Could a tent-rental company estimate that 5% to 10% of government and nonprofit receipts were deductible sales of direct, damaged, or lost property?

Plain-English summary

Albuquerque Tents could deduct one clearly documented $2,500 sale to a nonprofit church, but it could not apply an estimated 5%–10% sales percentage to years of mostly rental receipts. Government and nonprofit deductions covered tangible-property sales, not leases, and the company did not produce enough invoices to separate the two.

The company primarily rented tents, tables, chairs, linens, china, glassware, staging, generators, dance floors, lighting, and other event equipment. It sometimes sold items directly or charged customers when rented property was damaged, destroyed, lost, or stolen.

Many customers were government agencies or Section 501(c)(3) nonprofits. Albuquerque Tents timely held the correct Type 9 NTTCs; the dispute was factual—whether particular transactions were sales rather than leases.

Rentals were not deductible sales

Section 7-9-54 allowed sales of tangible personal property to government, while Section 7-9-60 covered qualifying sales to nonprofits. Regulations under both provisions excluded leases; government services also were not deductible.

Because leasing was Albuquerque Tents' primary business, most receipts did not qualify merely because the customer was governmental or nonprofit.

Experience did not establish a 5%–10% rate

The owner had 30 years in the tent business and estimated annual breakage, loss, or damage at about 5% for government customers and 10% for nonprofits and generally.

But the company provided no documentation of replacement inventory purchases and no invoice sample showing that 5%–10% of gross receipts actually came from direct sales or converted damage/loss sales.

Annual inventory replacement did not necessarily correlate with gross receipts in a rental-heavy business. The testimony therefore remained speculative.

The City invoice was too ambiguous

A June 2008 invoice charged the City of Albuquerque $434.60 to lease two canopies, a riser, and basket lights. That lease was taxable.

An attached order note said tables and chairs had been stolen, but those items did not appear on the original lease invoice. Another $434.60 invoice did not say what items or type of transaction it covered.

The Department and hearing officer could not determine whether anything was sold, what it was, or for how much. That example did not substantiate a damage-or-loss sales percentage.

The church sale was clearly deductible

A December 2009 invoice clearly documented a $2,500 direct sale of a large tent, windowalls, and sidewalls to Mountain Valley Church.

That transaction qualified under the nonprofit tangible-property deduction. More invoices like it could have supported additional relief, but Albuquerque Tents said it lacked the human resources to search its files.

The decision treated that as an economic choice with tax consequences: the taxpayer had the statutory duty to maintain records permitting accurate tax computation and bore the burden to prove deductions.

Result: protest GRANTED IN PART AND DENIED IN PART. If the audit had not already allowed it, the Department had to deduct gross receipts tax associated with the $2,500 church sale. The remaining tax and interest stayed due.

The initial assessment was $235,368.89 tax and $38,594.33 interest, totaling $273,963.22, with no penalty. The decision did not state a final adjusted balance or updated interest amount.

What this means for you

Rental businesses serving exempt organizations

Customer status does not turn a lease into a sale. Code invoices separately for rentals, services, direct sales, and charges that transfer damaged or lost property.

Businesses using sampling to prove deductions

An experience-based percentage needs representative underlying records. Preserve enough invoices to show transaction type, buyer, property, amount, and connection to the claimed rate.

Businesses with limited record-retrieval staff

The burden remains on the taxpayer. Design accounting systems so deductible transactions can be found without a manual search years later.

Common questions

Q: Were the Type 9 NTTCs late or incorrect?
A: No. They were timely and correct; the dispute was whether the invoices represented qualifying sales.

Q: Why wasn't the City transaction deductible?
A: The clear invoice was for a lease, while the documents about stolen items did not establish a specific sale.

Q: Why did the church transaction qualify?
A: Its invoice clearly documented a direct sale of tangible property to a nonprofit.

Q: Did the ruling accept the owner's 5%–10% estimate?
A: No. No adequate invoice sample or replacement-inventory evidence supported it.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-9-4, 7-9-3.3, and 7-9-5 — gross receipts tax and taxable-receipts presumption
• NMSA 1978, § 7-9-54 and Regulations 3.2.212.8 and 3.2.212.9 NMAC — government tangible-property sales, leases, and services
• NMSA 1978, § 7-9-60 and Regulation 3.2.218.9(A) NMAC — nonprofit tangible-property sales and excluded leases or services
• NMSA 1978, §§ 7-1-10 and 7-1-17(C) — recordkeeping and assessment presumption
• NMSA 1978, § 7-1-67 — mandatory interest

