NM D&O 08-04 Gross Receipts Tax 2008-11-19

Could a therapy provider deduct receipts from services sold to New Mexico public schools by accepting Type 9 government NTTCs?

Short answer: No. The government-sales deduction in Section 7-9-54 covered tangible personal property, while Cumberland sold psychology, social work, occupational, physical, and speech-language therapy services. The Type 9 NTTCs themselves said they applied only to tangible personal property. Good-faith acceptance did not make an inapplicable certificate valid for the transaction. The $102,703.57 gross receipts tax assessment and mandatory interest were upheld; no gross receipts penalty had been assessed.

Apply this to your situation

This page answers the general question as of 2008. Ezel answers yours, under current New Mexico tax law, with citations.

Disclaimer: This is a published Decision and Order of the New Mexico Administrative Hearings Office, an independent agency that adjudicates tax protests separately from the Taxation and Revenue Department. It resolves one taxpayer's protest on the specific facts and the law in effect when issued; different facts or later changes in the law can change the result, and another taxpayer should not assume it applies to their situation. A Decision and Order binds the parties to that protest and is not a general ruling or advisory opinion of the Department. This summary is informational only and is not legal or tax advice. Consult a licensed New Mexico tax professional about your specific situation.

About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked on this page as a PDF) is the authoritative source for any reliance.

View original ruling (PDF)

Plain-English summary

Cumberland Therapy Services owed $102,703.57 in New Mexico gross receipts tax on professional therapy services sold to five public school districts. Type 9 nontaxable transaction certificates did not support the deductions because they applied to tangible personal property, not services.

Cumberland, based in New Jersey, supplied psychology, social-work, occupational, physical, and speech-and-language therapy to the Roswell, Tucumcari, Moriarty, Clovis, and Albuquerque school districts from July 2001 through June 2005.

The Department assessed $102,703.57 in gross receipts tax principal and initially assessed $28,954.91 in interest. It did not impose a gross receipts tax penalty.

The government deduction covered property, not therapy services

Section 7-9-54(A) allowed a deduction for receipts from selling tangible personal property to governmental bodies. Cumberland did not dispute that it sold professional services rather than property.

Because the statutory deduction did not include services, the school-district receipts were taxable. The Albuquerque contract itself provided for payment of an hourly therapy rate plus New Mexico gross receipts tax.

Good-faith acceptance did not cure an inapplicable NTTC

Each district gave Cumberland a Type 9 NTTC. The certificates' instructions stated that governmental agencies and specified organizations could use Type 9 certificates to buy tangible personal property only.

Cumberland argued that accepting the certificates in good faith should protect the deductions. The decision distinguished two situations:

A valid certificate can protect a seller that cannot verify how the buyer later uses the covered property or service.
A certificate that does not apply to the transaction cannot transform an otherwise taxable transaction into a nontaxable one.

Sellers had a continuing duty to assess whether the NTTC actually covered the claimed deduction. Here, the certificates and CRS filer materials repeatedly limited Type 9 use to tangible property and supplied Department contact information. Cumberland's CPA did not call the Department, and a cited regulation specifically illustrated that services supplied to a government agency were not deductible.

Interest continued until payment

Section 7-1-67 made interest mandatory on unpaid tax. Cumberland had been told that it could pay the protested principal to stop interest, but the gross receipts principal remained unpaid.

Result: protest DENIED. Cumberland owed the $102,703.57 principal and interest until payment in full.

What this means for you

Service providers selling to New Mexico governments

Government-customer status alone did not make service receipts deductible under the statute applied here. Confirm that the deduction covers the type of transaction, not merely the buyer.

Businesses accepting NTTCs

Read the certificate instructions and match the certificate type to the sale. Good-faith acceptance protects reliance on a valid certificate's covered transaction; it does not expand the certificate's scope.

Tax professionals researching deductions

Use the statute, regulation, filer guidance, and Department contact channels together. The decision found that the available materials clearly distinguished taxable government services from qualifying property sales.

Common questions

Q: What services did Cumberland provide?
A: Psychology, social-work therapy, occupational therapy, physical therapy, and speech-and-language therapy for five New Mexico school districts.

Q: Why didn't the government-sales deduction apply?
A: Section 7-9-54 covered tangible personal property, and Cumberland sold services.

Q: Didn't the school districts provide Type 9 NTTCs?
A: Yes, but the certificates stated that they applied to governmental purchases of tangible personal property only.

Q: Does good-faith acceptance always protect an NTTC deduction?
A: No. The decision said the certificate must cover the transaction at issue.

