Were sales of two model homes isolated or occasional transactions exempt from New Mexico gross receipts tax?

Plain-English summary

Greg Hayes's first model-home sale qualified as an isolated or occasional transaction, but his second model-home sale was taxable because he had entered the residential construction business. The Department had to abate gross receipts tax and interest on the first sale; tax and interest on the second remained due.

Hayes owned a corporation that sold manufactured home packages and guided customers through construction. To demonstrate the finished product, he built a first model home under an owner-builder permit.

The first home was a genuine unplanned sale

Hayes originally built the first home as an office and marketing model, not for resale. He did not advertise it, post a for-sale sign, or hire a realtor. He used it for more than a year before visitors asked to buy the model itself.

He sold it in August 2002 for $238,000, with an approximate $57,000 profit. Because he was not then regularly engaged or holding himself out as selling finished homes, Section 7-9-28 applied to this isolated sale.

The second sale was part of a construction business

After completing the first model, Hayes became a qualifying party and obtained a contractor's license for his corporation. The corporation used that license to build the second model.

Hayes entered the second home in the Parade of Homes, was open to selling at the right price, and sold it in February 2003—only a few months after construction began—for $315,000, with an approximate $66,600 profit.

He then built and sold two more homes and intended to continue. The decision treated the license, second construction project, rapid sale, and later activity as evidence that the second home was in the line of his residential construction business. The isolated-sale exemption therefore did not apply.

Supplier tax could not be credited without NTTCs

Hayes's suppliers included their own gross receipts tax in the prices of materials and labor. The first home included $7,850 of passed-on tax and the second $11,870.

Once licensed, Hayes could have provided NTTCs so qualifying suppliers could deduct their sales under Sections 7-9-51 and 7-9-52. He was unfamiliar with the process and did not do so.

The decision rejected his request to credit the suppliers' tax against his tax on the finished-home sale. The suppliers and Hayes were separate taxpayers with taxable receipts from successive transactions. The statutory way to avoid tax at both stages required NTTCs, and no law gave the buyer a later credit when those certificates were not used.

Result: protest GRANTED IN PART AND DENIED IN PART. Tax and interest on the August 2002 first-home sale were abated; tax and accrued interest on the February 2003 second-home sale stood.

What this means for you

Businesses selling an asset originally built for their own use

An unplanned sale may qualify as isolated when the seller was not regularly engaged or holding itself out as selling that type of property. Purpose, marketing, timing, licensing, and later activity all matter.

Licensed contractors building model homes

A model can still be part of the construction business even if it was not actively advertised. A contractor's license, willingness to sell, quick sale, and repeated projects weighed against the exemption here.

Contractors purchasing materials and labor

Use NTTCs at the purchase stage when the statutory deductions apply. Tax passed on by a supplier did not become a credit against the contractor's later gross receipts tax.

Common questions

Q: Why was the first sale exempt?
A: The home was built as an office and display, used for more than a year, not marketed for sale, and sold only after a visitor asked to buy it.

Q: Why was the second sale taxable?
A: Hayes had obtained a contractor's license, built and sold the home quickly, and continued constructing and selling homes afterward.

Q: Does the number of sales alone decide whether a sale is isolated?
A: No. The decision focused on whether the sale was in line with the business in which the seller was engaged.

Q: Why wasn't there a credit for the suppliers' tax?
A: The supplier sales and completed-home sale were separate taxable transactions, and Hayes had not used the NTTC mechanism provided by law.

Q: Was penalty involved?
A: The decision discusses gross receipts tax and interest, and the final order abates or upholds those amounts; it does not impose a penalty.

Citations and references

Statutes and regulation:

• NMSA 1978, § 7-9-28 — isolated or occasional sale exemption
• NMSA 1978, §§ 7-9-51 and 7-9-52 — construction material and service deductions using NTTCs
• Regulation 3.2.116.9 NMAC — licensed sellers and isolated-sale exemption

Cases cited:

• Besser Co. v. Bureau of Revenue, 74 N.M. 377, 394 P.2d 141 (1964)
• Continental Inn of Albuquerque, Inc. v. New Mexico Taxation and Revenue Department, 113 N.M. 588, 829 P.2d 946 (Ct. App. 1992)
• Kewanee Industries, Inc. v. Reese, 114 N.M. 784, 845 P.2d 1238 (1993)
• House of Carpets, Inc. v. Bureau of Revenue, 84 N.M. 747, 507 P.2d 1078 (Ct. App. 1973)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Greg & Kimberly Hayes
• Decision PDF: D&O 07-21

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
GREG L. AND KIMBERLY HAYES
ID NO. 03-005938-00 0, TO ASSESSMENT No. 07-21
ISSUED UNDER LETTER ID L1737907200

DECISION AND ORDER

An administrative hearing on the above-referenced protest was held on November 28, 2007,

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

was represented by Jeffrey W. Loubet, Special Assistant Attorney General. Greg L. and Kimberly

Hayes were represented by Thomas Smidt, II, with Tax, Estate & Business Law, N.A., LLC. Based

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

FINDINGS OF FACT

1. During the audit period at issue, Greg Hayes (“the Taxpayer”) was the owner of GLH

Enterprises, Inc., a corporation that performed services as an independent sales representative for

President Homes, Inc., a manufacturer of home packages.