Case cited:

• Wing Pawn Shop v. Taxation and Revenue Department, 1991-NMCA-024 — strict proof and taxpayer burden for deductions

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Albuquerque Tents, LLC
• Decision PDF: D&O 13-30

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
ALBUQUERQUE TENTS, LLC. No. 13-30
TO ASSESSMENTS ISSUED UNDER LETTER
ID NO. L0184601920

DECISION AND ORDER

A protest hearing occurred on the above captioned matter on September 30, 2013 before

Brian VanDenzen, Esq., Tax Hearing Officer, in Santa Fe. Attorney R. Tracy Sprouls appeared

representing Albuquerque Tents, LLC. (“Taxpayer”). Mr. David Ortiz appeared as a Taxpayer

witness. Chief Legal Counsel Nelson Goodin appeared representing the Taxation and Revenue

Department of the State of New Mexico (“Department”). Protest Auditor Lizzy Vedamanikam

appeared as a witness for the Department. Taxpayer Exhibits #1-2 were admitted into the record.

All exhibits are more thoroughly described in the Administrative Exhibit Log. Based on the

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

FINDINGS OF FACT

1. On November 30, 2012, the Department assessed Taxpayer $235,368.89 in gross

receipts tax principal, $00.00 in penalty, and $38,594.33 in interest for a total assessment of

$273,963.22 for the CRS reporting periods January 31, 2006 through June 30, 2010. [Letter id.

no. L0184601920].

2. On December 26, 2012, Taxpayer requested an extension of time in which to file

a protest.

3. On January 7, 2013, the Department granted Taxpayer an extension in which to

file a protest.

4. On February 27, 2013, Taxpayer filed a written protest of the assessment.

5. On March 8, 2013, the Department acknowledged receipt of Taxpayer’s protest.

6. On July 30, 2013, the Department requested a hearing in this matter.

7. On July 31, 2013, the Hearing Bureau issued Notice of Administrative Hearing,

scheduling this matter for September 30, 2013.

8. Taxpayer’s primary business is the rental of tents, tables, chairs, linens, china,

glassware, staging, power generators, dance floors, lightning, and other materials needed for

social engagements, parties, and entertainment. [09-30-13 CD 17:10-46].

9. Taxpayer occasionally sells items to customers directly through its store or when

leased equipment is damaged, destroyed, lost, or stolen. [09-30-13 CD 17:46-18:50].

10. Taxpayer’s sales and rentals are documented through invoices. [09-30-13 CD

18:51-19:07].

11. Lost or damaged rental items are separately invoiced as a sale. [09-30-13 CD

18:55-19:22; 09-30-13 CD 38:59-39:27].

12. A large portion of Taxpayer’s customers are governmental agencies and 501(c)(3)

non-profit organizations. [09-30-13 CD 19:30-20:19].

13. Taxpayer’s annual revenue has grown from approximately $500,000.00 to

$1,300,000.00. [09-30-13 CD 20:26-20:45].

14. On June 12, 2008, Taxpayer invoiced the City of Albuquerque for $434.60 for the

lease of two canopies, a riser, and basket lights. [Taxpayer Ex. #1.1].

In the Matter of the Protest of Albuquerque Tents, LLC., page 2 of 10

15. Attached to the June 12, 2008 invoice to the City of Albuquerque is an order form

with a note indicating that tables and chairs (which were not listed as rented equipment on the

original invoice) were stolen. [Taxpayer Ex. #1.3; 09-30-13 CD 40:28-41:54].

16. Taxpayer did not present any evidence into the record that Taxpayer invoiced to

the City of Albuquerque the sale of the stolen tables and chairs or the amount of any such

invoice; Taxpayer only presented an invoice charging the City of Albuquerque $434.60 without

stating the nature of the transaction or the items invoiced. [Taxpayer Ex. #1.4; 09-30-13 CD

42:12-42:22].

17. On December 8, 2009, Taxpayer invoiced Mountain Valley Church for $2,500.00

for the direct sale of a large tent, windowalls, and sidewalls. [Taxpayer Ex. #2; 09-30-13 CD

38:25-50].

18. Mr. David Ortiz is the owner of Taxpayer, Albuquerque Tents, LLC, and has been

for nine-years. Mr. Ortiz has been in the tent rental business for 30-years. [09-30-13 CD 16:07-

34].

19. Based on Mr. Ortiz’s experience in the tent rental industry and experience in

reordering of inventory annually, Mr. Ortiz testified that the general expected rate of breakage,

loss, or damage of rented equipment is approximately 10% annually. [09-30-13 CD 25:05-

26:34].

