If I do accounting work in New Mexico for a local business owned by an out-of-state parent, can I skip gross receipts tax as an out-of-state sale of services?

Plain-English summary

A New Mexico accounting firm could not treat its work for a local art gallery as a tax-free "sale of services to an out-of-state buyer." The real buyer was the in-state gallery — not its Michigan parent company — and the reports were handed over in New Mexico, so the gross receipts tax deduction did not apply. Protest DENIED.

Santa Fe Business Services provided accounting services. On November 14, 1998, the Department assessed it $712.52 in gross receipts tax, plus $71.24 penalty and $342.91 interest, for calendar year 1995. The assessment covered two sets of receipts the firm had not taxed: $5,418.44 for contract work done for Greg Osborn, CPA, and $6,294.56 for accounting work done for Morningstar Gallery Ltd. in Santa Fe.

The Osborn receipts — conceded

Osborn had told the firm not to charge gross receipts tax because he was reselling the services to his own clients, but he never gave the firm a nontaxable transaction certificate (NTTC), and the firm did not ask for one until long after the work. Without that certificate, the firm could not support a resale deduction, and it did not dispute that part of the assessment.

The Morningstar Gallery receipts — the out-of-state-services argument fails twice

For the gallery work, the firm claimed the deduction in Section 7-9-57, which lets a business deduct receipts from performing a service sold to an out-of-state buyer (as long as the buyer does not take delivery of, or make initial use of, the product of the service in New Mexico). The firm's theory: it worked closely with accountants at the gallery's Michigan parent, Masco, Inc., and faxed the monthly and quarterly reports to Masco in Michigan.

The hearing officer held the deduction did not apply, for two independent reasons:

1. The buyer was in-state. Morningstar Gallery — not Masco — hired the firm, was invoiced by the firm, paid the firm, and issued it a Form 1099. The buyer of the services was therefore the New Mexico gallery, not its out-of-state parent.
2. Delivery happened in New Mexico. The firm's work product (the financial statements) was delivered both to Masco in Michigan and to the gallery's managers in Santa Fe. Because the buyer took delivery of the product of the service in New Mexico, Section 7-9-57(C)(2) bars the deduction.

Either reason alone was enough to disqualify the deduction.

The "wrong taxpayer" argument fails too

Before the assessment issued, the firm had stopped operating as a sole proprietorship and incorporated as Santa Fe Business Services, Ltd., with the new corporation assuming all assets and liabilities. The firm argued the assessment should have gone to that successor corporation. The hearing officer disagreed: the deductions were claimed — and disallowed — while the business was a sole proprietorship, so the liability was the taxpayer's, and the assessment was valid against it. Whether the taxpayer could seek indemnification from the successor was a private matter between them; the Department was not a party to their transfer agreement (though the Department noted it might separately pursue the successor under the successor-in-business provisions, Sections 7-1-61 to 7-1-64).

Result: protest DENIED.

What this means for you

The out-of-state-services deduction turns on who the buyer really is

Section 7-9-57 looks to the actual buyer — the party that hires you, receives your invoices, and pays you. Doing the work "for" an out-of-state parent, or coordinating with its staff, does not make the parent your buyer if a New Mexico subsidiary is the one contracting and paying. If your customer is in New Mexico, the deduction is off the table regardless of where corporate headquarters sits.

Delivering the work product anywhere in New Mexico defeats the deduction

Even if the buyer were out of state, delivering the product of your service into New Mexico — or the buyer making initial use of it here — disqualifies the deduction under Section 7-9-57(C)(2). Sending a copy to an out-of-state office does not help if a copy is also delivered to, or used by, someone in New Mexico.

Get the NTTC (or acceptable alternative evidence) at the time of the sale

The firm lost the Osborn receipts purely for lack of a nontaxable transaction certificate, and could not round one up after the fact. When a customer tells you a sale is nontaxable, get the certificate — or the other evidence the statute allows — while the transaction is fresh, not years later during an audit.

Incorporating later does not erase an existing tax liability

A gross receipts tax liability that arose while you operated as a sole proprietor stays yours even after you incorporate and transfer your assets and liabilities. The Department can assess you directly, and may separately reach the successor business under Sections 7-1-61 to 7-1-64 — so a reorganization is not a way to shed back taxes.

Common questions

Q: I did the work for a New Mexico company owned by an out-of-state parent. Isn't that an out-of-state sale of services?
A: Not under these facts. The deduction looks at the buyer — the entity that hires, is invoiced by, and pays you. Here that was the in-state gallery, not its Michigan parent, so the receipts were taxable in New Mexico.

Q: We faxed our reports to the client's out-of-state headquarters. Doesn't that count as out-of-state delivery?
A: Not if the product is also delivered in New Mexico. The reports went to the gallery's managers in Santa Fe as well, and delivery of the product of the service in New Mexico disqualifies the deduction under Section 7-9-57(C)(2).

