Could a fleet lessor rely on a Type 9 NTTC from New Mexico's vehicle agency when the agency said it would sublease the vehicles?

Plain-English summary

Merchants Automotive Group, Inc. could rely in good faith on a New Mexico General Services Department Type 9 NTTC and its representation that leased fleet vehicles would be subleased to other public entities. The Department had to abate $196,465.67 of gross receipts tax, plus interest, on the GSD lease receipts.

Merchants, a New Hampshire fleet lessor, bid on a 2000 state vehicle contract. The invitation required unit prices to exclude state taxes, and GSD's transportation director represented that the leases were tax exempt.

After awarding the contract, GSD faxed Merchants an official Type 9 NTTC. It was a single-sided copy titled for “governmental agencies and organizations,” displayed an official certificate number, and did not state that Type 9 was restricted to property purchases rather than leases.

GSD represented that it subleased the vehicles

Section 7-9-50 allowed a lessor to deduct receipts when tangible personal property was leased to a lessee for subsequent lease and the lessee delivered an NTTC.

The bid materials said state agencies, universities, municipalities, counties, school districts, and other public entities “must sub-lease” from the Transportation Services Division. State motor-pool regulations also described short- and long-term leases to state agencies.

The decision recognized that there might be a sophisticated legal question whether interagency assignments were true leases. That was the kind of buyer-use question NTTCs were designed to remove from the seller. Merchants could accept GSD's factual representation that it was engaged in subleasing and did not have to investigate the legal effect of each downstream transaction.

The particular certificate supported good-faith acceptance

Ordinarily, Type 9 certificates were limited to governmental purchases of tangible personal property and did not cover leases. The Department, however, did not prove that the 1996 form issued to GSD contained the explanatory reverse side found on its 1997 sample.

The actual fax Merchants received identified only governmental-agency transactions and gave no notice of a purchase-only limitation. The Department also did not put the relevant CRS filer kit or website contents into evidence.

Given GSD's sublease representations, the known statutory subsequent-lease deduction, and the official certificate with no visible contrary restriction, Merchants accepted the NTTC in good faith under Section 7-9-43(A).

The ruling was limited to the assessed period

The full audit assessed $209,854.54 of gross receipts tax and $96,166.89 of interest. Merchants conceded $13,232.67 relating to federal-government leases and $156.20 relating to nongovernmental receipts. The dispute decided here concerned the $196,465.67 GSD portion.

Merchants also requested a declaration for future periods. The hearing officer had authority only to decide existing assessments and took no position after June 30, 2005.

Result: protest GRANTED as to the GSD leases. The $196,465.67 tax and accrued interest on those receipts were abated.

What this means for you

Lessors accepting NTTCs

Good-faith protection depends on the certificate actually received, the transaction facts, and what the seller reasonably knew. Preserve the complete certificate and buyer representations.

Sellers evaluating a buyer's downstream use

An applicable NTTC can prevent the seller from having to make complex legal judgments about the buyer's later transactions. The Department can address improper issuance with the buyer.

Taxpayers seeking prospective guidance

An assessment protest resolves the periods and facts before the hearing officer. It does not necessarily approve the same treatment for future transactions.

Common questions

Q: What deduction did Merchants claim?
A: Section 7-9-50's deduction for leasing property to a lessee that will subsequently lease it in the ordinary course of business.

Q: What did GSD say it would do with the vehicles?
A: Its bid materials said other public entities had to sublease vehicles from the transportation division.

Q: Didn't Type 9 normally exclude leases?
A: Yes, but the actual single-sided 1996 certificate supplied to Merchants did not disclose that limitation, and the Department did not prove the reverse-side language applicable to that form.

Q: How much tax was abated?
A: $196,465.67, plus accrued interest, on GSD lease receipts.

