Does an auto mechanic owe gross receipts tax on his repair work if he never understood the tax and his exemption certificate arrived too late?

Plain-English summary

A mechanic who did his own repair business as an independent contractor owed gross receipts tax on the work, and he lost his deduction because his exemption certificate arrived after the 60-day deadline. Protest DENIED.

Gregory Hale, a master mechanic, moved to Carlsbad, New Mexico from California in 1996 and began repairing used cars for Glen's Auto Sales, which then sold the repaired cars to its customers. Hale was not an employee — he purchased the necessary parts and billed Glen's for the parts and his labor. He was not familiar with the gross receipts tax: he did not give his parts suppliers an exemption certificate when buying parts, never registered with the Department, never got a tax identification number, and never reported or paid gross receipts tax on his repair income. He was given a nontaxable transaction certificate (NTTC) by Glen's Auto Sales but handed it to the person who did his year-end income taxes and assumed she had taken care of it.

Under its C-Span program, the Department compares the business income taxpayers report to the IRS on federal Schedule C against what they report for gross receipts tax. That match flagged Hale's 1996 income against his zero gross receipts filings. On January 5, 2000, the Department sent a limited-scope audit letter that also gave the Section 7-9-43 notice that he had 60 days to present NTTCs or other documentation to support any deductions. Hale and his wife were in Texas because of Mrs. Hale's health; he did not find the letter and respond until late February. On April 7, 2000, the Department assessed $1,237 in gross receipts tax, plus penalty and interest for 1996.

"I'm just a mechanic" is not a defense

Hale argued he should not be expected to understand the details of the Gross Receipts and Compensating Tax Act. The hearing officer rejected that: every person is charged with a reasonable duty to find out the possible tax consequences of their actions, and if that is difficult, the answer is to hire a tax advisor (Tiffany Construction). Not understanding the tax is not a defense to the assessment.

Someone else paying tax does not cancel your liability

Hale also argued that because his parts suppliers paid tax on the parts and Glen's Auto Sales paid tax when it sold the repaired cars, he should not have to pay too. That failed because those are separate taxpayers and separate transactions. The Act avoids "pyramiding" through deductions instead — for example, had Hale registered, he could have used a Type 2 NTTC to buy parts for resale without the tax being passed on (Section 7-9-47), and the cars themselves were covered by the motor vehicle excise tax exemption when the dealer sold them (Section 7-9-22).

The deduction was lost to the mandatory 60-day NTTC deadline

Hale could have deducted his receipts from Glen's if he had produced a proper NTTC on time. But the Type 1 NTTC he obtained from Glen's did not come until April 30, 2000 — well past 60 days from the January 5 notice — and he could not locate the earlier certificate. Section 7-9-43(A) says that if the required NTTCs are not in the seller's possession within 60 days of the Department's notice, the deductions "shall be disallowed." That language is mandatory, so the late certificate could not save the deduction.

Hardship is a collection issue, not a defense to the tax

Hale asked for relief because his wife's chronic illness required round-the-clock care and left him unable to work. The hearing officer was sympathetic but explained that an assessment cannot be abated based on inability to pay (Regulation 3 NMAC 1.6.14). The Department's collectors may decide not to pursue collection from someone who cannot pay, but that is separate from whether the tax is owed. The decision expressly noted that nothing in it questioned Hale's honesty — he simply did not understand how the tax applied and did not get enough advice.

Result: protest DENIED; tax, penalty, and interest upheld.

What this means for you

Repair work billed as an independent contractor is subject to gross receipts tax

If you buy parts and bill a business for parts and labor rather than working as its employee, your receipts are generally subject to New Mexico gross receipts tax. You need to register and report, even when a larger business you work for pays its own taxes.

Handing an NTTC to your income-tax preparer is not the same as using it

An NTTC only helps if you are registered and actually claim the deduction it supports, within the deadlines. Hale gave his certificate to an income-tax preparer and assumed it was handled; it was not. Confirm who is responsible for your gross receipts tax and NTTCs.

