Could a tile subcontractor deduct 2008-2009 receipts using an NTTC submitted more than three years after the 60-day audit deadline?

Plain-English summary

S.J. Tile could not use an NTTC submitted more than three years after the statutory audit deadline, and the owner's serious illnesses did not establish the full prolonged-illness penalty exception. The AHO upheld the 2008 and 2009 gross receipts tax, penalty, and interest assessments.

Steve Jones operated S.J. Tile as a one-person tile-setting business from about 1987 through 2012, working only for construction contractors because he intended the receipts to be deductible. He knew NTTCs were important and obtained some, but several contractors had gone out of business before he could collect all of them.

The Department's May 7, 2012 audit notice set a July 6, 2012 deadline. It allowed deductions for timely certificates and reduced the proposed tax. Jones later submitted a certificate from TAJ Construction around December 2, 2015.

The TAJ certificate was far too late

Section 7-9-52 allowed construction-service receipts to be deducted when the contractor delivered an NTTC. Section 7-9-43 required the seller to possess the certificate when the return was due or within 60 days after Department notice.

The TAJ certificate arrived more than three years after the deadline. The AHO therefore could not consider it, regardless of whether the underlying tile work otherwise qualified.

New Mexico's self-reporting system placed the duty on Jones to obtain and retain certificates, keep records sufficient to compute tax, and file returns. He had not filed gross receipts returns for the assessed years.

Serious illness did not prove inability to file or obtain help

Jones developed stage-four kidney failure, blindness, and diabetes requiring six insulin shots per day. The AHO accepted that he was disabled and seriously ill.

Regulation 3.1.11.11(B), however, also required proof that the illness made him unable to prepare a return and unable to procure someone else to prepare it. Jones presented no evidence on those additional requirements; he testified instead that he believed no tax was owed.

The penalty therefore remained, as did mandatory interest.

Result: protest DENIED. At the decision date, the amounts stated were:

• 2008: $5,496.86 tax, $1,099.37 penalty, and $1,415.67 interest
• 2009: $4,120.65 tax, $824.13 penalty, and $873.37 interest

A separate later decision, D&O 16-50, addressed S.J. Tile's 2010-2012 periods and did not modify this ruling.

What this means for you

Construction subcontractors

Collect and retain NTTCs during the project. Long customer relationships and a buyer's later closure do not extend the audit deadline.

Taxpayers facing serious illness

Document both inability to handle the filing personally and inability to obtain outside help. Proof of diagnosis or disability alone does not satisfy the full regulatory exception.

Accountants and tax professionals

Reconcile every claimed construction deduction to a timely certificate. Where only some certificates exist, the Department may allow those receipts while taxing the unsupported balance.

Common questions

Q: Did S.J. Tile have any valid NTTCs?
A: Yes. The Department allowed deductions supported by certificates obtained within the required period.

Q: When was the TAJ certificate due and submitted?
A: It was due July 6, 2012 and was provided around December 2, 2015.

Q: Did Jones's illnesses establish disability?
A: Yes, but he did not prove that they prevented both filing and obtaining another person to help.

Q: Why did Jones not file returns?
A: He believed his work for construction contractors was not taxable, but that belief did not replace the certificate and filing requirements.

Q: What does D&O 16-50 cover?
A: It is a separate decision involving the same taxpayer's later 2010-2012 periods and assessments.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-9-3, 7-9-3.5, 7-9-4, and 7-9-5 — services and gross receipts
• NMSA 1978, §§ 7-9-43 and 7-9-52 — NTTC deadline and construction-service deduction
• NMSA 1978, §§ 7-1-10 and 7-1-13 — records and self-reporting duties
• NMSA 1978, §§ 7-1-67 and 7-1-69 — interest and negligence penalty
• Regulation 3.1.11.11(B) NMAC — prolonged-illness indicator of non-negligence

Cases cited:

• Proficient Food Co. v. New Mexico Taxation and Revenue Department, 1988-NMCA-042 — late certificate supports denial of a deduction
• New Mexico Taxation and Revenue Department v. Dean Baldwin Painting, Inc., 2007-NMCA-153 — taxpayer recordkeeping duty
• Carlsberg Management Co. v. State Taxation and Revenue Department, 1993-NMCA-121 — assessment presumption and burden
• Marbob Energy Corp. v. New Mexico Oil Conservation Commission, 2009-NMSC-013 — mandatory interest language

Source

• Listing: New Mexico Decisions & Orders
• Decision post: S.J. Tile
• Decision PDF: D&O 16-23

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
S.J. TILE No. 16-23
TO ASSESSMENTS ISSUED UNDER LETTER
ID NOs. L1721425216 and L0379247936

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on May 4, 2016, before

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

represented by Julia Belles, Esq., attorney for the Department. Ms. Sonya Varela, protest auditor,

from the Department, appeared as a witness for the Department. S.J. Tile (“Taxpayer”) appeared

through its owner, Steve Jones, at the appointed time. Mrs. Nora Jones, Steve Jones’ wife, also

appeared at the hearing. The Department introduced into the record Exhibits A-F.

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 March 28, 2013, the Department assessed Taxpayer in the principal amount of

gross receipts tax of $5,496.86, $1,099.38 in penalty and $903.93 in interest for the tax period

ending December 31, 2008. [Letter Id No. L1721425216]. Again on March 28, 2013, the

Department assessed Taxpayer in the principal amount of gross receipts tax of $4,120.65,
$824.13 in penalty and $489.75 in interest for the tax period ending December 31, 2009. [Letter

Id No. L0379247936].

2. Taxpayer filed a protest on each assessment on April 24, 2013.

3. On May 9, 2013, the Department acknowledged the protest filed by Taxpayer.

[Letter Id. No. L1559887168].

4. The Department requested a hearing in this matter with the Administrative

Hearings Office on October 16, 2015.

5. The Administrative Hearings Office mailed a Notice of Administrative Hearing to

Taxpayer on October 29, 2015 setting the hearing for May 2, 2016.

6. Taxpayer was audited through the Department’s Schedule C mismatch program

whereby the Internal Revenue Service provides computer records of Schedule C returns which

are compared to the Department’s gross receipts tax program. [Letter Id No. L1721425216;

[Letter Id No. L0379247936].

7. On May 7, 2012, the Department mailed Taxpayer a Notice of Limited Scope

Audit Commencement (“60 day letter”) which provided that Taxpayer was required to provide

any nontaxable transaction certificates within 60 days or by July 6, 2012. [Exhibit F].

8. On the 60 day letter, the Department claimed that Taxpayer owed in gross receipts

tax principal $7,934.00 for tax year 2008 and $5,316.00 for tax year 2009. [Exhibit F].

9. Taxpayer did not file gross receipts returns for the periods at issue.

10. Taxpayer was in business from approximately 1987 through 2012, and was in the

business of tile setting for construction contractors. [CD 1, 5-4-16, 16:40-16:51]. Taxpayer was a

one-person operation. [CD 1, 5-4-16, 6:59-7:12].

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11. Taxpayer only provided services for construction contractors because he did not

want to have to pay gross receipts taxes. [CD 1, 5-4-16, 6:30-6:55].

12. Taxpayer obtained some nontaxable transaction certificates from the construction

contractors he provided services to. He was not able to gather nontaxable transaction certificates

from all of the construction contractors he provided services to because many of the contractors

went out of business. [CD 1, 5-4-16, 7:59-8:45; 11:00-11:26].

13. Taxpayer worked for many of the construction contractors for 20 years and he knew the

importance of the nontaxable transaction certificates. [CD 1, 5-4-16, 13:00-13:05].

14. Taxpayer provided the nontaxable transaction certificates he was able to obtain to

the Department and the amounts of principal for both tax years were reduced to the assessed

amounts.

15. Sometime during the reporting period, Taxpayer’s health began failing. He

developed stage four kidney failure and developed blindness. [CD 1, 5-4-16, 7:21-7:45].

