Does a New Mexico welding business owe gross receipts tax on material charges passed to customers at cost when it paid tax to its suppliers and did not use NTTCs?

Plain-English summary

Kevin’s Kustom Welding owed gross receipts tax on material charges billed to customers even though the business paid tax when buying those materials and resold them without a markup. The supplier's sale and the welding business's later resale were separate taxable transactions.

Kevin Keune opened the welding business in April 2000. His wife handled the bookkeeping and received Department instructions explaining gross receipts, exemptions, deductions, and the use of nontaxable transaction certificates, or NTTCs.

She called the Department because she was confused about NTTCs. An employee explained that they could use NTTCs to buy materials for resale without paying the supplier's passed-on gross receipts tax. When she asked whether the business had to use them, he correctly said their use was voluntary.

She then assumed—but did not ask—that paying the supplier's tax meant the business would not owe tax when it charged customers for the materials. The business separately billed labor and materials, charged materials at cost, and reported only the labor receipts.

Paying supplier tax did not remove tax from the resale

Section 7-9-4 imposed gross receipts tax on the supplier's receipts from selling materials to the business. It also imposed tax on the welding business's receipts from its customers, including the portion attributable to materials.

The decision treated those as two distinct sales by two different taxpayers. Neither the absence of a markup nor the tax paid by the supplier excused the business from tax on its own receipts.

The assessment-presumption rule in Section 7-1-17 placed the burden on the taxpayer to show that the assessment was wrong. The decision also explained that a claimed deduction must be clearly established.

Accurate advice did not create estoppel

The Department employee accurately answered the question asked: NTTC use was voluntary. A business could decline the paperwork and pay the tax charged by its supplier.

But the Keunes never told the employee about their further assumption that supplier tax would eliminate tax on the resale. Nothing in the employee's answer or the filer kit supported that conclusion. The decision therefore held that the Department had not misled them and was not estopped from collecting the assessment.

Assessment upheld

The Department assessed $1,888.51 for April 2000 through October 2003: $1,534.06 of gross receipts tax and $354.45 of interest. No penalty was included.

Result: protest DENIED.

What this means for you

Contractors and service businesses billing materials

Separately stating materials or passing them through at cost does not by itself remove those amounts from gross receipts.

Businesses buying property for resale

This decision describes NTTCs as the mechanism for substantiating the property-resale deduction. Choosing not to use an NTTC can leave the supplier's transaction taxed without changing the tax treatment of the later customer receipts.

Taxpayers relying on agency conversations

Ask the complete question and document the answer. Here, the employee's answer was accurate, while the tax result turned on an assumption the taxpayer never raised.

Common questions

Q: Were customer material charges taxable even though they were billed at cost?
A: Yes. The absence of profit did not change the tax treatment of the business's receipts.

Q: Did paying tax to suppliers prevent tax on the customer charges?
A: No. The decision treated the supplier sale and customer resale as distinct taxable transactions.

Q: Was the business required to use NTTCs?
A: No. The Department employee correctly said their use was voluntary, but declining to use them did not exempt the later receipts.

Q: Why did the estoppel argument fail?
A: The employee accurately answered the question asked, and the taxpayer never disclosed the mistaken assumption underlying its reporting method.

Q: What amount was assessed?
A: $1,888.51, consisting of $1,534.06 in gross receipts tax and $354.45 in interest.

Citations and references

Statutes:

• NMSA 1978, § 7-1-17 — presumption that an assessment is correct
• NMSA 1978, § 7-9-4 — gross receipts tax imposed on persons engaging in business

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)
• Ft. Smith Lumber Co. v. Arkansas, 251 U.S. 532 (1920)
• New Mexico State Board of Public Accountancy v. Grant, 61 N.M. 287, 299 P.2d 464 (1956)
• Amarillo-Pecos Valley Truck Line, Inc. v. Gallegos, 44 N.M. 120, 99 P.2d 447 (1940)
• State ex rel. Attorney General v. Tittmann, 42 N.M. 76, 75 P.2d 701 (1938)
• House of Carpets, Inc. v. Bureau of Revenue, 84 N.M. 747, 507 P.2d 1078 (Ct. App. 1973)
• New Mexico Sheriffs & Police Association v. Bureau of Revenue, 85 N.M. 565, 514 P.2d 616 (Ct. App. 1973)
• New Mexico Enterprises, Inc. v. Bureau of Revenue, 86 N.M. 799, 528 P.2d 212 (Ct. App. 1974)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Kevin’s Kustom Welding
• Decision PDF: D&O 05-13

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
KEVIN’S KUSTOM WELDING No. 05-13
ID NO. 02-424139-00-3; TO ASSESSMENT
OF GROSS RECEIPTS TAX ISSUED
UNDER LETTER ID NO. L0720047104

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on July 13, 2005, before

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

was represented by Lewis J. Terr, Special Assistant Attorney General. Kevin’s Kustom Welding

was represented by its owner, Kevin Keune. Based on the evidence and arguments presented, IT

IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. In April 2000, Kevin Keune opened a welding business and registered with the

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

reported under New Mexico's Combined Reporting System (CRS).

