Could Santa Lucia deduct independent-contractor service receipts when its Type 5 NTTC was executed two days after New Mexico's 60-day deadline?

Plain-English summary

Sarah T. Fresquez could not deduct receipts from independent-contractor services because her Type 5 NTTC was executed two days after New Mexico's 60-day deadline and she did not prove the services were resold subject to gross receipts tax. Her protest against tax, penalty, and interest for 2009 through 2011 was denied.

Fresquez operated Santa Lucia as a sole proprietorship. She contracted with the separate entity Santa Lucia, LLC to provide community-based life-skills training, in-home and respite care, job coaching, and transportation to people with developmental disabilities in New Mexico.

The correct certificate arrived after the deadline

The Department sent Fresquez a limited-scope audit notice on May 16, 2014. Under Section 7-9-43(A), she had 60 days—through July 15—to obtain the required NTTC.

Fresquez did not request the certificate from Santa Lucia, LLC until July 2, only 13 days before the deadline. At that time, the Department had suspended the LLC from executing NTTCs because it was not in tax compliance. The LLC executed the correct Type 5 certificate on July 17.

The hearing officer acknowledged that the certificate was only two days late but held that the statutory deadline controlled. Fresquez had not possessed a Type 5 NTTC when the services were performed or by July 15, so the deduction was unavailable.

The resale-tax condition was not proved either

Section 7-9-48 also required the buyer to resell the service in its ordinary business and subject the resale to gross receipts tax.

The LLC's letter broadly said it paid CRS tax for all independent contractors, and Fresquez submitted WebFile summaries showing that the LLC filed returns. But the record did not show that the reported receipts included Fresquez's services. The hearing officer gave little weight to the LLC's statement because it was not in tax compliance and noted that other contractors had similar issues.

Registration without filing supported penalty

Fresquez said she initially did not know she needed to register and file gross receipts tax returns. In 2010, however, a CPA advised her to register as an independent contractor and file returns. She registered with the Department in March 2010 and received a registration certificate in April, but still did not file.

The decision treated that failure as carelessness, erroneous belief, or inattention and upheld the negligence penalty. Interest was mandatory on unpaid principal through payment.

As of January 21, 2015, the decision stated the following amounts:

• 2009: $1,049.47 tax, $209.90 penalty, and $182.50 interest
• 2010: $1,998.91 tax, $399.78 penalty, and $268.46 interest
• 2011: $2,005.86 tax, $401.18 penalty, and $196.89 interest

Result: protest DENIED. All three years' tax and penalty remained, with interest continuing on unpaid principal.

What this means for you

Independent contractors selling services for resale

Obtain the correct NTTC when the services are performed. If the Department issues a 60-day demand, a certificate executed even shortly after the deadline may be rejected.

Contractors relying on a buyer's tax filings

Keep transaction-level proof that the buyer resold your particular services and subjected that resale to gross receipts tax. A general letter or return summary may not be enough.

Newly registered businesses

Registration does not replace filing. If a professional or the Department tells you returns are required, failing to file can support a negligence penalty.

Common questions

Q: Did the two-day delay matter?
A: Yes. The decision applied the 60-day deadline and disallowed the deduction.

Q: Was the Type 5 NTTC otherwise the right certificate?
A: Yes, but it was not executed in time.

Q: Did the LLC's statement that it paid CRS tax prove the resale condition?
A: No. The evidence did not connect the LLC's reported receipts to Fresquez's specific services.

Q: Why was penalty upheld?
A: Fresquez failed to file after a CPA advised her to register and file and after she registered with the Department.

Citations and references

Statutes and regulation:

• NMSA 1978, §§ 7-9-3(M), 7-9-3.5(A)(1), and 7-9-5(A) — services, gross receipts, and presumption that business receipts are taxable
• NMSA 1978, §§ 7-9-43(A) and 7-9-48 — NTTC possession deadline and service-for-resale deduction
• NMSA 1978, §§ 7-1-17(C), 7-1-67(A), and 7-1-69(A)(1) — assessment presumption, mandatory interest, and negligence penalty
• Regulation 3.1.11.10 NMAC — definition of negligence

Cases cited:

• Carlsberg Management Co. v. New Mexico Taxation and Revenue Department, 1993-NMCA-121 — taxpayer's burden to overcome an assessment
• El Centro Villa Nursing Center v. Taxation and Revenue Department, 1989-NMCA-070 — inadvertent error as negligence
• Marbob Energy Corporation v. New Mexico Oil Conservation Commission, 2009-NMSC-013 — mandatory meaning of “shall” for interest

