Is windshield repair for car-rental fleets a taxable service or a tangible-property sale, and can wrong-type NTTCs accepted on a customer's say-so still support a gross receipts tax deduction?

Plain-English summary

A windshield repair company that serviced car-rental fleets was selling a taxable service, not a tangible product — and the wrong-type NTTCs it collected on its customers' say-so could not support a gross receipts tax deduction. Protest DENIED.

Save A Shield repairs small chips and reconditions badly pitted windshields for car-rental agencies, using a proprietary resin it blends but does not sell. When it started in New Mexico in 1996, its rental-agency customers told it not to charge gross receipts tax because they were "exempt," and offered nontaxable transaction certificates (NTTCs) if needed. The company never required or checked them, deducted its receipts in 1996–1997, and simply stopped reporting them in 1998. A 2000 audit and a Section 7-9-43 "60-day letter" prompted it to gather NTTCs — four Type 4s (tangible property for lease), one Type 2 (tangible property for resale), a Uniform Sales & Use Tax Certificate, and a letter. The auditor disallowed all of them and assessed about $5,347 for 1999 and about $21,674 for September 1996 through December 1998.

Service, not tangible property — the labor-vs-materials test

The company argued it sold a tangible product (the resin), so it could accept the tangible-property NTTCs. Section 7-9-3(K) defines a "service" as activities that predominantly involve performing a service rather than selling property, and under EG&G, Inc. v. Director the only material question is the relative inputs of services and tangible property — the seller's investment of skill versus materials. The company's own federal Schedule C returns answered that: cost of labor dwarfed materials every year ($103,818 vs. $3,343 in 1996; $214,368 vs. $0 in 1997; $416,091 vs. $65,111 in 1998). A shareholder's testimony that materials exceeded labor was unsubstantiated and contradicted by the returns. So the company sold services, and the tangible-property NTTCs did not fit.

A "good faith" NTTC must at least match the transaction

The company argued that even the wrong NTTCs protected its deductions because it accepted them in good faith under Section 7-9-43. The hearing officer explained the good-faith provision exists to protect a seller who cannot police how a customer later uses what it buys — not to excuse accepting a certificate that has nothing to do with the transaction. Under McKinley Ambulance Service, the "conclusive evidence" protection applies only if the certificate actually covers the receipts at issue, and Arco Materials holds a taxpayer has a continuing duty to make sure the NTTC is of the type needed for the transaction (Regulation 3.2.201.14, formerly GR 43:9). The company cited Leaco Rural Telephone, but there the court expressly said good faith was not at issue. Here the company "blindly accepted whatever NTTCs — and whatever tax advice — its customers provided," and blind acceptance is not good-faith acceptance.

The negligence penalty stood

Under Section 7-1-69(A), a negligence penalty applies to failing to pay tax when due; Regulation 3.1.11.11 can excuse a taxpayer who reasonably relied on a competent accountant's advice about its liability "after full disclosure of all relevant facts." Save A Shield did not qualify. It deducted its receipts based on its customers' advice, with no evidence it ever discussed the issue with its own CPA or that the CPA advised the deductions after full disclosure. Hiring an accountant does not relieve a taxpayer of the duty to ascertain its own tax consequences (El Centro Villa, Tiffany Construction); a shareholder admitted he did not even know whether the CPA filed the returns. And seeking advice only after the audit does not abate the penalty, because negligence is measured as of when the tax was due (Sonic Industries).

Result: protest DENIED. The receipts were taxable services, the NTTCs did not support the deductions, and the negligence penalty was proper.

What this means for you

Whether you sell a "service" turns on labor vs. materials, not what you call it

New Mexico decides service-versus-product by the relative inputs of skill/labor and materials (the EG&G test). If your labor costs far exceed your materials — as on most repair and reconditioning work — you are selling a taxable service, no matter how important the special product you apply is. Your own federal returns can be the proof.

An NTTC only works if it fits the transaction

The "good faith" protection for accepting an NTTC covers uncertainty about how your customer will use what you sold — not accepting a certificate that does not match what you actually do. A tangible-property NTTC cannot support a deduction for selling services. Check that the NTTC type matches your transaction before you rely on it; you have a continuing duty to get this right.