Q: Did the decision approve the treatment after June 30, 2005?
A: No. It expressly declined to issue prospective relief for unassessed periods.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-1-17(C) — presumption that an assessment is correct
• NMSA 1978, § 7-9-50 — lease-for-subsequent-lease deduction
• NMSA 1978, § 7-9-43(A) — good-faith NTTC acceptance
• NMSA 1978, § 7-1-13 — self-reporting responsibility
• NMSA 1978, § 7-1-24 — protest jurisdiction limited to existing assessments
• NMSA 1978, § 13-1-108 — state bid tax instruction
• Regulation 3.2.201.8(D) NMAC — limited uses of NTTC types
• Regulations 1.5.3.7(H) and 1.5.3.8 NMAC — state motor-pool leases

Cases cited:

• Siemens Energy & Automation, Inc. v. New Mexico Taxation and Revenue Department, 119 N.M. 316, 889 P.2d 1238 (Ct. App. 1994)
• Continental Inn v. New Mexico Taxation & Revenue Department, 113 N.M. 588, 829 P.2d 946 (Ct. App. 1992)
• McKinley Ambulance Service v. Bureau of Revenue, 92 N.M. 599, 592 P.2d 515 (Ct. App. 1979)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Merchants Automotive Group, Inc.
• Decision PDF: D&O 07-12

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
MERCHANTS AUTOMOTIVE GROUP, INC. No. 07-12
NM ID NO. 02-111118-00-9, TO ASSESSMENT
ISSUED UNDER LETTER ID NO. L0888202496

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on June 26, 2007, before

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

was represented by Susanne Farr, Special Assistant Attorney General. Merchants Automotive

Group, Inc. (“Merchants”) was represented by its attorneys, Thomas Smidt II, with Tax, Estate &

Business Law, N.A., LLC, and Paul Lanagan and Dan Sklar, with Nixon Peabody LLP. Based on

the evidence and arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

Parties’ Stipulation of Facts

1. In 2000, the New Mexico General Services Department (“GSD”) requested bids

for the leasing of vehicles to be used by the GSD Transportation Services Division (“TSD”). See

Exhibit A.

2. The terms and conditions of this bidding process specifically provided that “the

unit price shall exclude all State taxes.” See Id. at p.1 ¶9.

3. Merchants Automotive Group (“Merchants”) is a New Hampshire corporation

located in Hooksett, New Hampshire, specializing in commercial vehicle leases, especially large

fleet lease programs.

4. After receiving GSD’s request for services, Merchants submitted a bid in

accordance with its terms.

5. As part of the bidding process, Greg McIntyre, the director for government

contracts at Merchants, directly contacted James E. Russell, the director of TSD/GSD. See id. at

p. 4.

6. Gary Singer, a principal and vice president at Merchants, was also intimately

involved in the bidding process.

7. Over its thirty-five year history, Merchants has entered into fleet leases with

hundreds of state and federal agencies.

8. All of these leases with governmental agencies have been conducted on a tax-

exempt basis: In specific, Merchants cannot recall a prior situation where a state government

assessed a sales tax upon one of its own agencies.

9. In direct reliance on GSD’s requirement to exclude State taxes from the bid

(coupled with the representations referred to below), Merchants reduced the per vehicle leasing

rate by the taxes it would have charged or collected from GSD on each vehicle if the lease rate

used for its bid had been calculated on a taxable basis.

10. As part and parcel of the bidding process, GSD, through its director, also

represented to Merchants that its bid should not include gross receipts taxes because the leases

are tax exempt under New Mexico law. This representation corresponded with the vast

experience of Messrs. Singer and McIntyre in contracting with federal and state government

agencies.

11. On November 21, 2000, GSD awarded the contract to Merchants. See Exhibit B.

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12. Based on GSD’s representation that the vehicles or the gross receipts generated

under the leases were tax exempt, Merchants did not include any taxes when calculating the per

vehicle lease rate for its original bid as reflected on its original internally generated documents,

which included, inter alia, (1) the Lease Term Sheet and (2) the Rate Sheet. See Exhibits C, D.

13. Merchants also entered the transaction into its accounting system as tax exempt

and proceeded at that time (and at all times subsequent) under the impression that GSD was

accurately representing the tax exempt status of the leases. See Exhibit E.

14. On December 13, 2000, a few weeks after obtaining the contract, GSD formalized

these prior representations by executing and issuing a nontaxable transaction certificate

(“NTTC”) (Number A-1875845-09-02842) Type 9 signed by a “Rodriguez” (the full name of the

signatory is difficult to read on the NTTC) in favor of Merchants and faxing it to Merchants. See

Exhibit F.

