Could a welder deduct services resold by his customer when the correct Type 5 NTTC was executed more than three months after the extended deadline?

Plain-English summary

K and N Welding lost its resale deduction because it obtained the Type 5 NTTC after the Department's extended deadline. The customer actually resold the welding services and collected tax, but a correct certificate delivered too late did not satisfy Section 7-9-43.

K and N's owner, Kenneth Hooten, worked as an independent contractor providing welding and fabrication services to Madron Services in 2006. He used his own truck, equipment, tools, and welder. Madron resold his services in its ordinary business, and the later sale was taxed.

K and N reported $91,690 of federal Schedule C receipts but filed no New Mexico gross receipts returns for 2006.

The certificate missed both deadlines

An October 14, 2009 limited-scope-audit notice gave K and N until December 13 to provide NTTCs. The Department then granted another 60 days, through March 14, 2010.

K and N did not have a certificate by either deadline. Madron executed the correct Type 5 NTTC on June 28, 2010, more than three months after the extension expired.

There was no dispute that the certificate type was correct or that Madron's resale was taxable. Timing alone defeated the deduction: Section 7-9-43(A) required disallowance when the seller did not possess the required certificate within 60 days of the notice.

Buyer and accountant problems did not extend the period

Madron had not issued an NTTC when Hooten began working. After the audit notice, Hooten tried to obtain one, but the Department would not issue NTTCs to Madron while Madron was out of tax compliance.

K and N's accounting firm—which also served Madron—said it would obtain the certificate. An employee's departure contributed to the late delivery.

The decision nevertheless found no statutory provision permitting another extension after the 60-day period expired. It was unclear whether K and N, the accountant, or Madron caused the delay after the first notice, but none of those circumstances made the late certificate effective.

Penalty and interest also remained

The Department initially assessed $5,847.98 tax, $1,169.60 penalty, and $1,726.94 interest.

Hooten admitted that he did not file the 2006 gross receipts returns because he did not know they were required. The decision treated that failure as negligence under Section 7-1-69 and sustained the $1,169.60 penalty.

Interest was mandatory while principal remained unpaid. It had grown to $2,362.17 by August 26, 2013 and continued accruing through payment.

Result: protest denied. K and N owed $5,847.98 principal, $1,169.60 penalty, and accrued interest.

What this means for you

Contractors receiving NTTCs

Obtain the correct certificate when the transaction occurs. If the Department sends a notice requiring possession, treat the 60-day deadline as firm.

Sellers whose buyers have compliance problems

A buyer's inability to obtain or issue an NTTC did not preserve the seller's deduction after the deadline here.

Nonfilers who did not know about gross receipts tax

Lack of awareness was treated as negligence, not reasonable cause, when the taxpayer failed to file required returns.

Common questions

Q: Were the welding services actually resold?
A: Yes. Madron resold them in its ordinary business and collected tax on the resale.

Q: Was the Type 5 NTTC the wrong certificate?
A: No. It was the correct type, but it was executed too late.

Q: Why did the accounting-firm delay not excuse the deadline?
A: Section 7-9-43 contained no further extension once the 60-day period expired.

Q: Did interest stop at the original assessment amount?
A: No. It continued to accrue until the tax principal was paid.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-9-3.5, 7-9-3(M), and 7-9-5 — gross receipts, services, and taxable-receipts presumption
• NMSA 1978, § 7-9-48 — services sold for taxable resale
• NMSA 1978, § 7-9-43(A) and (D) — NTTC possession deadline and buyer compliance
• NMSA 1978, § 7-1-17(C) — assessment presumption
• NMSA 1978, § 7-1-69(A)(1) and Regulation 3.1.11.10 NMAC — negligence penalty
• NMSA 1978, § 7-1-67(A) — mandatory interest

Cases cited:

• Wing Pawn Shop v. Taxation and Revenue Department, 1991-NMCA-024
• MPC Ltd. v. New Mexico Taxation and Revenue Department, 2003-NMCA-021
• Marbob Energy Corp. v. New Mexico Oil Conservation Commission, 2009-NMSC-013

Source

• Listing: New Mexico Decisions & Orders
• Decision post: K and N Welding
• Decision PDF: D&O 13-33

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
K and N WELDING No. 13-33
TO ASSESSMENT ISSUED UNDER LETTER
ID NO. L0799044672

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on August 26, 2013, before

Monica Ontiveros, Hearing Officer. This matter was originally set for hearing on July 22, 2013.

