I run my business from just across the state line and ship products to New Mexico customers — do I owe New Mexico gross receipts tax, and can I avoid it if I couldn't get resale certificates?

Plain-English summary

Randall Gilbert sold custom and semi-custom cabinetry from his business in Farwell, Texas — a town on the New Mexico line, next to Texico, New Mexico. A New Mexico contractor or customer would place an order; Gilbert would relay it to the manufacturer, which shipped the product directly to the New Mexico job site, where the buyer installed it (Gilbert did not install). He had never registered for or paid New Mexico gross receipts tax, filing only New Mexico personal income tax returns.

A Schedule C mismatch revealed the unreported business income, and in December 2015 the Department assessed $75,019.81 in gross receipts tax plus penalty and interest (about $101,000 total) for 2008-2012. Of Gilbert's roughly $1.58 million in sales during that period, more than 94% were to New Mexico contractors and customers (the out-of-state portion was removed from the assessment).

Hearing Officer Chris Romero denied the protest:

• The sales are taxable in New Mexico (destination principle). An out-of-state seller who ships goods that are delivered and consumed in New Mexico makes a New Mexico sale subject to gross receipts tax (Kmart; Dell Catalog Sales). This was not an entirely out-of-state transaction, so the destination principle applied and Gilbert's New Mexico sales were taxable. (All receipts of someone engaged in business are presumed taxable, Section 7-9-5, and deductions are construed strictly against the taxpayer, Wing Pawn Shop.)
• No NTTCs, no deduction. His sales to contractors could have qualified for the construction-materials-for-resale deduction (Section 7-9-51), but that deduction requires nontaxable transaction certificates. The Department gave him a 60-day window (Section 7-9-43), yet he could not obtain a single NTTC for any transaction — so the law made disallowance mandatory ("shall," Marbob). The decision notes NTTCs are best gathered at the time of sale, since a 60-day letter often arrives years later when records and relationships have deteriorated.
• The interstate-commerce deduction did not apply. Section 7-9-55 allows a deduction only to the extent taxing the receipts would be unconstitutional, and Gilbert offered no evidence of that.
• Estoppel failed. Statutory estoppel (Section 7-1-60) requires reliance on a regulation in effect or a written ruling addressed to the taxpayer by the secretary. Gilbert relied on a February 2016 email that merely quoted Section 7-9-55 — sent after the transactions and giving no advice. (A cited "Secretary Ruling 422-00-1" turned out to be that same email.) Equitable estoppel against the State on tax is disfavored, requires affirmative misconduct (Kilmer), and oral statements are not enough — none of which was shown.
• Interest and penalty stand. Interest is mandatory (Section 7-1-67). The negligence penalty (Section 7-1-69) applies to the erroneous belief that no gross receipts tax was owed; the good-faith-mistake-of-law escape and the "misled by a Department employee" / "reliance on a competent accountant" abatement factors all failed, in part because Gilbert did not consult a tax professional about gross receipts tax until after the assessment.

Result: the protest was denied and the assessment (tax, penalty, and interest) stood.

What this means for you

Out-of-state sellers shipping into New Mexico

Operating from just across the state line does not keep you out of New Mexico gross receipts tax. If you sell goods that are delivered and used in New Mexico, the "destination principle" treats the sale as a New Mexico sale, and you should register and report — regardless of where your office is. Gilbert's location in Texas did not shield the 94% of his sales bound for New Mexico.

Sellers who rely on resale/deduction certificates

If your deduction depends on NTTCs (for example, selling construction materials to a contractor for resale), you must actually hold the certificates — get them at the time of sale. If the Department later issues a 60-day letter and you cannot produce the NTTCs, the deduction is disallowed automatically, no matter how legitimately the underlying sale might have qualified.

Anyone counting on something a state employee said

An offhand remark, or an email that just points you to a statute, will not estop New Mexico from assessing tax. Statutory estoppel needs a written ruling addressed to you by the secretary (or reliance on a regulation), and equitable estoppel needs affirmative misconduct. Get binding guidance in writing before you rely on it.

Accountants and tax professionals

Note the timing point that sank the penalty defense: Gilbert used a CPA for income tax only and did not seek gross-receipts-tax advice until after the assessment. Reliance-on-a-professional and good-faith-mistake-of-law defenses require advice obtained before the failure to pay, after full disclosure. And for cross-border clients, run the Kmart/Dell destination analysis proactively.

Common questions

Q: My business is in another state. Why do I owe New Mexico gross receipts tax?
A: Because the goods were delivered to and consumed in New Mexico. Under the destination principle, that makes the sale a New Mexico sale subject to gross receipts tax, even though you operate out of state.

