Could ACME Mechanical use construction-service NTTCs obtained more than 40 days after the audit's statutory 60-day deadline?

Plain-English summary

ACME Mechanical could not use two construction-service NTTCs obtained after the statutory 60-day audit deadline. The certificates would otherwise have covered all assessed receipts, but the Department had no authority to allow the deduction once the deadline expired.

ACME provided plumbing services in New Mexico as a subcontractor on construction projects during 2012 through 2014.

The Department assessed $3,694.58 gross receipts tax, $738.92 penalty, and initially $494.46 interest.

The audit gave ACME a second chance to obtain certificates

Section 7-9-52 allowed a deduction when construction or construction-related services were sold to a person in the construction business who delivered an NTTC to the service provider.

Section 7-9-43(A) said the provider should possess the certificate when the return was due. For an audited taxpayer that lacked the certificate, the statute gave a second chance: obtain it within 60 days after Department notice.

The Department's June 3, 2017 audit letter set an August 2, 2017 deadline. A July 13 reminder repeated it.

Both notices stated in capital letters that certificates had to be possessed and executed by the response date or the related deductions would be disallowed.

Both NTTCs arrived too late

ACME eventually obtained certificates from both construction companies:

• one was issued and executed on September 21, 49 days after the deadline; and
• the other was issued on September 15 and executed on September 22, 43 days after the deadline.

It was undisputed that the receipts would have been deductible if the NTTCs were timely and that the certificates covered the full assessment.

A reasonable explanation could not extend the statute

Owner Gene Palmeri had limited bookkeeping knowledge, was unfamiliar with NTTCs, and did not understand the importance of the audit and reminder letters. He did not consult the part-time person helping with ACME's books until after the deadline.

Once he understood the problem, he obtained the certificates and asked for a fresh start.

The AHO held that Section 7-9-43 and Regulation 3.2.201.12(C) NMAC left no discretion to accept late certificates, even when the taxpayer had a reasonable explanation. Failing to follow the prescribed method waived the deduction.

Result: protest DENIED. As of the hearing, ACME owed $3,694.58 tax, $738.92 penalty, and $540.17 interest, with interest continuing until the tax principal was paid.

Text note: Finding 14 calls the $540.17 amount “penalty,” but the final order identifies it as interest, consistent with the original assessment's separate penalty and interest components. This summary follows the final order.

What this means for you

Construction subcontractors

Obtain the correct NTTC before the return is due whenever possible. Do not wait for an audit to collect resale or construction certificates.

Taxpayers receiving a 60-day audit notice

Treat the stated deadline as mandatory. Calendar it immediately, contact customers, and verify both issuance and execution dates before submitting the certificates.

Small businesses without in-house tax staff

Route audit notices to a qualified accountant or tax professional promptly. Lack of familiarity with NTTC rules did not authorize a deadline extension here.

Businesses that eventually obtain valid certificates

Substantive coverage is not enough when the statute requires timely possession. A valid late certificate may still fail to support the deduction.

Common questions

Q: Would the receipts have qualified if the NTTCs were timely?
A: Yes. The parties agreed that the certificates would cover the entire assessment.

Q: What was the statutory second-chance deadline?
A: August 2, 2017, 60 days after the Department's audit notice.

Q: How late were the certificates?
A: One was 49 days late and the other was 43 days late.

Q: Did ACME receive a reminder?
A: Yes. The Department sent a July 13 reminder that repeated the deadline and consequence.

Q: Could the Department excuse the delay?
A: No. The AHO held that the statute and regulation made disallowance mandatory after the 60-day period.

