I paid gross receipts tax and only later got the nontaxable transaction certificate — can I still get a refund by claiming the deduction now?

Plain-English summary

Basin Electrical Services was a small, family-owned electrical contractor in Flora Vista, New Mexico, run by Walter "Tex" Barker. In spring 1994 it won subcontracts to do electrical work for two prime contractors, including the Jaynes Corporation on a school gym renovation. Then, on May 30, 1994, Mr. Barker died suddenly of a heart attack, and his widow and young son stepped in to finish the jobs.

Mr. Barker had handled all the tax reporting, and the remaining staff didn't realize that a subcontractor's receipts from a prime contractor can be deducted from gross receipts tax if the prime contractor delivers the right nontaxable transaction certificate (NTTC). So Basin paid gross receipts tax on its full Jaynes receipts and requested no NTTC. Only after later discussions did the office manager, Mr. Griffith, learn about the deduction. He obtained an NTTC from Jaynes on January 30, 1995, and filed a refund claim in February 1995.

The Department paid most of the refund but denied $1,146.64 — the tax on the Jaynes receipts — because Basin did not hold the Jaynes NTTC when the returns reporting those receipts were due (August, September and November 1994). Basin protested. Hearing Officer Gerald B. Richardson denied the protest:

• The NTTC must be in hand when the return is due. Section 7-9-43(A) requires that NTTCs be in the seller's possession "at the time the return is due for receipts from the transactions." A deduction that requires an NTTC but isn't backed by timely possession "shall be disallowed."
• The 1992 amendment made this strict. Before 1992, the statute said the seller "should" have the NTTC and gave a 60-day cure window after a Department notice. The Legislature changed "should" to the mandatory "shall" and tightened the rule — signaling it wanted the possession requirement strictly enforced.
• Hardship and double taxation don't change the result. The Legislature knew that requiring timely possession would sometimes mean the same transaction is taxed twice, and it still mandated disallowance. Mr. Barker's death was a reasonable explanation, and Basin acted honestly, but the Hearing Officer had no authority to waive the statute.
• A Department instruction can't expand the deduction. The filing-kit instruction to have the NTTC "when claiming the deduction" wasn't inaccurate, but the statute defines that more precisely; where an instruction conflicts with the clear statute, the statute governs.

What this means for you

Get your NTTCs before the return is due — not later

If you're a New Mexico seller or subcontractor relying on a deduction that requires a nontaxable transaction certificate, you must actually hold the NTTC by the time the return reporting those receipts is due. Obtaining it later — even before you formally claim the deduction on a refund — is too late. Collect NTTCs up front, as part of closing each job, rather than at tax time.

Subcontractor construction deduction has a paperwork trigger

The Section 7-9-52 deduction for subcontract construction services sold to a prime contractor is real and valuable, but it is conditioned on the NTTC. If the prime contractor never gives you one, or gives it late, the deduction can be lost even though the underlying transaction plainly qualifies.

Sympathetic circumstances won't save a late NTTC

A death in the business, honest bookkeeping, and the unfairness of paying tax twice on the same work were all present here and still didn't matter. The possession deadline is strict. Don't count on equitable relief; build the compliance step into your process so you never need it.

Don't rely solely on instruction booklets

Department filing instructions are a helpful guide but can be less precise than the statute. When a deduction is important to you, check the statute's actual requirements (or ask a professional), because in a conflict the statute — not the booklet — controls.

Common questions

Q: I qualified for the deduction but only got the NTTC after I filed and paid. Can I get a refund?
A: Not for the periods where you lacked the NTTC when the return was due. Section 7-9-43(A) requires possession by the return due date; getting the certificate later doesn't cure it, even if you have it before filing a refund claim.

Q: What's the difference between the pre-1992 and current rules?
A: Before 1992 the statute said the seller "should" have the NTTC and allowed a 60-day cure after a Department notice. Since 1992 it uses the mandatory "shall" and requires possession when the return is due — a deliberately stricter standard.