Q: My sales to contractors were really for resale — isn't that deductible?
A: Only if you have the required nontaxable transaction certificates. Without NTTCs (even after the Department's 60-day window), the deduction must be disallowed, regardless of the nature of the sale.

Q: A Department employee told me I didn't owe the tax. Doesn't that protect me?
A: Generally no. Statutory estoppel requires a written ruling addressed to you by the secretary, and equitable estoppel requires affirmative misconduct. Oral statements or an email quoting a statute are not enough.

Citations and references

Statutes:

• § 7-9-4 NMSA 1978 — gross receipts tax imposed for the privilege of engaging in business in New Mexico
• § 7-9-5 NMSA 1978 — all receipts of a person engaged in business are presumed taxable
• § 7-9-43 NMSA 1978 — deductions requiring NTTCs are mandatorily disallowed if the seller lacks the certificates within the Department's 60-day deadline
• § 7-9-51 NMSA 1978 — deduction for construction material sold for resale to a person in the construction business who delivers an NTTC
• § 7-9-55 NMSA 1978 — deduction for interstate-commerce receipts only to the extent taxing them would be unlawful under the U.S. Constitution
• § 7-1-60 NMSA 1978 — statutory estoppel limited to reliance on a regulation in effect or a written ruling addressed personally by the secretary
• § 7-1-67 NMSA 1978 — interest on unpaid tax is mandatory
• § 7-1-69 NMSA 1978 — civil negligence penalty; subsection (B) excuses only a good-faith mistake of law on reasonable grounds

Regulations:

• Regulation 3.1.11.10 NMAC — defines negligence, including an erroneous belief and inaction where action is required
• Regulation 3.1.11.11(A), (D) NMAC — abatement where the taxpayer was affirmatively misled by a Department employee, or reasonably relied on competent tax counsel or an accountant after full disclosure
• Regulation 3.2.209.7, 3.2.209.22, 3.2.1.11(H)(1) NMAC — construction material and "fixture" definitions for the Section 7-9-51 deduction

Cases cited:

• Kmart Corp. v. N.M. Taxation & Revenue Dep't, 2006-NMSC-006, 139 N.M. 172 — two-part analysis for taxing multistate transactions
• Dell Catalog Sales, LP v. N.M. Taxation & Revenue Dep't, 2009-NMCA-001, 145 N.M. 419 — the "destination principle" taxes goods delivered and consumed in New Mexico
• Wing Pawn Shop v. Taxation & Revenue Dep't, 1991-NMCA-024, 111 N.M. 735 — deductions are construed strictly in favor of the taxing authority
• TPL, Inc. v. N.M. Taxation & Revenue Dep't, 2003-NMSC-007, 133 N.M. 447 — the taxpayer must clearly establish a claimed deduction
• Taxation & Revenue Dep't v. Bien Mur Indian Mkt. Ctr., Inc., 1989-NMSC-015, 108 N.M. 22 — courts are reluctant to estop the State in tax assessment and collection
• Kilmer v. Goodwin, 2004-NMCA-122, 136 N.M. 440 — elements of equitable estoppel against the government, requiring affirmative misconduct
• Marbob Energy Corp. v. N.M. Oil Conservation Comm'n, 2009-NMSC-013, 146 N.M. 24 — the word "shall" makes a provision mandatory
• El Centro Villa Nursing Center v. Taxation & Revenue Dep't, 1989-NMCA-070, 108 N.M. 795 — the negligence penalty applies even to inadvertent error
• Tiffany Construction Co. v. Bureau of Revenue, 1976-NMCA-127, 90 N.M. 16 — every person has a duty to ascertain the possible tax consequences of their actions

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Randall & Judith Gilbert
• Decision PDF: D&O 17-06

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF 17-06
RANDALL & JUDITH GILBERT
TO ASSESSMENT
ISSUED UNDER LETTER ID NO. L0560913456

DECISION AND ORDER

A protest hearing occurred on the above captioned matter on December 20, 2016 before

Chris Romero, Esq., Hearing Officer, in Santa Fe, New Mexico. At the hearing, John P.

McKinley, Jr., C.P.A., of Woodard, Cowen & Co., C.P.A., represented Randall and Judith

Gilbert (“Taxpayer”) and testified on their behalf. Staff Attorney, Peter Breen, appeared

representing the State of New Mexico Taxation and Revenue Department (“Department”).