The 60-day NTTC deadline is strict

When the Department sends a notice requiring NTTCs, you have 60 days to have the proper certificates in hand. If they arrive later, the law says the deduction "shall be disallowed" — there is no good-cause exception in the statute. Gather and safeguard your certificates before you need them.

Inability to pay does not erase the tax

Financial hardship, even a genuine medical crisis, is not a defense to an assessment. It may affect whether the Department pursues collection, but the tax itself stands. Address the assessment on its merits and take up ability-to-pay separately with the Department's collectors.

Common questions

Q: The parts suppliers and the car dealer already paid tax. Why do I have to pay again?
A: Because those were separate taxpayers and separate transactions. The tax is not a single tax on the car; each business is taxed on its own receipts. The law prevents true double-taxing through deductions and certificates, which you have to claim correctly.

Q: I got the exemption certificate — why was my deduction denied?
A: Because it arrived after the 60-day deadline in Section 7-9-43. Once the Department gives notice, the required NTTCs must be in your possession within 60 days; a certificate obtained later leads to the deduction being disallowed by law.

Q: I didn't know this tax existed. Isn't that a reason to cancel it?
A: No. New Mexico expects every person in business to learn the tax consequences of their activities or hire someone who knows. Not understanding the gross receipts tax is not a defense to the assessment.

Q: My family is going through a medical and financial crisis. Can the tax be waived?
A: An assessment cannot be abated for inability to pay. The hearing officer was sympathetic, but hardship is handled by the Department's collectors deciding whether to pursue collection, not by canceling the tax.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-1-17(C) — an assessment of tax is presumed correct; the taxpayer bears the burden of overcoming it
• NMSA 1978, § 7-9-43(A) — if the required NTTCs are not in the seller's possession within 60 days of the Department's notice, the related deductions "shall be disallowed"
• NMSA 1978, § 7-9-47 — deduction for receipts from selling tangible personal property for resale (supported by a Type 2 NTTC)
• NMSA 1978, § 7-9-22 — exemption for receipts from selling vehicles on which the motor vehicle excise tax is imposed
• Regulation 3 NMAC 1.6.14 — an assessment of tax may not be abated based on a taxpayer's inability to pay

Cases cited:

• Archuleta v. O'Cheskey, 84 N.M. 428, 504 P.2d 638 (Ct. App. 1972) — the taxpayer bears the burden of overcoming the presumption that an assessment is correct
• Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 559 P.2d 1155 (Ct. App. 1976), cert. denied, 90 N.M. 255, 561 P.2d 1348 (1977) — every person must ascertain the possible tax consequences of their actions

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Gregory and Shirley Hale
• Decision PDF: D&O 01-02

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
GREGORY AND SHIRLEY HALE, NO. 01-02
ID NO. 02-405044-00-0, PROTEST TO
ASSESSMENT NO. 2511076

DECISION AND ORDER

This matter came on for formal hearing on February 20, 2001 before Gerald B.

Richardson, Hearing Officer. Gregory and Shirley Hale were represented by Mr. Gregory Hale.

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. In 1996, Mr. and Mrs. Hale moved to Carlsbad, New Mexico from California.

2. Mr. Hale is a master mechanic. He obtained work repairing used cars for Mr. Glen

Moore, owner of Glen’s Auto Sales in Carlsbad, New Mexico. Glen’s Auto Sales sold the

repaired cars to its customers.

3. Mr. Hale was not an employee of Glen’s Auto Sales. Rather, he was asked to repair

various vehicles. In doing so, he purchased the necessary parts and billed Glen’s Auto Sales for

the parts and the labor he performed in repairing the automobiles.

4. Mr. Hale was not familiar with the New Mexico gross receipts tax and how it might

apply to his activities. When he purchased automobile parts which he used for his automobile

repair activities, he did not use or tender a nontaxable transaction certificate to the seller in order

to purchase the parts without the passed-on cost of the gross receipts tax payable by the seller on

the sale.

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5. Mr. Hale was also issued a non-taxable transaction certificate by Glen’s Auto Sales.

