Which amounts could a New Mexico craftsman remove from gross receipts tax when his federal Schedule C mixed business receipts with stock-sale proceeds and he lacked records for other claimed deductions?

Plain-English summary

Terry R. Wolff received an abatement for $11,832 of stock-sale gain under the Department's hearing stipulation but failed to prove any other reduction to the gross receipts assessment. Claimed gifts, wholesale sales, and sales to the University of New Mexico lacked records tying them to the assessed income or satisfying the applicable deduction requirements.

Wolff sold woodcarvings and woodworking supplies, performed repairs and restoration, taught woodcarving classes, and also earned receipts from website design, knife repair, and book commissions. His 1999 federal Schedule C reported $25,994 of gross receipts, but he did not report New Mexico gross receipts tax.

After a federal information match, the Department removed $6,978.89 of documented out-of-state sales. It assessed $1,736.58 of tax, penalty, and interest on the remaining $19,015.11.

The stipulated stock gain was removed

At the hearing, Wolff produced Form 1099-B showing $11,832 of 1999 stock sales. The Department stipulated that it would abate the related gross receipts tax.

The hearing officer questioned whether Wolff had actually proved that the stock amount was included on Schedule C, because he never produced the filed Schedule C or Schedule D. Even so, the Department's stipulation bound it because the tax conceded was under the $10,000 approval threshold described in Section 7-1-28.

Tax, penalty, and interest attributable to the $11,832 were therefore abated.

Claimed family gifts were not shown in the assessed income

Wolff said $13,384 of family wedding and birthday gifts had been reported as business income to improve his appearance for a bank loan.

The decision agreed that gifts were not gross receipts but found no evidence they were part of the Schedule C figure. Wolff's own income schedules showed sales and service receipts of $22,224.07, already close to the $25,994 reported, leaving no numerical room for the additional gift amount.

No adjustment was allowed for the gifts.

The resale NTTC did not substantiate transactions

Section 7-9-47 required an NTTC for the resale deduction, and Section 7-9-43 required possession within 60 days after Department notice.

Wolff produced one Type 2 NTTC dated October 4, 1998. The decision rejected the Department's argument that it was late merely because it had not been delivered to the auditor within 60 days; the statute required timely possession, and the face of the certificate showed that.

But Wolff could not connect the named certificate holder to the customer called Import Warehouse through invoices or other records. Most listed transactions with that customer were repair or restoration services, which a Type 2 certificate did not cover. Other wholesale customers had supplied no surviving NTTCs.

The resale deductions were therefore denied.

UNM sales lacked government-payment proof

Section 7-9-54 allowed a deduction for tangible property sold to New Mexico government without an NTTC, but the seller still had to prove government payment.

The Department repeatedly requested UNM purchase orders, invoices, warrants, contracts, or similar records. Wolff produced none, so the claimed UNM sales deduction also failed.

Result: protest GRANTED IN PART and DENIED IN PART. The $11,832 stock gain was removed; the balance of tax, penalty, and interest remained due.

What this means for you

Businesses whose federal return mixes income categories

Keep the filed schedules and source documents showing which receipts are business income, capital gain, gifts, or other items. A later corrected return that was never filed did not establish the original reporting.

Sellers claiming resale deductions

Possess the correct NTTC on time and maintain invoices that connect each deducted transaction to the certificate holder and covered type of sale.

Vendors selling to New Mexico agencies

Retain purchase orders, contracts, warrants, and invoices proving that the governmental entity made payment for tangible personal property.

Taxpayers offering late hearing evidence

Evidence can still affect the result, as the stock-sale stipulation did, but unsupported categories remain subject to the assessment presumption.

Common questions

Q: What amount had already been removed as out-of-state sales?
A: $6,978.89.

Q: What stock-sale amount was abated?
A: $11,832.

Q: Was the single NTTC timely possessed?
A: Yes, based on its 1998 date, but it could not be linked to the transactions and did not cover most services.

