A mobile-home set-up contractor's Type 5 resale certificates were lost in a move and the dealers had gone out of business. Could he still deduct those receipts from New Mexico gross receipts tax?

Subject

Larry Lene, d/b/a CSI Mobile Home Set Up (D&O 00-05)

Plain-English summary

Larry Lene ran a one-man business, CSI Mobile Home Set Up, doing on-site mobile-home set-up work in New Mexico as an independent contractor for two dealers — QVS Mobile Homes and America's Choice Mobile Homes — during 1995. His accountant told him his receipts could be deducted from gross receipts tax if he got Type 5 nontaxable transaction certificates (NTTCs) from those dealers, and he asked her to obtain them for him. He did not follow the paperwork himself.

In 1998, using IRS data showing the business income on his federal Schedule C, the Department audited him and told him — under Section 7-9-43 — that he had to be in possession of the required NTTCs within 60 days or the deductions would be disallowed. He couldn't produce them. His accountant was only "pretty sure" she had ever obtained them; the box of tax papers had been lost when he moved from Las Cruces to Albuquerque; and when he tried to get duplicates, both dealers had gone out of business. The Department disallowed the deduction and assessed $7,223.08 in gross receipts tax, penalty, and interest for 1995.

The Hearing Officer denied the protest. To deduct receipts from selling a service for resale under Section 7-9-48, the buyer must actually deliver an NTTC — selling for resale is not enough by itself. And Section 7-9-43's 60-day possession rule is mandatory: if the seller is not in possession of the certificates within 60 days of the Department's notice, the deductions "shall be disallowed." Because Lene could not show he had the NTTCs within the window — and it was "far from clear" his accountant ever obtained them — the Department had no choice but to disallow the deduction. The Hearing Officer noted that handing the tax paperwork to an accountant did not relieve Lene of personal responsibility for meeting New Mexico's tax requirements.

What this means for you

• A resale deduction lives or dies on the paper certificate, not on the underlying facts. Even if your services genuinely are sold for resale, New Mexico's Section 7-9-48 deduction requires the buyer to deliver an NTTC. No certificate in hand, no deduction — the substance of the transaction does not save you.
• The 60-day NTTC rule is a hard deadline. Once the Department sends a notice, you have 60 days to be in possession of the required certificates. Miss it and the statute says the deduction "shall be disallowed" — there is no good-cause exception for lost paperwork or vanished customers.
• Get and keep your NTTCs early — don't wait for an audit. Certificates that exist today can become impossible to obtain later: businesses close, records are lost in moves, memories fade. Collect them at the time of the transaction and store them where an audit years later can find them.
• Delegating to an accountant does not transfer the legal responsibility. Relying on a bookkeeper or CPA to "handle the paperwork" is normal, but under New Mexico law (El Centro Villa) you cannot abdicate your own duty to meet the tax rules. If the certificates never got obtained, that is still your problem.

Key questions answered

Why was the deduction denied when the contractor believed he had qualified?
Because he could not produce the NTTCs. Under Section 7-9-48 the buyer must deliver a certificate, and under Section 7-9-43 the seller must be in possession of the required certificates within 60 days of the Department's notice. He was not, so the deduction was disallowed.

He said the certificates were lost in a move — didn't that count?
No. The 60-day rule is mandatory and has no exception for lost documents. It was also unclear whether the accountant had ever obtained the certificates in the first place, and because both dealers had gone out of business he could not get replacements within the window.

Does relying on an accountant excuse the failure?
No. The Hearing Officer, citing El Centro Villa Nursing Center, held that appointing an accountant as your agent in tax matters does not relieve you of personal responsibility to meet New Mexico's tax requirements.

What is the practical lesson for a service business selling to resellers?
Obtain the correct NTTC from each buyer at the time of the sale and keep it safely. A deduction you clearly earned in substance can still be lost if you cannot produce the certificate when the Department asks.

Verbatim citations

The service-for-resale deduction and its certificate requirement:

Receipts from selling a service for resale may be deducted from gross receipts ... if the sale is made to a person who delivers a nontaxable transaction certificate to the seller (emphasis added) .... The fact that a taxpayer sells his services for resale is not sufficient to support a deduction under Section 7-9-48 NMSA 1978; the buyer must deliver an NTTC to the seller before the seller is entitled to claim a deduction from gross receipts.

The mandatory 60-day possession rule:

The language of the statute is mandatory: if a taxpayer is not "in possession" of NTTCs within 60 days from the date of the Department's notice, deductions requiring delivery of these NTTCs "shall be disallowed."