Q: What amount remained due at the hearing?
A: $3,694.58 tax, $738.92 penalty, and $540.17 interest, plus later-accruing interest.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-9-4 and 7-9-52 — gross receipts tax and construction-service deduction
• NMSA 1978, § 7-9-43(A) — possession of NTTCs and the 60-day audit notice
• NMSA 1978, §§ 7-1-3 and 7-1-17(C) — definition of tax and assessment presumption
• Regulations 3.2.1.18(A) and 3.2.201.12(C) NMAC — in-state services and untimely certificates

Cases cited:

• Proficient Food Co. v. New Mexico Taxation & Revenue Department, 1988-NMCA-042 — untimely NTTC is a valid basis to deny a deduction
• Marbob Energy Corp. v. New Mexico Oil Conservation Commission, 2009-NMSC-013 — statutory “shall” indicates a mandatory requirement
• Archuleta v. O'Cheskey, 1972-NMCA-165 — presumption of assessment correctness

Source

• Listing: New Mexico Decisions & Orders
• Decision post: ACME Mechanical
• Decision PDF: D&O 18-03

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
ACME MECHANICAL,
TO THE ASSESSMENTS ISSUED UNDER
LETTER ID NO. L1302818096

v. D&O No. 18-03

NEW MEXICO TAXATION AND REVENUE DEPARTMENT

DECISION AND ORDER

A formal hearing on the above-referenced protest was held December 5, 2017, before

Administrative Law Judge Lauren Baldwin in Santa Fe, New Mexico. The Taxation and Revenue

Department (Department) was represented by Peter Breen, Staff Attorney. Danny Pogan, Auditor,

also appeared and testified on behalf of the Department. Gene Palmeri, owner of ACME

Mechanical (Taxpayer), appeared for the hearing and represented himself. Stephanie Duquette

appeared and testified as a witness for the Taxpayer. The Administrative Law Judge took notice

of all documents in the administrative file. Taxpayer Exhibits 1 – 5 and Department Exhibits A –

C were admitted into the evidentiary record of the hearing without objection. A more detailed

description of exhibits submitted at the hearing is included on the Administrative Exhibit

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

AS FOLLOWS:

FINDINGS OF FACT

1. On August 16, 2017, the Department assessed the Taxpayer for gross receipts tax,

penalty, and interest for the tax period of January 1, 2012 through December 31, 2014.

The assessment was for $3694.58 tax, $738.92 penalty, and $494.46 interest.

2. On August 30, 2017, September 21, 2017, and September 22, 2017 the Taxpayer

protested the Department’s assessment. The Department acknowledged receipt of each

protest letter, respectively, on September 5, 2017, September 26, 2017, and September

28, 2017.

3. On November 8, 2017, the Department filed a Request for Hearing asking that the

Taxpayer’s protest be scheduled for a formal administrative hearing.

4. On November 9, 2017, the Administrative Hearings Office issued a notice of hearing.

The hearing date was set within ninety days of the protest.

5. During 2012, 2013, and 2014, the Taxpayer was providing services in New Mexico as a

plumbing contractor.

6. The Taxpayer subcontracted with two companies to provide plumbing services on

construction projects in New Mexico.

7. The companies directly contracted or billed the Taxpayer’s plumbing services to

construction projects subject to gross receipts tax.

8. In 2017, the Department selected the Taxpayer for audit.

9. The Department sent the Taxpayer a Notice of Limited Scope Audit Commencement –

60 Day Notice, dated June 3, 2017, (the 60-day letter) advising of the audit and giving the

Taxpayer 60 days to obtain any applicable nontaxable transaction certificates (NTTCs).

[Dept. Exh. A].

10. The 60-day letter indicated that the deadline for obtaining NTTCs was August 2, 2017.

[Dept. Exh. A].

Acme Mechanical
Letter ID No. L1302818096
page 2 of 9

11. The Department sent the Taxpayer a Reminder Notice of Limited Scope Audit – Gross

Receipts, dated July 13, 2017, (Reminder Notice) reminding Taxpayer of the August 2,

2017 deadline for obtaining NTTCs. [Dept. Exh. B].

12. The Taxpayer obtained NTTCs from both companies. One was issued and executed to the

Taxpayer on September 21, 2017, which was 49 days after the deadline of August 2,

2017, listed in the 60-day letter. The second NTTC was issued on September 15, 2017,

and executed on September 22, 2017, which was 43 days after the deadline. [Taxpayer

Exhs. 2 and 3].

13. The Department rejected the NTTCs as they were not obtained by August 2, 2017 and

assessed the Taxpayer.

