Did timely Type 6 construction NTTCs protect architectural design-build receipts when the pre-2012 transactions technically required Type 5 resale certificates?

Plain-English summary

An architectural firm was protected by timely, complete Type 6 NTTCs accepted in good faith, even though its pre-2012 design services technically required Type 5 resale certificates. The AHO abated the entire $142,694.21 assessment.

SMPC provided architectural services to general contractors under design-build construction contracts. The contractors resold those services to the project owners and paid gross receipts tax on the design-build contracts. SMPC requested and timely received properly completed Type 6 construction NTTCs from the contractors.

The Department assessed $109,066.22 tax, $21,814.83 penalty, and $11,813.16 interest for 2008 through 2013. During most of that period, a regulation excluded architectural services from “construction services,” so the Department concluded that SMPC should have obtained Type 5 certificates for the service-for-resale deduction. A 2012 statutory amendment later treated architecture as a construction-related service eligible for Type 6 treatment.

The underlying transactions qualified for a real deduction

Section 7-9-48 allowed a deduction when a service was sold for resale in the buyer's ordinary course of business and the resale was subject to gross receipts tax. The evidence showed that the general contractors resold SMPC's architecture in the design-build contracts and paid the tax on that resale.

The Department acknowledged that it would have allowed the deductions if SMPC had possessed Type 5 NTTCs. This was therefore not an attempt to turn an inherently taxable transaction into a nontaxable one; the dispute concerned only the certificate series used to substantiate a valid deduction.

The wrong certificate series did not defeat the safe harbor

Section 7-9-43(A)'s safe harbor made a properly executed NTTC conclusive evidence when the seller accepted it on time and in good faith. Under Leaco, the three requirements were timeliness, proper completion, and good-faith acceptance.

SMPC met all three. It received the Type 6 certificates on time, the forms were filled out and signed, and the contractors' issuance conveyed that the receipts were deductible. The contractors also assured SMPC that they paid gross receipts tax under the design-build contracts.

The AHO found no dishonesty, deceit, intent to defraud, or other bad faith. The statutory text itself could reasonably suggest Type 6 treatment, and the Legislature later expressly allowed that certificate for the same kind of architectural transaction.

The decision reasoned that limiting the safe harbor only to a perfectly matched certificate would make the safe-harbor language meaningless: a taxpayer with the correct certificate would already qualify without needing the exception.

Result: protest GRANTED. The tax, penalty, and interest were abated in full.

What this means for you

Architects and design-build professionals

The substantive transaction still must fit a recognized deduction. Here the architectural services were actually resold in taxable design-build contracts; the safe harbor cured a certificate-series problem, not the absence of a deductible resale.

Contractors issuing NTTCs

Use the certificate type required for the transaction and applicable year. Even when a seller receives safe-harbor protection, an improperly issued certificate can remain an issue between the buyer and the Department.

Accountants and tax professionals

When the Department challenges the NTTC series, separately prove the underlying deduction, timely receipt, complete execution, and good faith. The combination of those facts was decisive here.

Common questions

Q: Why was Type 6 considered wrong for the earlier years?
A: Before the 2012 amendment, the applicable regulation did not treat architectural services as construction services, so the resale transaction called for a Type 5 NTTC.

Q: Did SMPC's services qualify for any deduction?
A: Yes. The general contractors resold the architectural services in their ordinary business and paid gross receipts tax on the design-build contracts, satisfying the service-for-resale framework.

Q: Were the Type 6 certificates incomplete or late?
A: No. The parties agreed that SMPC timely possessed properly filled-out and signed Type 6 NTTCs.

Q: Why did good faith matter?
A: The safe harbor required honest, timely acceptance of a properly executed certificate. The contractors' issuance and assurances supported SMPC's belief that the receipts were deductible.

