Could an equipment painter deduct services resold by its customers when one buyer gave the wrong NTTC type and two correct certificates arrived late?

Plain-English summary

Skelsey-Smith's equipment-painting receipts were not deductible because its supporting NTTCs were either the wrong type or executed after the audit deadline. The underlying services were actually resold and the resales taxed, but substantive eligibility did not replace the certificate requirements.

The Texas corporation painted heavy equipment and employed eight or nine people during the audit period. It performed most of its 2004–2007 work outside New Mexico but had New Mexico painting receipts at issue from June 2004 through June 2009.

The initial assessment listed $7,200.79 tax, $1,440.60 penalty, and $564.64 interest. During the audit the Department allowed every deduction supported by a timely Type 5 NTTC and disputed only receipts involving Frank's Supply, Worldwide Operating, and Romero Excavating/Trucking.

The three customers had different certificate defects

For a resale of services, Skelsey-Smith needed Type 5 certificates.

• Romero Excavating/Trucking: supplied a timely Type 7 NTTC, which covered construction services rather than the painting services sold here. No Type 5 was presented.
• Frank's Supply: supplied a timely Type 2 NTTC for tangible personal property, then a correct Type 5 only after the deadline.
• Worldwide Operating: likewise supplied a Type 2 rather than Type 5, followed by a correct Type 5 after the deadline.

The Department's first notice set February 15, 2010 as the certificate deadline. After Skelsey-Smith said it had not received that notice, the Department issued a second notice extending the deadline to March 22.

The statute and regulation provided no further extension. The correct Frank's and Worldwide certificates were executed after March 22 and therefore could not preserve the deductions.

The wrong certificates were not accepted in good faith

Skelsey-Smith argued that the auditor did not tell it which certificate was required. The auditor's notes said otherwise: before the deadline, the owner was told that Type 5 was needed.

The Type 2 and Type 7 forms themselves described transactions different from painting services. Skelsey-Smith also submitted several valid Type 5 certificates for other customers, showing awareness of the correct form. The decision therefore found no good-faith acceptance of the wrong types.

Penalty and interest remained

The owner admitted negligence in failing to file and report the gross receipts. Penalty applied, and interest was mandatory until principal payment.

Result: protest DENIED. The final order states $7,200.79 tax, $1,440.16 penalty, and interest accrued through payment. Interest assessed through February 28, 2011 was $564.64.

The decision contains inconsistent penalty figures: the first finding says $1,440.60, the penalty discussion says $1,140.16, and the final conclusion says $1,440.16. The final figure is also the rounded 20% of $7,200.79, so this summary uses the final-order amount while preserving all variants in the original text below.

What this means for you

Service sellers claiming resale deductions

Confirm both the transaction's substantive eligibility and the certificate series. A timely certificate for property or construction did not document a resale of painting services.

Businesses under an NTTC audit

Use the Department's written deadline as a final backstop. Even a correct certificate executed after the 60-day window was insufficient here.

Sellers asserting good-faith acceptance

Read the certificate face and compare it with what you sold. Prior possession of correct forms and direct auditor guidance can defeat a claim that the wrong form was accepted in good faith.

Common questions

Q: Were the painting services really resold?
A: Yes. The decision found ordinary-course resale and taxation of the subsequent sale.

Q: Why did Romero's Type 7 fail?
A: Type 7 did not cover the service-resale transaction; a Type 5 was required.

Q: Why did the Frank's and Worldwide Type 5 certificates fail?
A: They were executed after the Department's extended March 22 deadline.