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Santa Lucia
• Decision PDF: D&O 15-07

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
SANTA LUCIA No. 15-07
TO ASSESSMENTS ISSUED UNDER LETTER
ID NOs. L1413860304, L0876989392, and L1950731216

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on January 21, 2015, before

Monica Ontiveros, Hearing Officer. The Taxation and Revenue Department (“Department”) was

represented by Melinda Wolinksy, attorney for the Department. Milagros Bernardo appeared and

testified as a witness for the Department. Sarah T. Fresquez (“Taxpayer”) appeared and testified.

Her father, Steve Fresquez, appeared as a witness. The Department introduced into the record

Exhibits A and B. Based on the evidence and arguments presented, IT IS DECIDED AND

ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. On August 8, 2014, the Department issued three gross receipts tax assessments

against Taxpayer: 1) in the amount of $1,049.47 in tax, $209.90 in penalty, and $167.84 in interest

for the tax period of January 1, 2009 through December 31, 2009 (Letter Id. No. L1413860304);

2) in the amount of $1,998.91 in tax, $399.78 in penalty, and $240.53 in interest for the tax period

of March 1, 2010 through December 31, 2010 (Letter Id. No. L0876989392); and 3) in the amount

of $2,005.86 in tax, $401.18 in penalty, and $168.86 in interest for the tax period of January 1,

2011 through December 31, 2011 (Letter Id. No. L1950731216).

2. Taxpayer filed a protest to the assessments on October 30, 2014. A number of

documents were attached the protest letter including a Type 5 non-taxable transaction certificate
(NTTC) issued on July 17, 2014, a tax collection notice, six CRS returns, 15 summary details for

Santa Lucia, LLC, two summary details for Jamalczewski (same CRS number as Santa Lucia,

LLC), one email from Santa Lucia, LLC and a letter dated August 19, 2014 from Santa Lucia,

LLC.

3. The Department acknowledged the protest on November 5, 2014. Letter Id. No.

L2003041232.

4. On December 30, 2014, the Department requested a hearing in this matter.

5. On December 31, 2014, the Hearings Bureau mailed a Notice of Administrative

Hearing setting the hearing for January 21, 2015.

6. Sara T. Fresquez was the sole proprietor of Santa Lucia.

7. During the tax periods at issue, Taxpayer contracted with Santa Lucia, LLC to

provide services to people with developmental disabilities living in New Mexico. The services

included community base services (teaching individuals with life skills), in-home care

services/respite care, job coach services, and transportation services. [01-21-15 CD 12:43-14:02].

8. Taxpayer failed to file gross receipts returns for the tax periods at issue.

9. Santa Lucia, LLC (“Lucia”) is a separate entity from Taxpayer.

10. The letter from Lucia dated August 19, 2014 states that it “pays all the CRS tax for

all the Independent Contractors that provides services through Santa Lucia.” Letter dated August

19, 2014 attached to protest letter.

11. There is insufficient evidence to prove that Lucia resold Taxpayer’s services and

the resale was subject to gross receipts tax.

In the Matter of Santa Lucia
page 2 of 10

12. On May 16, 2014, the Department issued Taxpayer a Notice of Limited Scope

Audit Commencement-Gross Receipts letter or a 60 day letter. Exhibit A.

13. Taxpayer was required to have in her possession all NTTCs or Taxpayer had 60

days or until July 15, 2014 to produce any NTTCs to the Department.

14. Taxpayer received the 60 day letter from the Department and attempted to have in

her possession a NTTC from Lucia before the expiration of the 60 days.

15. On July 2, 2014, 13 days prior to the expiration of the 60 days, Taxpayer requested

a NTTC from Lucia. Email attached to protest letter.

16. Taxpayer was not prompt in trying to obtain a NTTC from Lucia.

17. At some point, Lucia was suspended by the Department from executing NTTCs.

On July 11, 2014, four days prior to the expiration of the 60 day letter, Lucia was still suspended

from issuing NTTCs, because it had failed to timely pay its gross receipts taxes. Letter dated

August 19, 2014 attached to protest letter.

18. On July 17, 2014, Lucia executed a Type 5 NTTC to Taxpayer.

19. The Type 5 NTTC was not issued by the Department within the 60 day period or

before July 15, 2014.