Q: What was abated?
A: The full assessment: $109,066.22 tax, $21,814.83 penalty, and $11,813.16 interest.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-9-3.3, 7-9-3.5, 7-9-4, and 7-9-5 — business, gross receipts, and taxability presumption
• NMSA 1978, § 7-9-48 — service-for-resale deduction
• NMSA 1978, § 7-9-52 — construction and construction-related service deduction
• NMSA 1978, § 7-9-43(A) — NTTC good-faith safe harbor
• Regulations 3.2.1.11(A)(2) and 3.2.201.15 NMAC — architectural services and good-faith acceptance

Cases cited:

• Leaco Rural Telephone Cooperative v. Bureau of Revenue, 1974-NMCA-076 — safe harbor requires timely, good-faith acceptance of a properly executed NTTC
• Continental Inn v. New Mexico Taxation and Revenue Department, 1992-NMCA-030 — certificate delivery conveys deductibility to the seller
• McKinley Ambulance Service v. Bureau of Revenue, 92 N.M. 599 (Ct. App. 1979) — no safe harbor where no deduction covered the transaction
• Proficient Food Co. v. New Mexico Taxation and Revenue Department, 1988-NMCA-042 — certificate-form requirements
• Siemens Energy & Automation, Inc. v. New Mexico Taxation and Revenue Department, 119 N.M. 316 (Ct. App. 1994) — certificate evidence can shift the burden

Source

• Listing: New Mexico Decisions & Orders
• Decision post: SMPC, P.A.
• Decision PDF: D&O 16-45

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
SMPC, P.A. No. 16-45
TO ASSESSMENT ISSUED UNDER LETTER
ID NO. L1466178512

DECISION AND ORDER

A protest hearing occurred on the above captioned matter on June 17, 2016 before Brian

VanDenzen, Esq., Chief Hearing Officer, in Santa Fe. At the hearing, Glen Fellows and David

Cook of SMPC, P.A. (“Taxpayer”) appeared, along with representatives Daniel Farley, C.P.A,

and James Ortiz of REDW, LLC. Staff Attorney Elena Morgan appeared representing the State

of New Mexico Taxation and Revenue Department (“Department”). Protest Auditor Danny

Pogan and Auditor Angela Hernandez appeared as witnesses for the Department. Taxpayer

Exhibit #1 and Department Exhibits A-E were admitted into the record. All exhibits are more

thoroughly described in the Administrative Exhibit Coversheet. Based on the evidence and

arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. On December 1, 2014, through letter id. no. L1466178512, the Department

assessed Taxpayer for $109,066.22 in gross receipts tax, $21,814.83 in penalty, and $11,813.16

in interest for a total assessment of $142,694.21 for the CRS reporting periods from January 31,

2008 through December 31, 2013.

2. On December 15, 2014, Taxpayer protested the Department’s assessment.

3. The Department received the protest on December 19, 2014.

4. On January 5, 2015, the Department’s protest office acknowledged receipt of a

valid protest in this matter.

5. On February 27, 2015, the Department filed a request for hearing in this matter

with the Hearings Bureau1.

6. On February 27, 2015, the Hearings Bureau sent Notice of Telephonic Scheduling

Hearing, scheduling this matter for a scheduling hearing on March 13, 2015.

7. On March 13, 2015, within 90-days of the Department’s receipt and

acknowledgement of a valid protest, the Hearings Bureau conducted a scheduling hearing in the

above-captioned matter. Neither party objected that conducting the scheduling hearing satisfied

the 90-day hearing requirement under the statute while also allowing for a full discovery process

and fair hearing as also required under NMSA 1978, Section 7-1-24.1.

8. On March 13, 2015, the Hearings Bureau issued a Scheduling Order and Notice

of Administrative Hearing, setting discovery and motions deadlines as well as a merits hearing

date on December 8, 2015.

9. On December 1, 2015, Taxpayer moved to continue the scheduled December 8,

2015 hearing date because it was still gathering evidence for the hearing. The Department did not

object to the continuance request.

10. On December 4, 2015, the Administrative Hearings Office issued a Continuance

Order, Amended Scheduling Order, and Notice of Administrative Hearing, resetting the hearing

date from December 8, 2015 to May 31, 2016.

1
On July 1, 2015, pursuant to enacted Senate Bill 356, the Hearings Bureau became the Administrative Hearings
Office (“AHO”). The Hearings Bureau will be used for events that occurred before July 1, 2015, even though the
hearing occurred before the new Administrative Hearings Office, an agency now independent of the Taxation and
Revenue Department.

