Can a New Mexico service provider deduct receipts from selling services for resale when she never actually had the buyer's nontaxable transaction certificate (NTTC) in her possession?

Plain-English summary

Sharon Steinberg had to pay New Mexico gross receipts tax on the counseling services she sold to a doctor for resale to his patients — because she never actually had the doctor's nontaxable transaction certificate (NTTC) in her possession, and New Mexico law disallows a resale deduction unless the seller holds the certificate. The receipts were taxable and interest was mandatory. Protest DENIED.

Lewis and Sharon Steinberg filed a joint 1996 federal return, each reporting business income on a separate Schedule C. Mr. Steinberg ran a refrigeration and heating business and had paid gross receipts tax on most of his income. Ms. Steinberg earned income from medical auditing and from patient-counseling services she performed for Dr. Harold Cohen, who resold her counseling services to his patients. She had not registered or paid gross receipts tax on that income, believing (as to the counseling) that only Dr. Cohen was responsible for the tax because he resold her services.

Acting on information from the IRS, the Department issued a 1996 gross receipts tax assessment. During the protest, several pieces fell away: the Department abated the portion of Ms. Steinberg's auditing receipts attributable to services performed outside New Mexico, and it abated the assessment against Mr. Steinberg because his liability was understated by less than 25 percent, making that part of the assessment untimely under the limitations statute. What remained at issue was $17,736.40 of Ms. Steinberg's receipts — chiefly her counseling receipts from Dr. Cohen — plus interest.

The resale deduction requires an NTTC — and possession of it

Ms. Steinberg claimed the deduction in Section 7-9-48 for "selling a service for resale." But that statute allows the deduction only "if the sale is made to a person who delivers a nontaxable transaction certificate to the seller." Selling a service for resale is not enough by itself; the buyer must deliver an NTTC. And Section 7-9-43 makes possession mandatory: if the seller is not "in possession of the required nontaxable transaction certificates within sixty days from the date" of the Department's notice, the NTTC-based deductions "shall be disallowed."

Ms. Steinberg was told by Dr. Cohen's office manager that an NTTC had been placed in her personnel file, but she acknowledged at the hearing that she never saw the certificate or held it. By the time the Department gave notice, Dr. Cohen had closed his office and destroyed many records, including her personnel file. A letter from the office manager said only that Dr. Cohen had paid gross receipts tax on all receipts coming into the office — it did not establish that an NTTC ever existed, let alone that Ms. Steinberg possessed one.

Deductions are strictly construed and must be clearly established

Section 7-9-5 presumes that all receipts of a person in business are subject to gross receipts tax. A taxpayer claiming a deduction must clearly establish the right to it, and one who fails to follow the method prescribed by statute waives the deduction (Wing Pawn Shop; Proficient Food). Because Ms. Steinberg could not show timely possession of the NTTC, the Department had no choice but to disallow the deduction, and the counseling receipts were taxable.

Interest is mandatory

Section 7-1-67 says interest "shall be paid" on tax not paid when due. The hearing officer explained that "shall" makes interest mandatory, and that interest is not a punishment but compensation to the state for the time value of unpaid revenue — so the reason for the late payment is irrelevant. Ms. Steinberg, not the state, had the use of those tax funds for six years, so interest was properly assessed.

Result: protest DENIED as to the receipts still at issue and the interest.

What this means for you

New Mexico service providers who sell services "for resale"

Selling your services to someone who resells them does not automatically make your receipts nontaxable. To claim the sale-for-resale deduction under Section 7-9-48, you need the buyer's NTTC — and you need to actually hold it. Get the certificate in hand and keep it.

The 60-day NTTC rule is a hard deadline

Under Section 7-9-43, once the Department notifies you, you have 60 days to be in possession of the required NTTCs. If you cannot produce them in that window, the deduction "shall be disallowed" — even if you believe a certificate was issued. Do not rely on a buyer's assurance that a certificate is "on file" somewhere you cannot access.

Someone else paying the tax does not substitute for the certificate

A buyer's statement that it already paid gross receipts tax on all receipts does not satisfy the statute. The deduction turns on the certificate and your possession of it, not on who ultimately remitted tax.

Interest runs regardless of good faith

If tax was owed and paid late, interest is automatic under Section 7-1-67. A sincere but mistaken belief that you did not owe the tax does not avoid interest.

Common questions

Q: What tax was at issue?
A: New Mexico gross receipts tax on Sharon Steinberg's 1996 receipts, chiefly from patient-counseling services she performed for Dr. Harold Cohen.

Q: Why was the resale deduction denied?
A: Section 7-9-48 requires the buyer to deliver an NTTC, and Section 7-9-43 requires the seller to possess the certificate within 60 days of the Department's notice. Ms. Steinberg never actually possessed an NTTC.

Q: Didn't the office manager say there was a certificate on file?
A: She said an NTTC had been placed in Ms. Steinberg's personnel file, but Ms. Steinberg never saw or held it, and the office had since closed and destroyed the records. That was not enough to establish possession.

