Can a New Mexico subcontractor deduct its construction receipts without the general contractor's nontaxable transaction certificate (NTTC) in hand within 60 days, and does being unable to collect the tax from the customer excuse it?

Plain-English summary

J.W. Jones Mechanical Contractors lost most of its gross receipts tax deductions because it could not show timely possession of the general contractors' nontaxable transaction certificates (NTTCs) — and because New Mexico gross receipts tax falls on the seller, the fact that it could not collect the tax from its customers did not excuse it. Its one win was a single project it could properly document. Protest GRANTED IN PART and DENIED IN PART.

Jones is a mechanical, heating, and plumbing subcontractor. It normally deducts its receipts under Section 7-9-52, which lets a subcontractor deduct receipts from selling a construction service to a construction business "who delivers a nontaxable transaction certificate to the person performing the construction service." Under Section 7-9-43, the seller must be in possession of the required NTTCs within 60 days of the Department's notice, or the deductions "shall be disallowed." A 1998 field audit gave Jones a 60-day letter (deadline May 3, 1998), and the Department ultimately assessed $530,011.49 of gross receipts tax, penalty, and interest for January 1994 through August 1997.

NTTCs that arrived late — or were never produced

For ESA Construction and Ray Ward & Sons, the NTTCs did not reach Jones until October and November 1998, months after the 60-day deadline; the auditor also found they had been backdated to the dates the work was performed. Because they were not in Jones's possession within the 60-day window, those deductions were foreclosed. For Waide Construction and Chaparral Builders, an owner testified Jones had the NTTCs when the audit began, but he never mentioned them to the field or protest auditor and did not bring them to the hearing — so Jones failed to meet its burden of proving timely possession. Jones also conceded it had no explanation for other disallowed deductions.

Gross receipts tax is on the seller — uncollected tax is still owed

For Leprino and D&S Construction (City of Roswell and federal projects), the general contractors told Jones no gross receipts tax was due and refused to pay the tax or provide an NTTC. Jones argued it should not owe tax it could never collect. The hearing officer explained the key point: unlike a sales tax charged to the buyer, New Mexico's gross receipts tax is imposed directly on the seller as part of its cost of doing business. A seller's inability to pass the tax on or collect reimbursement does not change its legal obligation to report and pay. In a self-reporting system, Jones had a duty to determine its own liability, and — despite having doubts (it kept billing the tax to Leprino) — it never consulted an accountant or attorney. That failure was negligence, so no abatement of tax, interest, or penalty was warranted on those receipts.

The one win — a documented project

At the hearing, Jones showed that the project the auditor listed as "Village Hall" was actually work for Greer Construction, a contractor for which Jones did hold a timely NTTC. The hearing officer ordered the tax, penalty, and interest on that project abated.

Result: protest GRANTED IN PART and DENIED IN PART. The Village Hall/Greer amounts were abated; Jones remained liable for the balance of the assessment.

What this means for you

Subcontractors: get the NTTC and hold it within 60 days

To deduct construction-service receipts under Section 7-9-52, you must have the general contractor's NTTC — and under Section 7-9-43 you must possess it within 60 days of the Department's notice. Collect certificates up front and keep them; a certificate that shows up months later will not save the deduction.

Backdated or late certificates do not cure the deadline

An NTTC issued after the 60-day window, even if backdated to the work dates, will be rejected. The test is actual, timely possession.

If you claim you have a certificate, produce it

Testifying that you had an NTTC is not enough. Show it to the auditor and bring it to any hearing; failing to produce it means you have not met your burden.

Being unable to collect the tax does not erase it

New Mexico gross receipts tax is on the seller, not a sales tax collected from the buyer. If a customer refuses to pay it or to issue an NTTC, you still owe the tax — so resolve the question (with professional advice) before treating receipts as nontaxable.

Common questions

Q: What tax was at issue?
A: New Mexico gross receipts tax — an assessment of $530,011.49 of tax, penalty, and interest for January 1994 through August 1997, tied to disallowed subcontractor deductions.