14. As of the date of hearing, Taxpayer owed $3694.58 in gross receipts tax, $738.92 in

penalty, and $540.17 in penalty. [Dept. Exh. C].

DISCUSSION

The issue to be decided is whether the Taxpayer is liable for the tax, penalty and interest

as assessed. This issue hinges upon whether the Taxpayer’s acceptance and submission of the

NTTCs was timely.

Burden of Proof.

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

(2007). Tax includes, by definition, the amount of tax principal imposed and, unless the context

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

§7-1-3 (2007). See also El Centro Villa Nursing Ctr. v. Taxation and Revenue Department, 1989-

NMCA-070, 108 N.M. 795. Therefore, the assessment issued to the Taxpayer is presumed to be

Acme Mechanical
Letter ID No. L1302818096
page 3 of 9
correct, and it is the Taxpayer’s burden to present evidence and legal argument to show that he is

entitled to an abatement.

Acme Mechanical
Letter ID No. L1302818096
page 4 of 9
NTTCs.

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

See NMSA 1978, §7-9-4 (2010); 3.2.1.18 (A) NMAC (2012). A taxpayer may deduct gross

receipts from sales of construction or construction-related services in New Mexico in certain

instances, as provided in NMSA 1978, Section 7-9-52 (2012). “Receipts from selling a

construction service or a construction-related service may be deducted from gross receipts if the

sale is made to a person engaged in the construction business who delivers a nontaxable

transaction certificate to the person performing the construction service or a construction-related

service. ” §7-9-52 (emphasis added).

NMSA 1978, Section 7-9-43(A) (2011) provides that a taxpayer “should be in the

possession of” the NTTC when the return for the receipts from the transaction is due, but also

gives taxpayers audited by the Department a second chance to obtain the NTTC within 60 days of

when the Department notifies the taxpayer that an NTTC is required. Id. (emphasis added). The

applicable statute specifically provides that, if a taxpayer has not obtained the NTTC within the

sixty days, the deduction is disallowed. Id. Consistent with the statutory language, under

Regulation 3.2.201.12 (C) NMAC (2012), a taxpayer “is not entitled to the deduction” when the

NTTC is untimely. The New Mexico Court of Appeals has held that despite its general reluctance to

place “form over substance,” the failure to timely and properly present a requisite NTTC is a “valid

basis” for the Department to deny a claimed deduction. Proficient Food Co. v. New Mexico

Taxation & Revenue Dep't, 1988-NMCA-042, ¶22, 107 N.M. 392.

It is undisputed that the Taxpayer’s receipts would be deductible if the NTTCs were

allowed. It is undisputed that the NTTCs would cover the totality of the assessments. But it also

Acme Mechanical
Letter ID No. L1302818096
page 5 of 9
is undisputed that the NTTCs were not executed to or in Taxpayer’s possession until September

15, 2017 and September 21, 2017.

Gene Palmeri has operated ACME Mechanical for many years. The business originally

was limited to service calls for plumbing matters, but Mr. Palmeri more recently began

subcontracting for large construction companies.

Mr. Palmeri has limited knowledge of bookkeeping and accounting. Stephanie Duquette

began helping Mr. Palmeri with bookkeeping and accounting for ACME Mechanical on a very

intermittent and part-time basis approximately two years ago.

Mr. Palmeri was not familiar with NTTCs before the audit in this matter occurred. He

testified that he did not understand the gravity of the 60-day letter and Reminder Notice when he

received them. He did not confer with Ms. Duquette about the 60-day letter and Reminder Notice

until after the deadline for obtaining executed NTTCs had passed. With Ms. Duquette’s

assistance, Mr. Palmeri obtained the NTTCs, but not until more than 40 days after the deadline

listed in the 60-day letter had passed. Mr. Palmeri testified that he understood his error but hoped

that, since he eventually did obtain the appropriate NTTCs, he could be given a “fresh start” and

the NTTCs could be accepted.