Do not deduct receipts on a customer's say-so

Customers telling you they are "exempt," or handing you a certificate, is not verification. Confirm with the Department (or the NTTC form and CRS Filer's Kit instructions) that you are actually entitled to the deduction. Blind reliance on customers is negligence, not good faith.

Hiring an accountant does not transfer your tax duty

Relying on a CPA only excuses a penalty if you disclosed all the facts and the CPA actually advised the position. Delegating everything and never checking — not even knowing if returns were filed — is negligence. And consulting a professional only after an audit will not undo the penalty; negligence is judged as of the due date.

Common questions

Q: What tax was assessed?
A: New Mexico gross receipts tax on Save A Shield's windshield repair and reconditioning receipts — about $5,347 for 1999 and about $21,674 for September 1996 through December 1998, including penalty and interest.

Q: Why wasn't the company selling a tangible product (the resin)?
A: Under Section 7-9-3(K) and the EG&G test, what controls is the relative inputs of labor and materials. The company's own Schedule C returns showed labor costs far exceeding materials, so it was selling services.

Q: The customers gave NTTCs — why were the deductions disallowed?
A: The Type 2 and Type 4 NTTCs cover sales of tangible personal property, not services, so they did not fit the transactions. Under McKinley Ambulance and Arco Materials, an NTTC supports a deduction only if it actually covers the receipts.

Q: Doesn't "good faith" acceptance protect the deduction anyway?
A: No. The good-faith rule protects sellers who cannot verify a buyer's later use of goods — not sellers who accept a certificate unrelated to the transaction. Blindly accepting whatever the customer offered is not good-faith acceptance.

Q: Why did the negligence penalty apply despite relying on an accountant?
A: The company relied on its customers, not its CPA, and never disclosed the facts to the CPA. Hiring an accountant does not shift the duty to get your taxes right, and getting advice only after the audit does not abate the penalty (Sonic Industries).

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-9-3(K) — "service" means activities predominantly involving performing a service rather than selling or leasing property
• NMSA 1978, § 7-9-43 — a properly executed NTTC accepted in good faith is conclusive evidence of a deduction; includes the 60-day possession requirement
• NMSA 1978, § 7-1-17(C) — a Department assessment is presumed correct; the taxpayer bears the burden to overcome it
• NMSA 1978, § 7-1-69(A) — negligence penalty (2% per month, up to 10%) for failing to pay tax when due
• Regulation 3.2.201.14 NMAC (formerly GR 43:9) — a taxpayer relying on an NTTC has a continuing duty to ensure goods/services are of the type the certificate covers
• Regulation 3.1.11.10 NMAC — definition of taxpayer negligence
• Regulation 3.1.11.11 NMAC — non-negligence includes reasonable reliance on a competent accountant's advice as to liability after full disclosure

Cases cited:

• EG & G, Inc. v. Director, Revenue Division, Taxation & Revenue Department, 94 N.M. 143, 607 P.2d 1161 (Ct. App. 1979)
• Wing Pawn Shop v. Taxation and Revenue Department, 111 N.M. 735, 809 P.2d 649 (Ct. App. 1991)
• Archuleta v. O'Cheskey, 84 N.M. 428, 504 P.2d 638 (Ct. App. 1972)
• Leaco Rural Telephone Cooperative, Inc. v. Bureau of Revenue, 86 N.M. 629, 526 P.2d 426 (Ct. App. 1974)
• Arco Materials, Inc. v. State, Taxation & Revenue Department, 118 N.M. 12, 878 P.2d 330 (Ct. App.), rev'd on other grounds, 118 N.M. 647, 884 P.2d 803 (1994)
• McKinley Ambulance Service v. Bureau of Revenue, 92 N.M. 599, 592 P.2d 515 (Ct. App. 1979)
• El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989)
• Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976)
• Sonic Industries, Inc. v. Chavez, 2000-NMCA-087, 129 N.M. 657, 11 P.3d 1219
• Kewanee Industries, Inc. v. Reese, 114 N.M. 784, 845 P.2d 1238 (1993)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Save A Shield, NM
• Decision PDF: D&O 02-01