2. Mr. Keune’s wife, who handles the bookkeeping, received a CRS Filer’s Kit

containing forms and instructions explaining the application of the gross receipts tax.

3. The instructions in both the January-June and the July-December Filer’s Kits for

2000 define the term “gross receipts” to include “the total amount of money received, plus the

monetary value of other consideration received, from selling property in New Mexico; leasing

property employed in New Mexico; performing services in New Mexico….”

4. The section titled “Overview of Gross Receipts and Compensating Taxes”

explains that “[g]ross receipts are either taxable, exempt or deductible. If your receipts do not

fall under any exemption or deduction, those receipts are taxable.”

5. The Filer’s Kit sets out a list of available exemptions and deductions, including

the “Property Resale Deduction,” which allows a seller of tangible personal property to deduct

receipts from a buyer who provides the seller with a nontaxable transaction certificate (“NTTC”).

As explained at page 5 of the July-December 2000 Filer’s Kit:

The NTTC is the only acceptable substantiation for certain deductions. The
buyer obtains an NTTC from the Department to give to a seller, which entitles
the seller to deduct those receipts when determining taxable gross receipts. In
practice, this means the buyer is able to purchase goods and services free of the
gross receipts tax that is usually passed on to the buyer….

The Filer’s Kit further states that all taxpayers “who wish to execute NTTCs” are required to

register with the Department and complete an application.

6. Ms. Keune was confused concerning the use of NTTCS and called the Department

for more information. Ms. Keune spoke with Victor Vigil, who explained that using NTTCs

would allow the Keunes to purchase materials that are resold to their customers tax free.

7. Ms. Keune thought that applying for and issuing NTTCS would result in a lot of

extra paperwork, and she asked Mr. Vigil if the business was required to use NTTCs. Mr. Vigil

told her that the use of NTTCs was voluntary.

8. Ms. Keune assumed, but did not verify with Mr. Vigil, that if the business elected

not to use NTTCs when purchasing materials, and paid the gross receipts tax charged by the

supplier at the time of purchase, the business would not have to pay gross receipts tax when it

charged its customers for those materials.

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9. Based on this erroneous assumption, Ms. Keune prepared billings that separated

the cost of labor from the cost of materials and charged gross receipts tax only on the cost of

labor. The materials were charged to customers at cost, without any markup.

10. In preparing CRS-1 returns for the business, Ms. Keune reported the amounts that

customers paid for labor and excluded the amounts that customers paid for materials.

11. In 2004, the Keunes’ business was audited by the Department.

12. During the course of the audit, the auditor explained that the Keunes were

required to pay tax on all of their receipts, including receipts attributable to the cost of materials.

13. On May 6, 2004, the Department issued an assessment under Letter ID No.

L0720047104 to Kevin’s Kustom Welding in the total amount of $1,888.51, representing

$1,534.06 of gross receipts tax, plus $354.45 of interest due for reporting periods April 2000

through October 2003.

14. On May 15, 2004, Mr. Keune filed a written protest to the assessment.

DISCUSSION

The issue to be determined is whether the Keunes are liable for gross receipts tax on the

portion of their receipts from Mr. Keune’s welding jobs that represent the cost of materials. The

Keunes argue that taxing receipts from materials that were previously taxed at the time of

purchase results in double taxation. They also maintain that they should be excused from

payment of the tax because they were misled by a Department employee. The Department

responds that New Mexico law imposes gross receipts tax on the total amount of money and

other consideration received by a taxpayer, and that no deduction or exemption applies to the

Keunes’ receipts from materials sold to their customers.

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Burden of Proof. NMSA 1978, § 7-1-17 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). Accordingly, it is the taxpayer’s burden to come forward with evidence and legal

arguments to show that a Department's assessment is incorrect.

Double Taxation. The Keunes argue that they should not be subject to gross receipts tax

on receipts attributable to the cost of materials because they were charged gross receipts tax on

those same materials at the time of purchase. The Keunes complain that this amounts to double

taxation, particularly in light of the fact that they made no profit on the resale of materials to their

customers. Contrary to popular belief, however, there is no prohibition against double taxation.