Protest Auditor Nicholas Pacheco appeared as a witness for the Department. Taxpayer Exhibit #1

and Department Exhibits A – B were admitted into the record. Taxpayer Exhibit #2 was not

admitted into the evidentiary record, but was accepted for the record of the hearing. All exhibits

are more thoroughly described in the Administrative Exhibit Coversheet. On January 11, 2017,

the Hearing Officer requested additional information pertaining to a Secretary Ruling to which

the Taxpayer referred at the hearing and in his Formal Protest. The deadline to respond to that

inquiry was January 20, 2017. Based on the evidence and arguments presented, IT IS DECIDED

AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. On December 3, 2015, through Letter ID No. L0560913456, the Department

assessed Taxpayer for $75,019.81 in gross receipts tax, $15,003.96 in penalty, and $10,974.46 in
interest for a total assessment of $100,998.23 for the CRS reporting periods from January 1,

2008 through December 31, 2012.

2. On March 2, 2016, Taxpayer protested the Department’s assessment.

3. The Department received the protest on March 2, 2016.

4. On March 7, 2016, the Department’s protest office acknowledged receipt of a

valid protest in this matter.

5. On April 15, 2016, the Department filed a request for hearing in this matter with

the Administrative Hearings Office.

6. On April 18, 2016, the Administrative Hearings Office sent Notice of Telephonic

Scheduling Hearing, setting this matter for a scheduling hearing on May 13, 2016.

7. On May 13, 2016, the Taxpayer filed a Tax Information Authorization to

authorize representation by John P. McKinley, Jr., C.P.A., of Woodard, Cowen & Co., C.P.A. in

all state tax matters for any year.

8. On May 13, 2016, the Administrative Hearings Office issued an Amended Notice

of Telephonic Scheduling Hearing, setting this matter for a scheduling hearing on May 27, 2016.

9. On May 27, 2016, within 90-days of the Department’s receipt and

acknowledgement of a valid protest, the Administrative Hearings Office 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

discovery, motions, and other prehearing activities intended to allow the parties to prepare for an

ample and fair presentation of their respective cases pursuant to NMSA 1978, Sec. 7-1-24.1 and

NMSA 1978, Sec. 7-1B-6 (D)(2016).

In the Matter of the Protest of Randall & Judith Gilbert
Page 2 of 19

10. On May 27, 2016, the Administrative Hearings Office issued a Scheduling Order

and Notice of Administrative Hearing, setting various deadlines for discovery and motions, and

setting the matter for a hearing on the merits on December 20, 2016.

11. The assessment subject of this protest arose from a Schedule C mismatch.

[Testimony of Mr. Pacheco].

12. Taxpayer, Randall Gilbert, owns and operates a business in which he sells custom

or semi-custom cabinetry to building contractors or individual customers from his place of

business in Farwell, Texas. The typical transaction involves a building contractor or individual

customer placing an order with Taxpayer, which he submits to the manufacturer. The

manufacturer ships the product directly to the installation site where the building contractor or

individual customer install the product. Taxpayer does not perform installation services.

[Testimony of Mr. McKinley].

13. Taxpayer established his business in Texas because there was a manufacturer that

refused to conduct business with him so long as he was operating in New Mexico. [Testimony

of Mr. McKinley].

14. Taxpayer filed Personal Income Tax returns in New Mexico. [Testimony of Mr.

McKinley].

15. Farwell, Texas borders the Texas-New Mexico boundary and the municipality of

Texico, New Mexico.

16. Depending on the circumstances, Taxpayer may visit a construction site to obtain

measurements or may rely on the building contractor or customer for measurements. [Testimony

of Mr. McKinley].

In the Matter of the Protest of Randall & Judith Gilbert
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17. Taxpayer may generate a computer rendering to enable the building contractor or

individual customer to visualize the installed and finished product. [Testimony of Mr.

McKinley].

18. In the typical transaction, the Taxpayer invoices the building contractor or

individual customer. Taxpayer then makes payment to the manufacturer, less the portion of the

sales price, which it retains, to which Mr. McKinley referred to as the upcharge. [Testimony of

Mr. McKinley].

19. Since 2008, Taxpayer has sold goods and associated services to building

contractors and individual customers in Texas and New Mexico. Sales to building contractors

were mostly for use in remodel and new construction projects. Associated services may include

taking measurements and creating computer renderings of the installed product. [Testimony of

Mr. McKinley; Taxpayer Ex. 1].

20. Some sales to building contractors may have also consisted of product samples.

[Testimony of Mr. McKinley].

21. Taxpayer’s invoice summary reflects sales to New Mexico building contractors

and individual customers, in which the manufacturer shipped the product to a New Mexico

address or construction site, in the total amount of $1,495,208.75 between September 28, 2008

through December 18, 2012. [Testimony of Mr. McKinley; Taxpayer Ex. 1].

22. During the same period of time, sales to out-of-state building contractors and

individual customers, in which the manufacturer shipped the product to a non-New Mexico

address or construction site, totaled $89,273.72. [Taxpayer Ex. 1].