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
SAVE A SHIELD, NM No. 02-01
ID NOS. 02-427868-00-8 & 02-317607-00-5
ASSESSMENT NOS. 2576316 & 2602872

DECISION AND ORDER

A formal hearing on the above-referenced protest was held November 27, 2001, before

Margaret B. Alcock, Hearing Officer. Save A Shield, NM (“Taxpayer”) was represented by Robert

M. Fiser, its attorney. The Taxation and Revenue Department ("Department") was represented by

Bruce J. Fort, Special Assistant Attorney General. Following the submission of written closing

arguments, the matter was submitted for decision. Based on the evidence and arguments presented, IT

IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer is engaged in the business of repairing and reconditioning automobile

windshields for car rental agencies.

2. The Taxpayer operates its business in Arizona, New Mexico, Colorado and

California.

3. The Taxpayer began business in New Mexico in 1996. At that time, the Taxpayer

was operating as a sole proprietorship. In 1999, the business was restructured as an S corporation.

4. The Taxpayer performs two types of services for car rental agencies: (1) repairing

small cracks and chips in windshields, which makes up 40 percent of the Taxpayer’s business, and

(2) reconditioning windshields, which makes up 60 percent of the Taxpayer’s business.

5. The Taxpayer has developed a unique resin that it uses in repairing and

reconditioning windshields. The Taxpayer pays a chemist to blend and package the resin, usually in

batches costing $2,000 to $3,000.

6. The Taxpayer has not patented its resin formula, but considers it to be proprietary

information.

7. The Taxpayer does not sell the resin used in its business. If an outside party asked to

purchase the resin, the Taxpayer would refuse the request.

8. The Taxpayer’s repair services are performed on windshields with small cracks or

chips no larger than the size of a quarter. These services involve injecting resin into the damaged

area of the windshield, waiting 5 to 10 minutes while the resin “cures” or bonds to the windshield,

scraping off the excess resin, and polishing the repaired area.

9. The Taxpayer’s reconditioning services are performed on windshields that are badly

pitted across all or a portion of the surface. These services involve treating the pits, applying resin to

the entire surface of the windshield, allowing the resin to cure, scraping off the excess resin, and

polishing the windshield

10. The Taxpayer’s reconditioning services are usually performed on vehicles the car

rental agency has leased from the manufacturer and is returning to the manufacturer at the expiration

of the lease term. When the vehicle’s windshield is pitted and the agency knows it will not pass the

manufacturer’s inspection, the agency has the Taxpayer recondition the windshield in order to avoid

a surcharge on the lease.

11. The Taxpayer performs repair and reconditioning services for its customers on-site at

each car rental agency’s facility.

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12. The Taxpayer does not takes title to the vehicles or windshields on which the

Taxpayer performs its services.

13. As reflected on Schedule C of the Taxpayer’s 1996, 1997 and 1998 federal income

tax returns, the Taxpayer’s cost of labor was substantially higher than the cost of materials used in its

windshield repair and reconditioning business.

14. When the Taxpayer began business in New Mexico in 1996, its customers told the

Taxpayer not to charge them the New Mexico gross receipts tax because they were “exempt”. The

car rental agencies also told the Taxpayer they could provide the Taxpayer with nontaxable

transaction certificates (NTTC) if necessary.

15. The Taxpayer did not require the car rental agencies to provide NTTCs to establish

their nontaxable status, nor did the Taxpayer question the tax information received from the agencies

or make any effort to verify this information with the Department.

16. The 1996 and 1997 gross receipts tax returns filed by the Taxpayer reported and

deducted the Taxpayer’s receipts from performing services for its car rental customers. Beginning in

1998, the Taxpayer stopped reporting these receipts altogether.

17. In February 2000, the Department began a field audit of the Taxpayer.

18. On February 24, 2000, the auditor gave the Taxpayer what is known as a “60-day

letter.” The letter advised the Taxpayer that, pursuant to Section 7-9-43 NMSA 1978, the Taxpayer

must be in possession of all required NTTCs within 60 days or deductions claimed relating to the

NTTCs would be disallowed.

