When I sell a portable, relocatable building that just gets set on blocks and leveled, am I selling tangible personal property (which can be sold tax-free to a government or nonprofit) or a construction service?

Plain-English summary

Two related companies were assessed after audits. Morgan Buildings & Spas Manufacturing Corp. ("Manufacturing") builds portable, relocatable buildings (and hot tubs and related products) at four plants, including one in Raton, New Mexico. Morgan Buildings & Spas, Inc. ("Buildings & Spas") sells those buildings through 24 retail stores and a dealer network. The Department assessed Buildings & Spas about $103,546 and Manufacturing about $17,119 in tax, penalty, and interest for periods in 1988–1992.

The central question was what Buildings & Spas actually sells: tangible personal property (goods) or a construction service. It mattered because most of the disputed sales were to governments and 501(c)(3) nonprofits — sales of goods to those buyers are deductible (§ 7-9-54, § 7-9-60), unless the goods become an "ingredient or component part of a construction project."

Hearing Officer Gerald B. Richardson ruled the buildings are tangible personal property, and granted the protests in part:

• These buildings aren't "construction." Morgan's buildings are built 100% complete at the plant, delivered on skids, and just set on blocks and leveled (delivery and setup are only 1–2% of the price). They're built to be relocatable and are not permanently affixed to land. New Mexico's definition of "construction" (§ 7-9-3(C)) contemplates a permanent improvement to real property, and courts even treat Morgan portable buildings as "goods" (Cates v. Morgan Portable Building Corp.; the UCC definition in § 55-2-105(1)).
• Part of the Department's regulation was struck down. The Department relied on Regulation GR 3(C):6, which declared prefabricated buildings to be construction services "irrespective of whether the building is permanently affixed to land." An agency can't adopt a rule out of harmony with its statute (Rivas). To the extent that regulation ignored permanent affixation, the Hearing Officer held it overbroad, beyond the Department's authority, and void.
• The taxpayer's evidence shifted the burden — and the Department didn't meet it. An assessment is presumed correct (§ 7-1-16), but Morgan's evidence rebutted that presumption, and the Department offered no evidence the buildings became permanently affixed. So denying the deductions for goods sold to governments and nonprofits was improper.

But several specific transactions were still taxable, mostly on paperwork grounds:

• Old NTTCs voided by a law change. A 1991 amendment (§ 7-9-43(D)) made all pre-1992 non-taxable transaction certificates void as of January 1, 1992. Manufacturing's sales to Buildings & Spas after that date, and Buildings & Spas's two 1992 sales to Sandia National Laboratories (including a custom building recognized on its books in March 1992), were denied because no valid 1992-series certificate was in hand within the Department's 60-day window.
• Missing or unreadable certificates. Deductions for sales to Northeastern Regional Hospital (only a certificate number, never the certificate), the Canoncito Senior Center (an illegible certificate), and dealer Sun Country Housing (no certificate produced) were all denied for failure to prove a valid NTTC.
• Two deductions were allowed once the taxpayer produced proof at the hearing — an interstate move for Inhalation Toxicology Research Institute (§ 7-9-55) and a sale to Albuquerque Development (an NTTC dated the day of the sale).
• Audit sampling. The Department's percentage-of-error method improperly swept in one highly unusual $123,776 sale to Sandia; the Hearing Officer ordered it removed from the sample and assessed separately.
• Negligence penalty upheld on the deductions that stayed denied. Failing to hold the certificates was negligence, and — importantly — taxpayers have an affirmative duty to keep up with changes in the tax law that affect their NTTCs (Arco Materials). Relying on certificates the Legislature had voided didn't excuse the penalty.

What this means for you

"Portable" and "not permanently affixed" can make your product goods, not construction

The dividing line here is permanence. New Mexico "construction" means building or altering something that becomes a permanent improvement to the land. A structure that's made complete off-site, delivered whole, and merely set on blocks so it can be moved again is tangible personal property. If relocatability is real — the item can be and is moved without destroying it — that cuts strongly against calling the sale a construction service.