In the Matter of the Protest of SMPC, P.A., page 2 of 15

11. On May 31, 2016, the hearing in this matter went on the record, with Glen

Fellows and David Cook of Taxpayer present, along with representative James Ortiz. However,

the matter was continued so that Taxpayer could secure an authorized representative under the

statute.

12. On May 31, 2016, the Administrative Hearings Office issued a Continuance

Order and Amended Notice of Administrative Hearing, resetting the matter for a hearing on June

17, 2016.

13. A full hearing on the merits occurred in this matter on June 17, 2016.

14. Taxpayer provides architectural services as part of design-build construction

contracts.

15. Taxpayer’s architectural services were resold by the general contractor under the

design-build construction contract to the other party under the design-build contract.

16. The general contractor paid the gross receipts tax associated with the design-build

contract.

17. Taxpayer requested nontaxable transaction certificates (“NTTC or NTTCs”) from

the general contractors under the projects.

18. Taxpayer timely possessed properly executed Type 6 NTTCs in good faith from

the various construction contractors it provided the architectural design services to as part of the

design-build construction contracts.

19. In 2014, the Department selected Taxpayer for an audit of gross receipts tax,

compensating tax, and withholding tax for the reporting periods from January 1, 2008 through

December 31, 2013.

In the Matter of the Protest of SMPC, P.A., page 3 of 15

20. Upon audit, the Department disallowed the deductions where Taxpayer possessed

Type 6 NTTCs because the Department determined that since Taxpayer was not a licensed

construction contractor and was providing indirect construction services, Taxpayer could only

accept a Type 5 NTTC, supporting the sale of a service for resale deduction.

21. If Taxpayer would have possessed Type 5 NTTCs, then the Department would

have allowed the claimed deductions in this matter under the a sale of a service for resale

deduction.

22. Because of a statutory change in 2012, architectural services now fall under the

construction service for resale covered by a Type 6 NTTC.

DISCUSSION

The only issue in this is whether Taxpayer’s timely receipt of properly executed Type 6

NTTCs provides Taxpayer with safe-harbor from the assessed tax. Taxpayer argues that under

controlling case law, it is entitled to the claimed deduction because it timely accepted the Type 6

NTTCs in good faith. However, the Department argues that Taxpayer did not demonstrate that it

accepted the Type 6 NTTC in good faith because it should have known that a Type 5 NTTC was

required rather than a Type 6 NTTC and that blind acceptance of a NTTC is insufficient to

establish good faith.

Presumption of Correctness.

Under NMSA 1978, Section 7-1-17 (C) (2007), the assessment issued in this case is

presumed correct. Consequently, Taxpayer has the burden to overcome the assessment. See

Archuleta v. O'Cheskey, 1972-NMCA-165, ¶11, 84 N.M. 428. Unless otherwise specified, for the

purposes of the Tax Administration Act, “tax” is defined to include interest and civil penalty. See

NMSA 1978, §7-1-3 (X) (2013). Under Regulation 3.1.6.13 NMAC, the presumption of

In the Matter of the Protest of SMPC, P.A., page 4 of 15
correctness under Section 7-1-17 (C) extends to the Department’s assessment of penalty and

interest. See Chevron U.S.A., Inc. v. State ex rel. Dep't of Taxation & Revenue, 2006-NMCA-50,

¶16, 139 N.M. 498, 503 (agency regulations interpreting a statute are presumed proper and are to be

given substantial weight).

Moreover, “[w]here 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.” Wing Pawn Shop v. Taxation and Revenue Department, 1991-NMCA-024, ¶16, 111

N.M. 735 (internal citation omitted); See also TPL, Inc. v. N.M. Taxation & Revenue Dep't, 2003-

NMSC-7, ¶9, 133 N.M. 447. Because Taxpayer is claiming a deduction from gross receipts tax,

Taxpayer must establish its right to claim the deduction.