20. The Department refused to issue NTTCs or suspended Lucia from executing

NTTCs because Lucia was not in tax compliance. Letter dated August 19, 2014.

21. Sometime in 2010, Taxpayer and her father sought advice from Robert Rivera,

CPA. Mr. Rivera instructed Taxpayer to register as an independent contractor and file gross

receipts returns. [01-21-15 CD 49:44-51:09].

22. Taxpayer registered, in person, with the Department as an independent contractor

In the Matter of Santa Lucia
page 3 of 10
in March 2010. [01-21-15 CD 49:44-51:00].

23. Taxpayer received a registration certificate from the Department on April 20, 2010.

[01-21-15 CD 49:24-49:34].

24. Taxpayer had multiple contacts with the Department.

25. Taxpayer pays her personal income tax in a timely manner. [01-21-15 CD 21:56-

21:59].

DISCUSSION

The sole issue to be determined is whether the Department properly assessed Taxpayer for

gross receipts tax, penalty and interest for the tax periods January 1, 2009 through December 31,

2009; March 1, 2010 through December 31, 2010; and January 1, 2011 through December 31,

2011. Taxpayer argued that because Lucia was unable to provide her with a timely NTTC, the

Department should abate the tax. In addition she requested that the penalty be forgiven.

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, §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, Carlsberg Mgt Co. v. State, Taxation and Revenue Dep’t.,

1993-NMCA-121, 116 N.M. 247. In addition, all receipts of a person engaging in business are

subject to gross receipts tax pursuant to NMSA 1978, Section 7-9-5(A) (2002).

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 Section 7-9-3.5(A)(1):

In the Matter of Santa Lucia
page 4 of 10
(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, §7-9-3.5(A)(1) (2003). The Gross Receipts and Compensating Tax Act, specifically

Section 7-9-3(M), defines “service” as “all activities ... which activities involve predominately the

performance of a service as distinguished from selling or leasing property.” NMSA 1978, Section

7-9-3(M) (2007).

There is no question that the services Taxpayer sold to Lucia are gross receipts and taxable.

The services included community base services, in-home care services, job coach services, respite

care services, and transportation services. These are all services as defined by Section 7-9-3(M).

Therefore, Taxpayer’s services performed for Lucia in New Mexico are gross receipts and taxable,

unless deducted.

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, §7-9-48 (2000).

In the Matter of Santa Lucia
page 5 of 10
In this case, Taxpayer presented evidence of the correct type of NTTC, Type 5 (Taxpayer

is reselling her services for resale); however, the NTTC was issued by the Department outside of

the 60 day period. A taxpayer may deduct her receipts if the NTTC was issued by the Department

and executed by second seller (Lucia in this case) at the time the services were rendered but in any

event no later than 60 days from the date of the letter from the Department or July 15, 2014.

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.

NMSA 1978, §7-9-43(A) (2011).

In this matter, Taxpayer did not have in her possession the requisite NTTC when she

contracted with Lucia. In addition, she was not able to obtain the NTTC within the 60 day period

because Lucia had been suspended by the Department from executing NTTCs. The 60 day period

began when the Department issued Taxpayer a Notice of Limited Scope Audit Commencement-

Gross Receipts letter or a 60 day letter on May 16, 2014. Exhibit A. Taxpayer had 60 days or

until July 15, 2014 to produce any NTTCs to the Department. Taxpayer waited until July 2, 2014

or 13 days before the expiration of the 60 day time period before she requested a NTTC from

Lucia. Email attached to protest letter. Taxpayer provided no explanation why she waited until

two weeks before the expiration of the 60 day time period to request the NTTC from Lucia. It

wasn’t until July 17, 2014 that Lucia issued a Type 5 NTTC to Taxpayer. Taxpayer took a risk by

waiting until the last minute to request a NTTC from Lucia. The Hearing Officer somewhat

sympathizes with Taxpayer that the NTTC was issued only two days after the expiration of the 60

In the Matter of Santa Lucia
page 6 of 10
day letter, but nonetheless, the NTTC was not timely issued and therefore Taxpayer’s receipts are

not deductible.

As for the other legal requirement of Section 7-9-48, there is insufficient evidence in the

record to determine whether Lucia imposed gross receipts tax on the resale of Taxpayer’s services.