Delegation to an accountant does not shift responsibility:

This delegation did not relieve Mr. Lene of his personal responsibility to insure he met all the requirements of New Mexico's tax laws. As stated by the court in El Centro Villa Nursing Center v. Taxation and Revenue Department ... "We are not inclined to hold that the taxpayer can abdicate this responsibility merely by appointing an accountant as its agent in tax matters."

The holding:

Mr. Lene is not entitled to a gross receipts tax deduction for receipts from selling services to mobile home dealers during 1995. IT IS THEREFORE ORDERED that the taxpayer's protest is denied.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Larry Lene, d/b/a CSI Mobile Home Set Up
• Decision PDF: D&O 00-05

Original ruling text

BEFORE THE HEARING OFFICER
OF THE TAXATION AND REVENUE DEPARTMENT
OF THE STATE OF NEW MEXICO

IN THE MATTER OF THE PROTEST
OF LARRY LENE d/b/a
CSI MOBILE HOME SET UP 00-05
ID. NO. 02-229749-00 0
ASSESSMENT NO. 2284621

DECISION AND ORDER

This matter was heard on January 31, 2000, before Margaret B. Alcock, Hearing Officer.

Larry Lene represented himself. Bridget A. Jacober, Special Assistant Attorney General, represented

the Taxation and Revenue Department ("Department"). Based on the evidence in the record and the

arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. In July 1995, Larry Lene began a business in Las Cruces, New Mexico, under the name

CSI Mobile Home Set Up.

2. During 1995, Mr. Lene performed on-site set up services as an independent contractor

for two mobile home dealers: QVS Mobile Homes and America’s Choice Mobile Homes.

3. Sometime in late 1995 or early 1996, Mr. Lene consulted his accountant concerning

the use of New Mexico nontaxable transaction certificates (NTTCs).

4. The accountant told Mr. Lene he should obtain Type 5 NTTCs from the dealers for

whom he performed services in order to deduct his receipts for gross receipts tax purposes.

5. Mr. Lene asked the accountant to obtain the NTTCs for him and she agreed to do so.

6. Mr. Lene did not pay attention to the paperwork side of the business, but relied on his

accountant to make sure all required NTTCs were on hand and all required tax returns were filed.

7. The 1995 federal income tax return prepared by his accountant reported the income Mr.

Lene earned from his mobile home set up services on Schedule C (Profit or Loss From Business) to

federal Form 1040.

8. Although Mr. Lene remembers signing various documents prepared by his

accountant, he does not know whether these documents included the quarterly CRS-1 returns he was

required to file with the Department to report gross receipts and compensating tax.

9. In February 1996, Mr. Lene relocated his business to Albuquerque, New Mexico.

10. On June 10, 1998, as a result of information obtained from the IRS, the Department

mailed Mr. Lene a notice of limited scope audit based on his failure to report and pay New Mexico

gross receipts tax on the business income reported to the IRS on Schedule C of his 1995 federal

income tax return.

11. The June 10, 1998 notice advised Mr. Lene that, pursuant to Section 7-9-43 NMSA

1978, he must be in possession of all required NTTCs within 60 days from the date of the notice or

any deductions relating to the NTTCs would be disallowed. The 60-day period expired August 9,

1998.

12. After receiving the notice, Mr. Lene contacted his Las Cruces accountant concerning

the NTTCs he needed to support a deduction of his 1995 receipts from performing services for QVS

Mobile Homes and America’s Choice Mobile Homes.

13. The accountant told Mr. Lene she was “pretty sure” she had obtained the required

NTTCs and said they would have been in the envelope of papers she gave him when he relocated to

Albuquerque in 1996.

2

14. The box containing Mr. Lene’s tax papers was lost or misplaced during his move

from Las Cruces to Albuquerque, and he was unable to locate any NTTCs from QVS Mobile Homes

or America’s Choice Mobile Homes.

15. Mr. Lene asked his accountant to obtain duplicate NTTCs from the Las Cruces

mobile home dealers. When she attempted to do so, she discovered that both dealers had gone out of

business.

16. Due to the above circumstances, Mr. Lene was unable to provide the Department

with NTTCs to support a deduction of his 1995 gross receipts.

17. On August 16, 1998, the Department issued Assessment No. 2284621 to Mr. Lene

for reporting periods January through December 1995 in the amount of $7,223.08, representing gross

receipts tax, penalty and interest due on his receipts from performing mobile home set up services

during 1995.

18. On September 5, 1998, Mr. Lene filed a written protest to the Department’s

assessment.