Q: Were the claimed family gifts removed?
A: No. Wolff did not prove they were included in the assessed Schedule C income.

Q: Why did the UNM deduction fail?
A: No purchase orders or other government-payment records were produced.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-1-17(C) — presumption that an assessment is correct
• NMSA 1978, § 7-1-28 — approval required for abatements of $10,000 or more
• NMSA 1978, § 7-9-5 — presumption that business receipts are taxable
• NMSA 1978, § 7-9-43 — deadline for possession of required NTTCs
• NMSA 1978, § 7-9-47 — resale deduction supported by an NTTC
• NMSA 1978, § 7-9-54 — deduction for tangible property sold to New Mexico government
• Regulation 3.2.201.8(A)(3) NMAC — NTTC acquired after 60 days not honored
• Regulation 3.2.201.10 NMAC — documentation linking transactions to an NTTC
• Regulation 3.2.212.19 NMAC — proof of government payment

Cases cited:

• Archuleta v. O'Cheskey, 84 N.M. 428, 504 P.2d 638 (Ct. App. 1972)
• Wing Pawn Shop v. Taxation and Revenue Department, 111 N.M. 735, 809 P.2d 649 (Ct. App. 1991)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Terry R. and Linda A. Wolff
• Decision PDF: D&O 04-04

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
TERRY R. AND LINDA A. WOLFF No. 04-04
ID NO. 02-440607-00-4
ASSESSMENT NOS. 3936272 & 3936273

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on March 18, 2004, before

Margaret B. Alcock, Hearing Officer. The Taxation and Revenue Department ("Department") was

represented by Jeffrey W. Loubet, Special Assistant Attorney General. Terry R. Wolff (“Taxpayer”)

represented himself. Based on the evidence and arguments presented, IT IS DECIDED AND

ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer was a resident of New Mexico during the 1999 tax year.

2. The Taxpayer is a craftsman whose primary business involves the sale of

woodcarvings and woodworking supplies, performing repair and restoration work, and teaching

classes on woodcarving at the University of New Mexico. During 1999, Mr. Wolff also performed

services designing web sites, repairing knives, and selling books on a commission basis.

3. When the Taxpayer filed his 1999 federal income tax return, he reported gross

receipts of $25,994.00 on Schedule C (Profit or Loss from Business) of his return.

4. The Taxpayer was not aware that his business receipts were subject to New Mexico’s

gross receipts tax and he did not report or pay gross receipts tax to the state.

5. As part of an information-sharing program with the Internal Revenue Service, the

Department was notified of the business income reported on the Taxpayer’s 1999 federal income tax

return.

6. On June 4, 2002, the Department sent the Taxpayer a Notice of Limited Scope Audit

asking him to explain why the business income reported on his 1999 federal income tax return was

not reported to New Mexico for gross receipts tax purposes.

7. The Department’s notice also advised the Taxpayer that he must be in possession of

all nontaxable transaction certificates (“NTTCs”) required to support his deductions within 60 days

or those deductions would be disallowed.

8. In response to the Department’s notice, the Taxpayer provided the Department with

evidence that $6,978.89 of his sales were out-of-state sales that were not subject to New Mexico

gross receipts tax, and the Department reduced the amount of business income subject to tax by that

amount.

9. The Taxpayer maintained that the balance of $19,015.11 included receipts from sales

of tangible personal property for resale, as well as $11,832.00 from sales of stock that were

mistakenly reported on Schedule C of his federal return.

10. The Taxpayer did not provide the Department with any proof of the stock sales or

any of the nontaxable transaction certificates required to support his deduction of sales for resale.

11. On September 19, 2002, the Department issued assessments in the total amount of

$1,736.58, representing gross receipts tax, penalty, and interest on $19,015.11 of the business

income reported on the Taxpayer’s 1999 federal return.

12. On October 8, 2002, the Department received the Taxpayer’s written protest to the

Department’s assessments.

