Did a Type 9 government NTTC exempt DNA and drug-testing services sold to New Mexico's Children, Youth and Families Department?

Plain-English summary

A Type 9 government NTTC did not exempt DNA, drug-screening, and other laboratory services sold to the New Mexico Children, Youth and Families Department because Type 9 applied to tangible personal property, not services. The AHO upheld the revised principal and interest but abated penalty based on reasonable reliance.

Mobile Blood Services had operated since about 1996 and began serving CYFD in 1999. A CYFD administrative employee told owner David Quintana not to charge gross receipts tax and gave the company a Type 9 NTTC.

For roughly 16 years, Mobile Blood Services did not charge or remit tax on CYFD receipts. In July 2015, a different CYFD employee told it to begin charging tax, and the company immediately complied.

Government status did not exempt purchased services

Mobile Blood Services conducted laboratory testing rather than selling tangible property. Section 7-9-54 and the certificate's own instructions limited Type 9 to qualifying tangible personal property sold to government agencies.

New Mexico generally taxed services sold to government agencies. The buyer's government status did not automatically exempt the seller's receipts, because gross receipts tax was the seller's liability unless a specific exemption or deduction applied.

The CYFD employee's advice did not legally eliminate the tax. Under the self-reporting system, the taxpayer remained responsible for determining the applicable law.

Older 2009 periods were removed

At the hearing, the parties identified periods through November 2009 that fell outside the six-year assessment limit. The Department adjusted the assessment.

After that correction, the decision stated $60,764.10 total principal and $7,587.48 interest through June 13, 2016. The record also included unprotested withholding tax and a compensating-tax credit within the overall assessment, so this summary does not recharacterize the revised total beyond the decision's stated figures.

Reliance supported penalty abatement

Quintana and his wife credibly testified that CYFD had instructed them to treat the services as nontaxable. An accountant prepared the company's gross receipts returns throughout the audit period and never advised that the certificate was invalid for services.

The AHO found reasonable reliance on the accountant's handling of the returns, together with the agency misinformation. Under Regulation 3.1.11.11(D), penalty was abated even though the tax remained.

Interest was mandatory and continued until payment of principal.

Result: protest PARTIALLY GRANTED AND PARTIALLY DENIED. Time-barred periods and penalty were removed; revised principal and interest remained.

What this means for you

Laboratories and healthcare testing businesses

Services to a government agency are not automatically exempt. Match the exact property-or-service transaction to the certificate type and statutory deduction.

Government vendors

Do not rely solely on a purchasing employee's statement that the agency is “tax exempt.” Read the certificate instructions and confirm whether it covers tangible goods, services, construction, or another category.

Accountants and tax professionals

Review long-standing customer exemptions periodically. Consistent filing over many years does not validate the wrong NTTC, but documented professional reliance may affect penalty.

Common questions

Q: What did Mobile Blood Services sell to CYFD?
A: Laboratory services, including DNA testing and drug screening.

Q: What did Type 9 cover?
A: Tangible personal property sold to a government agency, not the laboratory services at issue.

Q: Did CYFD's incorrect advice remove the tax?
A: No. The seller remained responsible for the tax law despite misinformation from a state-agency employee.

Q: Why was penalty abated?
A: The company credibly relied on CYFD's instruction and on the accountant who prepared its gross receipts returns without correcting the certificate error.

Q: What amounts remained after adjustment?
A: The decision stated $60,764.10 principal and $7,587.48 interest through June 13, 2016, with interest continuing to accrue.

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, § 7-9-54 — government tangible-property deduction and Type 9 NTTC
• NMSA 1978, § 7-1-18(D) — six-year assessment period
• NMSA 1978, §§ 7-1-67 and 7-1-69 — interest and negligence penalty
• Regulations 3.2.212.9 and 3.1.11.11(D) NMAC — government services and accountant reliance

Cases cited:

• Kinder Morgan CO2 Co. v. State Taxation and Revenue Department, 2009-NMCA-019 — self-reporting duty to determine tax obligations
• El Centro Villa Nursing Center v. Taxation and Revenue Department, 1989-NMCA-070 — reasonable professional reliance and negligence
• TPL, Inc. v. Taxation and Revenue Department, 2000-NMCA-083 — burden to establish a deduction
• Marbob Energy Corp. v. New Mexico Oil Conservation Commission, 2009-NMSC-013 — mandatory interest language

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Mobile Blood Services
• Decision PDF: D&O 16-26

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
MOBILE BLOOD SERVICES No. 16-26
TO ASSESSMENT ISSUED UNDER LETTER
ID NO. L1323706928

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on June 2, 2016, before

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

represented by Marek Grabowski, Esq., attorney for the Department. Mr. Tom Dillon, protest

officer supervisor, from the Department, appeared as a witness for the Department. Mobile

Blood Services (“Taxpayer”) appeared through its owner, David Quintana, at the appointed time.