2. Customers who purchased a home package received the plans and all construction

materials necessary to build the home, except for finish work such as floor coverings and paint.

GLH Enterprises, Inc. then guided the customer through the building process, including assistance in

obtaining financing, required permits, and subcontract labor.

3. In order to promote the sale of home packages and better compete with builders of

finished homes, the Taxpayer decided to build a model home as an example of the final product that

customers could expect when they purchased a home package.

4. Toward the end of 2000, the Taxpayer obtained an owner/builder permit and began

construction of a home using the same construction materials used in packages sold by President

Homes.

5. The Taxpayer did not qualify to give nontaxable transaction certificates (NTTCs) to

his vendors because he did not have a contractor’s license, nor was he building the home for resale.

As a result, the Taxpayer’s vendors included the gross receipts tax they were required to pay the state

as part of the sales price they charged to the Taxpayer.

6. The amount of gross receipts tax included in the price the Taxpayer paid for labor and

materials used to build his first model home was $7,850.

7. The Taxpayer completed construction in May 2001, and for over a year he used the

finished home as an office for his corporation and a model to promote the sale of home packages

manufactured by President Homes.

8. The Taxpayer did not represent the model home as being for sale, display a for-sale

sign on the property, or engage the services of a realtor. As a marketing tool for his home packages, he

did enter the home in the local home builders’ “Parade of Homes.”

9. After construction of the model home was completed, the Taxpayer decided to apply

for a contractor’s license.

10. In September 2001, the Taxpayer was certified as a qualifying party under the

Construction Industries Licensing Act, and a contractor’s license was issued to his corporation, GLH

Enterprises, Inc.

11. In the summer of 2002, a couple toured the Taxpayer’s model home and asked if they

could buy the model itself, rather than purchasing a home package and building their own home.

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12. In August 2002, the Taxpayer sold the model home for $238,000, netting a profit of

approximately $57,000.

13. The Taxpayer reported his gain from the sale of the home on his 2002 federal income

tax return, but did not report New Mexico gross receipts tax on the sale proceeds.

14. After the sale of his first model home, the Taxpayer built a second model home,

using his corporation’s contractor’s license to obtain the building permit.

15. Although GLH Enterprises, Inc. could have obtained NTTCs to use in purchasing

construction materials and labor, the Taxpayer was unfamiliar with New Mexico’s tax laws and did

not apply to the Department to execute NTTCs. Instead, the Taxpayer paid the passed-on gross

receipts tax charged by his suppliers.

16. The amount of gross receipts tax included in the price the Taxpayer paid for labor and

materials used to build the second model home was $11,870.

17. The Taxpayer did not advertise his second model home for sale, but again entered it

in the “Parade of Homes” and received an offer on the home within a short time after its completion.

18. In February 2003, six months after the sale of the first model home, the Taxpayer

sold his second model home for $315,000, netting a profit of approximately $66,600.

19. The Taxpayer reported his gain from the second model home on his 2003 federal

income tax return, but did not report New Mexico gross receipts tax on the sale proceeds.

20. During the next three years, the Taxpayer built and sold two more homes under his

contractor’s license and intends to continue in the business of residential construction.

21. After completing his second model home, the Taxpayer learned about the deduction

from gross receipts available to vendors of construction materials and labor who receive an NTTC

from a licensed contractor.

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22. When constructing his third and subsequent homes, the Taxpayer provided NTTCs to

the vendors from whom he purchased construction materials and labor and reported gross receipts

tax on the sales price of the completed construction projects.

23. In 2004, the Taxpayer was audited by the Department.

24. The auditor concluded that the Taxpayer was in the construction business and should

have paid gross receipts tax on his receipts from the sale of his first two model homes, less the value

of the underlying land.

25. On August 4, 2004, the Department assessed the Taxpayer for $26,990.46 of gross

receipts tax, plus interest, for reporting periods July 2001 through June 2004.

26. The Taxpayer received a 60-day extension of time to protest the assessment and filed

his protest on November 2, 2004.