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13. On April 9, 2003, the Department’s protest auditor wrote the Taxpayer a letter

outlining the documents that the Department would need in order to adjust the assessments. The

documents the auditor requested from the Taxpayer included a receipt for the sale of stock, NTTCs

to support his claim of sales for resale, purchase orders from UNM, and “any other documentation

that you deem necessary to prove why a transaction should not be taxed.”

14. The Department’s auditor followed up her letter with telephone calls during which

the Taxpayer said he would provide the documentation requested.

15. When the Taxpayer failed to provide the requested documents, the Department’s

attorney wrote the Taxpayer a letter on December 4, 2003, explaining that the Department could not

make any adjustments to the assessments without some evidence to support the Taxpayer’s claims.

16. No documents were forthcoming from the Taxpayer, and an administrative hearing

on the Taxpayer’s protest was subsequently scheduled for March 18, 2004.

17. At the March 18, 2004 hearing, the Taxpayer produced a Form 1099-B evidencing

1999 stock sales in the amount of $11,832.00. Based on this form, the Department’s attorney

stipulated that the Department would abate the amount of gross receipts tax attributable to the

$11,832.00 of capital gain.

18. The Taxpayer also produced an NTTC from John Neglia, which had been issued to

the Taxpayer on October 4, 1998; two schedules the Taxpayer had prepared setting out the different

categories of income he received during 1999; and a 1999 Form 1040 the Taxpayer had prepared—

but never filed with the Internal Revenue Service—to correct the mistakes he claims to have made

on his original return.

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DISCUSSION

The Taxpayer maintains that the Department erroneously assessed gross receipts tax on his

receipts from wholesale sales and from sales to the University of New Mexico (“UNM”). Although

not raised in his protest letter, the Taxpayer also claims that tax was erroneously assessed on

monetary gifts he received from family members as wedding and birthday gifts. The Department

responds that the Taxpayer failed to provide the documentation required to support his claimed

deductions.

Presumptions and Burden of Proof. NMSA 1978, § 7-1-17(C) provides that any

assessment of tax 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); Wing Pawn Shop, 111 N.M. 735, 741, 809 P.2d 649, 655 (Ct. App. 1991). In addition, "it is

presumed that all receipts of a person engaging in business are subject to the gross receipts tax."

NMSA 1978, § 7-9-5. 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).

Monetary Gifts and Capital Gains. At the administrative hearing, the Taxpayer argued

that $13,384.00 of monetary gifts he received from his family during 1999 are not subject to New

Mexico gross receipts tax. This is a correct statement of the law. There is no evidence, however, to

substantiate the Taxpayer’s claim that gross receipts tax was assessed on these amounts. Because

gifts are not subject to federal income tax, they would not normally appear on a taxpayer’s federal

return. There is certainly no reason for gifts to be reported as business income on Schedule C.

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Although the Taxpayer maintained that he included the gifts on Schedule C in order to inflate his

business income for purposes of obtaining a bank loan, the two income schedules the Taxpayer

prepared and introduced at the hearing call this testimony into question. Those schedules show

income from sales of tangible personal property and services totaling $22,224.07, which is close to

the $25,994.00 of business income reported on the Taxpayer’s 1999 Schedule C. Based on the

Taxpayer’s own exhibits, there is no way that the amount reported on Schedule C also could have

included the $13,384.00 of monetary gifts the Taxpayer received from his family.1

The same problem exists with regard to the Taxpayer’s $11,832.00 of capital gain on his sale

of stock. Unfortunately, neither the Taxpayer nor the Department’s attorney seemed to fully

understand the basis for the Department’s assessment. This is evidenced by the December 4, 2003

letter that Mr. Loubet sent to the Taxpayer. In that letter, Mr. Loubet listed the documents sought by

the Department “that would enable us to reduce your assessment without a hearing.” The list

included “[r]eceipt for the sale of your stock (I would also accept a copy of your 1999 Federal

Schedule D showing the stock sale).” This makes no sense. The assessment of tax was limited to

income reported on Schedule C. If the Taxpayer reported his sale of stock on Schedule D, this

would be prima facie evidence that the gain from the sale was not erroneously included on Schedule

C—as represented by the Taxpayer—and was not part of the income on which tax was assessed.