Mr. Moore explained to Mr. Hale that because of the certificate, Mr. Hale didn’t need to pay tax

on his receipts from Glen’s Auto Sales.

6. Mr. Hale gave the non-taxable transaction certificate he had received from Glen’s

Auto Sales to a woman who prepared his year end income taxes. The tax preparer never

informed Mr. Hale about gross receipts taxes or how they might apply to his car repair activities.

Mr. Hale assumed that the tax preparer had done whatever was necessary with the certificate and

he did nothing more with respect to his gross receipts taxes.

7. Mr. Hale never applied for or received a tax identification number for purposes of

reporting his gross receipts and/or claiming any deductions for gross receipts tax purposes, nor

did he report or pay gross receipts tax on his receipts from performing automobile repair

services.

8. The Department has an information sharing agreement with the Internal Revenue

Service (“IRS”) whereby the IRS provides information to the Department from the Federal tax

returns of New Mexico residents. Pursuant to the information sharing agreement, the

Department compares information from the Federal Schedule C forms on which taxpayers report

their income from a business or profession against the information reported by those taxpayers to

the Department with respect to gross receipts tax. This Departmental program is called the C-

Span program.

9. There is an approximate three year time lag between when a taxpayer files a return

with the IRS and when the information from that return is made available to the Department for

its C-Span program.

10. As a result of information the Department received from the IRS, on January 5, 2000,

the Department wrote Mr. and Mrs. Hale informing them that it was conducting a limited scope

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audit to address the discrepancy between the amount they had reported as income from a

business or profession on their 1996 Federal Schedule C and the zero amount of gross receipts

reported to the Department for the 1996 calendar year. The Department’s letter further provided

Mr. and Mrs. Hale notice, pursuant to Section 7-9-43 NMSA 1978 that they had 60 days to

present non-taxable transaction certificates (“NTTC’s”) or other documentation to support any

deductions from gross receipts tax which they claimed.

11. At the time the Department mailed the January 5, 2000 letter, Mr. and Mrs. Hale were

in Texas due to Mrs. Hale’s health. Mr. Hale returned to New Mexico in late February and

found the Department’s letter. On February 24, 2000, Mr. Hale contacted a Department

employee named Carolina in response to the January 5, 2000 letter.

12. On April 7, 2000, the Department issued Assessment No. 2511076 to Mr. and Mrs.

Hale, assessing $1,237 in gross receipts tax, $123.84 in penalty and $688.52 in interest for the

January, 1996 through December, 1996 reporting periods.

13. On April 11, 2000, Mr. and Mrs. Hale filed a written protest to Assessment No.

2511076.

14. On April 30, 2000, Mr. Hale received a Type 1 NTTC from Glen’s Auto Sales in

support of a deduction from Mr. Hale’s gross receipts for the amounts he was paid by Glen’s

Auto Sales in 1996. Mr. Hale was unable to locate the earlier NTTC from Glen’s Auto Sales or

the tax preparer to whom he had given the NTTC.

15. The Department denied Mr. Hale’s claim of deduction for his receipts from Glen’s

Auto Sales in 1996 due to Mr. Hale’s failure to demonstrate that he possessed the NTTC within

60 days of the Department’s letter of January 5, 2000.

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DISCUSSION

Section 7-1-17(C) NMSA 1978 provides that there is a presumption of correctness which

attaches to any assessment of tax by the Department. Thus, the burden of proof is on a taxpayer

challenging an assessment to present evidence or legal argument to overcome the presumption

that the assessment is correct. Archuleta v. O’Cheskey, 84 N.M. 428, 504 P.2d 638 (Ct. App.

1972). Mr. and Mrs. Hale have failed to meet the burden of proof in this case.

Mr. Hale first argues that he is a mechanic and that he should not be required to

understand the minutia of the Gross Receipts and Compensating Tax Act. He further argues that

because the parts suppliers paid gross receipts tax when he purchased parts to be used when

performing his repair work and because Glen’s Auto Sales paid tax1when it sold the repaired

vehicles, he should not be required to pay tax as well. Unfortunately, the law does not support

him in his arguments.