15. As Exhibit F shows, the NTTC that GSD faxed to Merchants was a single-sided

document and did not contain a back page describing the various types of NTTCs used by the

Taxation and Revenue Department (“Department”). Merchants believed that the faxed NTTC

contained all of the information necessary for the transaction to qualify as nontaxable. Exhibit F

is the only copy or version of the NTTC that Merchants received prior to the audit.

16. Pursuant to the terms of the Master Lease Agreement, Merchants generated the

“Schedule A” to the Master Lease Agreement for each vehicle, which expressly references the

lessee’s tax exempt status as well as the NTTC No. A-1875845-09-02842. See Exhibit G.

17. Merchants accepted the NTTC in reliance on at least the following representations

of GSD:

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(a) that TSD/GSD (the buyer) will employ the property or service transferred in a
nontaxable manner;

(b) the NTTC’s execution by a GSD official;

(c) the NTTC’s display of an official certificate number;

(d) the NTTC’s explicit reference in all capital letters across the top of the certificate that
the NTTC pertains to “09 GOVERNMENTAL AGENCIES AND ORGANIZATIONS;”

(e) the NTTC bears the name of a state agency-General Services Department on its face;

(f) the warning that an issuer who misuses the NTTC may be subject to suspension of the
right to use NTTCs; and

(g) that the registrant (i.e. GSD) has been approved as eligible to issue the NTTC for the
stated transaction.

18. In sum, in reliance on GSD’s demand that the bid should not include State taxes,

as well as the oral representations of Mr. Russell and the written representations in the form of

the single-sided NTTC, Merchants submitted its bid, and proceeded thereafter at all times under

the impression that the leases were, in fact, tax exempt.

19. Had Merchants known that GSD’s representations were false and/or the NTTC

was improperly issued by GSD, it would have included the taxes in its bid for services.

20. Finally, based upon its extensive experience leasing to state agencies, Merchants

had no superior knowledge or reason to suspect that under New Mexico law the receipts from the

vehicle leases with TSD/GSD might actually be subject to a sales or gross receipts tax.

21. On August 16, 2005, the Department informed Merchants that it will be con-

ducting an audit to determine Merchants’ compliance with the State’s tax laws. See Exhibit H.

22. Merchants immediately informed GSD of the Department’s scheduled audit.

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23. On September 13, 2005, Deborah Moll, the General Counsel for GSD, wrote a

letter to Merchants stating that any tax liability on the part of Merchants in connection with its

leases to GSD is an issue solely between Merchants and the Department. See Exhibit I.

24. In November 2005, Merchants contacted the Department regarding whether the

receipts from the leases were deductible from gross receipts or exempt from gross receipts tax or

other New Mexico taxes based on issuance of the NTTC.

25. In response, the Department requested a copy of the NTTC issued to Merchants,

and Merchants complied.

26. In November 2005, Merchants contacted an attorney familiar with New Mexico

state taxation regarding whether the receipts from the leases were deductible from gross receipts

or exempt from gross receipts tax or other New Mexico taxes.

27. In December 2005, counsel for Merchants wrote to Attorney Moll, explaining

Merchants’ position and putting GSD on notice that Merchants believed that this dispute was

actually a matter between the Department and GSD. See Exhibit J.

28. In January 2006, the Department commenced an audit of Merchants for the

periods from January 1, 1999 to June 30, 2005.

29. Merchants fully cooperated with the auditors, immediately produced the NTTC,

and explained its position to the Department.

30. The Department completed the audit in March 2006.

31. On July 21, 2006, the Department issued a Combined Reporting System Audit

Assessment to Merchants for periods from December 31, 1999 to June 30, 2005 for gross

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receipts tax of $209,854.54, plus $96,166.89 in interest for a total of $306,021.43

(“Assessment”).

32. On August 23, 2006, Merchants filed a formal protest and request for retroactive

extension of time to file a written protest.

33. On August 25, 2006, the Department granted a retroactive extension of time to

file a written protest of the Assessment.