DISCUSSION

The Taxpayer raises the following arguments in support of his protest: (1) the sale of the two

model homes at issue were isolated or occasional transactions entitled to the exemption provided in

NMSA 1978, § 7-9-28; and (2) if the sales do not qualify as isolated and occasional, the Taxpayer

should be given credit for the gross receipts tax his vendors included as part of the sales price of

construction materials and labor the Taxpayer purchased to build his model homes.

Exemption for Isolated or Occasional Sales. The Taxpayer argues that his receipts from

the sale of the first two model homes he constructed are exempt from tax under NMSA 1978, § 7-9-

28, which states:

Exempted from the gross receipts tax are the receipts from the isolated or
occasional sale of or leasing of property or a service by a person who is
neither regularly engaged nor holding himself out as engaged in the business
of selling or leasing the same or similar property or service.

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Based on the facts presented, the Taxpayer qualifies for this exemption on the sale of his first model

home, but not on the second.

Construction and Sale of First Model Home. The Taxpayer constructed his first model home

to promote the sale of home packages by his wholly-owned corporation, GLH Enterprises, Inc. The

Taxpayer believed that he could better compete with builders of finished homes by giving potential

customers a tangible example of the final product they could expect when purchasing a home

package. In late 2000, the Taxpayer obtained a permit as an owner/builder and began construction

using the same materials used in home packages sold by President Homes. The Taxpayer did not

have a contractor’s license and did not intend to sell the completed home. Instead, the Taxpayer

intended to use—and did use—the home as an office for his corporation and a model to promote the

corporation’s sale of home packages. More than a year after construction was completed, the Taxpayer

was approached by a couple who wanted to purchase the model instead of building a similar home from

a package. Given these facts, the Taxpayer’s sale of his first model home in August 2002 qualifies as

an isolated sale by a person who was not regularly engaged in the business of selling finished homes.

Construction and Sale of Second Model Home. After the sale of the first model home, the

Taxpayer proceeded to build a second home. The Taxpayer maintains that at the time the second

home was built, his business was still limited to the sale of home packages rather than the sale of

finished homes. In fact, the Taxpayer was engaged in both of these businesses. In Besser Co. v.

Bureau of Revenue, 74 N.M. 377, 383, 394 P.2d 141, 146 (1964), the New Mexico Supreme Court

held that the number of transactions entered into does not control whether those transactions are

isolated and occasional. Instead, the “real question is whether the sale or lease is in line with the

business for which the seller or lessor was organized and in which it engages.” Id. In Continental

Inn of Albuquerque, Inc. v. New Mexico Taxation and Revenue Department, 113 N.M. 588, 590, 829

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P.2d 946, 948 (Ct. App. 1992), the court of appeals held that a taxpayer who held a contractor’s

license and constructed a hotel in New Mexico was “engaged in the construction business” even

though the taxpayer intended to own and operate—rather than sell—the completed structure. See

also, Department Regulation 3.2.116.9 NMAC (taxpayer may not claim the exemption for isolated

and occasional sales if the taxpayer is licensed to sell property or carry on services that are the same

or similar to those being sold).

In this case, the Taxpayer built his first model home under an owner/builder permit. By the

time he began construction of the second home, the Taxpayer had taken the exam to be certified as a

qualifying party under the Construction Industries Licensing Act. He then used his position as a

qualifying party to obtain a contractor’s license for his wholly-owned corporation, and the

corporation applied for the permit to build the second model home. Upon completion, the Taxpayer

did not actively advertise the home for sale. He did, however, enter it in the “Parade of Homes” and

testified that he was open to selling if the price was right. Unlike his first home, which was used as

an office and demonstration model for well over a year before it was sold, the Taxpayer’s second

home was sold in February 2003, just a few months after construction began in August 2002. During

the next three years, the Taxpayer used his contractor’s license to build and sell two more homes and

has acknowledged that he intends to build more homes in the future.

The Taxpayer’s contention that he built his first model home for the sole purpose of

providing an office for his corporation and a model for potential customers of home packages is

plausible and conforms to the facts presented. His testimony that this was the only motivation for

constructing the second home is less persuasive. The Taxpayer’s decision to obtain a contractor’s

license, together with his successive construction and sale of three additional homes, support the

conclusion that the unplanned—but profitable—sale of his first model home led the Taxpayer to

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enter the residential construction business. The fact that he continued his business of selling home

packages on behalf of President Homes does not affect this conclusion. See, Kewanee Industries,

Inc. v. Reese, 114 N.M. 784, 792, 845 P.2d 1238, 1246 (1993) (rejecting Kewanee’s argument that

its leasing of draglines was isolated and occasional because it was not typical of its regular oil and

gas business). Because he was a licensed contractor engaged in constructing residential homes, the

Taxpayer is liable for gross receipts tax on the February 2003 sale of his second model home.