Q: Isn't it unfair for the state to tax the same construction work twice?
A: The Hearing Officer agreed it can produce double taxation, but held the Legislature knew that and still required disallowance when the NTTC isn't held on time. Fairness arguments can't override the statute's clear command.

Q: The Department's own instructions said I just need the NTTC "when claiming the deduction." Doesn't that help me?
A: No. The instruction wasn't wrong, but the statute defines what timely possession means more precisely. Where an instruction and the statute conflict, the statute controls.

Citations and references

Statutes:

• § 7-9-43(A) NMSA 1978 — all NTTCs of the appropriate series must be in the seller's or lessor's possession for nontaxable transactions at the time the return is due; if the seller can't demonstrate possession at the start of an audit or within sixty days of a Department notice, deductions requiring the NTTC shall be disallowed (applies to transactions on or after July 1, 1992)
• § 7-9-52 NMSA 1978 — deduction from gross receipts for a subcontractor's receipts from selling construction services to a prime contractor, conditioned on delivery of an NTTC
• § 7-9-11 NMSA 1978 — gross receipts tax must be paid on or before the twenty-fifth day of the month after the month in which the taxable event occurs
• § 7-1-26 NMSA 1978 — procedure for a claim for refund and for a timely written protest of a refund denial

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Basin Electrical Services Co. Inc.
• Decision PDF: D&O 96-13

Original ruling text

BEFORE THE HEARING OFFICER
OF THE TAXATION AND REVENUE DEPARTMENT
OF THE STATE OF NEW MEXICO

IN THE MATTER OF THE PROTEST OF
BASIN ELECTRICAL SERVICES CO., INC.
I.D. NO. 02-197353-00 9 PROTEST TO
DENIAL OF CLAIM FOR REFUND. No. 96-13

DECISION AND ORDER

This matter came on for formal hearing on April 16, 1996 before Gerald B. Richardson,

Hearing Officer. Basin Electrical Services Co., Inc. (hereinafter "Taxpayer") was represented by

Mr. Dudley Griffith, Office Manager for the Taxpayer. The Taxation and Revenue Department

(hereinafter "Department") was represented by Gail MacQuesten, Special Assistant Attorney

General.

Based upon the evidence and the arguments presented, IT IS DECIDED AND

ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer is an electrical contractor and a small, family owned and operated

corporation, which operated in Flora Vista New Mexico and was run by Mr. Walter "Tex" Barker.

2. In the spring of 1994, the Taxpayer bid for and was awarded two contracts to do

electrical work as a subcontractor on two construction projects. One was with Bradbury and

Stamm Construction Company and the other was with the Jaynes Corporation.

3. On May 30, 1994, Mr. Walter Barker died suddenly of a heart attack. Mr.

Barker's widow and young son had to step in and run the business long enough to complete its

contractual obligations with Bradbury and Stamm and the Jaynes Corporation.

4. The contract with the Jaynes Corporation was to perform certain specified electrical

work on the Blanco Gym Renovation Project for the Bloomfield Municipal School District. The

contract amount was $20,513, plus change orders of $1,074 for a total of $21,587, paid to the
Taxpayer as follows:

October 28, 1994 .......................................................................... $ 1,451

August 12, 1994.......................................................................................... $ 2,597

July 15, 1994 .............................................................................................. $17,539

5. The contract with the Jaynes Corporation specified that the contract amount was not

to include gross receipts tax.

6. The Jaynes Corporation did not deliver a nontaxable transaction certificate

("NTTC") to the Taxpayer when it made payment of the amounts paid under its contract and the

Taxpayer did not request a NTTC as Mr. Barker had handled the tax reporting and payment

functions previously and the remaining personnel did not realize or understand that their receipts

from performing subcontract electrical services could be deducted if a proper type of NTTC was

received from the prime contractor. Accordingly, when the Taxpayer reported and paid gross

receipts tax upon its receipts from the Jaynes corporation, the Taxpayer paid tax upon its total

receipts and claimed no deduction from tax.