Gross Receipts Tax, the Exemptions, and NTTCs

For the privilege of engaging in business, New Mexico imposes a gross receipts tax on the

receipts of any person engaged in business. See NMSA 1978, § 7-9-4 (2002). Under NMSA

1978, Section 7-9-3.5 (A) (1) (2007), the term “gross receipts” is broadly defined to mean

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.

“Engaging in business” is defined as “carrying on or causing to be carried on any activity with

the purpose of direct or indirect benefit.” NMSA 1978, § 7-9-3.3 (2003). Gross receipts applies

to the performance of a service in New Mexico. See NMSA 1978, § 7-9-3.5 (2007). Under the

Gross Receipts and Compensating Tax Act, there is a statutory presumption that all receipts of a

person engaged in business are taxable. See NMSA 1978, § 7-9-5 (2002).

In the Matter of the Protest of SMPC, P.A., page 5 of 15
The New Mexico Gross Receipts and Compensating Tax Act provides numerous deductions

of gross receipts tax. Two possible deductions are potentially applicable to the transaction in

question. First, under the sale of a service for resale deduction, NMSA 1978, Section 7-9-48 (2000)

states that:

Receipts from selling a service for resale may be deducted from
gross receipts or governmental 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....

The deduction is premised on the sale of a service for resale when the resale occurs in the regular

course of business and the resale is subject to New Mexico gross receipts tax. Here, the evidence

established that the general contractor was reselling Taxpayer’s architectural services and paying the

gross receipts tax under the contract. Thus, so long as Taxpayer met the NTTC requirements, the

transaction in question falls under the sale of a service for resale deduction described under under

Section 7-9-48, a point that the Department acknowledged at hearing. This deduction is covered by

a Type 5 NTTC. Although the transactions at issue themselves may have qualified for this

deduction, because Taxpayer did not possess Type 5 NTTCs, Taxpayer did not satisfy the NTTC

requirement of this deduction and the Department disallowed the claimed deductions on this basis.

The other deduction potentially at issue in this protest is found under NMSA 1978, Section

7-9-52 (A) (2000, before 2012 amendment), which states:

Receipts from selling a construction 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.

The deduction is covered by a Type 6 NTTC. In the 2012 amendment to Section 7-9-52,

architecture was listed as a “construction-related service” for the purpose of that section. Before that

In the Matter of the Protest of SMPC, P.A., page 6 of 15
amendment, by Regulation 3.2.1.11 (A) (2) NMAC, architecture services were not considered

construction services. Thus, during most of the audit period, Taxpayer’s selling of architectural

design services did not meet the “construction service” requirement of the Section 7-9-52 deduction

even though Taxpayer possessed the Type 6 NTTC. For this reason, the Department did not accept

the Type 6 NTTCs to substantiate the claimed deductions.

Does the NTTC, good-faith, safe harbor provision apply?

Nevertheless, despite not possessing the correct type of NTTC to support the deduction,

Taxpayer argues that because it timely accepted the Type 6 NTTC in good faith, the good-faith,

safe harbor protection under NMSA 1978, Section 7-9-43 (A) (2011) from the assessed tax.

Section 7-9-43 (A) grants taxpayers a good-faith acceptance, safe harbor from taxation

protection in some circumstances:

[w]hen the seller or lessor accepts a nontaxable transaction certificate within
the required time and in good faith that the buyer or lessee will employ the
property or service transferred in a nontaxable manner, the properly executed
nontaxable transaction certificate shall be conclusive evidence, and the only
material evidence, that the proceeds from the transaction are deductible from
the seller's or lessor's gross receipts.

In other words, the statute grants the seller of the service safe harbor from taxation when the seller

timely accepts a properly executed NTTC in good faith from the buyer. Regulation 3.2.201.15

NMAC (05/31/01) discusses good faith acceptance of a NTTC:

Acceptance of [NTTCs] in good faith that the property or service sold
thereunder will be employed by the purchaser in a nontaxable manner is
determined at the time of each transaction. The taxpayer claiming the
protection of a certificate continues to be responsible that the goods
delivered or services performed thereafter are of the type covered by the
certificate.