20. Based on Mr. Ortiz’s experience in the tent rental industry and experience in

reordering of inventory annually, Mr. Ortiz testified that the expected rate of breakage, loss, or

damage of rented equipment to governmental agencies is approximately 5% annually. [09-30-13

CD 26:35-27:03].

In the Matter of the Protest of Albuquerque Tents, LLC., page 3 of 10

21. Based on Mr. Ortiz’s experience in the tent rental industry and experience in

reordering of inventory annually, Mr. Ortiz testified that the expected rate of breakage, loss, or

damage of rented equipment to 501(c)(3) non-profit organizations is approximately 10%

annually. [09-30-13 CD 27:03-23].

22. Taxpayer did not provide any documentation showing the amount of replacement

products Taxpayer purchased annually because of loss of inventory attributable to direst sales or

to breakage, loss, or damage of rented equipment. [09-30-13 CD 29:13-30:13].

23. Taxpayer did not provide sufficient evidence and/or sampling of invoices to

establish that the expected rate of direct sales and breakage, loss, or damage of rented equipment

sales was between 5% to 10% annually.

24. During the audit, and at hearing, Taxpayer did not have or provide sufficient

information to differentiate between invoices to private customers conducting an event on Pueblo

land subject to gross receipts tax and tribal members conducting an event on Pueblo land not

subject to gross receipts tax. [09-30-13 CD 32:56-34:52].

25. Taxpayer timely possessed the correct type of nontaxable transaction certificates

(“NTTC or NTTCs”) to support the claimed deductions at issue in the protest1.

26. An updated spreadsheet of Taxpayer’s liabilities, including accrual of interest

since the time of assessment, was not tendered into the record.

DISCUSSION

As a result of an audit, in pertinent part, the Department disallowed Taxpayer’s claimed

deduction for the sale of tangible personal property to governmental agencies and 501(c)(3)

1
Neither side at hearing addressed the issue of whether Taxpayer timely possessed the requisite NTTC for this
transaction. However, as both the protest letter indicates and the Department’s Request for Hearing “issue to be
determined” section supports, Taxpayer timely possessed the correct Type 9 NTTC and the only issue at protest was
factually whether a sale had occurred instead of a lease.

In the Matter of the Protest of Albuquerque Tents, LLC., page 4 of 10
organizations because it found that Taxpayer’s invoiced the transactions as leases or failed to

provide sufficient evidence that a sale had occurred instead of the leasing arrangement typical in

Taxpayer’s business. The Department issued an assessment after that audit. Taxpayer protested

that assessment. At hearing, Taxpayer argued that between 5% to 10% of its gross receipts were

attributable to direct sales or the sale of damaged, lost or stolen tangible personal property to the

government or to 501(c)(3) organizations, and therefore that same percentage of its gross receipts

should be deductable.

Under NMSA 1978, Section 7-1-17 (C) (2007), the assessment issued in this case is

presumed correct. Consequently, Taxpayer has the burden to overcome the assessment. See

Archuleta v. O'Cheskey, 1972-NMCA-165, ¶11, 84 N.M. 428. Moreover, “[w]here 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, 1991-NMCA-024, ¶16, 111 N.M. 735 (internal citation omitted); See also

TPL, Inc. v. N.M. Taxation & Revenue Dep't, 2003-NMSC-7, ¶9, 133 N.M. 447.

For the privilege of engaging in business, New Mexico imposes a gross receipts tax on the

receipts of any person engaged in business. See NMSA 1978, § 7-9-4 (2002). “Engaging in

business” is defined as “carrying on or causing to be carried on any activity with the purpose of

direct or indirect benefit.” NMSA 1978, § 7-9-3.3 (2003). Under the Gross Receipts and

Compensating Tax Act, there is a statutory presumption that all receipts of a person engaged in

business are taxable. See NMSA 1978, § 7-9-5 (2002).

The New Mexico Gross Receipts and Compensating Tax Act provides numerous deductions

of gross receipts tax. There are two related deductions at issue in this case. Under NMSA 1978,

In the Matter of the Protest of Albuquerque Tents, LLC., page 5 of 10
Section 7-9-54 (2003), “[r]eceipts from selling tangible personal property to the United States or

New Mexico or any governmental unit… may be deducted from gross receipts or from

governmental gross receipts.” In accord with the clear language of the statute, under Regulation

3.2.212.8 NMAC, the leasing of tangible personal property is not deductible. Further, under

Regulation 3.2.212.9 NMAC, the sale of a service to governmental agency is not deductible.