A regulation that goes beyond the statute won't hold up

The Department lost its main position because its own regulation swept in "prefabricated buildings" regardless of whether they were ever affixed to land — further than the statute reaches. Agencies get deference in interpreting their statutes, but not the power to expand them. If an assessment rests on a regulation that contradicts or outruns the underlying law, that's a live argument worth making.

Winning the characterization is only half the battle — your NTTC paperwork still has to be perfect

Even after establishing the buildings were goods, Morgan lost every deduction where it couldn't produce a valid, current certificate. A certificate number on an invoice isn't proof; an illegible copy isn't proof; and a certificate the buyer never sent isn't proof. Get the correct certificate, keep a legible copy, and be able to produce it within the Department's 60-day demand.

A change in the law can void certificates you're already relying on — and you're expected to know

This case turned in part on the 1991 amendment that voided all pre-1992 certificates as of January 1, 1992. The certificate-possession rules protect you when a buyer's promise turns out wrong — but not when the law itself changes what's taxable. Taxpayers have an affirmative duty to track those changes, so a statutory shift like this won't spare you the tax or the negligence penalty.

One giant transaction shouldn't distort a sampling audit

When the Department audits by sampling months and projecting a "percentage of error" across the year, an abnormally large, one-off sale can badly skew the result. The correct approach is to pull that outlier out of the sample and assess it on its own. If a sampling audit lumps in a transaction that dwarfs your normal sales, challenge the methodology.

Common questions

Q: I sell buildings that are delivered complete and set on blocks. Is that a taxable construction service?
A: Not necessarily. If the building is built off-site, is relocatable, and isn't permanently affixed to the land, it's tangible personal property, not construction. Here that meant sales to governments and nonprofits could be deducted as sales of goods.

Q: The Department cited a regulation against me. Does that settle it?
A: No. Regulations are presumed valid, but a regulation that reaches beyond the statute it implements can be held void. Morgan defeated the Department's main position precisely because its regulation treated all prefabricated buildings as construction regardless of whether they were affixed to land.

Q: I had non-taxable transaction certificates from my buyers. Why were some deductions still denied?
A: Because the certificates weren't valid at the time of those sales, weren't produced, or were illegible. Some were pre-1992 certificates that a law change voided as of January 1, 1992, and the taxpayer didn't obtain new ones within the Department's 60-day window.

Q: Can I be penalized when the law changed the rules on my certificates?
A: Yes. Taxpayers have an affirmative duty to stay current on tax-law changes affecting their liability. Relying on certificates that the Legislature had voided was treated as negligence, so the penalty stood on those transactions.

Q: My audit projected tax using a sample that included one enormous sale. Is that proper?
A: Generally not. An out-of-scale transaction can distort a percentage-of-error projection. Here the Hearing Officer ordered the $123,776 sale removed from the sample and assessed separately.

Citations and references

Statutes and regulations:

• § 7-9-3(C) NMSA 1978 — definition of "construction" (contemplating a permanent improvement to real property); § 7-9-3(K) NMSA 1978 — definition of "service"; tangible personal property retains its character until installed as an ingredient or component part of a construction project
• § 7-9-54 NMSA 1978 — deduction for sales of tangible personal property to governmental entities; § 7-9-60 NMSA 1978 — deduction for sales of tangible personal property to 501(c)(3) organizations (both exclude property that becomes an ingredient or component part of a construction project)
• § 7-9-43 NMSA 1978 — NTTCs must be in the seller's possession within 60 days of the Department's notice; Subsection D (added by Laws 1991, ch. 9, § 29, effective July 1, 1991) voided all pre-1992 NTTCs as of January 1, 1992
• § 7-9-47 NMSA 1978 — resale deduction (requires an NTTC); § 7-9-51 NMSA 1978 — construction-materials deduction; § 7-9-55 NMSA 1978 — interstate-commerce deduction
• § 7-1-16 NMSA 1978 — assessments are presumed correct; § 7-1-69(A) NMSA 1978 — negligence penalty (2% per month, up to 10%); § 55-2-105(1) NMSA 1978 — UCC definition of "goods"
• Regulation GR 3(C):6 — prefabricated buildings are construction services (held overbroad and void to the extent it disregards permanent affixation); Regulation GR 3(C):9 — fixtures; Regulation GR 51:16 — criteria for an "ingredient or component part"; Regulation TA 69:3 — definition of negligence