As stated by Supreme Court Justice Oliver Wendell Holmes in Ft. Smith Lumber Co. v. Arkansas,

251 U.S. 532, 533 (1920):

The objection to the taxation as double may be laid on one side. That is a matter
of State law alone. The Fourteenth Amendment no more forbids double taxation
than it does doubling the amount of a tax….

See also, New Mexico State Board of Public Accountancy v. Grant, 61 N.M. 287, 299 P.2d 464

(1956); Amarillo-Pecos Valley Truck Line, Inc. v. Gallegos, 44 N.M. 120, 99 P.2d 447 (1940);

State ex rel. Attorney General v. Tittmann, 42 N.M. 76, 75 P.2d 701 (1938).

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In construing the Gross Receipts and Compensating Tax Act, New Mexico courts have also

held that double taxation does not exist when the taxes complained of are imposed on the receipts

of different taxpayers. See, e.g., House of Carpets, Inc. v. Bureau of Revenue, 84 N.M. 747, 507

P.2d 1078 (Ct. App. 1973); New Mexico Sheriffs & Police Association v. Bureau of Revenue, 85

N.M. 565, 514 P.2d 616 (Ct. App. 1973); New Mexico Enterprises, Inc. v. Bureau of Revenue, 86

N.M. 799, 528 P.2d 212 (Ct. App. 1974). That is the case here. The Keunes and their suppliers are

separate taxpayers, each of which is engaged in business in New Mexico and is subject to payment

of gross receipts tax. Pursuant to NMSA 1978, § 7-9-4, gross receipts tax is imposed on a

supplier’s receipts from selling materials to the Keunes. Only the supplier is liable for this tax.

Gross receipts tax is also imposed on the Keunes’ receipts from welding jobs, including receipts

attributable to the cost of materials. Only the Keunes are liable for this tax. The fact that the

supplier paid tax on his receipts from the sale of materials does not excuse the Keunes from paying

tax on their receipts from reselling the materials to their customers, regardless of whether they made

a profit on the resale. In New Mexico Enterprises, supra, 86 N.M. at 800, 528 P.2d at 213, the court

of appeals specifically rejected the argument that a lack of profit excuses payment of gross receipts

tax, noting: “In the instant case there were two distinct sales—the sale to the taxpayer, and the sales

from the taxpayer to the client. The absence of a profit does not change taxpayer's position, nor does

the fact of its failure of delivery of a non-taxable transaction certificate to its supplier.”

Advice Received from Department Employee. The Keunes maintain that they were

misled by Victor Vigil, the Department employee who advised them that the use of NTTCs was

voluntary. Mr. Vigil’s advice was correct. Although New Mexico law offers a procedure by

which taxpayers may apply for NTTCs in order to avoid charges for gross receipts tax on the

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purchase of certain materials, taxpayers are not required to avail themselves of this offer. In

certain cases, a taxpayer may decide that the cost of the paperwork required to use NTTCs is not

worth the resulting savings. In those cases, the taxpayer may forego the use of NTTCs and pay

the tax charged by its supplier.

The Keunes’ real complaint is that Mr. Vigil did not correct Ms. Keune’s erroneous

assumption that paying the gross receipts tax charged by the supplier would excuse the Keunes

from paying tax on the resale of materials to their customers. Unfortunately, Ms. Keune never

discussed her assumption with Mr. Vigil. Department employees are not clairvoyant and cannot

be expected to answer questions that are never asked or to give advice on issues that are never

raised by the taxpayer. In this case, the Keunes were not misled by the Department. There was

nothing in the advice given by Mr. Vigil or in the CRS Filer’s Kit to support the Keunes’

conclusion that they did not have to pay tax on receipts attributable to materials on which tax was

charged at the time of purchase. The fact that the Keunes misunderstood the nature of New

Mexico’s gross receipts tax system is unfortunate, but does not excuse their legal liability for

taxes due on their underreported gross receipts for the period at issue.

CONCLUSIONS OF LAW

A. The taxpayers filed a timely, written protest to the assessment issued under Letter ID

No. L0720047104, and jurisdiction lies over the parties and the subject matter of this protest.

B. The taxpayers are liable for gross receipts tax on all of their receipts from Mr.

Keune’s welding jobs, including receipts that represent the cost of materials passed on to the

customer.

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C. The advice given to the taxpayers by a Department employee was correct, and the

Department is not estopped from enforcing its assessment against the taxpayers.

For the foregoing reasons, the taxpayer’s protest IS DENIED.

DATED July 18, 2005.

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