Q: Why were the ESA and Ray Ward deductions denied?
A: Their NTTCs did not reach Jones until October–November 1998, after the May 3, 1998 60-day deadline, and appeared backdated. Section 7-9-43 disallows deductions when the NTTC is not timely in the seller's possession.

Q: Jones said it had NTTCs from Waide and Chaparral — why didn't that count?
A: It never showed them to the auditors or brought them to the hearing, so it did not prove timely possession.

Q: Its customers wouldn't pay the tax or give an NTTC — why does Jones owe it?
A: Because the gross receipts tax is imposed on the seller. Not being able to collect it from a customer does not remove the seller's obligation to pay it to the state.

Q: What did Jones win?
A: The tax, penalty, and interest on the project the auditor mislabeled "Village Hall," which was actually for Greer Construction — a contractor whose timely NTTC Jones did hold — were abated.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-9-52 — deduction for selling a construction service to a construction business that delivers an NTTC
• NMSA 1978, § 7-9-43 — NTTCs must be in the seller's possession within 60 days of the Department's notice, or the deductions "shall be disallowed"
• NMSA 1978, § 7-1-17(C) — a Department assessment is presumed correct; taxpayer bears the burden
• NMSA 1978, § 7-1-13(B) — taxpayer's self-reporting obligation
• Regulation 3.1.11.11 NMAC — situations indicating no negligence, including reliance on competent advice

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)
• Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976), cert. denied, 90 N.M. 255, 561 P.2d 1348 (1977)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: J.W. Jones Mechanical Contractors, Inc.
• Decision PDF: D&O 02-18

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
J. W. JONES MECHANICAL CONTRACTORS, INC. No. 02-18
ID NO. 01-134848-00-8
ASSESSMENT NO. 2589543

DECISION AND ORDER

A formal hearing on the above-referenced protest was held August 12, 2002, before Margaret

B. Alcock, Hearing Officer. J. W. Jones Mechanical Contractors, Inc. (“Taxpayer”) was represented

by Gary Jones, one of its owners. The Taxation and Revenue Department ("Department") was

represented by Bridget A. Jacober, Special Assistant Attorney General. Based on the evidence and

arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer is engaged in business in New Mexico and is registered with the

Department for payment of gross receipts, compensating and withholding taxes, which are required

to be paid monthly under the Department’s combined reporting system (“CRS”).

2. The Taxpayer performs mechanical, heating and plumbing services on construction

projects. The Taxpayer generally works as a subcontractor and obtains a nontaxable transaction

certificate from the general contractor, which allows the Taxpayer to deduct its receipts for purposes

of the New Mexico gross receipts tax.

3. On March 3, 1998, the Department began a field audit of the Taxpayer. On the same

day, the auditor delivered a “60-day letter” to Genevieve Jones, the company’s secretary/treasurer

and the contact person for the audit.

4. The letter notified the Taxpayer that it had 60 days to obtain possession of nontaxable

transaction certificates (“NTTCs”) needed to support its deductions and further stated: “If the above

listed required documentation is not in your possession within 60 days from the date of this notice,

deductions previously claimed relating to that documentation will be disallowed. Such

disallowance may result in a substantial tax liability which will include penalty and interest”

(emphasis in the original).

5. As of May 3, 1998, the expiration of the 60-day period, the Taxpayer still had not

provided the auditor with NTTCs to support its deduction of receipts from several general

contractors, including ESA Construction, Ray Ward & Sons, Leprino, D&S Construction, Waide

Construction, Chaparral Builders and Village Hall.

6. In October and November 1998, several months after the 60-day deadline, the auditor

received NTTCs from ESA Construction and Ray Ward & Sons. Based on the sequential numbering

of the NTTCs, the auditor determined that the two companies had backdated the NTTCs to the date

the Taxpayer’s work was performed, rather than the date the NTTC was issued.

7. Because the NTTCs from ESA and Ray Ward were not in the Taxpayer’s possession

within the 60-day period required by statute, the auditor refused to accept the NTTCs to support the

Taxpayer’s deductions.