7. Although the Taxpayer did have in its possession a NTTC from Bradbury and

Stamm Construction Company as a result of other subcontract electrical work it had previously

done for them, the Taxpayer also reported and paid gross receipts tax on its receipts from Bradbury

and Stamm. Subsequently, in discussions with someone from Bradbury and Stamm, Mr. Griffith

learned that the Taxpayer was eligible to claim a deduction from gross receipts tax upon its receipts

from performing subcontract electrical services for prime contractors when a NTTC has been

delivered to the subcontractor from the prime contractor and the prime contractor pays gross

receipts tax upon its receipts from the construction project.

8. As a result of these discussions, Mr. Griffith requested a NTTC from the Jaynes

Corporation, which the Jaynes Corporation issued on January 30, 1995. On February 2, 1995, Mr.

Griffith filed a claim for refund with the Department requesting a refund of $13,188.39 of gross

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receipts taxes paid on its receipts from the Jaynes Corporation, Bradbury and Stamm and Fesco

Contracting Company and claiming a deduction for those receipts.

9. By letters dated February 13, 1995 and February 21, 1995, the Department partially

denied the Taxpayer's refund claim in the amount of $1,146.64, representing the amounts of gross

receipts tax paid on the Taxpayer's receipts from the Jaynes Corporation. The basis for the

Department's partial denial of the Taxpayer's refund claim was that the Taxpayer was not in

possession of the NTTC from the Jaynes Corporation at the time its tax returns reporting and

paying tax on its receipts from the Jaynes Corporation were due.

10. On May 11, 1995, the Taxpayer filed a written protest of the partial refund denial

with the Department.

DISCUSSION
The issue presented herein is whether the Department properly denied the portion of the

Taxpayer's claim for refund which was denied. The Department based its denial upon the fact that

the Taxpayer was not in possession of the NTTC from the Jaynes Corporation at the time its tax

return was due reporting its receipts from the Jaynes Corporation. The Department argues that

possession of the NTTC at the time the tax return was due is required by the provisions of Section

7-9-43(A), which provides in pertinent part as follows:
The provisions of the subsection apply to transactions occurring on or after July 1, 1992.
All nontaxable transaction certificates of the appropriate series executed by buyers
or lessees shall be in the possession of the seller or lessor for nontaxable transactions
at the time the return is due for receipts from the transactions. If the seller or lessor
does not demonstrate possession of required nontaxable transaction certificates to
the department at the commencement of an audit or demonstrate within sixty days
from the date that the notice requiring possession of these nontaxable transaction
certificates is given the seller or lessor by the department that the seller or lessor was
in possession of such certificates at the time receipts from the transactions were
required to be reported, deductions claimed by the seller or lessor that require
delivery of these nontaxable transaction certificates shall be disallowed. . . .
(emphasis added).

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This provision, which was substantially amended by the legislature in 1992, clearly and

unambiguously requires that for taxpayers to claim a deduction requiring a NTTC, that the NTTC

be in the possession of the seller at the time the return is due for receipts from the transaction, or in

alternative language, at the time receipts from the transaction are required to be reported. There is

no dispute herein that the deduction which the Taxpayer sought to avail itself, the deduction at

Section 7-9-52 NMSA 1978 which allows a deduction for sellers of subcontracted construction

services sold to prime contractors, requires a NTTC as part of the statutory requirements for

claiming the deduction.