Taxpayer requested a continuance in this matter on July 10, 2013. The Department did not

object to the request for continuance. An Order was entered granting the continuance and

changing the hearing date to August 26, 2013.

At the hearing, the Taxation and Revenue Department (“Department”) was represented

by Aaron Rodriguez, Esq., attorney for the Department. Ms. Sonya Varela, protest auditor,

appeared as a witness for the Department. K and N Welding was represented by its owner,

Kenneth R. Hooten (“Taxpayer”) who appeared at the appointed time. The exhibits introduced

into the record are: Exhibit 1-Type 5 NTTC; Exhibit 2-Letter dated March 31, 2010; Exhibit A-

Notice of Limited Scope Audit Commencement; Exhibit B-Notice of Extension to Provide

Records; Exhibit C-Type 5 NTTC; and Exhibit D-Department spreadsheet.

Based on the aforementioned pleadings, the testimony and evidence introduced at the

hearing, and the arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:
FINDINGS OF FACT

1. On May 28, 2010, the Department assessed Taxpayer in gross receipts tax

principal in the amount of $5,847.98, $1,169.60 in penalty and $1,726.94 in interest for tax

period ending 2006. Letter Id No. L0790044672.

2. Taxpayer filed a protest to the assessment on July 7, 2010.

3. Taxpayer requested a retroactive extension to file a protest on July 8, 2010.

4. On August 17, 2010, the Department granted the retroactive extension and

acknowledged the protest. Letter Id No. L1540623424.

5. On June 6, 2013, the Department requested a hearing in this matter.

6. On June 10, 2013, the Hearings Bureau mailed a Notice of Administrative

Hearing setting the hearing for July 22, 2013. The matter was rescheduled to August 26, 2013.

7. Taxpayer filed a Federal 1040, Schedule C, reporting gross receipts.

8. Taxpayer failed to file gross receipts with New Mexico for tax period ending

December 31, 2006.

9. On October 14, 2009, the Department issued a Notice of Limited Scope Audit

indicating a discrepancy of $91,690.00 for tax year 2006 between what Taxpayer reported to the

Federal government and the State government. Exhibit A.

10. The Notice of Limited Scope Audit provided that Taxpayer had 60 days from the

date of the Notice of Limited Scope Audit letter or until December 13, 2009 to provide any

nontaxable transaction certificates (“NTTCs”) to the Department. Exhibit A.

11. The Department issued a Notice of Extension to Provide Records. This Notice

provided Taxpayer with an additional 60 days to provide any NTTCs to the Department. The

deadline to provide NTTCs was extended to March 14, 2010. Exhibit B.

In the Matter of the Protest of K and N Welding
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12. In 2006, Taxpayer provided welding and fabricator services to Madron Services,

Inc. (“Madron”) in the Carlsbad and Roswell area. Taxpayer was Madron’s only welder who

had passed tests to meet “code specifications.” (CD 25:07). Taxpayer worked in the mines for

Madron.

13. Taxpayer used his truck, his equipment and his tools to perform services for

Madron. Taxpayer used his own welder and paid for all repairs to the welder. Madron paid

Taxpayer on a weekly basis based on the number of hours worked by Taxpayer. Madron’s

supervisors told Taxpayer where to work but Madron did not direct or control the work of

Taxpayer. Taxpayer traveled a great deal on Madron’s behalf. Taxpayer did not receive any

benefits from Madron, except for a liability policy that covered Taxpayer. (CD 22:50-23:43).

14. Taxpayer provided services only to Madron. (CD 25:07). Taxpayer was an

independent contractor.

15. Madron sold welding, mining and oilfield services.

16. At the time Taxpayer began providing welding and fabricator services to Madron,

Madron did not execute a NTTC to Taxpayer.

17. After receiving the first letter from the Department, Taxpayer attempted to get

Madron to execute a NTTC to him.

18. Sometime between October 2009 and June 2010, the Department refused to issue

NTTCs to Madron because Madron was not in tax compliance.