19. After receiving the 60-day letter, the Taxpayer contacted its car rental customers and

asked them to send the Taxpayer the NTTCs needed to support the Taxpayer’s deductions.

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20. Four car rental agencies provided the Taxpayer with a Type 4 NTTC (sale of tangible

personal property for lease); one agency provided the Taxpayer with a Type 2 NTTC (sale of

tangible personal property for resale); one agency provided the Taxpayer with a Uniform Sales and

Use Tax Certificate; and one agency provided the Taxpayer with a letter.

21. A description of the proper use of each type of NTTC issued by the Department is set

out on the back of the NTTC form itself, as well as in the Department’s CRS Filer’s Kit, which is

mailed to all taxpayers registered for payment of gross receipts taxes.

22. The Taxpayer did not examine or question the documents it received to determine

whether they met the statutory requirements for the deductions claimed, but simply turned the

documents over to the Department’s auditor.

23. The auditor disallowed the Type 2 and Type 4 NTTCs because those NTTCs apply to

the sale of tangibles, not to the sale services. The auditor disallowed the Uniform Sales and Use Tax

Certificate and the letter because they did not meet the statutory requirements for NTTCs.

24. On September 13, 2000, the Department issued Assessment No. 2576316 to the

Taxpayer in the amount of $5,346.54, representing gross receipts tax, interest and penalty for

reporting periods January through December 1999.

25. On October 11, 2000, the Taxpayer filed a written protest to Assessment No.

2576316.

26. On November 22, 2000, the Department issued Assessment No. 2602872 to the

Taxpayer in the amount of $21,674.37, representing gross receipts tax, interest and penalty for

reporting periods September 1996 through December 1998.

27. On December 18, 2000, the Taxpayer filed a written protest to Assessment No.

2602872.

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DISCUSSION

The Taxpayer raises the following arguments in support of its protest: (1) the Taxpayer is

engaged in selling tangible personal property, not services, and is entitled to accept Type 2 and Type

4 NTTCs from its customers; (2) the Taxpayer is entitled to the deductions claimed because it

accepted the NTTCs in good faith; and (3) the Taxpayer is not liable for the negligence penalty

because the Taxpayer relied on the advice of its accountant. The Taxpayer has not challenged the

Department’s disallowance of deductions based on the Uniform Sales & Use Tax Certificate and the

letter provided by the Taxpayer’s customers.

Section 7-1-17(C) NMSA 1978 states that any assessment of taxes made by the Department

is presumed to be correct, and it is the taxpayer's burden to overcome this presumption. Archuleta v.

O'Cheskey, 84 N.M. 428, 431, 504 P.2d 638, 641 (Ct. App. 1972). Where an exemption or deduction

from tax is claimed, the statute must be construed strictly in favor of the taxing authority, the right to

the exemption or 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).

(1) Sale of Services v. Sale of Tangible Personal Property. In support of the deductions

and exemptions claimed during the audit period, the Taxpayer provided the Department with Type 2

and Type 4 NTTCs, both of which apply to transactions involving the sale of tangible personal

property. The Department refused to accept the NTTCs based on its position that the Taxpayer is

engaged in the sale of services. The Taxpayer argues that under the test set out in Section 7-9-3(K)

NMSA 1978, it is selling a tangible product—not services—and is entitled to accept the NTTCs

provided by its customers.

Section 7-9-3(K) NMSA 1978 defines the term “service” as follows:

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K. "service" means all activities engaged in for other persons for a consideration,
which activities involve predominantly the performance of a service as
distinguished from selling or leasing property.... In determining what is a service,
the intended use, principal objective or ultimate objective of the contracting
parties shall not be controlling....

This language was first enacted in a 1976 amendment to current Section 7-9-3(K) (formerly Section

72-16A-3K). See, 1976 N.M. Laws, ch. 25, § 1. In EG & G, Inc. v. Director, Revenue Division,

Taxation & Revenue Department, 94 N.M. 143, 607 P.2d 1161, (Ct. App.), cert. denied, 94 N.M.

