Did visible correction fluid on a timely service-resale NTTC invalidate Joseph and Carmen Garcia's gross receipts deductions?

Plain-English summary

White correction fluid used by the buyer to fix an address error did not invalidate Joseph and Carmen Garcia's timely service-resale NTTC. The certificate contained all required information and a proper signature, and the Garcias accepted it in good faith. All four yearly assessments were abated.

Joseph Garcia maintained and repaired foreclosed and vacant properties for another company. That buyer resold his services to its customers.

The buyer delivered the correct type of NTTC in 2008. When completing the form, its owner wrote an incorrect Garcia address, covered the mistake with correction fluid, entered the correct information, and issued the certificate.

The certificate met the statutory safe-harbor conditions

Section 7-9-48 allowed a deduction when a buyer resold services in the ordinary course, the resale was taxable, and the buyer delivered an NTTC.

The parties did not dispute that the certificate was timely, covered the assessed transactions, was the proper service-resale type, contained the required information, and had a proper signature.

Under Section 7-9-43(A), a properly executed NTTC accepted timely and in good faith was conclusive evidence that the receipts were deductible.

A corrected scrivener's error was not prohibited

The Department rejected the NTTC because visible white correction fluid made the document appear altered.

The Garcias explained that the buyer had delivered it in that condition. The buyer supplied written confirmation and separately told the Department that she had corrected her own address-entry mistake before issuing the form.

The regulations defined execution through completion of required vendor information and proper signature. They invalidated forms missing required information or not in the prescribed format, but did not prohibit correction fluid or a visible correction of a scrivener's error.

The Department cited no statute, regulation, or case supporting automatic invalidation. Once the Garcias produced the qualifying certificate and explanation, the burden shifted, and the Department did not reestablish the assessments.

Result: protest GRANTED. The assessments were fully abated:

• 2008: $292.11 tax, $58.42 penalty, and $62.09 interest;
• 2009: $1,949.75 tax, $389.95 penalty, and $325.25 interest;
• 2010: $2,864.87 tax, $572.97 penalty, and $363.99 interest; and
• 2011: $1,645.66 tax, $329.14 penalty, and $149.89 interest.

What this means for you

Sellers accepting NTTCs

Check the type, transaction coverage, required fields, signature, delivery date, and good-faith circumstances. Preserve the original certificate exactly as received.

Buyers correcting certificate mistakes

Document who made the correction, what was changed, when it occurred, and why. Provide a contemporaneous replacement or written confirmation if possible.

Taxpayers facing document-authenticity concerns

Obtain direct confirmation from the issuer and identify the exact statute or regulation governing validity. Suspicion about appearance is not the same as a legal defect.

Common questions

Q: What information was corrected?
A: The Garcias' address.

Q: Who applied the correction fluid?
A: The buyer's owner while completing the NTTC.

Q: Was the certificate late or the wrong type?
A: No. It was timely and the proper service-resale type.

Q: Did the buyer confirm the explanation?
A: Yes, both in writing and directly to the Department.

Q: Did any cited rule ban correction fluid?
A: No.

Q: What happened to penalty and interest?
A: They were abated with the tax because the receipts were deductible.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-9-43(A) and 7-9-48 — NTTC safe harbor and service-for-resale deduction
• NMSA 1978, § 7-1-17 — assessment presumption and burden shifting
• Regulations 3.2.201.8(C), 3.2.201.9(D), and 3.2.201.16 NMAC — required information, signature, and execution
• Regulation 3.2.1.18(A) NMAC — New Mexico services generally taxable absent a deduction

Cases cited:

• Leaco Rural Telephone Cooperative, Inc. v. Bureau of Revenue, 1974-NMCA-076 — timely, good-faith acceptance of a properly executed NTTC
• Proficient Food Co. v. New Mexico Taxation and Revenue Department, 1988-NMCA-042 — conclusive effect of a properly executed certificate
• Continental Inn v. New Mexico Taxation and Revenue Department, 1992-NMCA-030 — issuance is a matter between buyer and Department after timely delivery
• Gas Co. v. O'Cheskey, 1980-NMCA-085 — tax burden shifts to the issuing buyer after good-faith acceptance
• MPC Ltd. v. New Mexico Taxation and Revenue Department, 2003-NMCA-021 — burden shifts after rebutting an assessment

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Joseph and Carmen Garcia
• Decision PDF: D&O 15-12

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
JOSEPH AND CARMEN GARCIA, No. 15-12
TO ASSESSMENTS ISSUED UNDER
ID NOS. L0857603024; L1931344848;
L0186514384; and L1260256208