While a plumber understandably may not be skilled in bookkeeping and accounting, the

60-day letter explained that documentation could be “provided to the department to substantiate

that your gross receipts are not subject to taxation,” including “[i]nvoices with corresponding

NTTCs . . .” (Exh. A). And both the 60-day letter and the Reminder Notice stated explicitly in

capital letters:

NEW MEXICO STATUTE REQUIRES THAT ANY NONTAXABLE
TRANSACTION CERTIFICATES (NTTCs) BE IN YOUR POSSESSION AND
BE EXECUTED (DATED) ON OR PRIOR TO THE RESPONSE DATE ON

Acme Mechanical
Letter ID No. L1302818096
page 6 of 9
THIS NOTICE OR DEDUCTIONS RELATING TO THE NTTCs WILL BE
DISALLOWED.

(Exhs A and B).

Under Section 7-9-43 and 3.2.201.12 (C) NMAC, the Department has no authority to allow

a deduction after the expiration of the second chance, 60-day deadline, even if a taxpayer has a

reasonable explanation for the delay. By not presenting the NTTCs in a timely manner, as required

by Section 7-9-43 and 3.2.201.12 (C) (NMAC), Taxpayer waived its right to the claimed deduction.

See Proficient Food Co., ¶22 (internal citations omitted) (“Where a party claiming a right to an

exemption or deduction fails to follow the method prescribed by statute or regulation, he waives his

right thereto.”).

CONCLUSIONS OF LAW

A. The Taxpayer filed a timely written protest to the Notice of Assessment of 2012,

2013, and 2014 gross receipts taxes issued under Letter ID number L1302818096, and jurisdiction

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

B. The hearing was timely set within 90-days of protest under NMSA 1978, Section 7-

1B-8(A) (2015).

C. Taxpayer did not overcome 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.

D. Under NMSA 1978, Section 7-9-43 (2011), Taxpayer had a statutory obligation to

possess an NTTC when the gross receipts tax was initially due for the 2012, 2013, and 2014 sales of

plumbing services in New Mexico.

E. The Taxpayer was given notice that possession of NTTCs was required by August 2,

2017, in the 60-day letter, dated June 3, 2017. See §7-9-43.
Acme Mechanical
Letter ID No. L1302818096
page 7 of 9
F. Taxpayer did not present timely executed NTTCs to support the claimed deduction

for the sale of construction or construction-related services under NMSA 1978, Section 7-9-52

(2012).

G. Under Section 7-9-43 and 3.2.201.12 (C) (2012) NMAC, without a timely executed

NTTC at either the time of the filing of returns or by August 2, 2017, the Department cannot allow

and Taxpayer is not entitled to the claimed deduction under Section 7-9-52. See Marbob Energy

Corp. v. N.M. Oil Conservation Comm'n, 2009-NMSC-013, ¶22, 146 N.M. 24 (use of the word

“shall” in a statute indicates provision is mandatory absent clear indication to the contrary). See also

Proficient Food Co. v. New Mexico Taxation & Revenue Dep't, 1988-NMCA-042, ¶22, 107 N.M.

392 (Court found it valid for the Department to deny a claimed deduction when taxpayer did not

timely present a requisite NTTC).

For the foregoing reasons, the Taxpayers’ protest IS DENIED. IT IS ORDERED that the

Taxpayer is liable for $3,694.58 in gross receipts tax, $738.92 in penalty, and $540.17 in interest

as of the date of the hearing. Interest continues to accrue until the tax principal is satisfied.

DATED: January 4, 2018.

Lauren M. Baldwin
Lauren M. Baldwin
Administrative Law Judge
Administrative Hearings Office
Post Office Box 6400
Santa Fe, NM 87502

Acme Mechanical
Letter ID No. L1302818096
page 8 of 9
NOTICE OF RIGHT TO APPEAL

Pursuant to NMSA 1978, § 7-1-25, 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. See Rule 12-601 NMRA. If an appeal is not filed within 30 days, this Decision

and Order will become final. A copy of the Notice of Appeal should be mailed to John Griego,

P. O. Box 6400, Santa Fe, New Mexico 87502. Mr. Griego may be contacted at 505-827-0466.

CERTIFICATE OF SERVICE

I hereby certify that I mailed the foregoing Order to the parties listed below this _ day of
___, 20__ in the following manner:

Acme Mechanical
Letter ID No. L1302818096
page 9 of 9