Q: Which penalty amount controls the summary?
A: $1,440.16, the amount stated in the final conclusion; the ruling's conflicting figures are disclosed above.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-9-3.5(A), 7-9-3(M), and 7-9-5 — gross receipts, services, and taxable-receipts presumption
• NMSA 1978, §§ 7-9-48 and 7-9-43(A) — service-resale deduction and NTTC deadline
• Regulations 3.2.201.8(A)(3) and 3.2.201.8(D) NMAC — late and wrong-type NTTCs
• NMSA 1978, §§ 7-1-69(A) and 7-1-67(A) and Regulation 3.1.11.10 NMAC — penalty, interest, and negligence

Cases cited:

• Wing Pawn Shop v. Taxation and Revenue Department, 1991-NMCA-024 — strict construction and taxpayer burden for deductions
• Marbob Energy Corp. v. New Mexico Oil Conservation Commission, 2009-NMSC-013 — mandatory interest

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Skelsey-Smith, Inc.
• Decision PDF: D&O 14-01

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
SKELSEY-SMITH, INC. No. 14-01
TO ASSESSMENT ISSUED UNDER LETTER
ID NO. L0450631232

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on October 28, 2013, before

Monica Ontiveros, Hearing Officer. At the hearing, the Taxation and Revenue Department

(“Department”) was represented by Nelson Goodin, Esq., attorney for the Department. Ms.

Milagros Bernardo, protest auditor, appeared as a witness for the Department. Skelsey-Smith,

Inc. was represented by its owner, Michael S. Smith (“Taxpayer”) who appeared at the appointed

time. On October 24, 2013, Taxpayer requested a continuance. The request was denied on

October 25, 2013. The exhibits introduced into the record are: Exhibit 1-Type 5 NTTC January

4, 2011; Exhibit 2-Type 5 NTTC April 25, 2011; Exhibit A- NTTCs (4); Exhibit C-

Correspondence and Phone Log; Exhibit D-December 17, 2009 60 day letter; and Exhibit E-

portion of Audit.

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 February 28, 2011, the Department assessed Taxpayer in gross receipts tax

principal in the amount of $7,200.79, $1,440.60 in penalty and $564.64 in interest for tax period

June 30, 2004-June 30, 2009. Letter Id No. L0450631232.

2. Taxpayer filed a protest to the assessment on March 29, 2011.
3. On April 4, 2011, the Department acknowledged the protest. Letter Id No.

L0307702336.

4. On August 1, 2013, the Department requested a hearing in this matter.

5. On August 2, 2013, the Hearings Bureau mailed a Notice of Administrative

Hearing setting the hearing for October 28, 2013.

6. During the tax period at issue, Taxpayer provided painting services of heavy

equipment for certain buyers. Taxpayer was incorporated as a corporation in Texas in 1987.

7. Taxpayer sold its services for resale in the ordinary course of business.

8. During the tax period at issue Taxpayer employed between 8-9 employees.

9. Taxpayer provided most of its services, out of state, for tax years 2004-2007.

10. On December 17, 2009, the Department issued a 60 day letter to Taxpayer,

informing Mr. Smith that he had until February 15, 2010 to produce any nontaxaxable

transaction certificates (NTTCs). Exhibit D-1.

11. The Department reissued its 60 day letter to Taxpayer informing Mr. Smith that

the 60 day deadline to produce NTTCs had been extended to March 22, 2010. Exhibit D-2.

12. During the 60 day period, Taxpayer produced a number of NTTCs and provided

them to the Department. The Department reviewed these exhibits and allowed all deductions for

which Taxpayer had a timely Type 5 NTTC.

13. The Department rejected any Type 2 and Type 7 NTTCs from Taxpayer because

these were the wrong type of NTTCs needed to support the deduction.

14. The Department rejected NTTCs executed by Frank’s Supply Co., Worldwide

Operating, Inc., and Romero Excavating/Trucking Inc. Exhibit E-1.

In the Matter of the Protest of Skelsey-Smith, Inc.
Page 2 of 11

15. Taxpayer provided the Department with a Type 2 NTTC from Frank’s Supply

Co., Inc. Exhibit A-3. The NTTC was timely executed; however it was the wrong type of

NTTC.

16. Taxpayer provided the Department with a Type 5 NTTC from Frank’s Supply,

Co. Inc. Exhibit A-4. The NTTC was the right type, but it was executed outside of the 60 day

period.