23. On May 22, 2015, the Taxpayer was provided with a Notice of Limited Scope

Audit Commencement – 60 Day Notice. The Taxpayer was notified that he had 60 days to obtain

In the Matter of the Protest of Randall & Judith Gilbert
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and submit nontaxable transaction certificates (“NTTC or NTTCs”) to the Department on or

before July 21, 2015. [Testimony of Mr. Pacheco; Department Exhibit B].

24. Taxpayer requested NTTCs from the general contractors with whom he conducted

business during the relevant periods of time. [Testimony of Mr. McKinley].

25. The Taxpayer was not able to obtain NTTCs for any of the transactions subject of

the assessment and resulting protest. [Testimony of Mr. McKinley].

26. Prior to the assessment being issued in this matter, the Taxpayer was not

registered with the State of New Mexico for gross receipts tax reporting or payment. [Testimony

of Mr. Pacheco]. Taxpayer was assigned a CRS number as part of the audit and assessment

process. [Testimony of Mr. McKinley].

27. The Department’s GenTax database did not reflect any communications with the

Taxpayer except for a contact in January of 2016 in reference to NTTCs. The Taxpayer was

referred to the auditor then handing Taxpayer’s matter. The assessment at issue was issued the

previous month. [Testimony of Mr. Pacheco].

28. The Department’s GenTax system does not reflect any conversations between

Taxpayer or an authorized representative that address whether or not any sales of good or

services were taxable under the New Mexico Gross Receipts and Compensating Tax Act.

[Testimony of Mr. Pacheco].

29. If Taxpayer would have possessed the appropriate NTTCs, then the Department

could have allowed appropriate deductions as provided by the Gross Receipts and Compensating

Tax Act. [Testimony of Mr. Pacheco; Department Exhibit B].

30. A significant amount of Taxpayer’s goods and associated services were resold by

general contractors through remodel projects or new construction. However, there is no

In the Matter of the Protest of Randall & Judith Gilbert
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mechanism available to determine whether the contractors paid the gross receipts tax on the

gross receipts deriving from what would have been the final taxable transaction in the absence of

NTTCs. [Testimony of Mr. Pacheco].

31. Taxpayer did not pay gross receipts taxes on sales of goods or associated services

to individual customers. [Testimony of Mr. McKinley].

32. The services provided to Taxpayer by John P. McKinley, Jr., C.P.A., and

Woodard, Cowen & Co., C.P.A. have been limited to federal and New Mexico state income tax

matters only. John P. McKinley, Jr., C.P.A., and Woodard, Cowen & Co., C.P.A. did not provide

services concerning gross receipts taxes prior to the assessment being issued in this matter.

[Testimony of Mr. McKinley].

33. As of December 20, 2016, Taxpayer’s outstanding liability was $75,019.81 in

gross receipts tax, $15,003.96 in penalty, and $13,799.59 in interest. [Testimony of Mr.

Pacheco; Department Exhibit A].

34. The outstanding liability as provided in Department Exhibit A reflects an

adjustment made for out-of-state sales to out-of-state customers. [Testimony of Mr. Pacheco;

Department Exhibit B]. Consequently, the claimed tax liability is limited to receipts generated

from sales of goods and associated services to New Mexico contractors and individual

customers.

35. On January 11, 2017, the Hearing Officer requested that the parties cooperate in

providing a copy of Secretary Ruling 422-00-1. Despite references to the cited ruling at the

hearing on the merits, and in the Taxpayer’s Formal Protest, the Hearing Officer was not able to

locate the cited ruling at http://www.tax.newmexico.gov/rulings.aspx. On January 19, 2017,

Taxpayer’s representative responded that his reference to the ruling was actually a reference to

In the Matter of the Protest of Randall & Judith Gilbert
Page 6 of 19
an email in which the Taxpayer’s attention was directed to NMSA 1978, Sec. 7-9-55. The

Department did not provide any response to the correspondence of January 11, 2017.

DISCUSSION

It was apparent at the conclusion of the hearing in this protest that there was minimal

dispute of the material facts in this matter. The Taxpayer sold construction materials and

associated services from his primary business location in Farwell, Texas to New Mexico

customers and building contractors for use in New Mexico remodel and new construction

projects.

From September 28, 2008 through December 18, 2012, total sales were $1,584,482.47

with sales to New Mexico building contractors and individual customers accounting for more

than 94 percent of those sales. [Taxpayer Ex. 1]. When a Schedule C mismatch revealed that

Taxpayer earned income from his business activities that he reported on his Schedule C, but

which was never reported in New Mexico, the Department afforded the Taxpayer with an

opportunity to provide additional documents to substantiate that the gross receipts were not

subject to taxation. Among the documents requested were NTTCs. [Testimony of Mr. Pacheco;

Dept. Ex. B]. Despite his efforts, Taxpayer was not able to obtain any NTTCs for any

transaction in any reporting period subject of the protest. [Testimony of Mr. McKinley].