628, 614 P.2d 545 (1979), the court of appeals noted that the 1976 amendment changed the test for

determining whether a transaction constitutes a sale of services or a sale of tangibles from one

focusing on the end product's value to the purchaser to one focusing on the nature of the seller's

activity, i.e., on the seller’s investment of skills and materials. The court concluded that the “only

material issue of fact under the test adopted by the Legislature relates to the relative inputs of

services and tangible property.” Id., 94 N.M. at 146, 607 P.2d at 1164.1

In this case, the Taxpayer maintains that it is selling a tangible product because the cost of

materials used in its windshield repair and reconditioning business exceeds the cost of labor

involved. In support of this contention, the Taxpayer presented the testimony of Ed Fields, one of its

shareholders and corporate officers. Mr. Fields is also the father of Barton Fields, who was the sole

proprietor of the Taxpayer during the period 1996-1998. Ed Fields testified that 40 to 50 percent of

the cost of repairing a windshield is attributable to the special resin injected into the windshield and

60 to 70 percent of the cost of reconditioning a windshield is attributable to the cost of the resin.

This testimony conflicts with the federal income tax returns filed by Barton Fields for tax years

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The Department also relies on Regulation 3.2.1.29 NMAC, which sets out a number of factors to be considered in
determining whether a taxpayer is selling services or tangibles. Because this version of the regulation was not
enacted until the very end of the audit period, it has limited application to this protest. See, Kewanee Industries, Inc.
v. Reese, 114 N.M. 784, 790, 845 P.2d 1238, 1244 (1993), where the court refused to apply regulations not in effect

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1996, 1997 and 1998. Schedule C of those returns lists Barton Fields as the proprietor of the

Taxpayer, which is described as a “Windshield Repair” business. For each year, the cost of labor

deducted on Schedule C far exceeds the cost of materials and supplies:

Cost of Labor Materials and Supplies
Tax Year Sch. C, Line 37 Sch. C, Line 38

1996 $103,818 $ 3,343
1997 $214,368 $ --0--
1998 $416,091 $65,111

See, Department Exhibits A, B and C.

Ed Fields was unable to explain the discrepancy between his estimate of the cost of materials

and the amounts reported on the Taxpayer’s federal income tax returns, admitting that those figures

were “difficult to dispute”. Mr. Fields said his review of the federal tax returns had been “sketchy”

and that he relied on the Taxpayer’s CPA to insure everything was properly reported. Mr. Fields

suggested that the cost of resin for 1996 and 1997 may have been reported on Line 36 of Schedule C

(“Purchases less cost of items withdrawn for personal use”) rather than on Line 38, but this still

results in a cost of materials that is less than one-third the cost of labor reported for each of those

years. Mr. Fields also testified that the cost of labor reported on the returns overstated the cost of

performing the repair and reconditioning work because it included the salaries of the owner and

other managerial employees. Mr. Fields failed, however, to provide any breakdown of those salaries.

Nor did he explain why he thought the cost of labor reported on Line 37 of Schedule C included the

salary of the owner when the instructions for that line specifically state that the owner’s salary should

not be included.

during the tax years at issue, stating: “A regulation promulgated by an administrative agency shall be construed to have
retroactive effect only if it is clearly and manifestly intended.”

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On cross-examination, Mr. Fields was asked to describe the number of people employed by

the Taxpayer during the audit period, as well as their duties and salaries. He was also questioned

concerning the amount and cost of resin purchased during each tax year at issue. Mr. Fields was

either unable to answer the questions or gave conflicting information. He testified that he did not

know how much the Taxpayer spent on resin each year. Mr. Fields knew the resin was packaged in

different sized vials, and knew the number of vials used for each job, but he did not know how much

the vials cost, stating that his son and his CPA were more familiar with this aspect of the business.

Based on the evidence presented, Mr. Fields’ assertion that the cost of materials used in the

Taxpayer’s business exceeds the cost of labor is unconvincing. Mr. Fields was unable to provide any

documents or credible testimony to substantiate his position or to dispute the correctness of the

figures reported on the Taxpayer’s federal tax returns. Those returns establish that the cost of labor

far exceeded the cost of materials during 1996, 1997 and 1998, three of the four years under audit.

There is no evidence to indicate that this cost ratio changed during 1999, the final year of the audit.