The second related deduction at issue is found under NMSA 1978, Section 7-9-60 (2007).

Section 7-9-60 applies to the sale of tangible personal property to non profit 501(c)(3)

organizations. Like the deduction under Section 7-9-54, the leasing of tangible personal property or

the sale of a service for resale is not deductible under Section 7-9-60. See Regulation 3.2.218.9 (A)

NMAC.

Taxpayer’s primary business is the leasing of social event equipment like tents, tables,

chairs, etc. to private customers, governmental agencies, and 501(c)(3) non-profit organizations.

Since by regulation neither deduction under Section 7-9-54 or Section 7-9-60 applies to leasing of

property, Taxpayer is not entitled to either deduction for most of its gross receipts during the audit

period. The only question at protest is whether Taxpayer is entitled to some deductions for the direct

sale of tangible personal property and the sale of originally leased personal property items that were

broken, damaged, destroyed, lost, or stolen during the lease period.

While these direct sales and breakage sales of tangible personal property to governmental

agencies and 501(c)(3) organizations are potentially legally deductable under Section 7-9-54 and

Section 7-9-60, Taxpayer did not present enough evidence to substantiate the claimed deductions

for the 5%-10% rate of direct sales and sales of broken, lost or stolen leased items. At one point, Mr.

Ortiz testified that this rate of direct sales and breakage/loss sales comes from the annual inventory

reorder rate. However, annual inventory does not necessarily correlate to annual gross receipts,

In the Matter of the Protest of Albuquerque Tents, LLC., page 6 of 10
especially in a business focused heavily on leasing. More importantly, as will be addressed in more

detail in the discussion of the two admitted exhibits in this matter, Taxpayer’s two presented

invoices are not illustrative of the claimed 5%-10% direct sales and breakage/loss sales. While

Taxpayer did not need to produce every invoice showing the 5%-10% direct sales and breakage/loss

sales rate, Taxpayer did need to produce at least a sampling of invoices that illustrate and support

that claimed percentage. Without more applicable, concrete examples of invoices substantiating the

claimed 5%-10% direct sales and breakage/loss sales rate, Mr. Ortiz’s testimony is speculative and

provides an insufficient basis to differentiate between leases, leases converted to sales through

breakage, and direct sales.

The two invoices presented into the evidence as Taxpayer Ex.’s #1 & #2 illustrate

Taxpayer’s fundamental lack of evidence in this protest to either substantiate the claimed deductions

or overcome the presumption of correctness of the assessment. Taxpayer Ex. #1 shows that

Taxpayer leased two canopies, a riser, and basket lights to the City of Albuquerque for $434.60.

Under Regulation 3.2.212.8 NMAC, the leasing of this property does not qualify for the claimed

deduction, and therefore Taxpayer is not entitled to deduction of this amount. Attached to this first

invoice is a hand-written note that tables and chairs were stolen. [Taxpayer Ex. #1.3]. However,

tables and chairs were are not listed as leased on the original invoice, Taxpayer Ex. #1.1. Attached

to the original leasing invoice is Taxpayer Ex. 1.4, an invoice for $434.60 that does not specify the

nature of the transaction, whether it was a sale or a lease, or the specific property exchanged under

the invoice. It is possible that Taxpayer sold the City of Albuquerque tables and chairs, as the note

indicates, or the two canopies, the riser, and the basket lights as originally leased on the invoice. But

the Department is left to guess what, if anything, was sold to the City versus what was leased. Given

the inconsistencies of Taxpayer Ex. #1, this transaction is insufficient to substantiate Taxpayer’s

In the Matter of the Protest of Albuquerque Tents, LLC., page 7 of 10
claim that between 5%-10% of its annual inventory is sold because of breakage/loss of leased

equipment. In fact, even without the inconsistencies of Taxpayer Ex. #1, Taxpayer needed to

produce an additional sampling of invoices to support that claimed percentage of breakage/loss sales

during the audit period.

In contrast, Taxpayer Ex. #2 is much clearer: Taxpayer directly sold $2,500.00 in property

to Mountain Valley Church. Taxpayer is entitled to a deduction under Section 7-9-60 for this sale. If

Taxpayer had produced more invoices like Taxpayer Ex. #2, then Taxpayer would have been able

to establish it was entitled to further claimed deductions and overcome more portions of the

assessment. However, by itself, Taxpayer Ex. #2 does not establish what portion of Taxpayer’s

overall gross receipts during the audit period were attributable to direct sales.