Presumption of Correctness.

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

In the Matter of the Protest of Randall & Judith Gilbert
Page 7 of 19
correctness under Sec. 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 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, Sec. 7-9-4 (2002). Under NMSA

1978, Sec. 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, Sec. 7-9-3.3 (2003). 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, Sec. 7-9-5 (2002).

In the Matter of the Protest of Randall & Judith Gilbert
Page 8 of 19
A taxpayer engaged in business may be able to deduct certain gross receipts when they

are provided with NTTCs from buyers. See NMSA 1978, Sec. 7-9-43 (2011). A taxpayer

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

produce NTTCs within a 60-day deadline set by the Department. See NMSA 1978, Sec. 7-9-43.

The New Mexico Gross Receipts and Compensating Tax Act provides various deductions of

gross receipts tax. One deduction potentially applicable to the transactions in question is provided

by NMSA 1978, Sec. 7-9-51 for the sale of construction materials to persons engaged in the

construction business:

A. Receipts from selling construction material 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 seller.

The deduction is premised on the sale of a construction material 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, with concern for sales to building contractors, the products were

incorporated into finished construction projects intended for resale with applicable gross receipts tax

being paid at the conclusion of the final taxable transaction. See Regulation 3.2.209.7 NMAC

(establishing that the construction material must be an intended part of the finished project); See

Regulation 3.2.209.22 NMAC (construction material includes “fixtures” as defined by Regulation

3.2.1.11(H)(1) NMAC); See Regulation 3.2.1.11(H)(1) NMAC (a “fixture” includes tangible

property that is firmly attached to the realty to constitute part of the construction project, including

kitchen equipment).

Thus, so long as Taxpayer met the NTTC requirements provided above, the transaction in

question would fall under the sale of construction materials to persons engaged in the construction

business under Sec. 7-9-51. It was for this reason that the Department provided Taxpayer with an

In the Matter of the Protest of Randall & Judith Gilbert
Page 9 of 19
additional 60 days to obtain NTTCs to establish the right to the deductions for such sales.

[Testimony of Mr. Pacheco; Dept. Ex. B]. The Taxpayer was unable to obtain any NTTCs.

[Testimony of Mr. McKinley]. Although the transactions at issue themselves may have qualified

for this deduction, because Taxpayer did not possess NTTCs, Taxpayer did not satisfy the NTTC

requirement of this deduction and the Department was unable to permit any deductions on this

basis.

To the extent there could be other deductions that could arguably be applicable upon

delivery of an appropriate NTTC, those claims would fail for the same reason. The Taxpayer was

unable to obtain any single NTTC for any transaction during the period subject to protest.

[Testimony of Mr. McKinley].

Taxpayer’s inability to obtain NTTCs is regrettable. When the transaction takes place, the

parties should have a mutual interest in cooperation and convenient access to all documentation,

which makes that the ideal time to obtain an NTTC. Usually, a 60-day letter is issued months or

years after a transaction occurs. With time, records can be misplaced or destroyed, businesses

can cease to exist, business relationships can become acrimonious, and the motivation for

cooperation can deteriorate. When a taxpayer “is not in possession of the required [NTTCs]

within sixty days from the date that the notice…is given…, deductions claimed by the seller or

lessor that require delivery of these nontaxable transaction certificates shall be disallowed”.

NMSA 1978, Sec. 7-9-43 (A) (emphasis added). The word “shall” indicates that the denial of

the deduction is mandatory, not discretionary. See Marbob Energy Corp. v. N.M. Oil

Conservation Comm’n, 2009-NMSC-013, ¶ 22, 146 N.M. 24. Under the circumstances

presented, Taxpayer is not able to meet its burden. Taxpayer could not present any NTTCs covering

any transaction during any period subject of the protest.

In the Matter of the Protest of Randall & Judith Gilbert
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Statutory and Equitable Estoppel

The Taxpayer asserted that the Department should be estopped from assessing him based

on a conversation with a Department employee in which he understood that his business

activities were not subject to gross receipts tax. In addition to such conversation, Taxpayer

received an email on February 3, 2016 indicating that “receipts from transactions in interstate

commerce may be deducted from gross receipts to the extent that the imposition of the gross

receipts tax would be unlawful under the United States constitution.” [Testimony of Mr.