19. Madron executed a Type 5 NTTC to Taxpayer on June 28, 2010, over 3 months

from the extended deadline. Exhibit 1.

20. Madron resold Taxpayer’s services in the ordinary course of business and the

subsequent sale of the service was taxed.

In the Matter of the Protest of K and N Welding
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21. Taxpayer’s CPA, Golden Seward & Kelly, LLC (“Golden”), also provided

accounting services to Madron. Golden told Taxpayer that it would get a NTTC from Madron.

Later, Golden told Taxpayer that the Department could not issue a Type 5 NTTC to Madron

because Madron was not in tax compliance. (CD 36:17). An employee at Golden left and this

contributed to Taxpayer receiving the NTTC after the expiration of the extended 60 day period.

22. Taxpayer did not provide any NTTCs to the Department within the extended 60

day period or before March 14, 2010. Exhibits 1 and C.

23. Taxpayer was provided a Type 5 NTTC from Golden executed by Madron on or

about June 28, 2010. Exhibits 1 and C.

DISCUSSION

The sole issue to be determined is whether the Department was required to allow

Taxpayer to deduct his receipts from Madron. Taxpayer argued that he was unaware that he

needed a Type 5 NTTC at the time he provided services to Madron. He also argued that he was

unable to get a NTTC from Madron because they were not in compliance with the Department.

The Department argued that the Type 5 NTTC was untimely executed.1

Burden of Proof and Standard of Review.

Section 7-1-17(C) provides that any assessment of taxes made by the Department is

presumed to be correct. NMSA 1978, Section 7-1-17(C) (2007). Accordingly, it is Taxpayer’s

burden to present evidence and legal argument to show that it is entitled to an abatement, in full

or in part, of the assessment issued against it. See, TPL, Inc. v. Taxation and Revenue Dep’t,

2000-NMCA-083, ¶8, 129 N.M. 539, 542, 10 P.2d 3d 863, 866, cert. granted, 129 N.M. 519, 10

P.3d 843, rev’d on other grounds, 2003-NMSC-7, 133 N.M. 447, 64 P.3d, 474. When a taxpayer

presents sufficient evidence to rebut the presumption, the burden shifts to the Department to
1
There are insufficient facts to apply an equitable recoupment analysis pursuant to NMSA 1978, Section 7-1-28(F) (2013).

In the Matter of the Protest of K and N Welding
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show that the assessment is correct. See, MPC Ltd. v. N.M. Taxation and Revenue Dep’t., 2003-

NMCA-021, ¶ 13, 133 N.M. 217, 219-220, 62 P.3d 308, 310-311; Grogan v. New Mexico

Taxation and Revenue Department, 2003-NMCA-033, ¶11, 133 N.M. 354, 357-58, 62 P.3d

1236, 1239-40. Under NMSA 1978, Section 7-1-17(C) (2007), the assessment issued in this case

is presumed to be correct.

Consequently, Taxpayer has the burden to show that the Department’s assessment is

incorrect and establish that he was entitled to the deduction for services rendered to Madron. See

Archuleta v. O'Cheskey, 1972-NMCA-165, ¶7, 84 N.M. 428, 431, 504 P.2d 638, 641 (NM Ct. App.

1972). The courts have held 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 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, 740, 809 P.2d 649, 654 (Ct. App. 1991).

Gross Receipts.

Generally speaking, goods sold or services performed within the State of New Mexico

are taxable. The term “gross receipts” is broadly defined in § 7-9-3.5(A)(1):

(1) “gross receipts” means the total amount of money or the value of other
consideration received from selling property in New Mexico, from leasing or
licensing property employed in New Mexico, from granting a right to use a franchise
employed in New Mexico, from selling services performed outside New Mexico, the
product of which is initially used in New Mexico, or from performing services in
New Mexico. In an exchange in which the money or other consideration received
does not represent the value of the property or services exchanged, “gross receipts”
means the reasonable value of the property or services exchanged;”

NMSA 1978, Section 7-9-3.5(A) (1) (2003). The Gross Receipts and Compensating Tax Act,

Sections 7-9-1 through 114, defines “service” as “all activities … which activities involve

predominately the performance of a service as distinguished from selling or leasing property. …