Taxpayer indicated that it did not have the human resources to search through its invoices to

find the invoices reflecting the sale of tangible personal property, either in direct sales or through

breakage/loss of leased goods. Under NMSA 1978, Section 7-1-10 (2007), taxpayers are required to

maintain “records in a manner that will permit the accurate computation of state taxes…” While

Taxpayer made an economic choice that the additional resources required to locate and present the

sales invoices was not justified, there are tax liability consequences to that choice. Under applicable

case law, when claiming a deduction from imposition of gross receipts tax, it is Taxpayer whom

bears the burden and responsibility of demonstrating that it was entitled to the claimed deduction.

See Wing Pawn Shop, ¶16. Further, under Section 7-1-17 (C), Taxpayer also bore the burden to

overcome the presumption of correctness that attached to the Department’s assessment. By deciding

that it had insufficient resources to find and produce the relevant invoices needed to justify the

claimed deductions, Taxpayer was unable to substantiate any more of its claimed deductions under

Wing Pawn Shop and unable to overcome the presumption of correctness under Section 7-1-17 (C).

In the Matter of the Protest of Albuquerque Tents, LLC., page 8 of 10
Turning to the assessment of interest, when a taxpayer fails to make timely payment of

taxes due to the state, “interest shall be paid to the state on that amount from the first day

following the day on which the tax becomes due...until it is paid.” NMSA 1978, § 7-1-67 (2007)

(italics for emphasis). Under the statute, the Department has no discretion in the imposition of

interest, as the statutory use of the word “shall” makes the imposition of interest mandatory. See

Marbob Energy Corp. v. N.M. Oil Conservation Comm'n, 2009-NMSC-013, ¶22, 146 N.M. 24 (use

of the word “shall” in a statute indicates provision is mandatory absent clear indication to the

contrary). The language of the statute also makes it clear that interest begins to run from the original

due date of the tax and continues until the tax principal is paid in full. The Department has no

discretion under Section 7-1-67 and must assess interest against Taxpayer from the time the tax was

due but not paid until the tax is paid.

In conclusion, while some of Taxpayer’s transactions might have met the legal requirements

for deductions under Section 7-9-54 and Section 7-9-60, factually Taxpayer did not prove at hearing

which transactions or percentage of transactions were entitled to further deductions. Taxpayer only

presented two invoices, neither of which was sufficient to support Mr. Ortiz’s claimed 5%-10%

direct sales and breakage/loss sales rate. Without a broader sample of invoices supporting Mr.

Ortiz’s testimony, there is insufficient evidence to apply that 5%-10% rate to all of Taxpayer’s gross

receipts over the entire audit period. Therefore, Taxpayer did not carry its burden under Wing Pawn

Shop, ¶16, to establish it was entitled to further deductions and did not overcome the presumption of

correctness under Section 7-1-17 (C). With the exception of an applicable deduction for the direct

sale to Mountain Valley Church, Taxpayer’s protest is denied.

In the Matter of the Protest of Albuquerque Tents, LLC., page 9 of 10
CONCLUSIONS OF LAW

A. After the Department properly granted an extension in which to file a protest,

Taxpayer filed a timely, written protest to the assessment. Jurisdiction lies over the parties and the

subject matter of this protest.

B. Taxpayer did not produce sufficient evidence and/or a sampling of invoices

necessary to substantiate its claimed deductions under NMSA 1978, Section 7-9-54 (2003) and

under NMSA 1978, Section 7-9-60 (2007). By failing to produce the requisite invoices, Taxpayer

did not carry its burden under Wing Pawn Shop to show it was entitled to a deduction and did not

overcome the presumption of correctness under NMSA 1978, Section 7-1-17 (C).

C. Under NMSA 1978, Section 7-1-67 (2007), Taxpayer is liable for accrued interest

under the assessment. Interest continues to accrue until the tax principal is satisfied.

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

PART. If not previously allowed during the audit, Taxpayer is entitled to a deduction of gross

receipts tax associated with the $2,500.00 direct sale to Mountain Valley Church. Otherwise,

Taxpayer is liable for payment of the remaining gross receipts tax and interest under the

assessment.

DATED: October 29, 2013.

Brian VanDenzen, Esq.
Tax Hearing Officer
Taxation & Revenue Department
Post Office Box 630
Santa Fe, NM 87504-0630

In the Matter of the Protest of Albuquerque Tents, LLC., page 10 of 10