Hearing Officer’s Additional Findings of Fact

34. The information that GSD provided to potential bidders in its invitation for bids

(Exhibit A) included a document titled “Vehicles, Passenger, Leasing,” which contained the

following statements:

INTRODUCTION:
The intent and purpose of this Invitation for Bids is to establish a term
contract...for the lease of vehicles for use by New Mexico State agencies,
commissions, boards, and institutions. Other political subdivisions and local
public bodies allowed by law may also issue orders against this agreement, but
only through the Transportation Services Division....

GENERAL REQUIREMENTS:

1. The Transportation Services Division (TSD) will exercise exclusivity on
   behalf of the State of New Mexico. State agencies, commissions, boards,
   universities, other institutions of higher learning, municipalities, counties,
   public school districts and other political subdivisions and public-funded
   entities must sub-lease from TSD. (emphasis in the original).

2. The NTTC that GSD provided to Merchants upon award of the leasing contract

was issued to GSD by the Taxation and Revenue Department (“Department”) on January 1,

1996. See Exhibit F.

1997. The NTTC displayed the following typed notation at the top: “09 GOVERN-

MENTAL AGENCIES AND ORGANIZATIONS” and included the following statement: “The

6
registrant named above has been approved as eligible to issue Nontaxable Transaction

Certificates for the transaction stated above and more specifically described in the Gross Receipts

and Compensating Tax Act.” See Exhibit F.

37. The face of the NTTC did not indicate that governmental agencies’ use of the

NTTC was restricted to the purchase of tangible personal property, nor was there any reference to

information contained on the back of the NTTC.

38. In addition to leasing vehicles to GSD, Merchants was engaged in leasing vehicles

in New Mexico to the federal government and to private entities.

39. During the audit period at issue, Merchants was 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”).

40. The Department’s auditor made the following findings concerning Merchants’

CRS reporting history:

The taxpayer was aware that gross receipts taxes were due on leased vehicle
receipts, except in instances where the customer delivered a nontaxable
transaction certificate and the property was not used in any manner other than in a
subsequent lease. The taxpayer also believed that gross receipts taxes were not
due on vehicle leases entered into with governmental agencies (State of New
Mexico, Department of Energy, United States Armed Services, etc.) since one
government agency (State of New Mexico) executed a nontaxable transaction
certificate and the certificate was accepted in good faith. As a result of their
reliance on the nontaxable transaction certificate issued by the State of New
Mexico and other governmental contracts entered with other federal governmental
agencies, the taxpayer exempted gross receipts derived from government agencies
and reported and paid gross receipts taxes on all other gross receipts.

Exhibit 1, Audit Narrative, p. AN2.

41. The auditor concluded that there was no basis for Merchants’ exemption of its

receipts from leasing vehicles to the federal government and found that $13,232.67 of additional

7
gross receipts tax was due on these receipts, plus accrued interest. At the administrative hearing

and in a subsequent filing with the Hearing Officer, the Taxpayer conceded its liability for this

portion of the assessment, as well as for $156.20 of gross receipts tax assessed on receipts from

nongovernmental entities. See Taxpayer’s Notice Regarding Protest, filed June 29, 2007.

42. The auditor reviewed several documents provided by Merchants, including a

Master Lease Agreement, Schedule A to the Master Lease Agreement, and the NTTC Merchants

produced to explain its failure to pay gross receipts tax on receipts from that agreement. See

Exhibit 1, p.AN1.

43. The auditor concluded that the NTTC was not applicable to the underlying lease

transaction, stating: “The motor vehicles leased by the taxpayer are used by the customer in the

ordinary course of business and are not subsequently leased, therefore, the deduction afforded by

Section 7-9-50 NMSA 1978 is not applicable to the taxpayer. The auditor determined that

NTTCs were not an issue during the course of the audit.” See Exhibit 1, Audit Narrative, p.

AN2.

44. The auditor further noted that the Type 9 NTTC produced by Merchants was

“valid only for the purchase of tangible personal property to governmental agencies or 501(c)(3)

organizations and not for the lease of tangible personal property employed in New Mexico.” See

Exhibit 1, Audit Narrative, p. AN2.

45. Based on these findings, the auditor determined that Merchants was liable for

$196,465.67 of additional gross receipts tax, plus interest, on the receipts from its contract with

GSD.