17. Taxpayer provided the Department with a Type 7 NTTC from Romero

Excavating/Trucking Inc. The NTTC was timely executed; however it was the wrong type of

NTTC. Exhibit E-1.

18. Taxpayer provided the Department with a Type 2 NTTC from Worldwide

Operating, Inc. Exhibit A-1. The NTTC was the wrong type of NTTC.

19. Taxpayer provided the Department with a Type 5 NTTC from Worldwide

Operating, Inc. Exhibit A-2. The NTTC was the right type, but it was executed outside of the 60

day period.

20. Taxpayer’s services were sold in the ordinary course of business and the

subsequent sale of the service was taxed.

21. Taxpayer did not sell tangible personal property in support of a deduction for a

Type 2 NTTC.

22. Taxpayer did not sell construction services for resale in support of a deduction for

a Type 7 NTTC.

23. Taxpayer did not accept the Type 2 and Type 7 NTTCs in good faith.

DISCUSSION

In the Matter of the Protest of Skelsey-Smith, Inc.
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The sole issue to be determined is whether the Department properly denied the

deductions for Frank’s Supply Co., Inc., Worldwide Operating, Inc., and Romero

Excavating/Trucking, Inc. Taxpayer argued that all of the NTTCs he provided should be

accepted. The Department argued that it accepted all the timely Type 5 NTTCs and rejected

those NTTCs that were untimely or of the wrong type.

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

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 it was entitled to the deduction for services. See Archuleta v.

O'Cheskey, 1972-NMCA-165, ¶7, 84 N.M. 428, 431, 504 P.2d 638, 641. 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

In the Matter of the Protest of Skelsey-Smith, Inc.
Page 4 of 11
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). Taxpayer did not present evidence to rebut the presumption of

correctness.

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 determining what a service is, 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, 1937-NMSC-032, ¶37, 41 N.M.

403, 412, 69 P.2d 936, 941 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 painting services performed for Frank’s Supply

In the Matter of the Protest of Skelsey-Smith, Inc.
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Co., Worldwide Operating, Inc. and Romero Excavating/Trucking, Inc. are gross receipts and are

presumed to be taxable. NMSA 1978, Section 7-9-5(A) (2002).

Wrong Type of 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). Regulation 3.2.201.8(D) NMAC

requires Taxpayer to be in possession of the correct type of NTTC. The regulation provides that

the type or form of NTTC must be correct. To deduct receipts for services performed for

Romero Excavating/Trucking, Inc., Taxpayer was required to provide a Type 5 NTTC for

services sold to Romero Excavating/Trucking, Inc. Taxpayer did not present a Type 5 NTTC,

but only provided a Type 7 NTTC, for transactions for Romero Excavating/Trucking, Inc.

Therefore, the deduction was properly disallowed by the Department.

Untimely NTTCs.

The other two buyers, Frank’s Supply Co. and Worldwide Operating, Inc., provided

Taxpayer with the correct type of NTTC, however, Taxpayer failed to meet the requirement that

the NTTCs be in its possession within 60 days. 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
certificates within sixty days from the date that the notice requiring possession …
deductions shall be disallowed.

In the Matter of the Protest of Skelsey-Smith, Inc.
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(Emphasis added.) NMSA 1978, Section 7-9-43(A) (2011). In addition regulation

3.2.201.8(A)(3) NMAC provides that a taxpayer who acquires a NTTC after the 60 day period is

not entitled to the deduction.

The Department provided Taxpayer with two 60 day notices that provided deadlines for

Taxpayer to be in possession of the NTTCs. The Department issued its first notice to Taxpayer

on December 17, 2009 giving Taxpayer 60 days or until February 15, 2010 to provide any

NTTCs to the Department to support a deduction. Exhibit D-1. The Department provided

Taxpayer with a second 60 day letter on January 21, 2010 giving Taxpayer 60 additional days or

until March 22, 2010 to provide any NTTCs to the Department to support a deduction. Exhibit

D-2. In reviewing the Department’s notes, Taxpayer claimed that he had not received the first 60

day letter and a second 60 day letter was issued to him. Exhibit C-2. The Type 5 NTTCs

provided to the Department from Frank’s Supply Co., Inc. and Worldwide Operating, Inc. were

untimely because they were executed after March 22, 2010. The Department properly

disallowed these deductions.