The Administrative Hearings Office, and its predecessor the Hearings Bureau, have

employed a broader view of the good-faith, safe harbor protection since the 2013 issuance of the

In the Matter of the Protest of SMPC, P.A., page 7 of 15
decision and order In the Matter of the Protest of Case Manager, No. 13-12 (non-precedential) and

In the Matter of the Protest of Rio Grande Electric Co., Inc, No. 13-16 (non-precedential). In an

unpublished decision, the New Mexico Court of Appeals affirmed the ruling in the Case Manager

decision and order narrowly under a right for any reason standard. See New Mexico Taxation and

Revenue Dep’t. v. Case Manager, No. 32,940 (N.M. Ct. App. April 29, 2015) (non-precedential).

On July 25, 2016, the Court of Appeals looked favorably upon the good-faith, safe harbor

provision as previously applied by the Administrative Hearings Office/Hearings Bureau In the

Matter of the Protest of Case Manager, No. 13-12 (non-precedential). See Southwest Mobile

Service and Richard Cameron v. New Mexico Taxation and Revenue Department, No. 34,551

(N.M. Ct. App. July 25, 2016) (non-precedential) (although the Court of Appeals overturned the

hearing officer on whether the good faith analysis applies on a MTC rather than a NTTC, it relied

extensively on the Case Manager analysis in reaching its conclusion).

NTTCs and the safe harbor provision have been addressed in numerous Court of Appeal

decisions over the years. In Leaco Rural Tel. Coop. v. Bureau of Revenue, 1974-NMCA-076, ¶15,

86 N.M. 629, the New Mexico Court of Appeals considered what requirements must be met

“before an NTTC becomes conclusive evidence that proceeds of a transaction are deductible.”

While the Leaco Court of Appeals was considering NMSA 1978, §7-9-43(A) (2011)’s predecessor

statue, NMSA 1953, Section 72-16A-13(A), the good faith, safe harbor provision of both statutes is

substantially the same. In Leaco, a buyer had executed a NTTC to a seller for a transaction held to

be subject to tax. The Leaco court found that a seller-taxpayer must satisfy three statutory

requirements before the good faith, safe harbor protection attaches to the transaction. See id. As the

Leaco Court of Appeals expounded, those three “requirements are timeliness of acceptance of the

NTTC, good faith acceptance of the NTTC and a properly executed NTTC.” id. By “properly

In the Matter of the Protest of SMPC, P.A., page 8 of 15
executed” the Leaco Court of Appeals—relying on the Black’s Law Dictionary—meant only that

the NTTC forms were filled out and signed. See id. If these three conditions are met, then the Leaco

Court of Appeals found that the NTTC becomes the only material and conclusive evidence

establishing that the seller-taxpayer is entitled to the claimed deduction even when the buyer

improperly issued the NTTC to the seller. See id; See also Rainbo Baking Co. v. Commissioner of

Revenue, 84 N.M. 303, 305 502 P.2d 406, 408 (N.M. Ct. App. 1972) (absent a claim of bad faith,

some other issue of good faith, or a claim of improper execution of the NTTC, a taxpayer’s

presentation of the NTTC established that taxpayer’s claim with conclusive evidence). The Leaco

Court of Appeals found no relevance to the fact that the buyer had improperly issued a NTTC to the

seller by stating that was an issue between the Department and the buyer. See Leaco at 632, 429.

While Leaco found no relevance to whether the buyer improperly issued a NTTC to the

seller, the Court of Appeals modified that stance somewhat when it found in McKinley Ambulance

Serv. v. Bureau of Revenue, 92 N.M. 599, 601, 592 P.2d 515, 517 (N.M. Ct. App. 1979) that the

good-faith, conclusive evidence provision did not protect a seller from taxation “unless the

certificate covered the receipts in question.” That is, since there was “no certificate applicable” for

the type of services that taxpayer provided, the McKinley Ambulance Serv. Court of Appeals upheld

the Department’s denial of the deduction. id. at 602, 58. Similarly (although perhaps in dicta), the

Court of Appeals in Gas Co. v. O'Cheskey, 94 N.M. 630, 632, 614 P.2d 547, 549 (N.M. Ct. App.