DISCUSSION

The sole issue presented is whether Mr. Lene’s failure to produce NTTCs from QVS Mobile

Homes and America’s Choice Mobile Homes bars him from claiming a gross receipts tax deduction

for receipts from performing services for those companies during 1995.

The Gross Receipts and Compensating Tax Act provides several deductions from gross receipts

for taxpayers who meet the statutory requirements set by the legislature. Mr. Lene claims the deduction

provided in Section 7-9-48 NMSA 1978, which states:

Receipts from selling a service for resale may be deducted from gross receipts
... if the sale is made to a person who delivers a nontaxable transaction
certificate to the seller (emphasis added) ....

3
The fact that a taxpayer sells his services for resale is not sufficient to support a deduction under

Section 7-9-48 NMSA 1978; the buyer must deliver an NTTC to the seller before the seller is entitled

to claim a deduction from gross receipts.

The requirements for obtaining NTTCs to support deductions from gross receipts are set out in

Section 7-9-43 NMSA 1978. The version of the statute in effect at the time the Department’s audit

reads as follows:

All nontaxable transaction certificates of the appropriate series executed by
buyers or lessees should be in the possession of the seller or lessor for
nontaxable transactions at the time the return is due for receipts from the
transactions. If the seller or lessor is not in possession of the required
nontaxable transaction certificates within sixty days from the date that the
notice requiring possession of these nontaxable transaction certificates is given
the seller or lessor by the department, deductions claimed by the seller or lessor
that require delivery of these nontaxable transaction certificates shall be
disallowed.

The language of the statute is mandatory: if a taxpayer is not “in possession” of NTTCs within 60 days

from the date of the Department's notice, deductions requiring delivery of these NTTCs “shall be

disallowed."

Mr. Lene maintains that he did have timely possession of the required NTTCs but they were

lost or misplaced during his move from Las Cruces to Albuquerque. Mr. Lene acknowledges he did not

personally obtain the NTTCs from the two mobile home dealers. Instead, he delegated the task to his

accountant.1 The only evidence to show the accountant followed through on her assignment is her

statement to Mr. Lene that she was “pretty sure” she had obtained the NTTCs and that they would have

been included with the papers she gave Mr. Lene when he moved to Albuquerque. Unfortunately, Mr.

1
This delegation did not relieve Mr. Lene of his personal responsibility to insure he met all the requirements of New
Mexico’s tax laws. As stated by the court in El Centro Villa Nursing Center v. Taxation and Revenue Department,
108 N.M. 795, 799, 779 P.2d 982, 986 (Ct. App. 1989): ”We are not inclined to hold that the taxpayer can abdicate
this responsibility merely by appointing an accountant as its agent in tax matters.”

4
Lene’s tax papers were lost or misplaced in the move and there was no way for him to confirm the

existence of the NTTCs or provide copies to the Department. Because QVS Mobile Homes and

America’s Choice Mobile Homes had both gone out of business, Mr. Lene was unable to obtain new

NTTCs within the required 60-day period.

Section 7-9-5 NMSA 1978 creates a statutory presumption "that all receipts of a person

engaging in business are subject to the gross receipts tax." Where a deduction from tax is claimed, the

statute must be construed strictly in favor of the taxing authority, the right to the deduction must be

clearly and unambiguously expressed in the statute, and the right must be clearly established by the

taxpayer. Wing Pawn Shop v. Taxation and Revenue Department, 111 N.M. 735, 740, 809 P.2d 649,

654 (Ct. App. 1991). Where a party claiming a right to a tax deduction fails to follow the method

prescribed by statute or regulation, he waives his right thereto. Proficient Food v. New Mexico

Taxation & Revenue Department, 107 N.M. 392, 397, 758 P.2d 806, 811 (Ct. App.), cert. denied, 107

N.M. 308, 756 P.2d 1203 (1988).

In this case, Mr. Lene was not able to show timely possession of the NTTCs required to support

his deduction of receipts from performing services for QVS Mobile Homes and America’s Choice

Mobile Homes. It is far from clear that Mr. Lene’s accountant ever obtained the NTTCs in the first

place. What is clear is that the NTTCs were not in Mr. Lene’s possession within the 60-day period

provided in NMSA 1978 Section 7-9-43. Accordingly, the Department had no choice but to disallow

the deduction.

CONCLUSIONS OF LAW

1. Mr. Lene filed a timely, written protest to Assessment No. 2284621, and jurisdiction

lies over the parties and the subject matter of this protest.

5

2. Mr. Lene is not entitled to a gross receipts tax deduction for receipts from selling

services to mobile home dealers during 1995.

IT IS THEREFORE ORDERED that the taxpayer's protest is denied.

Dated February 4, 2000.

6