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46. During the course of the audit, Merchants sent GSD a letter setting out Merchants’

position that it was entitled to rely on the NTTC it received from GSD to support the deduction

provided in NMSA 1978, § 7-9-50 of the Gross Receipts and Compensating Tax Act, which

states that a lessor may deduct receipts from leasing tangible personal property for subsequent

lease if the lessee delivers an NTTC to the lessor. See Exhibit J.

47. In its August 23, 2006 protest to the Department’s assessment, Merchants

reconfirmed its position that it had accepted the NTTC from GSD in good faith and was entitled

to claim the deduction provided in § 7-9-50. See Exhibit 3, Formal Protest, p. 2.

DISCUSSION

The issue to be decided is whether Merchants is liable for the gross receipts tax assessed

on its receipts from leasing vehicles to GSD during the period January 1, 1999 through June 30,

2005. Merchants raises two alternative arguments in support of its protest: (1) that Merchants

accepted the NTTC it received from GSD in good faith and is entitled to claim a deduction under

NMSA 1978, § 7-9-50, which states that a lessor may deduct receipts from leasing tangible

personal property for subsequent lease if the lessee delivers an NTTC to the lessor; and (2) if

Merchants is not entitled to the deduction in NMSA 1978, § 7-9-50, Merchants still should be

excused from payment of gross receipts tax based on GSD’s representations that receipts from

leasing vehicles to the State are tax exempt.

Burden of Proof. Any assessment of tax made by the Department is presumed to be

correct. NMSA 1978, § 7-1-17(C). 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

9
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). Once the presumption of correctness is rebutted,

however, the burden shifts to the Department to show the correctness of the assessed tax. New

Mexico Taxation and Revenue Department v. Whitener, 117 N.M. 130, 133, 869 P.2d 829, 832

(Ct. App. 1993).

Statutes at Issue. NMSA 1978, § 7-9-50 states as follows:

Except as provided otherwise in Subsection B of this section, receipts from leasing
tangible personal property or licenses may be deducted from gross receipts if the
lease is made to a lessee who delivers a nontaxable transaction certificate to the
lessor. The lessee delivering the nontaxable transaction certificate may not use the
tangible personal property or license in any manner other than for subsequent lease
in the ordinary course of business.

NMSA 1978, § 7-9-43(A) sets out the requirements for execution and acceptance of NTTCs and

provides, in pertinent part:

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.... The
nontaxable transaction certificates shall contain the information and be in a form
prescribed by the department.... 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 material evidence, that the proceeds from the transaction are deductible
from the seller’s or lessor’s gross receipts.

Application of § 7-9-50 to the Lease Transaction Between Merchants and GSD. In this

case, the Department’s field auditor noted that Merchants “was aware that gross receipts taxes

were due on leased vehicle receipts, except in instances where the customer delivered a

nontaxable transaction certificate and the property was not used in any manner other than in a

subsequent lease.” Exhibit 1, Audit Narrative, p. AN2 (emphasis added). The auditor further

10
noted that “as a result of their reliance on the nontaxable transaction certificate issued by the

State of New Mexico,” Merchants exempted its receipts from the GSD contract. Id.; see also,

Stipulated Facts 17 & 18. The auditor nonetheless concluded:

The motor vehicles leased by the taxpayer are used by the customer in the
ordinary course of business and are not subsequently leased, therefore, the
deduction afforded by Section 7-9-50 NMSA 1978 is not applicable to the
taxpayer. The auditor determined that NTTCs were not an issue during the
course of the audit.

Exhibit 1, Audit Narrative, p. AN2. This is the same argument the Department made at the

administrative hearing, i.e., that GSD is not engaged in leasing vehicles for subsequent lease and

that there is no other deduction applicable to Merchants’ receipts from the lease agreement.

Consequently, the Department argues, the NTTC Merchants received from GSD has no effect. See,

Gas Co. v. O'Cheskey, 94 N.M. 630, 632, 614 P.2d 547, 549 (Ct. App.1980) (issuance of NTTC

does not transform an otherwise taxable transaction into a nontaxable one); McKinley Ambulance

Service v. Bureau of Revenue, 92 N.M. 599, 601-602, 592 P.2d 515, 517-518 (Ct. App. 1979)

(the "conclusive evidence" provision of § 7-9-43(A) does not apply when there is no NTTC

applicable to the transaction at issue).