Cases cited:

• Cates v. Morgan Portable Building Corp., 591 F.2d 17 (7th Cir. 1979) — Morgan portable buildings are "goods" under Article 2 of the Uniform Commercial Code
• State ex rel. Battershell v. City of Albuquerque, 108 N.M. 658, 777 P.2d 386 (Ct. App. 1989) — a court accords substantial weight to an agency's interpretation of the statute it administers
• Rivas v. Board of Cosmetologists, 101 N.M. 522, 686 P.2d 934 (1984) — an agency has no power to create a rule that is not in harmony with its statutory authority
• Arco Materials, Inc. v. State, Taxation and Revenue Department, 118 N.M. 12, 878 P.2d 330 (Ct. App. 1994), rev'd on other grounds, Blaze Construction Co. v. Taxation and Revenue Department, 118 N.M. 647, 884 P.2d 803 (1994) — taxpayers have an affirmative duty to keep informed about changes in the tax law affecting their NTTC-based deductions

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Morgan Buildings & Spas, Inc. and Morgan Buildings and Spas Manufacturing Corp.
• Decision PDF: D&O 97-10

Original ruling text

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

IN THE MATTER OF THE PROTESTS OF
MORGAN BUILDINGS & SPAS, INC., No. 97-10
ID. NO. 01-870277-00 5,
PROTEST TO ASSESSMENT NO. 1870629

and

MORGAN BUILDINGS & SPAS MANUFACTURING CORP.
ID. NO. 01-822399-00 0, PROTEST
TO ASSESSMENT NO. 1885510

DECISION AND ORDER

This matter came on for formal hearing on October 10, 1996, before Gerald B.

Richardson, Hearing Officer. Morgan Buildings & Spas, Inc. and Morgan Buildings & Spas

Manufacturing Corporation were represented by Curtis W. Schwartz, Esq. and Jennifer A. Noya,

Esq. The Taxation and Revenue Department, hereinafter, "Department", was represented by

Bridget A. Jacober, Esq. Following the hearing the parties submitted briefs in support of their

respective positions. The last brief was submitted on February 18, 1997, and the matter was
considered submitted for decision at that time.

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

AS FOLLOWS:

FINDINGS OF FACT

1. Morgan Buildings & Spas Manufacturing Corporation, hereinafter,

"Manufacturing" manufactures portable and relocatable buildings, hot tubs and redwood related
products that are sold with hot tubs, such as gazebos.

2. Manufacturing operates four plants where its products are manufactured. They

are located in Macon, Mississippi, Hallettsville, Texas, Walnut Ridge, Arkansas and Raton, New

Mexico. The Raton plant does not manufacture hot tubs or related products. It only
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manufactures portable buildings.

3. Morgan Buildings & Spas, Inc., hereinafter, "Buildings & Spas" markets the

portable buildings, spas and redwood related products produced by Manufacturing. It operates 24

company owned retail stores in 11 states, including a store in Albuquerque, New Mexico. It also

sells Morgan products through a dealer network of approximately 40 independent dealers

throughout the United States, including 12 or 13 independent dealers in New Mexico.

4. Buildings & Spas also has a commercial and industrial business division which

employs salesmen who concentrate on marketing the portable building complexes or multiple

modular relocatable buildings which are sold primarily to the government and other large

concerns.

5. Manufacturing and Building & Spas are part of a family owned group of

corporations collectively referred to as "the Morgan Companies".