McKinley]. Although a copy of the email was not introduced in evidence, the language read into

the record by Mr. McKinley, is a direct quotation of the statutory language contained in NMSA

1978, Sec. 7-9-55. Taxpayer also asserted reliance on Secretary Ruling 422-00-1. [Testimony of

Mr. McKinley; Formal Protest]. However, Secretary Ruling 422-00-1 could not be located and

upon further inquiry of the parties and their representatives, Taxpayer’s representative clarified

that this reference to Secretary Ruling 422-00-1 was intended as a reference to the same email he

read into the record.

Nevertheless, NMSA 1978, Sec. 7-1-60 (1993) provides for statutory estoppel in certain

circumstances. In pertinent part, under Sec. 7-1-60, the Department is estopped from acting when

a taxpayer’s actions were “in accordance with any regulation effective during the time the

asserted liability for tax arose or in accordance with any ruling addressed to the party personally

and in writing by the secretary…” The evidence presented in this protest did not establish that

the Taxpayer’s actions, at the time the various transactions occurred, were in accordance with

any regulation effective during the time the asserted liability arose or in accordance with any

ruling addressed to him personally in writing by the secretary. The email from February of 2016

was subsequent to all transactions eventually giving rise to the protest. Moreover, the email

In the Matter of the Protest of Randall & Judith Gilbert
Page 11 of 19
simply directed the Taxpayer to NMSA 1978, Sec. 7-9-55. It did not attempt to instruct or advise

the Taxpayer on how to assert a deduction under the statute.

Nevertheless, taxpayers are entitled to assert claims for deductions for receipts from

transactions in interstate commerce. However, the deduction only applies to the extent the

imposition of the gross receipts tax would be unlawful under the United States constitution. The

Taxpayer did not present such evidence in this case.

However, when an interstate transaction occurs, Kmart Corp. v. N.M. Taxation &

Revenue Dep’t., 2006-NMSC-006, ¶11, 139 N.M. 172, 131 P.3d 22 should be applied to the

transaction to determine whether the sale is taxable in New Mexico. In Kmart, the New Mexico

Supreme Court set out a two-part analysis to determine whether the gross receipts tax applies in

multistate transactions. The first part of the test is whether the Legislature intended to tax the sale

of products from Taxpayer, an out-of-state corporation, to customers in New Mexico.

Generally speaking NMSA 1978, Section 7-9-2 (1966) provides that the Gross Receipts

Tax Act is intended to “provide revenue for public purposes by levying a tax on the privilege of

engaging in certain activities within New Mexico and to protect New Mexico businessmen from

the unfair competition that would otherwise result from the importation into the state of property

without payment of a similar tax.” In Dell Catalog Sales, LP v. N.M. Taxation & Revenue Dep’t.,

2009-NMCA-001, ¶30, 145 N.M. 419, 199 P.3d 863, the court held that for purposes of

determining whether an interstate transaction is a taxable sale under gross receipts tax law, the

“destination principle” applies. The “destination principle” is defined as taxing the sale of goods

that cross state lines at the point of destination or where the goods are consumed, which may be

different from the point of delivery and where title is transferred. In Dell, the assumption is that

the goods are consumed at the destination. Dell Catalog Sales, LP, 2009-NMCA-001, ¶28. It is

In the Matter of the Protest of Randall & Judith Gilbert
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clear from Dell that if an out-of-state seller sells goods that are delivered in New Mexico, and

consumed in New Mexico, then gross receipts tax applies on the sale of the goods. However, the

Dell court also found that its analysis did not “apply in cases where the entire transaction occurs

out-of-state and the parties are present out-of-state at the time and place of the transaction.” Dell

Catalog Sales, LP, 2009-NMCA-001, ¶25. The court concluded that “in those circumstances, the

transaction is clearly not a sale “in NM for purposes of the Act.” Dell Catalog Sales, LP, 2009-

NMCA-001, ¶25. There is insufficient evidence in this case to find that the entire transaction

took place out of state. Rather, the evidence establishes that the destination principle should

apply.

In this protest, an overwhelming majority (94%) of Taxpayer’s receipts during the period

in protest derived from sales to building contractors and individual customers in New Mexico.

Building contractors or individual customers would communicate their product preferences to

Taxpayer, who occasionally came into New Mexico to take measurements. Taxpayer would then

place the order with the manufacturer, which then shipped the product to New Mexico, where the

buyer took possession at the location where the goods were to be affixed to the realty. Based on

the foregoing, the sale of the goods was taxable in New Mexico. Taxpayer has not presented

sufficient evidence to rebut this conclusion.

Taxpayer’s argument may also be construed as asserting a claim for equitable estoppel.