Mrs. Noreen Quintana, David Quintana’s wife, also appeared at the hearing. The Department

introduced into the record Exhibits A and B, and Taxpayer introduced into the record Exhibits 1

and 2.

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 10, 2016, the Department assessed Taxpayer in the principal amount of

gross receipts tax of $87,164.25, $15,213.24 in penalty and $10,690.84 in interest for the tax

periods January 31, 2009 through May 31, 2015. [Letter Id No. L1323706928]. As part of this

same assessment Taxpayer was assessed $1,822.43 in withholding principal tax, $323.34 in
penalty and $52.26 in interest. Taxpayer was also given a credit for compensating tax in the

amount of $11,801.57. [Letter Id No. L1323706928].

2. Taxpayer filed a protest of the assessment on April 11, 2016.

3. On April 19, 2016, the Department acknowledged the protest filed by Taxpayer.

[Letter Id. No. L0298187312].

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

Hearings Office on May 3, 2016.

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

Taxpayer on May 6, 2016 setting the hearing for May 23, 2016.

6. Taxpayer filed gross receipts returns for the periods at issue.

7. Taxpayer has been in business from approximately January 1996 and continues to

be in business. [CD 6-2-16, 6:52-6:57].

8. Taxpayer was registered with the State of New Mexico to conduct business. He

also filed and paid gross receipts taxes. [CD 6-2-16, 14:55-15:10].

9. Taxpayer’s primary business is to provide a service or to conduct laboratory

testing, including DNA testing and drug screening or testing. [CD 6-2-16, 6:57-7:20]. Taxpayer

does business all over the country. [CD 6-2-16, 7:27-7:36].

10. All of the receipts at issue are from the New Mexico Children, Youth and Families

Department (“CYFD”).

11. Taxpayer began providing laboratory testing to CYFD in 1999. [CD 6-2-16,

8:44].

In the Matter of the Protest of Mobile Blood Services
Page !2 of 13
!

12. Sometime in 1999 when Taxpayer began providing services to CYFD, Frances

from the Administrative Services Division of CYFD, told Taxpayer that he should not charge

gross receipts tax and CYFD executed a nontaxable transaction certificate (“NTTC”) to

Taxpayer. [CD 6-2-16, 8:44]; [Exhibit 1].

13. On September 16, 1999, CYFD executed a timely Type 9 NTTC to Taxpayer.

[Exhibit 1].

14. The backside of the Type 9 NTTC states that a Type 9 NTTC is for the purchase

of tangible personal property. [Exhibit 2].

15. Taxpayer was selling a service to CYFD, which in turn was not reselling the

service in the ordinary coarse of business.

16. CYFD did not enter into a contract at any time with Taxpayer. [CD 6-2-16,

15:25-15:33].

17. Taxpayer did not charge or collect gross receipts taxes on its receipts from CYFD.

18. Sometime in July 2015, Sarah Palmer from CYFD, notified Taxpayer that he

should begin charging CYFD gross receipts tax. [CD 6-2-16, 15:44-15:59].

19. After receiving the call from Ms. Palmer, Taxpayer began charging, collecting and

remitting gross receipts for his services. [CD 6-2-16, 8:58-9:20].

20. During the audit period in question, an accountant prepared Taxpayer’s gross

receipts returns. [CD 6-2-16, 16:13-16:58; 18:39-18:57; 25:44-25:47].

21. At no time did Taxpayer’s accountant informed him that the Type 9 NTTC was

not valid for the transactions with CYFD.

In the Matter of the Protest of Mobile Blood Services
Page !3 of 13
!

22. During the hearing, the Department offered that abatement of penalty might be

appropriate. [CD 6-2-16, 30:03-30:13].

23. At the hearing, it was pointed out to the Department that the reporting periods

through November 2009 which were included in the 2016 assessment were outside of the six

year statute of limitations provided in NMSA 1978, Section 7-1-18(D) (2013). The Department

made an adjustment to tax year 2009. [Exhibit B].

24. The revised amount of gross receipts tax due is $60,764.10 in principal tax and

$7,587.48 in interest for gross receipts, withholding and compensating tax, with interest accrued

through June 13, 2016. [Exhibit B].

25. Both Mr. and Mrs. Quintana testified and they were credible and believable in

their testimony that Frances from CYFD misinformed them that the Type 9 NTTC allowed them

not to charge gross receipts tax on the services they provided to CYFD. They were also credible

that their accountant did not advise them that they should not be deducting the CYFD receipts.

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 January 31, 2009 through May

31, 2015. There was no argument made that Taxpayer did not owe withholding tax. Taxpayer

argued that he was misled by Frances from CYFD and because she worked for a state agency, he

believed that he was able to deduct the receipts from CYFD from his returns. Taxpayer thought

that he could deduct CYFD's gross receipts because CYFD provided him with a NTTC.