Taxpayer testified that the director of Lucia assured her that the gross receipts taxes were paid to

the Department on Taxpayer’s services. [01-21-15 CD 22:03-22:40]. Taxpayer also provided a

letter from the Director of Lucia stating that Lucia had paid CRS (gross receipts) taxes for all the

independent contractors. Letter dated August 19, 2014. The letter from Lucia dated August 19,

2014 states that it “pays all the CRS tax for all the Independent Contractors that provides services

through Santa Lucia.” Letter dated August 19, 2014. However, because Lucia was not in tax

compliance, the Hearing Officer places little weight on this statement.

Taxpayer also submitted a number of NM WebFile summary details for Lucia indicating

that Lucia was filing its returns. However, there is no evidence to indicate that the amount of

gross receipts reported to the Department included the receipts for Taxpayer’s services. Taxpayer

testified that a number of other independent contractors working for Lucia had a problem similar

to hers and it is not clear whose receipts were reported to the Department by Lucia. [01-21-15 CD

12:43-14:57]. There is insufficient evidence in the record to rebut the presumption that the

assessment is correct.

Civil Penalty.

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)(1)

states that:

In the Matter of Santa Lucia
page 7 of 10
(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 that degree of ordinary business care and

prudence which reasonable taxpayers would exercise under like circumstances; inaction by

taxpayers where action is required; inadvertence, indifference, thoughtlessness, carelessness,

erroneous belief or inattention” for either failing to file a return on time or failing to make a

payment on time. Regulation 3.1.11.10 NMAC (2001). Inadvertent error is defined as

“negligence.” See El Centro Villa Nursing Ctr. v. Taxation & Revenue Dep’t, 1989-NMCA-070,

¶14, 108 N.M. 795.

Taxpayer testified that at the time she was performing services for Lucia she was unaware

that she was required to register and file gross receipts returns. [01-21-15 CD 21:29-21:40].

However, at some point in 2010, Taxpayer and her father sought advice from Robert Rivera, CPA.

Mr. Rivera instructed Taxpayer to register as an independent contractor and file gross receipts

returns. Taxpayer registered in person with the Department as an independent contractor in March

2010 and she received a registration certificate from the Department, but she still failed to file her

returns. [01-21-15 CD 49:24-49:34]. Taxpayer had multiple opportunities to discuss the tax

consequences of performing services as an independent contractor with the Department.

In the Matter of Santa Lucia
page 8 of 10
Taxpayer’s actions were careless based on erroneous belief or inattention which is by definition

negligent and subject to civil penalty. Therefore, Taxpayer owes the penalty amount.

Interest.

New Mexico law is very clear on the imposition of interest when the principal

amount of tax is unpaid when due, even if the payment is received one day late. 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. 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 on the principal amount until the date it was paid. Therefore, Taxpayer

owes the interest amount calculated through date of payment of the principal.

CONCLUSIONS OF LAW

A. Taxpayer filed a timely written protest to the Notice of Assessments Letter Id. Nos.

L1413860304, L0876989392, and L1950731216 for gross receipts tax principal, penalty and interest

for the tax periods ending 2009, 2010 and 2011.

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

C. The hearing was timely set as required by NMSA 1978, Section 7-1-24.1(A)

(2013).

D. Pursuant to NMSA 1978, Section 7-1-17(C) (2007), the Department’s assessment

In the Matter of Santa Lucia
page 9 of 10
is presumed to be correct, and it is Taxpayer’s burden to come forward with evidence and legal

argument to establish that it was entitled to an abatement.

E. Taxpayer did not possess a Type 5 NTTC at the time the services were provided to

Lucia or in any event no later than 60 days after the expiration of the 60 day time period or no

later than July 15, 2014.

F. Taxpayer failed to provide sufficient evidence that Lucia imposed gross receipts tax

on the resale of Taxpayer’s services.

G. Taxpayer was negligent in not filing her gross receipts returns when due for the tax

years 2009, 2010 and 2011; accordingly, she owes penalty.

H. Interest is due on the amount of unpaid principal tax and continues to accrue on the

unpaid principal amount until the principal amount of tax due is paid.

I. The total amount due for tax year 2009 is $1,049.47 in principal, $209.90 in penalty

and $182.50 in interest. For tax year 2010, the amount due is $1,998.91 in principal, $399.78 in

penalty and $268.46 in interest. For tax year 2011, the amount due is $2,005.86 in principal, $401.18

in penalty and $196.89 in interest. The interest amount is calculated through January 21, 2015.

Exhibit B.

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

DATED: February 23, 2015

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

In the Matter of Santa Lucia
page 10 of 10