Under the test set out in EG&G, supra, the Taxpayer was not engaged in the sale of resin—or any

other tangible product—during the tax periods at issue. Accordingly, the Type 2 and Type 4 NTTCs

were properly disallowed by the Department.

(2) Good Faith Acceptance of NTTCs. The Taxpayer argues that it is entitled to the

deductions claimed even if Type 2 and Type 4 NTTCs do not apply to the transactions at issue

because the Taxpayer accepted the NTTCs in good faith. The good faith provision at issue appears

in Section 7-9-43 NMSA 1978, which provides, in pertinent part:

When the seller or lessor accepts a nontaxable transaction certificate 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
nontaxable transaction certificate shall be conclusive evidence, and the only

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material evidence, that the proceeds from the transaction are deductible from
the seller’s or lessor’s gross receipts.

In support of its contention that even the wrong NTTC can support a deduction, the Taxpayer cites to

Leaco Rural Telephone Cooperative, Inc. v. Bureau of Revenue, 86 N.M. 629, 526 P.2d 426 (Ct. App.

1974), which upheld a telephone company’s right to claim a deduction based on an improperly issued

NTTC. In Leaco, however, the court specifically stated that its decision was not based on a finding of

good faith on the part of the taxpayer:

[N]either good faith nor bad faith is an issue in this appeal. The Commissioner
made no finding concerning good faith. The Commissioner did not reject the
applicability of the NTTCs on the basis that Leaco did not accept them in good
faith.

86 N.M. at 632, 526 P.2d at 429. In contrast to Leaco, the primary issue in this case is whether the

Taxpayer accepted NTTCs in good faith that its customers would employ the Taxpayer’s services in a

nontaxable manner. The Leaco decision provides no guidance on this issue.

The purpose of the good faith provision is to protect a seller who has no way of verifying

whether its customer’s subsequent use of goods or services complies with the requirements for

issuance of a particular NTTC. In Arco Materials, Inc. v. State, Taxation & Revenue Department, 118

N.M. 12, 15, 878 P.2d 330, 333 (Ct. App.), rev'd on other grounds, 118 N.M. 647, 884 P.2d 803

(1994), the court noted that it would create a tremendous burden to require a taxpayer to monitor its

purchaser’s activities. The good faith provision is designed to relieve the taxpayer of this burden. For

example, a seller of tools is entitled to accept a Type 2 NTTC (sale of tangible personal property for

resale) from a hardware store in good faith that the hardware store will use the tools in a nontaxable

manner, i.e., will resell the tools in the ordinary course of business. The seller is not required to

check up on its customer the following month to be sure the tools were actually resold. The seller is

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entitled to deduct its receipts in reliance on the NTTC, even if it is later discovered that the owner of

the hardware store took the tools home for his personal use.

A different scenario is presented, however, when the NTTC proffered by the customer bears

no relation to the transaction at issue. New Mexico case law holds that the good faith provision in

Section 7-9-43 NMSA 1978 does not cover situations where the NTTC accepted by the seller is

inapplicable to the goods or services being sold. In McKinley Ambulance Service v. Bureau of

Revenue, 92 N.M. 599, 601-602, 592 P.2d 515, 517-518 (Ct. App. 1979), the court rejected the

ambulance company’s claim that the NTTC it accepted from its customer served as conclusive

evidence of the company’s right to a deduction:

The taxpayer claims he accepted a nontaxable transaction certificate in good
faith, and the certificate is conclusive evidence that proceeds from intrastate
transportation of ambulance passengers were deductible. The "conclusive
evidence" provision of § 7-9-43(A), N.M.S.A. 1978 does not apply unless the
certificate covered the receipts in question....

The certificate in this case was for the "PURCHASE OF SERVICES FOR
EXPORT".... This certificate did not apply to receipts from the taxpayer's in-
state ambulance service....

There being no certificate applicable to the taxpayer's in-state services, the
failure to approve a deduction on the basis of receipts from in-state services was
not error.