Accordingly, there would be no basis for reducing the assessment.

In any event, the Taxpayer never produced a copy of Schedule C or D to his 1999 federal

return. And, while I do not believe that the Taxpayer met his burden of proving that the proceeds of

his stock sale were included in the income reported on Schedule C, I also believe that the

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The Taxpayer testified that he erroneously reported his income on an accrual basis. It is difficult to
understand how he could have done so, however, when his own schedules show that calculating his business

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Department is bound by Mr. Loubet’s stipulation that the Department would accept the Taxpayer’s

testimony on this issue and abate the amount of gross receipts tax that corresponds to the $11,832.00

of capital gain.2 The Taxpayer is not, however, entitled to an additional adjustment on the

$13,384.00 of monetary gifts he received during 1999.

Sales for Resale. The Taxpayer argues that the Department should have allowed him to deduct

his wholesale sales of woodcarvings and other tangible personal property. The Gross Receipts and

Compensating Tax Act provides several deductions from gross receipts for taxpayers who meet the

statutory requirements set by the legislature. With regard to the sale of tangible personal property for

resale, NMSA 1978, § 7-9-47 states as follows:

Receipts from selling tangible personal property or licenses may be
deducted from gross receipts...if the sale is made to a person who delivers a
nontaxable transaction certificate to the seller....

Based on this language, the fact that some of the Taxpayer’s sales were made for resale is not sufficient

to support a deduction under Section 7-9-47. The requirements of the statute are very specific. 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 are set out in NMSA 1978, § 7-9-43, which provides,

in pertinent part:

All nontaxable transaction certificates...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

income on a cash basis results in a figure very close to that actually reported. Had the accrual method been
used, the gross sales reported on Schedule C would have been substantially higher.
2
The Department’s stipulation would not be binding if the amount at issue exceeded $10,000, since the Tax
Administration Act requires the Department to obtain the prior written approval of the New Mexico Attorney
General before abating taxes amounting to $10,000 or more. NMSA 1978, § 7-1-28. In this case, the amount
of tax conceded by the Department was under $1,000.

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claimed by the seller or lessor that require delivery of these nontaxable
transaction certificates shall be disallowed.

While taxpayers “should” have possession of required NTTCs at the time of the transaction at issue, the

statute gives taxpayers audited by the Department a second chance to obtain these NTTCs. Taxpayers

who rely on this provision must recognize, however, that they run the risk of having their deductions

disallowed if they are unable to meet the 60-day deadline set by the legislature. The reason why a

taxpayer cannot obtain an NTTC is irrelevant. The language of the statute is mandatory: 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).

At the administrative hearing, the Taxpayer produced a Type 2 NTTC issued by John Neglia on

October 4, 1998. The Department’s attorney argued that the NTTC could not be accepted because it

had not been delivered to the Department within the 60-day period provided in § 7-9-43. The

Department is misreading the statute. Section 7-9-43 does not require the Taxpayer to deliver his

NTTCs to the Department within the 60-day period, it simply requires the Taxpayer to have possession

of the NTTCs within that time frame. As stated in Department Regulation 3.2.201.8(A)(3):

(3) a NTTC acquired by the taxpayer after the 60 days following notice
have expired will not be honored by the department for the period covered
by the audit. (emphasis added)

In this case, the face of the NTTC indicates that it was acquired by the Taxpayer in October 1998.

There is no evidence that the NTTC has been altered or backdated. Accordingly, it meets the time

limitations set out in § 7-9-43.