Q: A customer told me not to charge tax because they were reselling my services. Is that enough?
A: No. You need a nontaxable transaction certificate (or other evidence the statute allows) to support the deduction. The firm here had only the customer's say-so, never obtained a certificate, and lost that part of the case.

Q: We incorporated and moved everything to the new company. Can the Department still assess the old sole proprietorship?
A: Yes. The liability arose while the business was a sole proprietorship, so the assessment was valid against the taxpayer. Transferring assets and liabilities to a successor is a private arrangement that does not undo the tax debt; the Department may also pursue the successor separately.

Citations and references

Statutes:

• NMSA 1978, § 7-9-57 (1995 Repl. Pamp.) — deduction for receipts from performing a service sold to an out-of-state buyer who delivers a nontaxable transaction certificate or other evidence acceptable to the secretary
• NMSA 1978, § 7-9-57(C)(2) — no deduction where the buyer (or its employees or agents) takes delivery of the product of the service in New Mexico
• NMSA 1978, §§ 7-1-61 to 7-1-64 — successor-in-business liability provisions of the Tax Administration Act

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Santa Fe Business Service, Inc.
• Decision PDF: D&O 00-17

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
SANTA FE BUSINESS SERVICES NO. 00-17
ID NO. 02-189277-00 6,
PROTEST TO ASSESSMENT NO. 2313218

DECISION AND ORDER

This matter came on for formal hearing before Gerald B. Richardson on May 10, 2000.

Santa Fe Business Services, hereinafter, “Taxpayer”, was represented by Robert S. Caballero, its

owner. The Taxation and Revenue Department, hereinafter, “Department”, was represented by

Bruce J. Fort, Special Assistant Attorney General. Based upon the evidence and the arguments

presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. On November 14, 1998 the Department issued Assessment No. 2313218 to the Taxpayer

assessing $712.52 in gross receipts tax, $71.24 in penalty and $342.91 in interest for calendar

year 1995.

2. On November 20, 1998, the Taxpayer filed a written protest to Assessment No. 2313218.

3. The Taxpayer is engaged in the business of providing accounting services.

4. The Assessment was based upon the Taxpayer’s failure to report and pay gross receipts

tax on a portion of its total receipts during the assessment period. The Taxpayer failed to report

and pay gross receipts tax upon $5,418.44 it received for performing contract work for Greg

Osborn, CPA and $6,294.56 it received from performing contract accounting services for

Morningstar Gallery Ltd.

5. On August 25, 1998, the Taxpayer was presented a letter from the Department providing

it sixty days, until October 24, 1998, to demonstrate to the Department the possession of any

nontaxable transaction certificates in support of any deductions claimed during the 1995 tax year.

6. With respect to the Taxpayer’s receipts from Greg Osborn, CPA, Mr. Osborn directed the

Taxpayer not to charge gross receipts tax on the basis that the Taxpayer’s services were being

resold to Mr. Osborn’s clients. Mr. Osborn failed to provide a nontaxable transaction certificate

to the Taxpayer and the Taxpayer failed to request one from Mr. Osborn until long after the

transactions at issue. The Taxpayer was unable to obtain such a certificate from Mr. Osborn.

7. In 1995, the Taxpayer was hired by Morningstar Gallery Ltd., in Santa Fe, New Mexico,

to perform accounting services and to prepare monthly and quarterly statements reflecting the

business of the gallery which could be incorporated into the records of the gallery’s parent

corporation, Masco, Inc. These financial statements included profit and loss statements, bank

reconciliations, and balance sheets.

8. Masco, Inc. is a Michigan corporation headquartered in Taylor, Michigan.

9. In preparing the accounting documents for Morningstar Gallery Ltd., the Taxpayer

worked closely with the accountants at Masco, Inc., so that the documents were in the form

Masco wanted. The documents the Taxpayer prepared were faxed to Masco, Inc. at its Michigan

offices. At the same time, the documents were also provided to the managers of Morningstar

Gallery Ltd., Mr. Joe Rivera and Mr. Dick Pohrt at the gallery offices in Santa Fe.

10. The Taxpayer invoiced Morningstar Gallery Ltd. for the services it provided and it

received payment of its invoices from the gallery. The Taxpayer also received a Federal form

1099 from Morningstar Gallery Ltd. reflecting the compensation it received for the services it

provided.

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11. The Taxpayer never received a nontaxable transaction certificate from Morningstar

Gallery Ltd. to support a claim of deduction for its receipts from the gallery.