DECISION AND ORDER

A formal hearing on the above-referenced protest was held March 19, 2015, before Dee

Dee Hoxie, Hearing Officer. The Taxation and Revenue Department (Department) was

represented by Ms. Elena Morgan, Staff Attorney. Ms. Veronica Galewaler, Auditor, also

appeared on behalf of the Department. Mr. Joseph Garcia (Taxpayer) appeared for the hearing

and represented himself. The Hearing Officer took notice of all documents in the administrative

file. Based on the evidence and arguments presented, IT IS DECIDED AND ORDERED AS

FOLLOWS:

FINDINGS OF FACT

1. On October 31, 2014, the Department assessed the Taxpayer for gross receipts tax,

penalty, and interest for the tax period January 1, 2008 through December 31, 2008. The

assessment was for $292.11 tax, $58.42 penalty, and $62.09 interest. [L0857603024]

2. On October 31, 2014, the Department assessed the Taxpayer for gross receipts tax,

penalty, and interest for the tax period January 1, 2009 through December 31, 2009. The

assessment was for $1,949.75 tax, $389.95 penalty, and $325.25 interest. [L1931344848]

3. On October 31, 2014, the Department assessed the Taxpayer for gross receipts tax,

penalty, and interest for the tax period January 1, 2010 through December 31, 2010. The

assessment was for $2,864.87 tax, $572.97 penalty, and $363.99 interest. [L0186514384]

4. On October 31, 2014, the Department assessed the Taxpayer for gross receipts tax,

penalty, and interest for the tax period January 1, 2011 through December 31, 2011. The

assessment was for $1,645.66 tax, $329.14 penalty, and $149.89 interest. [L1260256208]

5. On January 27, 2015, the Taxpayer filed a formal protest to the assessments.

6. On February 23, 2015, the Department filed a request for hearing on this protest with the

Hearings Bureau.

7. The Taxpayer was engaged in business in New Mexico in 2008 through 2011 (the tax

years). The Taxpayer provided services to another company in maintaining and repairing

foreclosed and vacant properties.

8. The Department determined that the Taxpayer was a non-filer on gross receipts tax for

the tax years.

9. The Department began an audit of the Taxpayer and requested proof of any nontaxable

transaction certificates by October 7, 2014.

10. The Taxpayer produced a properly executed and timely nontaxable transaction certificate

(NTTC) for services.

11. The Taxpayer accepted the NTTC in good faith.

12. The Department rejected the NTTC provided because it had been visibly altered. There

was white correction fluid visible on the NTTC.

13. The Taxpayer explained that the NTTC had been issued to him in that condition.

14. The Taxpayer contacted the buyer who issued the NTTC, and the buyer provided letters

to the Taxpayer that confirmed that the NTTC had been issued to the Taxpayer in 2008.

Joseph and Carmen Garcia
Letter ID Nos. L0857603024; L1931344848; L0186514384; and L1260256208
page 2 of 8

15. The Department also contacted the buyer, and the buyer confirmed again that the NTTC

had been issued to the Taxpayer in 2008. The buyer spoke to Ms. Galewaler. The buyer

explained that she is the owner of the company that contracted with the Taxpayer.

16. The buyer explained that she filled out the NTTC and used the white correction fluid on it

when she realized that she had made a mistake when she was filling it out.

17. The buyer applied the white correction fluid to the Taxpayer’s address where she had

written the incorrect information. The buyer then filled in the correct information for the

Taxpayer and issued the NTTC to the Taxpayer in 2008.

18. The Department still refused to accept the NTTC and assessed the Taxpayer.

DISCUSSION

The issue to be decided is whether the Taxpayer is liable for gross receipts tax, penalty,

and interest for the tax years or whether the Taxpayer was entitled to deduct his gross receipts

based upon his acceptance of a NTTC.

Burden of Proof.

Assessments by the Department are presumed to be correct. See NMSA 1978, § 7-1-17.

Tax includes, by definition, the amount of tax principal imposed and, unless the context

otherwise requires, “the amount of any interest or civil penalty relating thereto.” NMSA 1978, §

7-1-3. See also El Centro Villa Nursing Ctr. v. Taxation and Revenue Dep’t., 1989-NMCA-070,

108 N.M. 795. Therefore, the assessment issued to the Taxpayers is presumed to be correct, and

it is the Taxpayer’s burden to present evidence and legal argument to show that he is not liable

for the tax and is entitled to an abatement of penalty and interest.