Burden of Proof and Standard of Review

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

In the Matter of the Protest of Mobile Blood Services
Page !4 of 13
!
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, ¶10, 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). Taxpayer has the burden of overcoming the

statutory presumption created by Section 7-9-5(A) and establish that he is entitled to a deduction.

TPL, Inc. v. Taxation & Revenue Dep’t., 2000-NMCA-083, ¶8, 129 N.M. 539, 10 P.3d 863, rev’d

on other grounds, 2003-NMSC-007, 133 N.M. 447, 64P.3d 474.

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.”

In the Matter of the Protest of Mobile Blood Services
Page !5 of 13
!
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).

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

conducting laboratory testing, including DNA and drug testing. Since Taxpayer was providing a

service, Taxpayer was required to charge, collect and remit gross receipts on the services he

provided to CYFD. Services sold to a governmental agency are generally taxable pursuant to

regulation 3.2.212.9 NMAC. Taxpayer was provided a Type 9 NTTC from CYFD, but because

Taxpayer was providing a service to CYFD and not selling tangible personal property, the Type 9

NTTC was not applicable to the transactions with CYFD. A Type 9 NTTC may only be used by

a seller if he is selling tangible personal property to a governmental agency and does not apply to

the purchase of services by a governmental agency. NMSA 1978, §7-9-54 (2003). On the back

of the NTTC, the Types and uses of NTTCs are described in specificity. [Exhibit 2].

Unfortunately, Taxpayer was misinformed by Frances from CYFD that the services he

provided were nontaxable and that he should not charge gross receipts taxes on his services. A

taxpayer is always responsible for understanding the tax laws and paying taxes accordingly, even

if Taxpayer was misinformed by a CYFD employee. A general proposition in tax law is

“(i)mplicit in a requirement to self-declare is an obligation to assess one’s tax obligation under

applicable tax law.” Kinder Morgan C02 Co. L.P. v. State Taxation & Revenue Dep’t., 2009-

NMCA-019, ¶43, 145 N.M. 579, 203 P.3d 110. There is no provision within the law that excuses

a taxpayer from paying a tax because he relied on a state employee.

Taxpayer provided services to CYFD for approximately 16 years before CYFD or the

Department took any action in informing Taxpayer that he was not charging or remitting gross

In the Matter of the Protest of Mobile Blood Services
Page !6 of 13
!
receipts on his services to CYFD. Why the delay in informing Taxpayer that his returns were

incorrect and that he failed to charge gross receipts tax; there is no explanation. Nonetheless,

Taxpayer is now fully aware of his tax obligations.

In addition, the Department has a very informative FYI (For Your Information), which is

available on the internet, on which transactions are deductible when conducting business with a

governmental agency. FYI-240, Transactions with Government Agencies (7/2014). FYI-240

makes it clear that:

A government may say, "We're not taxable, so don't charge us gross
receipts tax." Remember that the gross receipts tax applies to the
seller's receipts. Unless an exemption or deduction applies, the seller's
receipts are taxable regardless of the buyer's tax status. When an
exemption is in place, the seller's receipts are not taxed and do not have
to be reported (Section 7-9-12 NMSA 1978). Only the seller or lessor
can be exempt from taxation because gross receipts tax is the liability
of the seller of a product or a service and of the person who leases
property to someone else. While governmental entities are exempt from
gross receipts tax on their own receipts (Section 7-9-13 NMSA 1978),
persons who sell to governmental entities are not automatically exempt
from gross receipts tax on their receipts. Note, however, that even when
a transaction is not exempt, it may be deductible.

FYI-240, Transactions with Government Agencies (7/2014), page 3.

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
In the Matter of the Protest of Mobile Blood Services
Page !7 of 13
!
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, §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. After reviewing the

exceptions or indications of nonnegligence found in regulation 3.1.11.11 NMAC (1/15/01), the

only possible applicable regulation that might apply to Taxpayer is found in paragraph D of the

regulation. Regulation 3.1.11.11(D) provides that:

(t)he taxpayer proves that the failure to pay tax or to file a return
was caused by reasonable reliance on the advice of competent tax
counsel or accountant as to the taxpayer’s liability after full
disclosure of all relevant facts; failure to make a timely filing of a
tax return, however, is not excused by taxpayer’s reliance on an
agent;

To meet this regulation, it requires Taxpayer to prove that he reasonably relied on the

advice of a competent accountant and that the competent accountant provided incorrect tax

advice. The term “reasonable reliance” is a factual determination made by the Hearing Officer.