In the Matter of the Protest of K and N Welding
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In determining what is a service, the intended use, principal objective or ultimate objective of the

contracting parties shall not be controlling.” NMSA 1978, Section 7-9-3(M) (2003). The

Supreme Court in 1937 decided in Comer v. State Tax Comm'n, 41 N.M. 403, 412, 69 P.2d 936,

941 (1937) that gross receipts shall include “all activities or acts engaged in (personal,

professional and corporate) or caused to be engaged in with the object of gain, benefit[,] or

advantage either direct or indirect." In addition thereto, it is presumed that “all receipts of a

person engaging in business are subject to the gross receipts tax.” NMSA 1978, Section 7-9-5

(2002). Therefore, Taxpayer’s welding and fabricating services performed for Madron in New

Mexico are gross receipts and presumed to be taxable. NMSA 1978, 7-9-5(A) (2002).

Type 5 NTTC.

Receipts from selling a service that are resold are deductible if all the statutory conditions

are met. Section 7-9-48 provides that “(r)eceipts from selling a service for resale may be

deducted from gross receipts … if the sale is made to a person who delivers a nontaxable

transaction certificate to the seller. The buyer delivering the nontaxable transaction certificate

must resell the service in the ordinary course of business and the resale must be subject to the

gross receipts tax.” NMSA 1978, Section 7-9-48 (2000). In this case, Taxpayer presented the

Department with the correct type of NTTC, Type 5, and there was no issue that the services that

Taxpayer sold to Madron were resold in the ordinary course of business and taxable. Therefore,

the only issue is whether Taxpayer may deduct his receipts if the NTTC was provided to the

Department after the 60 day period expired.

Section 7-9-43(A) provides that:

(a)ll 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. If the
seller or lessor is not in possession of the required nontaxable transaction

In the Matter of the Protest of K and N Welding
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certificates within sixty days from the date that the notice requiring possession …
deductions shall be disallowed.

(Emphasis added.) NMSA 1978, Section 7-9-43(A) (2011).

In this case, because Taxpayer failed to request or obtain the Type 5 NTTC from Madron

when he first started working for Madron or within the extended 60 day period, Taxpayer failed

to meet the requirement that the NTTC be his possession within 60 days. The Department

provided Taxpayer with two 60 day notices that provided deadlines for Taxpayer to be in

possession of the NTTC. The Department issued its first notice to Taxpayer when it mailed its

Notice of Limited Scope Audit on October 14, 2009 to Taxpayer giving Taxpayer 60 days or

until December 13, 2009 to provide any NTTCs to the Department to support a deduction.

Instead, it is not clear from the facts if Taxpayer, his CPA or Madron were the cause of the delay

in Taxpayer obtaining a NTTC from Madron after this first notice. Regardless, the Department

extended the 60 day period when it issued to Taxpayer a Notice of Extension to Provide Records.

This Notice provided Taxpayer with an additional 60 days to provide any NTTCs to the

Department. The deadline to provide NTTCs was extended to March 14, 2010. Exhibit B.

Unfortunately because the Type 5 NTTC from Madron was executed after the extended deadline,

Taxpayer is not entitled to deduct his receipts from Madron.

Taxpayer argued that because he did not know of the filing requirements and because of

Madron’s tax compliance issues he should not have to suffer the consequences. Unfortunately

there is no provision within the Gross Receipts Tax Act that allows for an extension of the 60

day period once it has expired. The Department does have the right, but it is not required, to

refuse to approve an application to issue NTTCs of a person or company if the person or

company is found to be delinquent or to have a non-filed period. NMSA 1978, Section 7-9-

43(D) (2011). In this case, the Department refused to issue any NTTCs to Madron until Madron

In the Matter of the Protest of K and N Welding
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became compliant. Therefore Taxpayer is not allowed to deduct its receipts because he did not

timely possess the Type 5 NTTC.

Civil Penalty.

