Process Equipment & Service Company, Inc. v. New Mexico Taxation & Revenue Department

The New Mexico Taxation and Revenue Department appealed the Administrative Hearings Office's decision granting Process Equipment & Service Company (PESCO) technology jobs and research and development tax credits for the 2014 and 2016 tax years. The Department argued that PESCO's methodology — reviewing contemporaneous drafting logs and interviewing engineers to allocate wages to qualifying research projects — did not qualify as a 'cost accounting methodology' because it omitted a purported 'key element' of aiding management in measuring financial performance, and that PESCO failed to prove it used that same methodology in its other business activities.

'Cost Accounting Methodology' Is a Flexible Term of Art

Addressing an issue of first impression, the Court held that 'cost accounting methodology' is a technical term of art that should be interpreted according to how it is understood by accounting professionals, relying in part on an Investopedia definition presented as evidence of industry usage. The Court rejected the Department's argument that measuring financial performance is a mandatory element, holding instead that a cost accounting method need only be an internally focused system flexibly used by management to make informed business decisions — which the drafting-log review process satisfied.

Substantial Evidence Supported the 'Other Business Activities' Finding

The Court affirmed the administrative hearing officer's finding that PESCO used the same methodology in its other business activities, based on the testimony of PESCO's Vice President of Engineering that he informally compared drafting time against a project's likely viability to decide whether to continue or abandon research and development work. The Court held that the credible testimony of a single witness is sufficient to constitute substantial evidence under New Mexico law, rejecting the Department's argument that this single line of testimony, standing alone, could not carry the taxpayer's burden.

A Sharp Dissent

Judge Bustamante, sitting by designation, concurred that 'cost accounting methodology' was properly treated as a term of art but dissented from the majority's conclusion on the second element, reasoning that the evidence showed PESCO's engineering team never actually used the results of the accounting firm's methodology — only the same underlying drafting-log data — in its own business decisions, and that this disconnect meant the statute's 'used ... in its other business activities' requirement was not truly satisfied.

The Court of Appeals affirmed the decision granting PESCO's protest, over Judge Bustamante's partial dissent.

Significance: This decision is the controlling New Mexico appellate precedent construing the Technology Jobs and Research and Development Tax Credit Act's 'cost accounting methodology' substantiation requirement, confirming that small and mid-sized New Mexico research and development companies may satisfy it through consistently applied, informal internal practices rather than a dedicated financial-performance accounting system, while a strong dissent flags the evidentiary risk of relying on a single ambiguous line of witness testimony to establish that requirement.