In the Matter of the Protest of Mobile Blood Services
Page !8 of 13
!
It requires evidence that the taxpayer acted reasonably or acted in a “(f)air, proper or moderate

under the circumstances” and the person exercised reliance or a “(d)ependence or trust” on the

advice of a competent accountant. Black’s Law Dictionary, 1379, 1404 (9th ed. 2009). This

indication, as with the other indications of nonnegligence, are in keeping with the holding in El

Centro Villa Nursing Center v. Taxation & Revenue Dep’t., where the court stated that “(u)nder the

statutory definition of negligence, it is inappropriate to impose a penalty where the taxpayer acted

reasonably in failing to report income or to pay taxes.” Id. at ¶6. The court also held that a

taxpayer is not relieved of his or her duty to ascertain the possible tax consequences of his action or

inaction by abdicating this responsibility by merely appointing an accountant to act as an agent in

tax matters. Id. at ¶14. Thus, in reading the regulation and El Centro Villa, the hiring of an

accountant by itself is insufficient to prove that a taxpayer is nonnegligent. The taxpayer must act

reasonably and he or she must have relied on the accountant’s incorrect tax advice.

The Administrative Hearings Office (formally known as the Hearings Bureau) has ruled in

numerous cases that reasonable reliance on a CPA may be a reason for abatement of penalty

especially when it seems clear from the evidence that the accountant provided “incorrect tax

advice.” See, Carlos Chavez Formerly d/b/a Mayan Construction, Decision and Order No. 12-09

(the accountant failed to review the work of Taxpayer’s employee and failed to properly advise

Taxpayer of time deadlines); Jesus Hernandez, Decision and Order No. 11-16 (the accountant

stated in a letter that he had provided taxpayer with incorrect advice); Wal-Mart, Decision and

Order No. 06-07 (taxpayer relied on in-house tax accountants to form a subsidiary company to

reduce state tax liability); Children’s Orchard, Decision and Order No. 01-05 (taxpayer hired an

accountant to give them advice to assist them in making sure their taxes were properly paid); and

In the Matter of the Protest of Mobile Blood Services
Page !9 of 13
!
Eileen P. Cahoon, Decision and Order No. 98-38 (taxpayer relied on her accountant’s advice in not

providing a timely NTTC). But see, Marilyn Stock, Decision and Order 05-04 (taxpayer was not

granted a refund of the penalty amount she paid even though she had relied on her CPA who used

the wrong tax table in determining her tax liability).

In this case, Taxpayer’s accountant was in charge of filing Taxpayer’s gross receipts returns

during the tax periods at issue. The accountant may have relied on Frances’s statement that the

transactions were nontaxable. Regardless, the transactions were taxable and Taxpayer reasonably

relied on his accountant to file and pay gross receipts returns. Therefore, penalty should be

abated.

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 B].
In the Matter of the Protest of Mobile Blood Services
Page !10 of ! 13
CONCLUSIONS OF LAW

A. Taxpayer filed a timely written protest to the assessment issued under Letter ID No.

L1323706928 and jurisdiction lies over the parties and the subject matter of this protest.

B. The hearing was timely set as required by NMSA 1978, Section 7-1B-8(A) (2015).

C. 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 he was entitled to an abatement.

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

E. Taxpayer provided laboratory services and he did not sell tangible personal

property to CYFD for tax periods January 31, 2009 through May 31, 2015.

F. The Type 9 NTTC CYFD executed to Taxpayer was not applicable to the

transactions with CYFD because it is not permissible to deduct services sold to a governmental

agency pursuant to NMSA 1978, Section 7-9-54 (2003).

G. Services sold to a governmental agency are generally taxable pursuant to

regulation 3.2.212.9 NMAC.

H. Taxpayer proved that he reasonably relied on Frances from CYFD and his

accountant to deduct the receipts, albeit the receipts were not deductible.

I. Pursuant to regulation 3.1.11.11(D) NMAC, penalty is abated because Taxpayer

relied on his accountant to deduct the receipts from CYFD for tax periods January 31, 2009

through May 31, 2015; accordingly, he does not owe penalty.

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

should be applied to the principal amount of tax due.

In the Matter of the Protest of Mobile Blood Services
Page 11
! of 13
!
K. The total amount due for tax periods January 31, 2009 through May 31, 2015 is

$60,764.10 in principal gross receipts tax and $7,587.48 in interest, with interest accrued through

June 13, 2016.

For the foregoing reasons, Taxpayer’s protest IS PARTIALLY GRANTED AND

PARTIALLY DENIED.

DATED: June 14, 2016

Monica Ontiveros
MONICA ONTIVEROS
Hearing Officer
Administrative Hearings Office

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 6400, Santa Fe, New Mexico

87502. Mr. Griego may be contacted at 505-827-0466.

In the Matter of the Protest of Mobile Blood Services
Page !12 of ! 13
In the Matter of the Protest of Mobile Blood Services
Page !13 of ! 13