Q: What parts of the assessment were dropped?
A: The Department abated the portion of Ms. Steinberg's auditing receipts for services performed outside New Mexico, and abated the assessment against Mr. Steinberg because his liability was understated by less than 25 percent and thus assessed too late.

Q: Could the interest be waived?
A: No. Interest under Section 7-1-67 is mandatory and compensates the state for the time value of unpaid revenue; the reason for late payment does not matter.

Citations and references

Statutes:

• NMSA 1978, § 7-9-48 — deduction for selling a service for resale, allowed only "if the sale is made to a person who delivers a nontaxable transaction certificate to the seller"
• NMSA 1978, § 7-9-43 — NTTCs must be in the seller's possession within 60 days of the Department's notice, or the NTTC-based deductions "shall be disallowed"
• NMSA 1978, § 7-9-5 — presumption that all receipts of a person engaging in business are subject to gross receipts tax
• NMSA 1978, § 7-1-67 — interest on late-paid taxes ("shall be paid")
• NMSA 1978, § 7-1-18 — limitations period for assessments (basis for abating Mr. Steinberg's under-25% understatement)

Cases cited:

• Wing Pawn Shop v. Taxation and Revenue Department, 111 N.M. 735, 809 P.2d 649 (Ct. App. 1991)
• Proficient Food Co. v. New Mexico Taxation & Revenue Department, 107 N.M. 392, 758 P.2d 806 (Ct. App.), cert. denied, 107 N.M. 308, 756 P.2d 1203 (1988)
• State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Lewis & Sharon Steinberg
• Decision PDF: D&O 02-07

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
LEWIS & SHARON STEINBERG No. 02-07
ID NO. 02-256160-00-9
ASSESSMENT NO. 2555379

DECISION AND ORDER

A formal hearing on the above-referenced protest was held February 18, 2002, before

Margaret B. Alcock, Hearing Officer. Lewis and Sharon Steinberg were represented by Sharon

Steinberg. The Taxation and Revenue Department ("Department") was represented by Monica M.

Ontiveros, Special Assistant Attorney General. Based on the evidence and arguments presented, IT IS

DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. Lewis and Sharon Steinberg filed a joint 1996 federal income tax return reporting the

income each of them had earned during 1996 on separate Schedule Cs (Profit or Loss From Business).

2. Lewis Steinberg reported $58,842 of income he earned from his refrigeration and

heating business on his Schedule C. During 1996, Mr. Steinberg was registered with the Department

and reported and paid New Mexico gross receipts tax on $44,344 of this income.

3. Sharon Steinberg reported $24,258 of income she earned performing medical audits

and patient counseling services on her Schedule C. During 1996, Ms. Steinberg was not registered with

the Department and did not report or pay New Mexico gross receipts tax on her income.

4. Ms. Steinberg did not report gross receipts tax on her auditing receipts because most of

the income was derived from services performed outside New Mexico and because she was advised by
an employee of the Department that receipts from her auditing services were not subject to gross

receipts tax.

5. Ms. Steinberg did not report gross receipts tax on her counseling receipts because she

performed those services for Harold Cohen, a medical doctor who resold Ms. Steinberg’s services to his

patients, and Ms. Steinberg believed that only Dr. Cohen was responsible for payment of gross receipts

tax.

6. Dr. Cohen’s office manager told Ms. Steinberg that a nontaxable transaction certificate

(“NTTC”) had been placed in her personnel file. Ms. Steinberg was not told what type of NTTC had

been issued by Dr. Cohen, nor did Ms. Steinberg ever see the NTTC or have it in her possession.

7. On April 17, 2000, as a result of information obtained from the IRS, the Department

mailed the Steinbergs a notice of limited scope audit concerning the discrepancy between business

income reported to the IRS on their 1996 Schedule Cs and business income reported to the

Department for gross receipts tax purposes.

8. The notice stated that, pursuant to Section 7-9-43 NMSA 1978, the Steinbergs must

be in possession of all required NTTCs within 60 days from the date of the notice or any deductions

relating to NTTCs would be disallowed. The 60-day period expired on June 16, 2000.

9. After receiving the notice, Ms. Steinberg called Dr. Cohen, but discovered that he

had closed his office and destroyed many of his records, including Ms. Steinberg’s personnel file.

10. Ariane Emery, Dr. Cohen’s wife and office manager, gave Ms. Steinberg a letter

stating that Dr. Cohen paid gross receipts tax on all receipts coming into the office. The letter

concludes that Ms. Steinberg’s income “was never subject to gross receipts tax, since that was

already paid out”. The letter does not mention the existence of an NTTC.

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11. On July 19, 2000, the Department issued Assessment No. 2555379 to the Steinbergs

in the total amount of $3,090.02, representing $1,734.72 gross receipts tax, $173.52 penalty, and

$1,181.78 interest for tax periods January through December 1996.

12. On August 16, 2000, the Steinbergs filed a written protest to the assessment.

13. During the course of the protest, Ms. Steinberg provided evidence that $6,521.60 of

her 1996 receipts were from services performed outside New Mexico, and the Department abated the

portion of the assessment attributable to those receipts.