Mr. Smith argued that because the auditor did not specifically tell him in writing or orally

that it needed a Type 5 NTTC that Taxpayer should not be responsible for the not providing the

correct type of NTTC. In reviewing the auditor’s notes from December 15, 2009, made prior to

the expiration of the 60 day period, the auditor made a specific notation that Mr. Smith was

informed that he would need to provide a Type 5 NTTC. Exhibit C-2. In addition thereto, in

reading the Type 2 or the Type 7 NTTCs, Taxpayer should have been alerted that its business of

reselling painting services did not fall within the activities described on the Type 2 or Type 7

NTTC. Finally, Mr. Smith must have known that he needed to provide Type 5 NTTCs because

In the Matter of the Protest of Skelsey-Smith, Inc.
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he provided a number of Type 5 NTTCs. Exhibit E-1. Thus, the Department correctly denied

the untimely and wrong types of NTTCs during the 60 day period.

Civil Penalty.

Taxpayer did not specifically argue that it did not owe penalty; however, its protest is

broad in its scope and this argument will be addressed. Taxpayer failed to provide either timely

or Type 5 NTTCs for all of its transactions for tax periods June 30, 2004-June 30, 2009. 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 Mr. Smith’s own admission, Taxpayer was negligent in not filing and

reporting his gross receipts returns. Therefore, Taxpayer is liable for penalty. The

penalty assessed is $1,140.16.

Interest.

In the Matter of the Protest of Skelsey-Smith, Inc.
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Taxpayer did not specifically argue that it did not owe interest; however,

Taxpayer’s 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. 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

February 28, 2011 is $564.64.

CONCLUSIONS OF LAW

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

L00450631232 for gross receipts taxes, penalty, and interest for the periods June 30, 2004-June 30,

2009.

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

C. Taxpayer sold services to Romero Excavating/Trucking, Inc., Frank’s Supply Co.,

Inc. and Worldwide Operating, Inc. in the ordinary course of business. Romero

Excavating/Trucking Inc., Frank’s Supply Co., Inc. and Worldwide Operating, Inc. resold

Taxpayer’s services in the ordinary course of business.

D. Romero Excavating/Trucking Inc. issued the wrong type of NTTC to Taxpayer.

In the Matter of the Protest of Skelsey-Smith, Inc.
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E. Frank’s Supply Co., Inc. and Worldwide Operating, Inc. issued the correct type of

NTTC to Taxpayer to substantiate Taxpayer’s receipts as deductible, but Taxpayer was not in

possession of the NTTCs within 60 days of the Department’s second notice.

F. There is no provision that allows an extension of the 60 day period.

G. Taxpayer did not rebut the presumption of correctness.

H. Taxpayer was negligent in not filing its gross receipts returns for tax periods at

issue; accordingly, it owes penalty.

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

principal is paid.

J. The total amount due is $7,200.79 in principal; $1,440.16 in penalty and interest

accrued through the date of payment of the principal.

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

DATED: January 28, 2014

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

In the Matter of the Protest of Skelsey-Smith, Inc.
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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.

CERTIFICATE OF SERVICE

On January 29, 2014, a copy of the foregoing Decision and Order was mailed by first class

mail to Michael S. Smith, owner of Skelsey-Smith, Inc. located at 120 Savanah Lane, Corrales,

New Mexico 87048 and delivered through interoffice mail to Staff Attorney Kathleen Carlow Esq.

Taxation and Revenue Department, Santa Fe, New Mexico.

John Griego

In the Matter of the Protest of Skelsey-Smith, Inc.
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