Joseph and Carmen Garcia
Letter ID Nos. L0857603024; L1931344848; L0186514384; and L1260256208
page 3 of 8
Gross Receipts Tax.

Services performed within the State of New Mexico are subject to the gross receipts tax.

See 3.2.1.18 (A) NMAC (2003). The Taxpayer admitted that he was engaged in a service

business performing maintenance and repairs on properties. There was no dispute that the

Taxpayer’s services would ordinarily be subject to gross receipts tax. The Taxpayer argued that

he was exempt from the tax based on his acceptance of a NTTC.

NTTCs.

A taxpayer engaged in business may be able to deduct certain gross receipts when they

are provided with NTTCs from buyers. See NMSA 1978, § 7-9-43 (2011). An NTTC must be

in the proper form and of the proper type to be valid. See 3.2.201.8 (C) NMAC (2012). See also

McKinley Ambulance Serv. v. Bureau of Revenue, 1979-NMCA-026, 92 N.M. 599 (noting that a

NTTC is conclusive evidence only if the NTTC applies to the transaction at issue). A taxpayer

should be in possession of NTTCs when the receipts from the transaction are due, but may also

produce NTTCs within a deadline set by the Department. See NMSA 1978, § 7-9-43. The seller

must accept the NTTC in good faith. See id. The Taxpayer produced a timely, properly

executed NTTC for services. There was no dispute that the NTTC was of the right type and

contained all of the required information. There was no dispute that the NTTC would cover the

amount of gross receipts taxes in the assessments.

NTTCs for services.

“Receipts 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. The

Joseph and Carmen Garcia
Letter ID Nos. L0857603024; L1931344848; L0186514384; and L1260256208
page 4 of 8
Taxpayer was selling his maintenance and repair services to the buyer, and the Taxpayer was

aware that the buyer was reselling his service to its customers. The buyer delivered a NTTC to

the Taxpayer. The NTTC was of the proper type, for resale of services. The Taxpayer was in

timely possession of the NTTC. Therefore, the Taxpayer accepted the NTTC in good faith. A

properly executed NTTC “shall be conclusive evidence, and the only material evidence, that the

proceeds from the transaction are deductible[.]” NMSA 1978, § 7-9-43 (A) (emphasis added).

The word “shall” indicates that the provision is mandatory, not discretionary. See Marbob Energy

Corp. v. N.M. Oil Conservation Comm’n, 2009-NMSC-013, ¶ 22, 146 N.M. 24. Consequently,

the Taxpayer has overcome the presumption and has provided conclusive evidence that the

transactions are deductible.

Burden shifted.

When a taxpayer presents evidence sufficient 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 (filed October 2, 2002). The Department

argued that the Taxpayer had not overcome the presumption of correctness. The Department

argued that the NTTC was not properly executed. The Department argued that the NTTC was

invalid and could not be relied upon for that reason.

The burden is on the Taxpayer to prove that he is entitled to an exemption or deduction.

See Public Services Co. v. N.M. Taxation and Revenue Dep’t., 2007-NMCA-050, ¶ 32, 141 N.M.

520. See also Till v. Jones, 1972-NMCA-046, 83 N.M. 743. “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.” Sec. Escrow Corp. v. State Taxation

Joseph and Carmen Garcia
Letter ID Nos. L0857603024; L1931344848; L0186514384; and L1260256208
page 5 of 8
and Revenue Dep’t., 1988-NMCA-068, ¶ 8, 107 N.M. 540. See also Wing Pawn Shop v.

Taxation and Revenue Dep’t., 1991-NMCA-024, ¶ 16, 111 N.M. 735. See also Chavez v.

Commissioner of Revenue, 1970-NMCA-116, ¶ 7, 82 N.M. 97. A properly executed NTTC is

conclusive proof that the seller is entitled to the deductions. See NMSA 1978, § 7-9-43.

However, that protection will be conclusive only when three requirements are met; the

acceptance of the NTTC must be timely, must be in good faith, and the NTTC must be properly

executed. See Leaco Rural Telephone Coop., Inc. v. Bureau of Revenue, 1974-NMCA-076, ¶ 15,

86 N.M. 629. Several cases also indicate that a properly executed NTTC delivered to the seller

is conclusive proof that the seller is entitled to the deductions. See Proficient Food Co. v. N.M.