However, the availability of equitable estoppel for providing the relief the Taxpayer seeks is

questionable in an administrative protest hearing. See AA Oilfield Service v. New Mexico State

Corporation Commission, 1994-NMSC-085, ¶18, 118 N.M. 273 (equitable remedies are not part

of the “quasi-judicial” powers of administrative agencies). Even if it is available in this context,

courts are reluctant to apply the doctrine of equitable estoppel against the state in cases involving

In the Matter of the Protest of Randall & Judith Gilbert
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the assessment and collection of taxes. See Taxation & Revenue Dep’t v. Bien Mur Indian Mkt.

Ctr., Inc., 1989-NMSC-015, ¶9, 108 N.M. 22. In such cases, estoppel applies only pursuant to

statute or when “right and justice demand it.” Bien Mur Indian Market, ¶9. Oral statements not

reduced to writing are generally not grounds to grant equitable estoppel. See Kilmer v. Goodwin,

2004-NMCA-122, ¶28, 136 N.M. 440. Estoppel cannot lie against the state when the act sought

would be contrary to the requirements expressed by statute. See Rainaldi v. Public Employees

Retirement Board, 1993-NMSC-028, ¶18-19, 115 N.M. 650.

Under Kilmer, ¶26 (internal citations omitted), in order for a taxpayer to establish an

equitable estoppel claim against the Department, a taxpayer must show that

(1) the government knew the facts; (2) the government intended its
conduct to be acted upon or so acted that plaintiffs had the right to believe
it was so intended; (3) plaintiffs must have been ignorant of the true facts;
and (4) plaintiffs reasonably relied on the government's conduct to their
injury.

The claimant must also show “affirmative misconduct on the part of the government.” id., ¶27

(internal citations omitted). There is simply no evidence to suggest affirmative misconduct by

any employee of the Department with whom the Taxpayer may have communicated.

Penalty and Interest

When a taxpayer fails to make timely payment of taxes due to the state, “interest shall be

paid to the state on that amount from the first day following the day on which the tax becomes

due...until it is paid.” NMSA 1978, Sec. 7-1-67 (2007) (italics for emphasis). Under the statute,

regardless of the reason for non-payment of the tax, the Department has no discretion in the

imposition of interest, as the statutory use of the word “shall” makes the imposition of interest

mandatory. See Marbob Energy Corp. v. N.M. Oil Conservation Comm'n, 2009-NMSC-013, ¶22,

146 N.M. 24, 32 (use of the word “shall” in a statute indicates the provision is mandatory absent

In the Matter of the Protest of Randall & Judith Gilbert
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clear indication to the contrary). The language of the statute also makes it clear that interest begins

to run from the original due date of the tax and continues until the tax principal is paid in full.

The Department has no discretion under Sec. 7-1-67 and must assess interest against

Taxpayer from the time the tax was due, but not paid, until the tax principal liability is satisfied.

Therefore, the assessment of interest is mandatory and the Department is without legal authority to

abate it despite the Taxpayer’s lack of bad faith.

With concern for penalty, when a taxpayer fails to pay taxes due to the State because of

negligence or disregard of rules and regulations, but without intent to evade or defeat a tax,

NMSA 1978 Sec. 7-1-69 (2007) requires that

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.

(italics added for emphasis).

As discussed above, the statute’s use of the word “shall” makes the imposition of penalty

mandatory in all instances where a taxpayer’s actions or inactions meet the legal definition of

“negligence” even if, like here, Taxpayer’s actions or inactions were unintentional.

Regulation 3.1.11.10 NMAC defines negligence in three separate ways: (A) “failure to

exercise that degree of ordinary business care and prudence which reasonable taxpayers would

exercise under like circumstances;” (B) “inaction by taxpayer where action is required”; or (C)

“inadvertence, indifference, thoughtlessness, carelessness, erroneous belief or inattention.” In this

case, Taxpayer was negligent under Regulation 3.1.11.10 (A), (B) & (C) NMAC due to inaction in

failing to pay gross receipts tax when due resulting from the erroneous belief that the income

derived from the business activity did not give rise to gross receipts tax obligations.

In the Matter of the Protest of Randall & Judith Gilbert
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In instances where a taxpayer might come within the definition of civil negligence

generally subject to penalty, Sec. 7-1-69 (B) provides a limited exception: “[n]o penalty shall be

assessed against a taxpayer if the failure to pay an amount of tax when due results from a mistake

of law made in good faith and on reasonable grounds.” Here, there is no evidence that Taxpayer

made an informed judgment or determination based on reasonable grounds. See C & D Trailer

Sales v. Taxation and Revenue Dep’t, 1979-NMCA-151, ¶8-9, 93 N.M. 697 (penalty upheld where

there was no evidence that the taxpayer “relied on any informed consultation” in deciding not to

pay tax). Consequently, this mistake of law provision of Section 7-1-69 (B) does not provide for

abatement of penalty in this case.