Taxpayer also became a diabetic requiring six shots of insulin per day. [CD 1, 5-4-16,

12:34-12:36].

16. Taxpayer’s new address is 8975 Angie Lane, Mesilla Park, New Mexico 88047.

DISCUSSION

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

for gross receipts tax, penalty and interest for the tax years ending December 31, 2008 and

December 31, 2009. Taxpayer argued that he did not collect gross receipts tax so therefore he

should not have to pay gross receipts tax. In addition, Taxpayer requested that the penalty be

forgiven because he suffered from a number of health issues.

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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 he is entitled to an abatement, in full or in

part, of the assessment issued against him. See, Carlsberg Management Co. v. State, Taxation

and Revenue Dep’t., 1993-NMCA-121, 116 N.M. 247, 861 P.2d 288. In addition, all receipts of a

person engaging in business are presumed to be subject to the 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):

(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) (2007). 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, §7-9-3(M) (2007). The gross receipts tax is imposed on “any person engaging in

business in New Mexico.” NMSA 1978, §7-9-4 (2010).

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For the tax periods at issue, Taxpayer provided a service and was in the business of

setting tile for construction contractors. Since Taxpayer was providing a service, Taxpayer was

required to file gross receipts returns while in business. If Taxpayer was providing a service to a

construction contractor, Taxpayer could have deducted his receipts from his return if he had

asked for and received a nontaxable transaction certificate. NMSA 1978, Section 7-9-52(A)

(2012) provides that “(r)eceipts from selling a construction service or a construction-related

service may be deducted from gross receipts if the sale is made to a person engaged in the

construction business who delivers a nontaxable transaction certificate to the person performing

the construction service or a construction-related service.” In this case, for those transactions

that Taxpayer had a timely nontaxable transaction certificate, the Department allowed the

deduction. For those transactions that Taxpayer did not have a timely nontaxable transaction

certificate, the deduction was disallowed. A deduction is properly disallowed if the seller does

not have a timely nontaxable transaction certificate. See, Proficient Food Co. v. N.M. Taxation &

Rev. Dept., 1988-NMCA-042, ¶18, 107 N.M. 392, 758 P.2d 806.

New Mexico has a self-reporting tax system. It was the obligation of Taxpayer, not the

Department, to obtain and retain the nontaxable transaction certificates. A taxpayer has the

obligation “to maintain books of account or other records in a manner that will permit the

accurate computation of state taxes.” NMSA 1978, Section 7-1-10(A)(2007); N.M. Taxation &

Rev. Dept. v. Dean Baldwin Painting, Inc., 2007-NMCA-153, ¶12, 143 N.M. 189, 174 P.3d 525.

It was also the obligation of Taxpayer to determine the amount of gross receipts tax due to the

state and file timely returns. NMSA 1978, Section 7-1-13(B) (2013). Taxpayer failed to obtain

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and retain the applicable nontaxable transaction certificates and therefore, the deductions were

properly disallowed.

Taxpayer provided the Department with a nontaxable transaction certificate on or around

December 2, 2015. [Exhibits D and D-1]. The certificate was executed by TAJ Construction

Inc. to Taxpayer. The certificate was presented to the Department well after the 60 day period or

after July 6, 2012. [Exhibit F]. All nontaxable transaction certificates must be in the possession

of the seller at the time the return is due or no later than 60 days from the date the notice

requiring possession is given by the Department to the seller or the deduction will be disallowed.

NMSA 1978, §7-9-43(A)(1994). Because the TAJ nontaxable transaction certificate was

received by the Department over three years after the 60 day letter was mailed to Taxpayer, the

nontaxable transaction certificate cannot be considered.