Q: Was a negligence penalty imposed?
A: No. The findings state that the Department did not assess penalty on the gross receipts tax, but it did assess interest.

Citations and references

Statutes and regulations:

NMSA 1978, § 7-1-17(C) (2007) — presumption that an assessment is correct
NMSA 1978, § 7-9-5 (2002) — presumption that receipts are taxable
NMSA 1978, § 7-9-54(A) (2003) — government tangible-personal-property deduction
NMSA 1978, § 7-9-3(M) and (J) — definitions of services and property
NMSA 1978, § 7-9-43(A) (2005) — good-faith NTTC safe harbor
NMSA 1978, § 7-1-67(A) (2007) — mandatory interest
NMSA 1978, § 7-1-13(E) (2007) — interest despite an extension
Regulation 3.2.201.14(A) NMAC (2001) — certificate must cover the transaction
Regulation 3.2.212.9(B) NMAC (2001) — services supplied to government example

Cases cited:

Arco Materials, Inc. v. New Mexico Taxation and Revenue Department, 118 N.M. 12, 878 P.2d 330 (Ct. App.), rev'd on other grounds, 118 N.M. 647, 884 P.2d 803 (1994)
Gas Co. v. O'Cheskey, 94 N.M. 630, 614 P.2d 547 (Ct. App. 1980)
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: Cumberland Therapy Services
Decision PDF: D&O 08-04

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
CUMBERLAND THERAPY SERVICES No. 08-04
ID NO. 02-475331-00-9
TO ASSESSMENT ISSUED UNDER
LETTER ID NO. L0674253056

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on July 22, 2008,

before Monica Ontiveros, Chief Hearing Officer. The Taxation and Revenue

Department (“Department”) was represented by Amy Chavez, Special Assistant

Attorney General. Cumberland Therapy Services, Inc. (“Cumberland”) was represented

by its representative, Henry Ricci. Based on the evidence and arguments presented, IT

IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

Cumberland provides professional therapy services for schools in the

areas of psychology, social work therapy, occupational therapy, physical therapy, and

speech and language therapy. Exhibit M, pages GN1 and B11.

Cumberland’s principal office is located at 4130 Quakerbridge Rd.,

Lawrenceville, New Jersey 08648. Exhibit B11.

Cumberland provided professional therapy services to five New Mexico

school districts. Those school districts were Roswell, Tucumcari, Moriarty, Clovis and

Albuquerque. Exhibit M, page GN1.

The Department conducted a thorough audit of Cumberland on

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September 19, 2005 for the audit period July 1, 2001 through June 30, 2005. Exhibit M,

page GN1.

The audit was completed on December 21, 2005. Exhibit M, page GN1.
The Department determined that Cumberland improperly took deductions

for professional therapy services by deducting its receipts from each of the five New

Mexico school districts. Exhibit M.

On May 5, 2006, the Department assessed Cumberland in the amount of

$102,703.57 in gross receipts tax principal and $1,804.36 in withholding taxes. (These

amounts do not include interest.) Exhibit N.

The Department did not assess penalty on the gross receipts taxes.

Exhibit N.

On May 5, 2006, the Department assessed interest on the gross receipts

taxes in the amount of $28,954.91. Exhibit N. The amount of interest accrued through

the date of the hearing is set forth in Exhibit O.

On June 13, 2006, the Department advised Cumberland, through its

attorney of record, in Letter ID: L0788326656 that “interest on any amount of tax

determined to be due at the conclusion of your protest will continue to accrue at a rate

of .041% per day until such liability has been paid.” The letter also states that “(y)ou

may make payment on a protested assessment to stop the accrual of interest and

penalty.” Exhibit Q.

On October 20, 2005, Cumberland paid the principal amount of the

withholding tax due of $1,804.36. Exhibit M, page B3.1.

On June 2, 2006, Cumberland protested the assessment of gross receipts

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taxes. Exhibit P.

The grounds set out by Cumberland for the protest are that Henry Ricci, a

certified public accountant, had researched New Mexico law and had determined that

the gross receipts were deductible. Mr. Ricci requested and received Nontaxable

Transaction Certificates (“NTTCs”), Type 9s based on his research into New Mexico

law. Exhibit P.

Cumberland entered into a contract with the Albuquerque Public Schools

Special Education Department (“Albuquerque Public Schools”) whereby the

Albuquerque Public Schools contracted to pay Cumberland a per hour rate for therapy

plus “New Mexico Gross Receipts Tax.” Exhibit R, pages 2-5.