12. Subsequent to the issuance of the Department’s August 25, 1998 letter to the Taxpayer,

but prior to the issuance of Assessment No. 2313218, the Taxpayer discontinued business as a

sole proprietorship and incorporated as Santa Fe Business Services, Ltd. When that occurred,

Santa Fe Business Services, Ltd. assumed all of the assets and liabilities of Santa Fe Business

Services.

DISCUSSION

The Taxpayer does not dispute the portion of the assessment relating to its receipts from

Greg Osborne, CPA, on the basis of his failure to demonstrate possession of a non-taxable

transaction certificate to support a claim of deduction from tax. The Taxpayer does claim a

deduction, pursuant to § 7-9-57 NMSA 1978 for its receipts from Morningstar Gallery Ltd.

because that provision, while providing for the receipt of a non-taxable transaction certificate to

support a claim of deduction, also allows a taxpayer the option of providing other evidence

acceptable to the Department, to support a claim of deduction.

The version of § 7-9-57 which was in effect at the time the Taxpayer received the receipts

for which deduction is claimed provides as follows:

Deduction, gross receipts tax; sale of certain services to an out-of-state buyer.

A. Receipts from performing a service may be deducted from
gross receipts if the sale of the service is made to a buyer who
delivers to the seller either a nontaxable transaction certificate
or other evidence acceptable to the secretary that the
transaction does not contravene the conditions set out in
Subsection C of this section.
B. The buyer delivering the nontaxable transaction certificate or
other evidence acceptable to the secretary shall not contravene
the conditions set out in Subsection C of this section.

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C. Receipts from performance of a service shall not be subject to
the deduction provided if the buyer of the service or any of the
buyer’s employees or agents:
(1) makes initial use of the product of the service in New
Mexico; or
(2) takes delivery of the product of the service in New
Mexico.

§ 7-9-57 NMSA 1978 (1995 Repl. Pamp.)

In this case, the Taxpayer sought evidence from Masco, Inc. that it made initial use of the

product of the Taxpayer’s service, the monthly and quarterly reports, outside of New Mexico.

The Taxpayer was not successful in obtaining this information. From the information that was

elicited from the Taxpayer at the hearing, however, the Taxpayer would not qualify for the

deduction.1 In the first place, the buyer of the Taxpayer’s services was not Masco, Inc., which

may be an out-of-state buyer, but Morningstar Gallery. The Taxpayer was hired by the gallery,

invoiced the gallery for the services provided and was paid by the Gallery. Thus, the buyer of

the services was an in-state entity, rather than its out-of-state parent. Additionally, because the

Taxpayer’s work product was delivered both to Masco, Inc. as well as to the gallery, the work

product was delivered in New Mexico. Both of these facts make the transaction ineligible for the

deduction provided at § 7-9-57.

The final matter raised by the Taxpayer is the Taxpayer’s argument that since all of the

assets and liabilities of the Taxpayer had been transferred to Santa Fe Business Services, Inc. at

the time the assessment was issued, that the assessment should have been issued to the successor

corporation, rather than the Taxpayer. This argument is without merit. The Taxpayer was a sole

proprietorship at the time the deductions were claimed and when those deductions are

disallowed, they become a liability of the Taxpayer. The fact that responsibility for payment of

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Mr. Caballero, owner of the Taxpayer, was candid and forthcoming in providing testimony concerning his business
relationship with Morningstar Gallery Ltd. and Masco, Inc.

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that liability can be passed on to the corporate successor under the terms of the transfer in no way

invalidates the assessment itself. Whether the Taxpayer can seek indemnification from the

corporate successor for the liability is a matter between those parties governed by the terms of

the transfer. The Department was not a party to that transaction and is not bound by the terms of

that agreement.2

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment No. 2313218 and jurisdiction

lies over the subject matter and parties to this protest.

2. The Taxpayer failed to demonstrate possession of a nontaxable transaction certificate

from Greg Osborn, CPA to demonstrate its entitlement to claim a deduction for its receipts from

Mr. Osborn.

3. The Taxpayer did not qualify to claim a deduction pursuant to § 7-9-57 NMSA 1978 for

its receipts from Morningstar Gallery Ltd. because the buyer of the product of the Taxpayer’s

services received delivery of the product of the services within New Mexico in contravention of

§ 7-9-57(C)(2).

4. Assessment No. 2313218 is valid against the Taxpayer even though at the date of the

Assessment, the Taxpayer had transferred all of its assets and liabilities to Santa Fe Business

Services, Ltd.

For the foregoing reasons, the Taxpayer’s protest IS HEREBY DENIED.

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Although the Department is not bound by the terms of the transaction transferring the Taxpayer’s assets, the
Department may be able to assert liability against the corporate successor in addition to the Taxpayer under the
successor in business provisions of the Tax Administration Act, §§ 7-1-61 to 7-1-64 NMSA 1978.

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DONE, this 23rd day of June, 2000.

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