1980) stated that “[t]he issuance of a ‘Nontaxable Transaction Certificate’ does not operate to

transform an otherwise taxable transaction into a nontaxable transaction.” However, the Gas Co.

Court of Appeals expressly noted that Leaco remained an exception. See Gas Co. at 632, 549. Since

Gas Co. was decided after McKinley Ambulance Serv., Gas Co.’s subsequent reaffirmation of Leaco

meant that Leaco remained good law even after McKinley Ambulance Serv. In Arco Materials v.

In the Matter of the Protest of SMPC, P.A., page 9 of 15
Taxation & Revenue Dep't, 118 N.M. 12, 15-16, 878 P.2d 330, 333-334 (N.M. Ct. App. 1994),

rev’d on other grounds, 118 N.M. 647, 884 P.2d 803 (1994), the Court of Appeals cited Regulation

3.2.201.15 NMAC (05/31/01) favorably in finding that a taxpayer was not protected by its

acceptance of an executed NTTC when a change in law rendered the executed NTTC invalid for the

transaction in question. See also Proficient Food Co. v. New Mexico Taxation & Revenue Dep't, 107

N.M. 392, 397, 758 P.2d 806, 811 (N.M. Ct. App. 1988) (taxpayer not entitled to a deduction when

the nontaxable transaction form presented was not in the NTTC form proscribed by the

Department).

Leaco and not McKinley Ambulance Serv., Arco, Proficient Food Co., or Gas Co. control

the outcome of this protest both because those other cases are distinguishable from transaction at

issue in this protest and because NMSA 1978, §7-9-43(A) (2011) must be read to give full effect to

that statute’s good-faith, safe harbor provision. The transaction at issue between Taxpayer and the

general contractors qualified for a deduction under NMSA 1978, § 7-9-48 (2000) because Taxpayer

sold the general contractors architectural services, which the general contractors resold under the

design-build contracts, the resale of which was subject to gross receipts tax that was in fact paid.

McKinley Ambulance Serv. is distinguishable from the facts of this protest. Unlike here, the Court of

Appeals in McKinley Ambulance Serv. found that transaction at issue in that case was taxable and

not covered by the claimed deduction. See McKinley Ambulance Serv. at 601, 517. The fact that no

certificate could have covered the transaction (because Taxpayer’s services did not qualify for a

deduction) was an important part of the Court of Appeals finding in McKinley Ambulance Serv. See

id. at 602, 518. This protest is not the McKinley Ambulance Serv. or Gas Co. scenario where

Taxpayer is attempting to convert a taxable transaction not covered by any recognized deduction

into a nontaxable transaction by virtue of NMSA 1978, §7-9-43(A) (2011)’s good faith, conclusive

In the Matter of the Protest of SMPC, P.A., page 10 of 15
evidence safe harbor provision. Nor is this the Arco case, where a statutory change rendered the

executed NTTC invalid for the underlying transaction. Moreover, this is also not the Proficient

Food Company case because all the NTTCs executed in this matter were on a form proscribed by

the Department. In this case, Taxpayer merely seeks to substantiate a deduction for a transaction

that but for the procedural NTTC issue would, as the Department indicated at hearing, qualify as a

recognized and proper deduction under NMSA 1978, § 7-9-48 (2000).

The other reason McKinley Ambulance Serv., Arco, and Regulation 3.2.201.15 NMAC

(05/31/01) do not control the outcome of this protest has to do with giving full effect to NMSA

1978, §7-9-43 (A) (2011)’s good faith, conclusive evidence safe harbor provision. Statutes are to be

interpreted in a manner to give the entire statute effect and not render portions of the statute

superfluous. See Regents of the Univ. of New Mexico v. New Mexico Fed'n of Teachers, 1998-

NMSC-20, ¶28, 125 N.M. 401, 411, 962 P.2d 1236, 1246 (N.M. 1998). If the answer to the

remaining issue in this protest is that Taxpayer is not entitled to the statute’s good-faith safe harbor

protection merely because the general contractors timely and properly executed an incorrect type of