Taxation and Revenue Dep’t., 1988-NMCA-042, 107 N.M. 392, 396 (holding that a properly

executed NTTC is conclusive evidence that the transaction is deductible). See also Leaco Rural

Tel. Coop. v. Bureau of Revenue, 1974-NMCA-076, 86 N.M. 269 (holding that proper issuance

of an NTTC is the responsibility of the buyer and that an accepted NTTC is conclusive evidence

that the deduction is allowed). See also Continental Inn v. N.M. Taxation and Revenue Dep’t.,

1992-NMCA-030, ¶ 12-13, 113 N.M. 588 (holding that proper issuance of an NTTC is a matter

between the buyer who issued it and the Department, and that a timely delivery of an NTTC by a

buyer conveys that the seller is entitled to deduction). See also Gas Co. v. O’Cheskey, 1980-

NMCA-085, ¶ 12, 94 N.M. 630 (indicating that when a seller accepts a NTTC in good faith, the

burden of the tax shifts to the buyer who issued the NTTC, even if it was wrongfully issued).

However, none of these cases deal with proper execution of a NTTC. The statute is

likewise silent on what “properly executed” means. See NMSA 1978, § 7-9-43. The

Department argued that having white correction fluid applied to the document meant that it was

altered and was, therefore, not properly executed. The Department cited no authority in support

Joseph and Carmen Garcia
Letter ID Nos. L0857603024; L1931344848; L0186514384; and L1260256208
page 6 of 8
of its position. Execution of a NTTC is defined by regulation, and says that a NTTC is executed

when “a taxpayer, having already obtained the requisite forms from the department, completes

an nttc form by entering the required information about the vendor to whom the nttc is to be

delivered.” 3.2.201.16 NMAC (2001). Nothing in this regulation prohibits execution of a NTTC

because of a visible correction made due to a scrivener’s error. See id. “An nttc is not valid if it

does not contain the information or is not in a form prescribed by the department.” 3.2.201.8 (C)

NMAC (2012). Forms are issued to taxpayers by the department in the appropriate type and are

serially numbered. See 3.2.201.9 NMAC (2001). Again, NTTCs are executed “[a]fter

completion of the information required on the nttc and after proper signature”. 3.2.201.9 (D)

NMAC. Again, nothing in the regulations prohibit the use of white correction fluid or indicate

that corrections on scrivener’s errors will invalidate a NTTC. See id.

Although it is understandable that the Department might be wary of document that

appeared to be altered, the Taxpayer provided ample explanation for the white correction fluid

on the NTTC provided to him. The Taxpayer explained that he received the NTTC from the

buyer in that condition. The buyer provided written documentation to the Taxpayer that the

NTTC was provided to the Taxpayer in 2008 and that the white correction fluid was applied to

correct an error made while filling out the document. The NTTC contained the information

required and a proper signature. The Department also communicated with the buyer, and

confirmed that the buyer had made a mistake while filling out the NTTC and had used white

correction fluid to correct the error.

Again, no statute, regulation, or case cited prohibits the acceptance of a NTTC for the use

of white correction fluid. The Taxpayer accepted the timely, properly executed NTTC in good

faith and is entitled to the safe harbor protection of the statute. See NMSA 1978, § 7-9-43.

Joseph and Carmen Garcia
Letter ID Nos. L0857603024; L1931344848; L0186514384; and L1260256208
page 7 of 8
CONCLUSIONS OF LAW

1. The Taxpayer filed a timely written protest to the Notices of Assessment of 2008,

2009, 2010, and 2011 gross receipts taxes issued under respective Letter ID numbers L0857603024,

L1931344848, L0186514384, and L1260256208, and jurisdiction lies over the parties and the

subject matter of this protest.

2. The Taxpayer had a properly executed and timely NTTC for the sale of his

services, which the Taxpayer accepted in good faith. See NMSA 1978, § 7-9-43.

3. The Taxpayer successfully rebutted the presumption of correctness as an NTTC is

conclusive evidence. See id.

4. The Department failed to establish that the assessments were correct and failed to

establish that NTTCs with visible corrections are prohibited or will negate a taxpayer’s safe harbor

protection. See id. See also 3.2.201.8 and 3.2.201.9 NMAC.

5. As the Taxpayer was entitled to deduct the gross receipts, he owed no gross receipts

taxes. Therefore, penalty and interest do not apply.

For the foregoing reasons, the Taxpayers' protest is GRANTED and the assessments are

hereby ABATED.

DATED: April 13, 2015.

Dee Dee Hoxie
DEE DEE HOXIE
Hearing Officer
Taxation & Revenue Department
Post Office Box 630
Santa Fe, NM 87504-0630

Joseph and Carmen Garcia
Letter ID Nos. L0857603024; L1931344848; L0186514384; and L1260256208
page 8 of 8