The problem with the Department’s argument is that the information GSD provided to

potential bidders indicates that GSD was, in fact, engaged in subleasing vehicles to other state

entities. Paragraph 1 of the General Requirements section of the Invitation to Bid states:

The Transportation Services Division (TSD) will exercise exclusivity on behalf of
the State of New Mexico. State agencies, commissions, boards, universities, other
institutions of higher learning, municipalities, counties, public school districts and
other political subdivisions and public-funded entities must sub-lease from TSD.
(emphasis in the original).

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Exhibit A. See also, GSD Regulations 1.5.3.7(H) NMAC (defining a “motor pool vehicle” as a

state vehicle in the custody of TSD that is available for short-term or long-term lease to state

agencies) and 1.5.3.8 NMAC (setting out the terms for state agencies to lease vehicles from TSD).

There may be a legal issue as to whether GSD’s “lease” of vehicles to other state agencies is

simply an interagency transaction and not a true lease as contemplated by the Gross Receipts and

Compensating Tax Act.1 This is the type of issue, however, that the use of NTTCs was designed to

avoid. In Siemens Energy & Automation, Inc. v. New Mexico Taxation and Revenue Department,

119 N.M. 316, 889 P.2d 1238 (Ct. App. 1994) the Court of Appeals held that Siemens was

entitled to accept multijurisdictional sales and use tax certificates (“MTC certificates”) from its

customers, even though the presence of a tax identification number on the certificates could be

seen as evidence that the customers had nexus with New Mexico and were subject to gross

receipts tax. As the court explained:

If a seller must presume that any purchaser with a New Mexico taxpayer
identification number is automatically disqualified, it places the burden on the
seller to determine, at the seller's own peril, the nature of the purchaser's nexus
with New Mexico.... An interpretation which would require sellers to make a
factual inquiry, and then make such a sophisticated legal decision on each MTC
received from purchasers across the country, would totally eviscerate any purpose
for the MTC certificate and render the Compact a sham in this area. Siemens was
entitled to rely on the certifications contained on the MTC certificates received
from Westinghouse and Triangle.

Id., 119 N.M. at 321-322, 889 P.2d at 1243-1244. Although Siemens involved the use of MTC

certificates, rather than NTTCs, the court noted that NTTCs

serve the same purpose in intrastate transactions that are served by MTCs for
interstate drop shipments. Regarding NTTCs, this Court stated in Continental Inn

1
The Transportation Services Act (NMSA 1978, §§ 15-8-1, et seq.) authorizes TSD to “assign” the use of
vehicles to other state agencies. See, NMSA 1978, § 15-8-6.

12
v. New Mexico Taxation & Revenue Department, 113 N.M. 588, 829 P.2d 946
(Ct. App. 1992):

The deduction from gross receipts pursuant to Sections 7-9-51 and 7-9-
52 is not conditioned upon proper issuance of the NTTCs by the buyer.
The determination of whether a NTTC has been properly issued is a
matter between the Department and the buyer....

Id., 119 N.M. at 319, 889 P.2d at 1241. In this case, Merchants was entitled to accept GSD’s

representations that it was engaged in subleasing the vehicles it leased from Merchants. Merchants

was not required to investigate GSD’s claims to determine the legal effect of its transactions with

other state entities.

Acceptance of Type 9 NTTC. The final issue to be determined is whether the NTTC

Merchants accepted from GSD supports the deduction provided in § 7-9-50. The Department’s

auditor found that the Type 9 NTTC produced by Merchants was “valid only for the purchase of

tangible personal property to governmental agencies or 501(c)(3) organizations and not for the

lease of tangible personal property employed in New Mexico.” Exhibit 1, Audit Narrative, p.

AN2. At the administrative hearing, the Department reiterated its position that the use of Type 9

certificates is limited to the sale—and does not cover the lease—of tangible personal property to

governmental entities.

In response, Merchants argued that it was not required to conduct any inquiry or

independent research to determine whether the Type 9 NTTC covered the transaction at issue,

but was entitled to rely on GSD’s oral representations that the lease transaction was tax exempt.2

Similar arguments have been repeatedly rejected by the courts. New Mexico has a self-reporting

2
Merchants also argued that GSD “negligently or fraudulently” misrepresented New Mexico law by instructing
potential bidders to exclude state taxes from the unit price of their bids. In fact, GSD was statutorily required to
include this instruction in its bid invitation. See, NMSA 1978, § 13-1-108.