8. The Taxpayer’s work for Leprino and D&S Construction was performed on

construction projects for the City of Roswell and the federal government. The two general

contractors told the Taxpayer that these projects were not subject to gross receipts tax and refused to

either pay the gross receipts tax charged by the Taxpayer or provide the Taxpayer with an

appropriate NTTC.

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9. The Taxpayer never consulted with an attorney or an accountant to determine

whether the advice received from the general contractors was correct or to insure that the Taxpayer

was properly reporting its gross receipts taxes to the state.

10. At the administrative hearing, the Taxpayer provided evidence that the project listed

as “Village Hall” in the auditor’s workpapers was actually work done for Greer Construction, a

contractor for which the Taxpayer did have a timely NTTC.

11. The Taxpayer did not provide any explanation for its failure to produce NTTCs to

support the remaining disallowed deductions, including its deduction of receipts from Waide

Construction and Chaparral Builders.

12. On October 21, 2000, the Department issued Assessment No. 2589543 to the

Taxpayer in the total amount of $530,011.49, representing gross receipts tax, penalty and interest for

the period January 1994 through August 1997.

13. On October 24, 2000, the Taxpayer filed a written protest to the assessment.

DISCUSSION

In general, the Taxpayer does not dispute the correctness of the Department’s audit findings

or the fact that it did not demonstrate timely possession of NTTCs needed to support certain

deductions taken during the audit period. Nonetheless, the Taxpayer believes that there are

extenuating circumstances and that it should not be required to pay gross receipts taxes it never

collected from its customers, particularly when its actions were due to a lack of knowledge and not

to any intent to defraud the state.

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

is presumed to be correct. Where a deduction from tax is claimed, the statute must be construed

strictly in favor of the taxing authority, the right to the deduction must be clearly and unambiguously

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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). When a

taxpayer claiming a deduction fails to follow the method prescribed by statute or regulation, he waives

his right thereto. Proficient Food v. New Mexico Taxation & Revenue Department, 107 N.M. 392, 397,

758 P.2d 806, 811 (Ct. App.), cert. denied, 107 N.M. 308, 756 P.2d 1203 (1988). Based on these

principles, it is the Taxpayer’s burden to come forward with evidence and legal argument to show that

it is entitled to the deductions it claims and that the Department's assessment is incorrect.

The Gross Receipts and Compensating Tax Act provides several deductions for taxpayers who

meet the statutory requirements set by the legislature. In this case, the Taxpayer claims the following

deduction provided in Section 7-9-52 NMSA 1978:

A. Receipts from selling a construction service may be deducted from
gross receipts if the sale is made to a person engaged in the construction
business who delivers a nontaxable transaction certificate to the person
performing the construction service. (emphasis added)

This statute allows the Taxpayer to deduct its receipts from performing services as a subcontractor if

the general contractor provides the Taxpayer with an NTTC. As quoted above, the requirements of

Section 7-9-52 NMSA 1978 are very specific. If the subcontractor fails to obtain an NTTC from the

general contractor, there is no basis for a deduction.

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

Section 7-9-43 NMSA 1978. At the time of the audit, this section provided, in pertinent part:

A. 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

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that require delivery of these nontaxable transaction certificates shall be
disallowed....

The language of the statute is mandatory and provides no exceptions. If a seller is not in possession of

required NTTCs within 60 days from the date of the Department's notice, "deductions claimed by the

seller...that require delivery of these nontaxable transaction certificates shall be disallowed" (emphasis

added).

Deduction of Receipts from ESA Construction, Inc. and Ray Ward & Sons. In this case, the

auditor gave the Taxpayer a 60-day notice on March 3, 1998, and the Taxpayer was required to have

all NTTCs in its possession by May 3, 1998. Although the Taxpayer later provided the auditor with

NTTCs from ESA Construction, Inc. and Ray Ward & Sons, these NTTCs were not issued to the

Taxpayer by the general contractors until October and November 1998, well after the 60-day

deadline. For this reason, the Taxpayer is foreclosed from deducting its receipts from these

contractors.