More recently, in Arco Materials, supra, the court held that taxpayers have a continuing duty to

assess the validity of deductions taken in reliance on NTTCs, including the duty to insure that the

NTTC is of the type needed to cover the transaction at issue. In its decision, the court quoted the

following language from Department Regulation GR 43:9 (now renumbered as 3.2.201.14 NMAC):

Acceptance of nontaxable transaction certificates (NTTCs) in good faith that the
property or service sold thereunder will be employed by the purchaser in a
nontaxable manner is determined at the time the certificates are initially
accepted. The taxpayer claiming the protection of a certificate continues to be

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responsible that the goods delivered thereafter are of the type covered by the
certificate (emphasis the court’s).

Id., 118 N.M. at 16, 878 P.2d at 334.

In this case, the Taxpayer made no effort to assess the validity of the deductions it claimed

during the audit period. When the Taxpayer began business in New Mexico in 1996, its car rental

customers told the Taxpayer not to charge them tax because they were “exempt.” The Taxpayer did

not question this information or ask its customers to explain which provision of New Mexico law

exempted them from the gross receipts tax. Nor did the Taxpayer check with the Department to

verify whether the Taxpayer was, in fact, entitled to deduct its receipts from performing windshield

repair and reconditioning services. Instead, the Taxpayer simply started deducting its receipts from

the car rental companies. In 1998, the Taxpayer stopped reporting those receipts altogether.

The first time the Taxpayer asked its customers for the NTTCs required to support its

deductions was when it received the Department’s 60-day letter in February 2000. At that time, four

car rental agencies provided the Taxpayer with Type 4 NTTCs (sale of tangible personal property for

lease) and one agency provided the Taxpayer with a Type 2 NTTC (sale of tangible personal

property for resale). Although there is a description of the proper use of each type of NTTC on the

back of the form itself, as well as in the Department’s CRS Filer’s Kit, the Taxpayer made no effort

to examine the NTTCs it received to ascertain whether they covered the transactions at issue. Only

after the Department’s audit did the Taxpayer contact the tax departments of the various car rental

companies to discuss the advice they had given the Taxpayer four years earlier.

The facts establish that the Taxpayer blindly accepted whatever NTTCs—and whatever tax

advice—its customers provided. Blind acceptance is not equivalent to good faith acceptance.

Although taxpayers are not expected to monitor the activities of their customers, taxpayers are

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required to make some effort to determine whether they are entitled to the deductions they claim.

There is no dispute that the NTTCs accepted by the Taxpayer applied to the sale of tangible personal

property. Pursuant to the holdings in McKinley Ambulance, supra, and Arco Materials, supra, these

NTTCs do not support the Taxpayer’s deduction of receipts from performing windshield repair and

reconditioning services.

(3) Assessment of Penalty. Section 7-1-69 NMSA 1978 governs the imposition of penalty.

Subsection A imposes a penalty of two percent per month, up to a maximum of 10 percent, “in the case

of failure due to negligence or disregard of rules and regulations...to pay when due any amount of tax

required to be paid.” Taxpayer "negligence" is defined in Regulation 3.1.11.10 NMAC as:

1. failure to exercise that degree of ordinary business care and prudence
   which reasonable taxpayers would exercise under like circumstances;

2. inaction by taxpayers where action is required;

3. inadvertence, indifference, thoughtlessness, carelessness, erroneous
   belief or inattention.

Regulation 3.1.11.11 NMAC sets out several situations that may indicate a taxpayer has not been

negligent, including proof that the failure to pay tax “was caused by reasonable reliance on the advice

of competent tax counsel or accountant as to the taxpayer’s liability after full disclosure of all relevant

facts”.

The Taxpayer argues that it comes within the nonnegligence provisions of Regulation 3.1.11.11

NMAC because it relied on its CPA to take care of all tax matters relating to the business. The

Taxpayer appears to believe that hiring an accountant served to relieve the Taxpayer of any further

responsibility to insure that its taxes were properly paid. This is not the case. As the New Mexico

Court of Appeals stated in El Centro Villa Nursing Center v. Taxation and Revenue Department, 108

N.M. 795, 799, 779 P.2d 982, 986 (Ct. App. 1989):

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this court has held that "[e]very person is charged with the reasonable duty to
ascertain the possible tax consequences of his action [or inaction]." Tiffany
Constr. Co. v. Bureau of Revenue, 90 N.M. at 17, 558 P.2d at 1156. We are not
inclined to hold that the taxpayer can abdicate this responsibility merely by
appointing an accountant as its agent in tax matters.

