCA did not accept the NTTC in good faith is supported by substantial evidence and
was not arbitrary, capricious, or an abuse of discretion. CCA knew that there was no
resale of services or a license because it was directly billing the Marshals Service, that
the Marshals Service was paying CCA directly, and that the Department relied on
CCA’s misstatement in issuing the NTTC. Therefore, CCA did not, on the facts and
circumstances known to it, accept the NTTC in good faith.

III. CONCLUSION

{28} For the reasons set forth above, we reverse the Court of Appeals’ holding that
CCA was entitled to safe harbor protection under Section 7-9-43(A) and we affirm the
administrative hearing officer’s decision.

{29} IT IS SO ORDERED.

BRIANA H. ZAMORA, Justice

WE CONCUR:

C. SHANNON BACON, Chief Justice

MICHAEL E. VIGIL, Justice

DAVID K. THOMSON, Justice

GEORGE P. EICHWALD, Judge
Sitting by designation