The Taxpayer does not dispute that Section 7-9-43 requires that the NTTC be in its

possession at the time its tax returns reporting its receipts from the Jaynes Corporation were due,1

nor does it dispute that it did not comply with that requirement. The Taxpayer, however, asks that

the Department take into consideration the unfortunate circumstances which caused it to not be in

compliance with the statutory requirements, the death of Mr. Barker, who had handled the tax

matters previously and would have been aware of the NTTC requirement. The Taxpayer also

asks that the Department take into consideration the fact that if the deduction is denied, the state

will have collected tax twice on the same electrical work. Finally, the Taxpayer asks that

consideration be given to the fact that the instructions to the filing kit given gross receipts tax filers

only requires that taxpayers claiming deductions only have the NTTC in their possession "when

claiming the deduction," and the Taxpayer points out that it did have the NTTC from Jaynes

Corporation by the time it claimed the deduction by filing its refund claim in February of 1995.

In considering the issues raised by the Taxpayer, the changes made to Section 7-9-43 by the

1992 legislature (Laws 1992, Ch. 39), provide an informative backdrop. Section 7-9-43 had been

written less stringently prior to the 1992 amendments. Although there was language which
1
Section 7-9-11 NMSA 1978 requires that gross receipts taxes must be paid on or before the twenty-fifth day of the month
in which the taxable event occurs. Since the Taxpayer's receipts from the Jaynes Corporation were received in July, August
and October of 1994, its returns reporting those taxes were due in August, September and November of 1994, respectively.
The Taxpayer did not have the NTTC from the Jaynes Corporation until January of 1995, however.

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indicated that the seller should be in possession of the NTTC at the time the nontaxable

transactions occur, the legislature chose to use the word, "should," rather than the mandatory term

"shall," as is presently used. Additionally, a taxpayer's claimed deduction would only be disallowed

if they failed to produce a NTTC within sixty days of the receipt of notice from the Department

requiring their possession. There was no requirement, however, that the Taxpayer actually

demonstrate possession at the time the return claiming the deduction is filed. Thus, the legislature

substantially tightened the requirements for possessing NTTCs to substantiate claimed deductions.

This is indicative of the fact that the legislature intended that the requirement to possess a NTTC to

claim a deduction be strictly enforced. Thus, although Mr. Barker's death certainly provides a

reasonable explanation for why statutory requirements were not strictly met, nonetheless, the

allowance of the deduction is governed by the terms of the statute which the legislature intended to

be strictly enforced. Additionally, the legislative changes indicate that the legislature was well aware

that there would be circumstances where the failure to possess the NTTC at the time the tax

deduction was claimed would result in the double taxation of a transaction, but the legislature still

mandated that the deduction "shall be disallowed". Finally, although the Department's instructions

are not inaccurate in their requirement that the NTTC be in the seller's possession "when claiming

the deduction," the statutory language is more precise in defining what possession "when claiming

the deduction" means. The Department has been charged with the responsibility to interpret,

implement and enforce the various tax statutes. It is without authority, however, to interpret and

implement a statute in a way which would conflict with the clear and unambiguous language in the

statute, and in the event of a conflict between a statute and a departmental instruction, the statute

would govern.

It should be noted that the Taxpayer in this case conducted its business operations in a

totally honest and above-board manner with respect to the manner in which it reported and paid

taxes. Unfortunately, this may not be taken into consideration with respect to the Department's

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obligation to implement the statutes as the legislature has written them even where the

circumstances affecting the Taxpayer's compliance with the strict letter of the law are quite

understandable.

For these reasons, the Taxpayer's protest to the partial denial of its refund claim must be

denied.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest, pursuant to Section 7-1-26 NMSA

1978, to the Department's partial denial of its claim for refund, and jurisdiction lies over both the

parties and the subject matter of this protest.

2. The Taxpayer was not in possession of a NTTC from the Jaynes Corporation at the

time its returns were due to report its gross receipts from the Jaynes Corporation and therefore the

Taxpayer was not entitled to claim a deduction for its receipts from the Jaynes Corporation

pursuant to Section 7-9-43(A) NMSA 1978.

3. The Department properly denied the Taxpayer's claim for refund for the gross

receipts taxes reported upon its receipts from the Jaynes Corporation.

For the foregoing reasons, the Taxpayer's protest IS HEREBY DENIED.

DONE, this 22nd day of April, 1996.

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