The other grounds for abatement of civil negligence penalty are found under Regulation

3.1.11.11 NMAC. That regulation establishes eight indicators of non-negligence where penalty

may be abated. Based on the argument of Taxpayer and the evidence presented, only two factors

under Regulation 3.1.11.11 NMAC are potentially pertinent in this proceeding:

A. the taxpayer proves the taxpayer was affirmatively misled by a
department employee;

…

D. the 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 the taxpayer's reliance on an agent;

There is no evidence to establish that the taxpayer was affirmatively misled by a

department employee under Regulation 3.1.11.11 (A) NMAC. At the most, the evidence

established that after the assessment resulting in the protest, a Department employee directed the

Taxpayer to NMSA 1978, Sec. 7-9-55 without providing any additional advice or instruction.

In the Matter of the Protest of Randall & Judith Gilbert
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There is also a lack of evidence under Regulation 3.1.11.11 (D) NMAC to establish that

the Taxpayer’s failure to pay the tax 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. The evidence established that Taxpayer did not seek counsel until after the

Department issued its assessment.

The Department did not allege that the Taxpayer’s inaction was with the intent to evade or

defeat a tax. In contrast, there was no dispute that the issue giving rise to this protest was the

result of Taxpayer’s inadvertence, erroneous belief, or inattention. In other words, Taxpayer’s

conduct was not in bad faith or with dishonest intentions. Yet, El Centro Villa Nursing established

that the civil negligence penalty is appropriate for inadvertent error and Regulation 3.1.11.11 (A)

and (D) NMAC do not provide grounds for abatement of the penalty in this case. Therefore,

Taxpayer has not overcome the presumption of correctness and failed to establish an entitlement

to an abatement of penalty in this matter.

The result is unfortunate. Under New Mexico's self-reporting tax system, “every person is

charged with the reasonable duty to ascertain the possible tax consequences” of his or her actions.

Tiffany Construction Co. v. Bureau of Revenue, 1976-NMCA-127, ¶5, 90 N.M. 16. Had Taxpayer

consulted a tax professional or made a more thorough inquiry regarding his tax responsibilities

prior to engaging in business, the results might be different.

Since the Taxpayer did not establish the right to the claimed deduction, or entitlement to an

abatement of the assessed interest or penalty, the Taxpayer’s protest should be denied.

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.

In the Matter of the Protest of Randall & Judith Gilbert
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B. The hearing was timely set and held within 90-days of protest under NMSA 1978,

Sec. 7-1B-8 (2015).

C. Taxpayer did not qualify for any deduction under NMSA 1978, Sec. 7-9-51 because

Taxpayer did not possess nontaxable transaction certificates at the time of the transactions subject of

the protest or within the 60-day deadline set by the Department in accordance with NMSA 1978,

Sec. 7-9-43.

D. Taxpayer did not establish that the right to a deduction pursuant to NMSA 1978,

Sec. 7-9-55 because Taxpayer did not prove that the application of the gross receipts tax would

be unlawful under the United States constitution under the circumstances of this protest.

E. Taxpayer did not prove entitlement to statutory estoppel pursuant to NMSA 7-1-

60 (1993) or equitable estoppel under Kilmer v. Goodwin, 2004-NMCA-122, ¶28, 136 N.M. 440.

F. Taxpayer did not overcome the presumption of correctness that attached to the

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

165, ¶11, 84 N.M. 428.

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

DATED: January 31, 2017

Chris Romero
Hearing Officer
Administrative Hearings Office
Post Office Box 6400
Santa Fe, NM 87502

In the Matter of the Protest of Randall & Judith Gilbert
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NOTICE OF RIGHT TO APPEAL

Pursuant to NMSA 1978, Section 7-1-25 (2015), the parties have 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. If an appeal is not timely filed with the Court of Appeals within 30 days, this

Decision and Order will become final. Rule of Appellate Procedure 12-601 NMRA articulates

the requirements of perfecting an appeal of an administrative decision with the Court of Appeals.

Either party filing an appeal shall file a courtesy copy of the appeal with the Administrative

Hearings Office contemporaneous with the Court of Appeals filing so that the Administrative

Hearings Office may begin preparing the record proper. The parties will each be provided with a

copy of the record proper at the time of the filing of the record proper with the Court of Appeals,

which occurs within 14-days of the Administrative Hearings Office receipt of the docketing

statement from the appealing party. See Rule 12-209 NMRA.

In the Matter of the Protest of Randall & Judith Gilbert
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