In El Centro Villa, the taxpayer failed to report gross receipts tax on certain Medicaid payments. The

court rejected the taxpayer’s contention that it should be excused from the negligence penalty because it

relied on the gross receipts tax reports prepared by its accountant. Instead, the court held that the

taxpayer had a responsibility to question the accountant concerning the tax treatment of the payments at

issue:

Beyond taxpayer's mere failure to inquire as to these particular payments, we find
substantial evidence exists to support the finding that it was not reasonable for
taxpayer to rely on the December 1983 and November 1984 reports. According to
the accountant's testimony, taxpayer reviewed the monthly reports and failed to
inquire about the reporting of the payments as cost reimbursements. Taxpayer
should have known that it had received large payments, especially in November
1984, no different in character than the Medicaid income received monthly
throughout the year and reported monthly as gross receipts, and that the same
readjustment payments were reported in 1982 as gross receipts. Given taxpayer's
knowledge of the character and size of the income payments in question, taxpayer
cannot be said to have reasonably relied on the incorrect reports as advice of its
accountant.

Id., 108 N.M. at 796-797, 779 P.2d at 983-984. In this case, Ed Fields testified that the Taxpayer

deducted its receipts based on advice received from its customers. There is no evidence that Mr. Fields,

his son, or any other employee of the Taxpayer discussed this advice with the Taxpayer’s CPA. Nor is

there any evidence that the CPA advised the Taxpayer to deduct its receipts “after full disclosure of all

relevant facts” concerning the nature of the services being performed for the car rental agencies. See,

Regulation 3.1.11.11 NMAC. The Taxpayer did not reasonably rely on the advice of its accountant—it

simply delegated all of its tax responsibilities to him. At the November 27, 2001 hearing, Ed Fields

testified that he did not know whether the Taxpayer’s CPA actually filed gross receipts tax returns with

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the Department. Although Mr. Fields was aware that no tax was paid on the Taxpayer’s receipts, when

Department counsel asked him why no tax was paid, Mr. Fields again stated that he did not know.

Such a complete abdication of responsibility does not meet the standard of nonnegligence set out in the

Department’s regulation or in the court’s decision in El Centro Villa, supra.

As additional evidence that it was not negligent, the Taxpayer points to the fact that Ed Fields

sought advice concerning the Taxpayer’s deductions from the tax departments of its car rental

customers. This did not occur, however, until after the Department’s audit was complete. As confirmed

in a recent decision of the court of appeals, negligence is determined as of the time that taxes are due:

Where the taxpayer ignores its tax obligations and consults with an attorney or
accountant about its tax obligations only after an audit and assessment by the
Department, such conduct is not evidence of a diligent protest and does not
provide a basis for avoiding a penalty. (emphasis the court’s)

Sonic Industries, Inc. v. Chavez, Secretary of Taxation & Revenue, 2000-NMCA-087, P38, 129 N.M.

657, 666, 11 P.3d 1219, 1228, cert. granted and pending, 10 P.3d 843 (2000). Here, as in Sonic, the

Taxpayer’s after-the-fact decision to seek advice concerning its gross receipts tax liability does not

support abatement of the negligence penalty.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment Nos. 2576316 and 2602872,

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

2. During the tax years at issue, the Taxpayer was engaged in selling services, not tangible

personal property.

3. Type 2 and Type 4 NTTCs apply to the sale of tangible personal property and do not

support the Taxpayer’s deduction of receipts from selling services.

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4. The Taxpayer did not accept Type 2 and Type 4 NTTCs in good faith that its customers

would use the Taxpayer’s services in a nontaxable manner.

5. The Taxpayer was negligent in failing to pay gross receipts tax on receipts from

performing services for car rental agencies, and penalty was properly imposed pursuant to Section 7-1-

69(A) NMSA 1978.

For the foregoing reasons, the Taxpayer's protest IS DENIED.

DATED January 3, 2002.

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