Taxpayer did not specifically argue that he did not owe penalty; however, his protest is

broad in its scope and this argument will be addressed. Taxpayer failed to file gross receipts

returns for tax year 2006 because he was unaware that he was required to do so. Civil penalty is

imposed when a taxpayer is “negligent” or disregards the Department’s rules and regulations in

not filing a return or paying tax when it is due. Section 7-1-69(A) states that:

(e)xcept as provided in Subsection C of this section, in the case of failure due to
negligence or disregard of department rules and regulations, but without intent
to evade or defeat a tax, to pay when due the amount of tax required to be paid,
to pay in accordance with the provisions of Section 7-1-13.1 NMSA 1978 when
required to do so or to file by the date required a return regardless of whether a
tax is due, there shall be added to the amount assessed a penalty in an amount
equal to the greater of:

(1) two percent per month or any fraction of a month from the date the
tax was due multiplied by the amount of tax due but not paid, not to exceed
twenty percent of the tax due but not paid;

(Emphasis added). NMSA 1978, Section 7-1-69 (A) (1) (2007). The Department’s

regulation provides that “negligence” includes “failure to exercise ordinary business

care and prudence which reasonable taxpayers would exercise under like circumstances;

inaction where action is required; inadvertence, indifference, thoughtlessness,

carelessness, erroneous belief or inattention.” Regulation 3.1.11.10 NMAC (2001).

By Taxpayer’s own admission, he was negligent in not filing and reporting his

In the Matter of the Protest of K and N Welding
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gross receipts returns. Therefore, Taxpayer is liable for penalty. The penalty assessed

is $1,169.60.2

Interest.

Taxpayer did not specifically argue that he did not owe interest; however, his

protest is broad in its scope and this argument will be addressed. Section 7-1-67(A)

(2007) states that interest “shall be paid” on taxes that are not paid on or before the date on

which the tax is due. NMSA 1978, § 7-1-67 (A) (2007). The word “shall” is interpreted to

mean that the Department does not have discretion and must assess interest if principal tax

is due and owing. Marbob Energy Corporation v. NM Oil Conservation Commission, 2009-

NMSC-013, ¶22, 146 N.M. 24, 32, 206 P.3d 135, 143 (2009). The assessment of interest is

not designed to punish taxpayers, but to compensate the state for the time value of unpaid

revenues. Because the principal amount of tax was not paid when it was due, interest was

properly assessed. Therefore, Taxpayer owes the interest amount calculated through date of

payment of the principal. The interest assessed through August 26, 2013 is $2,362.17.

Exhibit D.

CONCLUSIONS OF LAW

A. Taxpayer filed a timely written protest of the Notices of Assessment Letter ID No. #

L0799044672 for gross receipts taxes, penalty, and interest for the period ending 2006.

B. Jurisdiction lies over the parties and the subject matter of this protest.

C. Taxpayer sold services to Madron in the ordinary course of business. Madron

resold Taxpayer’s services and collected tax on the sale of the services.

D. Taxpayer provided the correct type of NTTC to substantiate its receipts as

deductible, but he was not in possession of the NTTC within 60 days of the Department’s notice.

2
There is a $1.00 difference between the assessed penalty amount and Exhibit D.

In the Matter of the Protest of K and N Welding
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E. There is no provision that allows an extension of the 60 day period.

F. Taxpayer did not rebut the presumption of correctness.

G. Taxpayer was negligent in not filing his gross receipts returns for period ending

2006; accordingly, he owes penalty.

H. Interest is due and owing on the principal amount of tax due until the date the

principal is paid.

I. The total amount due is $5,847.98 in principal; $1,169.60 in penalty and interest

accrued through the date of payment of the principal.

For the foregoing reasons, the Taxpayer's protest IS DENIED.

DATED: November 4, 2013

Monica Ontiveros
Hearing Officer
Taxation & Revenue Department
Post Office Box 630
Santa Fe, NM 87504-0630

NOTICE OF RIGHT TO APPEAL

Pursuant to NMSA 1978, §7-1-25 (1989), Taxpayer has the right to appeal this decision

by filing a notice of appeal with the New Mexico Court of Appeals within 30 days of the date

shown above. See NMRA, 12-601 of the Rules of Appellate Procedure. If an appeal is not filed

within 30 days, this Decision and Order will become final. A copy of the Notice of Appeal

should be mailed to John Griego, P. O. Box 630, Santa Fe, New Mexico 87504-0630. Mr.

Griego may be contacted at 505-827-0466.

In the Matter of the Protest of K and N Welding
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