14. Following the hearing, in a letter to the parties dated February 19, 2002, the hearing

officer raised the issue of whether the Department’s assessment against Mr. Steinberg for receipts

earned between January and November 1996 was issued within the limitations period set out in

Section 7-1-18 NMSA 1978. By letter dated February 27, 2002, the Department acknowledged that

since Mr. Steinberg’s gross receipts tax liability for this period was understated by less than 25

percent, the assessment of tax on his income was not timely and would be abated.

15. The amount of Ms. Steinberg’s receipts remaining at issue is $17,736.40. This

includes the $14,979.72 Ms. Steinberg earned from performing patient counseling services for Dr.

Harold Cohen, and an additional $2,756.68 Ms. Steinberg earned from medical auditing services.

16. Although most of her auditing receipts were attributable to services performed

outside New Mexico, Ms. Steinberg does not have records to establish the percentage of in-state v.

out-of-state work. During the protest and again at the hearing, Ms. Steinberg stated that she was not

challenging the Department’s assessment of tax on the $2,756.68.

DISCUSSION

The issues remaining to be decided in this protest are: (1) whether Ms. Steinberg’s inability

to produce an NTTC bars her from claiming a gross receipts tax deduction for receipts from

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performing services for Dr. Harold Cohen during 1996, and (2) whether the Department’s delay in

issuing its assessment and bringing this matter to hearing should excuse Ms. Steinberg from payment of

at least a portion of accrued interest.

Requirement for Possession of NTTC. The Gross Receipts and Compensating Tax Act

provides several deductions for taxpayers who meet the statutory requirements set by the legislature.

Ms. Steinberg claims the deduction provided in Section 7-9-48 NMSA 1978, which states, in pertinent

part:

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)

As the highlighted passage confirms, the fact that a taxpayer sells her 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 of 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 an NTTC within 60

days from the date of the Department's notice, deductions requiring delivery of the NTTC “shall be

disallowed."

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In this case, Ariane Emery, Dr. Cohen’s office manager, told Ms. Steinberg that an NTTC had

been placed in her personnel file. At the February 18, 2002 hearing, Ms. Steinberg acknowledged that

she never actually saw the NTTC or had it in her possession. Although Ms. Steinberg introduced a

letter from Ms. Emery as evidence, the letter simply states that Dr. Cohen paid gross receipts tax on all

receipts coming into the office and concludes that Ms. Steinberg’s income “was never subject to

gross receipts tax, since that was already paid out”. The letter does not mention the existence of an

NTTC.

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

right to the deduction 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). When the party claiming

a right to a tax deduction fails to follow the method prescribed by statute or regulation, she waives her

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). Here, Ms. Steinberg

failed to demonstrate timely possession of the NTTC needed to support her deduction of receipts from

performing services for Dr. Cohen. Based on the evidence, it is not clear that an NTTC was actually

issued to Ms. Steinberg. What is clear is that the NTTC was never in Ms. Steinberg’s possession as

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

the deduction.

Assessment of Interest. Ms. Steinberg maintains that even if tax is due on her receipts from

Dr. Cohen, she should not be liable for the full amount of interest assessed because of the initial

delay in notifying the Steinbergs of their reporting problems and the Department’s subsequent delay

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in evaluating the information provided by Ms. Steinberg to determine how much of the assessment

could be abated.

Section 7-1-67 NMSA 1978 (1996) governs the imposition of interest during the period at

issue and states, in pertinent part:

A. If any tax imposed is not paid on or before the day on which it
becomes due, interest shall be paid to the state on such amount from
the first day following the day on which the tax becomes due, without
regard to any extension of time or installment agreement, until it is
paid.... (emphasis added).

The legislature’s use of the word “shall” indicates that the assessment of interest is mandatory rather

than discretionary. State v. Lujan, 90 N.M. 103, 105, 560 P.2d 167, 169 (1977). The assessment of

interest is not designed to punish taxpayers, but to compensate the state for the time value of unpaid

revenues. Accordingly, the reason for a late payment of tax is irrelevant to the imposition of interest.

While it could be argued that the rate of interest is excessive in comparison with current market

rates, that is a matter within the discretion of the legislature.

In this case, the state was entitled to receive payment of Ms. Steinberg’s gross receipts tax in

1996, and Ms. Steinberg—not the state—has had the use of those tax funds during the last six years.

Accordingly, interest was properly assessed by the Department and there is no basis for abatement.

CONCLUSIONS OF LAW

1. The Taxpayers filed a timely, written protest to Assessment No. 2555379, and

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

2. Because Ms. Steinberg was unable to demonstrate possession of an NTTC from Dr.

Harold Cohen, she is not entitled to deduct her receipts from selling services to Dr. Cohen, and those

receipts are subject to gross receipts tax.

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3. Pursuant to Section 7-1-67(A) NMSA 1978, interest was properly assessed against Ms.

Steinberg’s unreported gross receipts tax.

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

DATED March 7, 2002.

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