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tax system, and taxpayers have a statutory obligation to determine their tax liabilities and accurately

report those liabilities to the state. See, Section 7-1-13 NMSA 1978; Tiffany Construction Co. v.

Bureau of Revenue, 90 N.M. 16, 17, 558 P.2d 1155, 1156 (Ct.App.1976). A taxpayer is not

entitled to rely on the oral advice of a state employee as a substitute for conducting its own

analysis of New Mexico’s tax statutes and regulations. Taxation and Revenue Department v. Bien

Mur Indian Market, 108 N.M. 228, 231, 770 P.2d 873, 876 (1989). See also, Kilmer v. Goodwin,

2004-NMCA-122, ¶ 122, 136 N.M. 440, 99 P.3d 690 (oral statements do not provide a basis to

apply estoppel against a state agency); Grogan v. New Mexico Taxation and Revenue

Department, 2003-NMCA-033, ¶ 35, 133 N.M. 354, 62 P.3d 1236, cert. denied, 133 N.M. 413,

63 P.3d 516 (2003) (to avoid negligence penalty, taxpayer must demonstrate that she reasonably

attempted to ascertain whether her actions were justifiable under the tax statutes and regulations);

Rainaldi v. Public Employees Retirement Board, 115 N.M. 650, 658-59, 857 P.2d 761, 769-70

(1993) (estoppel cannot lie against the state when the act sought would be contrary to the

requirements expressed by statute); Trujillo v. Gonzales, 106 N.M. 620, 622, 747 P.2d 915, 917

(1987) (county not estopped by promises of county commissioners made outside of a legally

called board meeting); Patten v. Santa Fe National Life Ins. Co., 47 N.M. 202, 208, 138 P.2d

1019, 1023 (1943) (when a party seeking to establish estoppel shows indifference to information

at hand, that party may be precluded from relying on the doctrine of estoppel).

The issue, then, is whether Merchants knew, or reasonably should have known, that it

could not accept a Type 9 NTTC to support a deduction of receipts from leasing vehicles for

subsequent lease. New Mexico’s Gross Receipts and Compensating Tax Act does not describe

the types of NTTCs taxpayers may accept in support of the deductions provided in the Act.

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NMSA 1978, § 7-9-43 simply states that NTTCs “shall contain the information and be in a form

prescribed by the department.” Regulation 3.2.201.8(D) NMAC under § 7-9-43 explains that:

The department issues different types of NTTCs. Each type is of limited useage and
relates to a particular deduction allowed by possession of that certificate. An NTTC
is valid only if it contains the information and is in a form prescribed by the
department....

The regulation does not, however, identify the types of NTTCs issued by the Department or

explain the proper use of each type.

The only evidence the Department presented concerning the types of NTTCs applicable

to specific deductions is found in Exhibit 6. This exhibit includes the front and back of a sample

NTTC. The notation: “Type X-XXXXXXXXXXX” appears at the top of the front page. The

back page lists 15 different NTTCs, with an explanation as to the proper use of each type. The

explanation under Type 9 states:

Type 9 certificates may be executed by GOVERNMENTAL AGENCIES,
501(c)(3) ORGANIZATIONS or FEDERALLY or STATE-CHARTERED
CREDIT UNIONS for the purchase of TANGIBLE PERSONAL PROPERTY
ONLY. These certificates may not be used for the purchase of services or for the
lease of property....

The Department argues that this explanation should have alerted Merchants that it could not

accept a Type 9 NTTC to support a deduction of lease receipts. Unfortunately, the notation in

the top left-hand corner of Exhibit 6 establishes that it is a sample of an NTTC form revised in

July 1997. The NTTC Merchants received from GSD was issued by the Department in January

1996. See, Exhibit F. A comparison of the two forms shows that the language used in the 1997

version is somewhat different than that in the earlier version. There is no way to tell whether the

NTTC form the Department issued to GSD in 1996—and GSD subsequently executed to

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Merchants—included the information found on the back of the 1997 sample form introduced at

the administrative hearing.