Cumberland entered into a contract with the Tucumcari Public Schools

whereby the Tucumcari Public Schools contracted to pay Cumberland a per hour rate

for therapy services. Exhibit R, page 6.

The Roswell Board of Education executed a Type 9 NTTC to Cumberland

on December 9, 2005. Exhibit R, pages 13-14.

The Moriarity Municipal Schools executed a Type 9 NTTC to Cumberland

on September 19, 2001. Exhibit R, pages 11-12.

The Clovis Municipal Schools executed a Type 9 NTTC to Cumberland on

October 11, 2005. Exhibit R, pages 7-8.

The Tucumcari Public Schools executed a Type 9 NTTC to Cumberland

on October 11, 2005. Exhibit R, page 15.

The Albuquerque Public Schools executed a Type 9 NTTC to Cumberland

in November 2005. Exhibit R, pages 9-10.

The NTTCs executed to Cumberland had an instruction side on the back

side. The instruction side clearly states that a Type 9 NTTC certificate may be issued

by GOVERNMENTAL AGENCIES and 501(c)(3) ORGANIZATIONS for the purchase of

TANGIBLE PERSONAL PROPERTY ONLY. (The language varies on some of the

NTTCS, but it has essentially the same meaning.) Exhibit R, pages 8, 10, 12 and 14;

and Exhibit S1, page 2.

The Department mailed CRS-1 Filer’s Kits to Cumberland.
The CRS-1 Filer’s Kit for July through December 2001 defines gross

receipts as “the total amount of money or other consideration received from selling

property in New Mexico, leasing property employed in New Mexico, performing services

in New Mexico…” Exhibit T.

The CRS-1 Filer’s Kit for July through December 2001 cites to a State of

New Mexico web page if further information is needed regarding gross receipts taxes.

The Filer’s Kit also states that the “…instructions are intended to provide general

guidance and do not address all specific circumstances, they are not binding on the

Department. If you have any questions regarding your particular situation please

contact the department’s district tax offices or the Santa Fe headquarters.” Exhibit T.

The CRS-1 Filer’s Kit for July through December 2001 describes what a

deduction is and describes under what circumstances a deduction may be taken.

Exhibit T.

The CRS-1 Filer’s Kit for January through June 2002 refers the taxpayer

to the local Taxation and Revenue Department Office if the taxpayer has any questions.

The Kit also lists the Department’s mailing address and lists telephone numbers for

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technical help. The Kit also lists a series of free publications including, SALES TO

GOVERNMENT AGENCIES (FYI-240) and cites to the Department’s website if

additional information is needed. Included within the Kit is an Application For

NONTAXABLE TRANSACTION CERTIFICATES which states that Type 9 NTTCs 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.” Exhibit U.

The CRS-1 Filer’s Kit for July through December 2002 describes what a

governmental deduction is and describes under what circumstances this deduction may

be taken. Exhibit V. It also provides additional contact information if the taxpayer has

any technical questions. Exhibit V.

The CRS-1 Filer’s Kit for July through December 2002 defines gross

receipts as “the total amount of money or other consideration received from selling

property in New Mexico, leasing property employed in New Mexico, performing services

in New Mexico…” Exhibit V.

The CRS-1 Filer’s Kit for January through June 2003 refers the taxpayer

to the local Taxation and Revenue Department Office if the taxpayer has any questions.

The Kit also lists the Department’s mailing address and lists telephone numbers for

technical help. The Kit also lists a series of free publications including, SALES TO

GOVERNMENT AGENCIES (FYI-240) and cites to the Department’s website if

additional information is needed. Included within the Kit is an Application For

NONTAXABLE TRANSACTION CERTIFICATES which states that Type 9 NTTCs may

be executed by “GOVERNMENTAL AGENCIES, 501(c)(3) ORGANIZATIONS or

5
FEDERALLY or STATE-CHARTERED CREDIT UNIONS for the purchase of

TANGIBLE PERSONAL PROPERTY ONLY.” Exhibit W.

The CRS-1 Filer’s Kit for July through December 2003 refers the taxpayer

to the local Taxation and Revenue Department Office if the taxpayer has any technical

questions. The Kit also lists the Department’s mailing address and lists telephone

numbers for technical help. It also lists a series of free publications including, SALES

TO GOVERNMENT AGENCIES (FYI-240) and cites to the Department’s website if

additional information is needed. Included within the Kit is an Application For

NONTAXABLE TRANSACTION CERTIFICATES which states that Type 9 NTTCs 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.” Exhibit X.

The CRS-1 Filer’s Kit for January through June 2004 refers the taxpayer