Deduction of Receipts from Waide Construction and Chaparral Builders, Inc. At the

administrative hearing, Gary Jones, one of the Taxpayer’s owners, testified that the Taxpayer had

NTTCs from Waide Construction and Chaparral Builders, Inc. in its possession at the time the audit

began. Unfortunately, Mr. Jones never mentioned this to the field auditor or to the Department’s

protest auditor. Nor did he bring the NTTCs with him to the administrative hearing. Having failed to

produce copies of the NTTCs at issue, the Taxpayer has not met its burden of proving that the NTTCs

were in its possession within the time limits set by Section 7-9-43 NMSA 1978, and the Taxpayer is not

entitled to deduct its receipts from these contractors.

Deduction of Receipts from Leprino and D&S Construction. The Taxpayer does not dispute its

failure to obtain NTTCs from Leprino and D&S Construction, but maintains that it was misled by these

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contractors and should not be required to pay gross receipts taxes that it was never able to collect.

The problem with this argument is that, unlike other states, New Mexico does not have a sales tax

that is charged to and collected from the buyer. New Mexico has a gross receipts tax that is imposed

directly on the seller of goods and services. In effect, the gross receipts tax is part of the seller’s cost

of doing business. Although it is common practice for a seller to pass the gross receipts tax on to the

buyer, the seller’s ability to separately charge or obtain reimbursement of the tax does not affect its

legal obligation to report and pay gross receipts tax to the state.

New Mexico has a self-reporting tax system, and all taxpayers have a duty to determine their

tax liabilities and accurately report those liabilities to the state. See, Section 7-1-13(B) NMSA 1978;

Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 17, 558 P.2d 1155, 1156 (Ct. App.

1976), cert. denied, 90 N.M. 255, 561 P.2d 1348 (1977). If a taxpayer does not have adequate

knowledge or information concerning the tax laws, the taxpayer has an obligation to consult with a

qualified accountant or attorney. In Tiffany Construction, supra, the court held that a taxpayer’s

mere belief that taxes are not owed, without further investigation, constitutes negligence. The court

further held that a taxpayer’s failure to consult with an expert as to its tax liability may constitute

negligence. See also, Department Regulation 3.1.11.11 NMAC.

In this case, Gary Jones had reservations concerning Leprino’s assertions that no gross receipts

tax was due on the construction project for the City of Roswell, as evidenced by the fact that the

Taxpayer continued to include the tax on its invoices to Leprino. Despite these reservations, the

Taxpayer never consulted with an attorney or an accountant concerning the advice it received from

Leprino. Nor did the taxpayer consult with a tax advisor when D&S Construction told the Taxpayer

that federal projects were not subject to tax. The Taxpayer’s lack of knowledge and its failure to take

the steps necessary to accurately determine its gross receipts tax liability comes within the definition of

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negligence and does not warrant an abatement of the tax, interest or penalty assessed on these

transactions.

Deduction of Receipts from Greer Construction. At the administrative hearing, the Taxpayer

provided evidence that the construction project listed as “Village Hall” in the auditor’s workpapers

was actually work done for Greer Construction, a contractor for which the Taxpayer did have a

timely NTTC. Accordingly, the Taxpayer is entitled to an abatement of the tax, penalty and interest

assessed on its receipts from this project.

Other Disallowed Deductions. The Taxpayer conceded that it did not have any explanation

for its failure to pay gross receipts tax on the remaining disallowed deductions listed in the auditor’s

workpapers.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment No. 2589543, and

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

2. The Taxpayer had a timely NTTC from Greer Construction to support the disallowed

deduction listed in the auditor’s workpapers as “Village Hall.”

3. The Taxpayer did not have timely possession of the NTTCs required to support its

deduction of the remaining receipts at issue in this case.

4. With the exception of tax on the Village Hall project, the Taxpayer has failed to meet

its burden of proving that the Department’s assessment of tax, penalty and interest was incorrect.

For the foregoing reasons, the Taxpayer's protest IS GRANTED IN PART AND DENIED IN

PART. The Department is ordered to abate the tax principal, penalty and interest related to the Village

Hall construction project. The Taxpayer remains liable for the balance of tax, penalty and interest due

under Assessment No. 2589543.

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DATED August 15, 2002.

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