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) 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;

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(Emphasis added) NMSA 1978, §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” for

either failing to file a return on time or failing to make a payment on time. Regulation 3.1.11.10

NMAC. Inadvertent error is defined as “negligence.” El Centro Villa Nursing Ctr. v. Taxation &

Revenue Dep’t., 1989-NMCA-070, ¶9, 108 N.M. 795, 779 P.2d 982. The regulations provide

exceptions to the negligence definition. The applicable exception related to when a taxpayer is

ill is found in regulation 3.1.11.11(B) which provides that:

the taxpayer, disabled because of injury or prolonged illness, demonstrates
the inability to prepare a return and make payment and was unable to procure
the services of another person to prepare a return because of injury or illness;

To meet this regulation, Taxpayer must prove that he was disabled, which he has, but in addition,

Taxpayer must prove that he was also unable to prepare a return and he was unable to procure the

services of another person to prepare a return because of the injury or the illness.

Taxpayer’s medical situation is clearly serious and it is undisputed that a prolonged

debilitating illness can impede a taxpayer’s ability to file a return. There is no dispute that this is

true for Taxpayer and many other taxpayers. Taxpayer, nonetheless did not present any evidence

that his illness prevented him from seeking assistance with the filing of his gross receipts returns.

The only testimony presented by Taxpayer on this subject was that he did not think he owed any

gross receipts tax which is why he did not register or file gross receipts returns. Therefore,

penalty was properly assessed. This Decision and Order is consistent with a number of other

Decision and Orders on this subject. See, Gail Stefl, No. 15-15; Promoco, No. 11-06; Sandia Oil

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Company No. 01-01; Gregory and Shirley Hale, No. 01-02; BR Gordon Construction Co., No.

98-01; and Rio Rancho Pharmacy, No. 97-05. Cf, Tafoyas Store, No. 97-43.

Interest

On the subject of 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) (2013) 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) (2013). 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, 206 P.3d 135. 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 as set out in the

Department’s worksheet. [Exhibit E].

CONCLUSIONS OF LAW

A. Taxpayer filed a timely written protest to the assessments issued under Letter ID

Nos. L1721425216 and L0379247936 and jurisdiction lies over the parties and the subject matter

of this protest.

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

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.

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C. Taxpayer did not rebut the presumption that he did owe the gross receipts tax

principal amount, and more specifically he failed to present evidence that he submitted to the

Department any other timely nontaxable transaction certificate within the 60 day period to

support a deduction.

D. The nontaxable transaction certificate executed by TAJ Construction Inc. to

Taxpayer was presented to the Department well after the 60 day period or after July 6, 2012 and

therefore was not valid to support a deduction pursuant to NMSA 1978, §7-9-43(A)(1994).

E. While Taxpayer proved he was disabled and seriously ill, he failed to prove that

he was also unable to prepare a return and he was unable to procure the services of another

person to prepare a return because of the injury or the illness to support the abatement of the civil

penalty pursuant to regulation 3.1.11.11(B) NMAC.

F. Taxpayer was negligent in not filing his gross receipts returns when due for the

tax years 2008 and 2009; accordingly, he owes penalty.

G. Interest continues to accrue until the principal is paid in full and all payments

should be applied to the principal amount of tax due.

H. The total amount due for tax year 2008 is $5,496.86 in principal, $1,099.37 in

penalty, and $1,415.67 in interest; and for the tax year 2009, the amount due is $4,120.65 in

principal, $824.13 in penalty, and $873.37 in interest.

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

DATED: June 2, 2016

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Monica Ontiveros
MONICA ONTIVEROS
Hearing Officer
Administrative Hearings Office
Post Office Box 630
Santa Fe, NM 87504-0630

NOTICE OF RIGHT TO APPEAL

Pursuant to NMSA 1978, Section 7-1-25 (2015), the 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 party filing an appeal

shall file a courtesy copy of the Notice of Appeal with the Administrative Hearings Office

contemporaneously with the filing of the Notice with the Court of Appeals so that the

Administrative Hearings Office may prepare the record proper. The Notice of Appeal should be

mailed to John Grieg, Administrative Hearings Office at P.O. Box 630, Santa Fe, New Mexico

87504-0630. Mr. Griego may be contacted at 505-827-0466.

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