NTTC to Taxpayer, then the safe-harbor protection of NMSA 1978, §7-9-43 (A) (2011) would be

superfluous. That is so because if the good faith safe harbor only applied to instances where the

buyer timely executed a proper type of NTTC to a seller-taxpayer for a legitimately deductible

transaction, a seller-taxpayer would have already qualified for the deduction under the first portion

of NMSA 1978, §7-9-43 (A) (2011) without ever having to consider that statute’s safe harbor

provision. In other words, there would be no purpose in creating a good faith, safe harbor exception

to the statute’s NTTC requirements if the only way a taxpayer could ever qualify for the exception

is by otherwise satisfying the statute’s primary NTTC requirements. In simplest form, there is no

meaningful exception to the rule if the exception itself requires full compliance with the rule.

In the Matter of the Protest of SMPC, P.A., page 11 of 15
Therefore, in order to give full effect to NMSA 1978, §7-9-43 (A) (2011), the good-faith safe harbor

provision protects Taxpayer when the transaction itself is covered by a recognized deduction and

when Taxpayer timely accepted a properly completed NTTC even though the Type 6 NTTC was

the incorrect type of NTTC.

Under the three-part Leaco good-faith, conclusive evidence test, Taxpayer presented

conclusive evidence that it is entitled to the claimed deduction. The first prong is the timeliness of

acceptance of a NTTC. See Leaco at 632, 429. There is no dispute that Taxpayer timely

received/possessed the Type 6 NTTCs at issue. The second Leaco factor is whether there was a

properly executed NTTC. See Leaco at 632, 429. Again, by “proper execution”, the Leaco court

meant that the NTTC was filled out, signed, and completed. See id. In this case, there is no dispute

that the Type 6 NTTCs at issue were properly filled out, signed, and completed. The fact that the

general contractors improperly executed a Type 6 NTTC to Taxpayer rather than a Type 5 NTTC

that covered the transaction is an issue between the Department and the general contractors. See

Leaco at 632, 429.

The final requirement under Leaco is good faith acceptance. See id. Section 7-9-43,

Regulation 3.2.201.15 NMAC, and Leaco do not expressly define what is meant by good faith

acceptance of a NTTC. However, another recent Court of Appeal cases provided some guidance on

what is meant by good faith acceptance of a NTTC. In Cont'l Inn v. N.M. Taxation & Revenue

Dep't, 113 N.M. 588, 591-592, 829 P.2d 946, 949-950 (N.M. Ct. App. 1992), the Court of Appeals

rejected a claim of no good faith because “the timely delivery of a NTTC from the buyer to the

seller convey[ed] a message to the seller that the use of the NTTCs is such that the seller is entitled

to deductions…” id. at 592, 950. In other words, the message conveyed by a buyer to a seller by the

In the Matter of the Protest of SMPC, P.A., page 12 of 15
issuance of a NTTC is enough for the seller to have good faith (or at least not bad faith) that it is

entitled to a deduction for the transaction at issue.

Further, in other contexts, the New Mexico Court of Appeals has turned to Black’s Law

Dictionary to define good faith. In the case Erica, Inc. v. N.M. Regulation & Licensing Dep't, 2008

NMCA 65, ¶18, 144 N.M. 132, 140, 184 P.3d 444, 452 (N.M. Ct. App. 2008), the Court of Appeals

stated that

[g]ood faith is a broad term: "The phrase 'good faith' is used in a variety of
contexts, and its meaning varies somewhat with the context." Black's Law
Dictionary 701 (7th ed. 1999) (internal quotation marks and citation omitted)
(defining good faith as "A state of mind consisting in (1) honesty in belief or
purpose, (2) faithfulness to one's duty or obligation, (3) observance of
reasonable commercial standards of fair dealing in a given trade or business,
or (4) absence of intent to defraud or to seek unconscionable advantage").