Credit for Gross Receipts Tax Charged by Suppliers. When the Taxpayer purchased

construction materials and labor to build his first two model homes, the vendors included the gross

receipts tax they were required to pay on each transaction as part of the sales price. After the Taxpayer

obtained his contractor’s license, he had the option of providing his vendors with NTTCs to avoid the

cost of the passed-on gross receipts tax. See, NMSA 1978, §§ 7-9-51 and 7-9-52 (allowing sellers of

construction materials and services to deduct receipts from sales to a person engaged in the

construction business, provided that person delivers an NTTC to the seller). Unfortunately, the

Taxpayer was unfamiliar with New Mexico’s tax laws and never filed an application for NTTCs with

the Department. As a result, his suppliers were not eligible for the deductions provided in §§ 7-9-51

and 7-9-52.

The Taxpayer maintains that he is entitled to a credit for the gross receipts tax his vendors

paid to the state when the Taxpayer failed to provide them with NTTCs. The Taxpayer argues that

the New Mexico Legislature did not intend construction materials and labor to be taxed both at the

time they are purchased and at the time they are sold as part of a completed structure. The Taxpayer

believes that taxing him on his receipts from the sale of his second model home without giving him

credit for the taxes his suppliers paid and passed on to him results in double taxation.

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The Taxpayer’s arguments reflect a misunderstanding of New Mexico’s gross receipts tax.

More than 30 years ago, the New Mexico Court of Appeals rejected the argument that taxing the

receipts of different taxpayers in successive transactions constitutes double taxation or violates New

Mexico’s tax laws or constitution. House of Carpets, Inc. v. Bureau of Revenue, 84 N.M. 747, 507

P.2d 1078 (Ct. App. 1973). See also, New Mexico Sheriffs and 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). In this case, the Taxpayer and his vendors are

separate taxpayers, each of which is engaged in business in New Mexico. The gross receipts tax is

imposed—once—on a vendor’s receipts from selling construction materials or services to the

Taxpayer. The gross receipts tax is also imposed—once—on the Taxpayer's receipts from selling the

completed construction project. Under these facts, there is no double taxation.

The issue of legislative intent was addressed in Judge Hendley’s specially concurring opinion

in House of Carpets, supra:

It is taxpayer's contention that it is the legislative intent, as manifested by the
provisions permitting the deduction of receipts from sales for resale, that the tax “...
be assessed but once.” Assuming, without deciding, that taxpayer's statement of the
legislative purpose is correct, taxpayer still cannot prevail. As we said in Reed v.
Jones, 81 N.M. 481, 468 P.2d 882 (Ct.App.1970):

“... The burden is on the taxpayer to establish clearly his right to the
deduction....”

In the present case the Legislature has provided the means for the tax to be assessed
but once, namely, by using nontaxable transaction certificates. Not having availed
himself of the means for avoiding the tax in question, taxpayer is left with the
presumption of taxability.

84 N.M. at 752, 507 P.2d at 1083. Judge Hendley’s conclusion is supported by a long line of cases

holding that 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

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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); Security Escrow Corp. v. Taxation and Revenue Department, 107 N.M. 540, 543, 760 P.2d

1306, 1309 (Ct. App. 1988). Taxation is the rule and the claimant for an exemption must show that

his demand is within the letter as well as the spirit of the law. Id.

The Gross Receipts and Compensating Tax Act provides a deduction for receipts from selling

construction materials and services to a buyer who delivers an NTTC to the seller. The requirements

for claiming the deduction are clear and unambiguous. The deduction is available to the seller—not the

buyer—and is predicated on the seller’s receipt of an NTTC. No provision of New Mexico law

supports the Taxpayer’s claim to a credit for gross receipts tax paid by his vendors in the absence of

required NTTCs.

CONCLUSIONS OF LAW

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

L1737907200, and jurisdiction lies over the parties and the subject matter of this protest.

B. The Taxpayer’s August 2002 sale of his first model home was an isolated or occasional

transaction, and the receipts from that sale qualify for the deduction provided in NMSA 1978, § 7-9-28.

C. Once the Taxpayer acquired a contractor’s license and began construction of his second

model home, he was engaged in the residential construction business and his receipts from the February

2003 sale of the second home does not qualify for the deduction provided in NMSA 1978, § 7-9-28.

D. The Taxpayer is not entitled to a credit for the gross receipts tax his vendors were

required to pay to the state and included as part of the sales price of construction materials and labor

the Taxpayer purchased to build his model homes.

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

PART. The Department is ordered to abate the gross receipts tax and related interest assessed on the

Taxpayer’s receipts from selling his first model home in August 2002. The Taxpayer remains liable for

the gross receipts tax and accrued interest assessed on his receipts from the sale of his second model

home in February 2003.

Dated December 5, 2007.

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