The NTTC that GSD provided to Merchants does not make any reference to information

on the reverse side. The front of the form states: “The registrant named above has been

approved as eligible to issue Nontaxable Transaction Certificates for the transaction stated above

and more specifically described in the Gross Receipts and Compensating Tax Act.” Exhibit F.

As previously discussed, the Gross Receipts and Compensating Tax Act does not provide any

information concerning the type of NTTC needed to qualify for a particular deduction. The only

“transaction stated” on the NTTC itself is “09 GOVERNMENTAL AGENCIES AND

ORGANIZATIONS.” The form does not indicate that governmental agencies’ use of the NTTC

is restricted to the purchase of tangible personal property. This distinguishes the facts of this

case from those of McKinley Ambulance Service v. Bureau of Revenue, 92 N.M. 599, 601, 592

P.2d 515, 517 (Ct. App. 1979), where the taxpayer accepted an NTTC titled “PURCHASE OF

SERVICES FOR EXPORT.” Based on this description of the intended use of the NTTC, the

court concluded that the taxpayer could not rely on the certificate to claim a deduction of receipts

from the taxpayer's in-state ambulance service. Here, the Type 9 NTTC tendered to Merchants

did not provide any information concerning the use of the NTTC, except that it applied to

transactions with governmental agencies and organizations.

The Department’s prehearing memorandum argues that Merchants could have obtained

information concerning the proper use of Type 9 NTTCs from the Department’s CRS Filer’s Kit

or its web site. The Filer’s Kit was not introduced as an exhibit, however, nor did the

Department call any witnesses to testify concerning the content of the Filer’s Kit or the web site.

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The arguments of counsel are not evidence. Chevron U.S.A., Inc. v. State ex rel. Dep't of

Taxation & Revenue, 2006-NMCA-050, ¶ 36, 139 N.M. 498, 134 P.3d 785. Based on the

evidence in the record, there is nothing to support the conclusion that Merchants should have

known that the Type 9 NTTC tendered by GSD was not applicable to the parties’ lease

transaction. Instead, the evidence shows that GSD represented that it was engaged in leasing

vehicles for sublease to other state agencies; that Merchants knew a deduction existed for

receipts from leasing vehicles for subsequent lease if the lessee provided the lessor with an

NTTC; that GSD provided Merchants with an NTTC, the title of which indicated that it applied

to transactions with governmental agencies. These facts support the conclusion that Merchants

accepted the NTTC tendered by GSD in good faith and is entitled to claim the deduction

provided in NMSA 1978, § 7-9-50.

Time Period at Issue. Merchants states that it is seeking an abatement of gross receipts

taxes assessed for the period December 31, 1999 to June 30, 2005, as well as “an explicit

recognition or declaratory judgment that the same leases with GSD are tax exempt from this date

going forward.” Merchants’ June 22, 2007 Memorandum of Law, p. 13. Pursuant to NMSA

1978, § 7-1-24, the Hearing Officer is charged with hearing and deciding taxpayers’ protests to

existing assessments; there is no provision for issuing advisory or preemptive decisions

applicable to reporting periods not yet assessed. This Decision and Order is based solely on the

evidence presented at the June 26, 2007 administrative hearing and on the facts as they existed

during the period December 31, 1999 through June 30, 2005. The Hearing Officer takes no

position on whether Merchants was entitled to rely on the Type 9 NTTC tendered by GSD for

any period subsequent to June 30, 2005.

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CONCLUSIONS OF LAW

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

No. L0888202496, and jurisdiction lies over the parties and the subject matter of this protest.

B. Merchants was entitled to accept GSD’s representations that it was engaged in

leasing vehicles for sublease, and Merchants was not required to investigate GSD’s claims to

determine the legal effect of its transactions with other state entities.

C. Merchants accepted the NTTC tendered by GSD in good faith and is entitled to

claim the deduction provided in NMSA 1978, § 7-9-50.

For the foregoing reasons, Merchants’ protest IS GRANTED. The Department is ordered to

abate the $196,465.67 of gross receipts tax, plus accrued interest, assessed on Merchants’ receipts

from leasing vehicles to GSD during the period December 31, 1999 to June 30, 2005.

DATED July 11, 2007.

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