Considering these conceptions of good faith in applying the final Leaco safe harbor

requirement, Taxpayer in good faith believed that the Type 6 NTTCs issued by the general

construction contractors, whom assured Taxpayer that they paid the gross receipts tax under the

design-build contracts, allowed Taxpayer to deduct the gross receipts. Like discussed in Cont'l Inn

at 592, 950, Taxpayer’s belief and acceptance of the executed Type 6 NTTC was not unreasonable

or in bad faith given the message that the general contractors issuance of that NTTC sent to

Taxpayer. There is no evidence on this record that Taxpayer acted with dishonesty, deceit, with

intent to defraud, or in any other malevolent manner in accepting the Type 6 NTTCs. Indeed, a

basic reading of the language of just Section 7-9-52 would suggest that Taxpayer was entitled to

accept a Type 6 NTTCs for these transactions (only a regulation indicated at that time that

architectural services were not construction services). And after the Legislature passed the 2012

amendment, Taxpayer would be eligible to use the Type 6 NTTC for the same type of transactions

at issue in this protest. To say that acceptance of a Type 6 NTTC in good faith, a type of NTTC

In the Matter of the Protest of SMPC, P.A., page 13 of 15
expressly allowed for the exact same transaction at issue in this protest, was insufficient for

Taxpayer to substantiate a deduction it was otherwise qualified for, would be to put form over

substance.

By presenting a timely executed, completed Type 6 NTTC, accepted in good-faith,

Taxpayer met its initial burden and shifted the burden to the Department to establish that Taxpayer

was not entitled to the good-faith, safe harbor provision. See Siemens Energy & Automation, Inc. v.

New Mexico Taxation and Revenue Department, 119 N.M. 316, 318, 889 P.2d 1238, 1240 (Ct.

App. 1994) (presentation of a multistate nontaxable transaction certificate satisfied presumption

of correctness and shifted burden to Department to show certificate was invalid); See also MPC

Ltd. at ¶13, 220, 311. The Department did not allege or prove that Taxpayer did not act in good faith

in accepting the Type 6 NTTC. The facts of this case fall under the Cont'l Inn conception of good

faith and meet the Black’s Law Dictionary definition of good faith cited favorably by the Court of

Appeals in Erica, Inc. at ¶18, 140.

In summary, all three Leaco requirements for the good faith, conclusive evidence protection

under the statute are met in this case. Consequently, Leaco dictates in this circumstance that the

timely executed Type 6 NTTC Taxpayer accepted in good faith is conclusive evidence under

NMSA 1978, §7-9-43(A) (2011) that Taxpayer is entitled to the deduction under NMSA 1978, § 7-

9-48. Taxpayer’s protest to the assessment is granted.

CONCLUSIONS OF LAW

A. Taxpayer filed a timely, written protest to the Department’s assessment, and

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

B. The hearing was timely set and held within 90-days of protest under NMSA 1978,

Section 7-1B-8 (2015).

In the Matter of the Protest of SMPC, P.A., page 14 of 15
C. Taxpayer sold architectural services under a design-build contract that the

construction general contractor resold in its regular course of business and paid gross receipts tax on

the resale, making the transaction eligible for a deduction under NMSA 1978, § 7-9-48 (2000).

D. Taxpayer’s possession of a timely executed and properly completed Type 6 NTTC

accepted in good faith is conclusive evidence under NMSA 1978, §7-9-43(A) (2011) that Taxpayer

was entitled to the claimed deductions. See Leaco Rural Tel. Coop. v. Bureau of Revenue, 86 N.M.

629, 632, 526 P.2d 426, 429 (N.M. Ct. App. 1974).

E. Taxpayer overcame the presumption of correctness that attached to the assessment

under NMSA 1978, Section 7-1-17 (C) (2007) and Archuleta v. O'Cheskey, 1972-NMCA-165,

¶11, 84 N.M. 428 by establishing that the transactions at issue were the subject of a recognized

deduction and that Taxpayer timely accepted a properly completed NTTC in good faith.

For the foregoing reasons, the Taxpayer’s protest IS GRANTED. IT IS ORDERED that

the assessment is abated in its entirety.

DATED: September 15, 2016.

Brian VanDenzen
Chief Hearing Officer
Administrative Hearings Office
P.O. Box 6400
Santa Fe, NM 87502

In the Matter of the Protest of SMPC, P.A., page 15 of 15