The problem with the Taxpayer’s NTTC is not one of timeliness, but one of relevance. The

name John Neglia does not appear on the Taxpayer’s list of customers. Although the Taxpayer testified

that the NTTC was issued by the owner of Import Warehouse in Taos, he did not provide any invoices

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or other records to substantiate this claim. Department Regulation 3.2.201.10 NMAC provides that

receipts may be deducted “only if documentation justifying the deduction is maintained so it can be

verified upon audit.” Example 3 of the regulation states:

Example 3: M, a motor parts store, deducts receipts for sales made over the
counter to cash customers who have delivered proper NTTCs. A sales
ticket is prepared by M indicating the date, the amount and the items
purchased. “CASH” is written in the space provided for the customer’s
name. If M is audited, the deduction would be disallowed; the transaction
could not be related to a specific NTTC.

In this case, there is no documentation to link the Taxpayer’s transactions with Import Warehouse to

the NTTC issued by John Neglia. For this reason, the Taxpayer has not met his burden of proving that

he is entitled to a deduction. In addition, most of the Taxpayer’s sales to Import Warehouse were sales

of services and not sales of tangibles. The Taxpayer’s list of sales for 1999 (Taxpayer Exhibit 4)

includes 15 invoices for Import Warehouse. With the exception of two invoices for the sale of

“penetrating wood finish,” all of these invoices were for restoration or repair services. Because a Type

2 NTTC does not cover the sale of services, a deduction could not be allowed for these transactions

even if the Taxpayer had been able to establish that John Neglia and Import Warehouse were the same

entity.

The NTTC from John Neglia was the only NTTC produced by the Taxpayer. The Taxpayer

testified that he either did not obtain or lost the NTTCs from his other wholesale customers. He

explained that some of these customers had gone out of business or changed ownership, making it

impossible for him to replace the missing NTTCs within the 60-day period. While this is unfortunate,

it cannot override the statutory directive that deductions for which a taxpayer does not have a timely

NTTC “shall be disallowed.” § 7-1-43(B). Based on this language, the Department has no choice

but to deny the Taxpayer’s deductions.

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Sales to UNM. Receipts from sales of tangible personal property to the State of New Mexico

or “any governmental unit or subdivision, agency, department or instrumentality thereof” may be

deducted from gross receipts without the requirement of obtaining an NTTC. NMSA 1978, § 7-9-54.

The Taxpayer argues that the Department erroneously assessed tax on his sales of tangible personal

property to UNM. Once again, the issue is one of proof. Department Regulation 3.2.212.19 NMAC

states that:

A seller must be able to prove that payment for tangible personal property
was made from the state of New Mexico, or any political subdivision
thereof,...or the deduction will not be allowed.

Acceptable proof includes:

documents related to the transaction showing the governmental entity’s
name, such as purchase orders, copies of warrants issued in payment and
contracts covering the items purchased.

In this case, the Department gave the Taxpayer ample opportunity to substantiate his deduction of

receipts from UNM. In April 2003, the Department’s protest auditor sent the Taxpayer a letter

asking him to provide the purchase orders for his sales to UNM. She followed up her letter with two

telephone calls, during which the Taxpayer stated that he would send the requested documents. No

documents were received, however, prompting another letter to the Taxpayer, this time from the

Department’s attorney. Still no purchase orders, invoices, warrants or other evidence of the

Taxpayer’s sales to UNM were produced. In the absence of such evidence, the Taxpayer has not met

his burden of proving his right to the deduction claimed.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment Nos. 3936272 & 3936273,

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

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2. The Department is bound by its stipulation that it will abate gross receipts tax on the

Taxpayer’s 1999 capital gain from his sale of stock.

3. The Taxpayer did not meet his burden of proving that he is entitled to any additional

exemption or deduction of the income reported on Schedule C to his 1999 federal return.

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

PART. The Department is ordered to abate gross receipts tax, penalty, and interest on the $11,832.00

of capital gain the Taxpayer realized during 1999. The Taxpayer is liable for the balance of tax,

penalty, and interest remaining after this adjustment is made.

DATED March 25, 2004.

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