It is well settled in New Mexico that every person is charged with the reasonable duty to

ascertain the possible tax consequences of his actions. Tiffany Construction Co. v. Bureau of

Revenue, 90 N.M. 16, 559 P.2d 1155 (Ct. App. 1976), cert. denied, 90 N.M. 255, 561 P.2d 1348

(1977). Thus, although it may be difficult and burdensome for someone such as Mr. Hale to

learn how the gross receipts tax applies to his business activities, he must do so, or hire a tax

advisor to guide him through that process.2 Additionally, the fact that the state may have

collected taxes from the parts vendor or the automobile dealer does not relieve Mr. and Mrs.

Hale of their liability for gross receipts taxes. This is because there are separate taxpayers and

separate transactions involved. The Gross Receipts and Compensating Tax Act does provide for

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In this case, it would be the motor vehicle excise tax because there is an exemption provided at Section 7-9-22
NMSA 1978, for receipts from selling vehicles on which sales the motor vehicle excise tax is imposed.
2
In this case, although Mr. Hale hired a tax return preparer, it was not at all clear whether the preparer was hired to
prepare state and federal income tax returns only as Mr. Hale could not recall any discussions with the advisor in
which gross receipts tax requirements were discussed or explained.

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various deductions which avoid the pyramiding or stacking of taxes on various activities. Thus,

when an item is purchased for resale, for instance, a deduction is available under Section 7-9-47

NMSA 1978, for the seller who accepts a NTTC from the purchaser stating that the item will be

resold. In this case, Mr. Hale, if he had registered with the Department for gross receipts

purposes, could have obtained a type 2 NTTC to deliver to the vendors from whom he purchased

parts to purchase the parts without the seller passing on the cost of the gross receipts tax.

Additionally, if Mr. Hale had been able to produce proper NTTC’s from Glen’s Auto Sales in a

timely manner, he would have been entitled to claim a deduction against the receipts upon which

the assessment was issued. Mr. Hale’s failure, however, to produce the NTTC in a timely

manner is fatal to his claim of deduction. This is because Section 7-9-43(A) NMSA 1978

provides:

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.
(emphasis added.)

Finally, Mr. Hale asked for relief from the assessment on the basis of hardship. Due to

his wife’s chronic health problems, Mr. Hale must provide her with care around the clock and is

unable to engage in gainful employment. While I am sympathetic with the hardships which Mr.

and Mrs. Hale face, I am not allowed to take those matters into consideration when determining

whether tax is owed. An assessment of tax may not be abated based upon a taxpayer’s inability

to pay. Regulation 3 NMAC 1.6.14. The Department may determine not to pursue collection of

a tax obligation if it is convinced of a taxpayer’s inability to pay, but that is a matter for the

Department’s collectors to determine. It is not a defense, however, to an assessment of tax. It

should also be stated that nothing contained herein is intended in any way to put into question the

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character of Mr. or Mrs. Hale with regard to the taxes which were not paid and which are owing.

Mr. Hale is an honest working man who simply did not understand how New Mexico’s taxes

applied to him and failed to get sufficient advice about his taxes so that the situation could have

been avoided. Nonetheless, Mr. Hale’s arguments are insufficient to provide a basis for

providing the relief from the assessment of taxes which he requests and for these reasons, his

protest must be denied.

CONCLUSIONS OF LAW

1. Mr. and Mrs. Hale filed a timely, written protest, pursuant to Section 7-1-24 NMSA

1978, to Assessment No. 2511076 and jurisdiction lies over both the parties and the subject

matter of this protest.

2. Mr. Hale’s failure to understand how the gross receipts tax applied to his activities or

the requirements for documenting his entitlement to a deduction from tax is not a defense to an

assessment of tax.

3. Mr. and Mrs. Hale are not entitled to claim a deduction against their receipts from

performing automobile repair services for Glen’s Auto Sales because of their failure to produce a

timely and proper NTTC to support a claim of deduction.

4. The Taxpayer’s inability to pay an assessment of tax is not a basis for the abatement

of tax.

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

DONE, this 7th day of March, 2001.

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