6. Manufacturing places portable buildings on consignment to be sold by Building &
   Spas. When the portable buildings are sold, Manufacturing is paid an agreed upon "list price" for

the building. The list price comes from a schedule of prices for "stock" or standard sized
buildings built by Manufacturing.

7. Manufacturing sometimes sells construction materials from its Raton plant to local
   individuals and contractors, but its primary business is fabricating portable buildings which it sells

through Buildings & Spas and its dealer network.

8. A third Morgan company, Morgan Building Transport Corporation exclusively

hauls Morgan products both for Buildings & Spas and for Manufacturing, and delivers those

products to customers.

9. Stock buildings are wood frame construction with a plywood floor. They are
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mounted on skids, which allow the building to be moved by sliding the building on its skids. The

buildings may have wooden or steel siding and the roofs are always of steel. Stock buildings are

stocked at Building & Spas retail outlets and at the independent dealers. They come in standard

sizes and colors. The buildings are displayed on a sales lot so that customers can inspect them

when contemplating a purchase.

10. Custom buildings are buildings which are built to order to suit a customer's needs.

For instance, a customer may specify a finished interior, that the building be insulated and that

the building be pre-wired for electricity.

11. The most common use for Morgan buildings is for storage. They are not

generally used for housing because they are not built to housing codes. Other uses are as portable

classrooms, as construction field offices, guard shacks, portable offices, etc. 12. An

important reason for many customers to buy a Morgan building is its relocatability. Morgan

buildings are built so that they can be moved many times without damaging the building. This is
advantageous for people who don't want to build a permanent improvement to the land where they

wish to locate the building, either because the customer does not own the land or because the
customer only contemplates a short term use for the building.

13. Some of the larger Morgan buildings are assembled by putting a number of
    building modules together. Perhaps the biggest Morgan building sold was 40,000 square feet and

consisted of 50 to 60 modules.

14. The employees who build Morgan portable buildings are paid on a piece work and

not an hourly basis.

15. When Morgan buildings leave the plant, they are 100% complete.

16. In the prefabricated and portable building industry, the terms prefabricated
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building and portable building are understood to be different. "Prefabricated buildings" are

generally understood to refer to pre-engineered steel buildings in which the components are

pre-engineered and are shipped to a site for erection. They are erected on a foundation and

cement slab and are permanently affixed to the land. Portable buildings are constructed off-site

and are built to be portable and relocatable. They often are not permanently affixed to the land.

17. Building & Spas customers are responsible for site preparation of the site where

the building is to be delivered. The ground of the site should be compacted or hard and should be

relatively level, with differentials of no more than six inches.

18. Morgan buildings are moved by winching them up onto a trailer which is equipped

with rollers at the end of the trailer over which the skids on the building are rolled. 19. When

Morgan buildings are delivered to a site, they are unloaded from the trailer and if need be, dragged

to their site. The building is jacked up and blocks are placed under the corners and at other places

such as under the access door. The blocks are shimmed to get the building level. Depending
upon how big the building is and how many units must be joined together, this can take less than

an hour or several hours.

20. Morgan custom buildings can be pre-wired or plumbed at the customer's request.

The pre-wiring includes placing a junction box on the outside of the building. The customer is
responsible for bringing electricity to the site and hooking up electricity to the building, or for

bringing water and sewer or septic service to the site and for making those hook-ups after the

building has been delivered and set up on the site.

21. The cost of delivering the building and placing it on blocks is included in the price

Building & Spas charges its customers. The cost of this service is approximately 1% to 2% of

the sales price of the building.
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22. There is a resale market for Morgan portable buildings. Buildings & Spas will

take in used buildings as trade-ins for new buildings. It sometimes purchases used buildings at

auctions and it takes back buildings it has leased at the end of the lease term. If the building was

composed of many modular units, the units can be remodelled and reconfigured and resold. It

resells used buildings at a discount from the price of new buildings.

23. Following an audit, the Department issued Assessment No. 1885510 to

Manufacturing. The assessment assessed $9,649.91 in gross receipts tax, $1,138.14 in

compensating tax, $1,078.85 in penalty and $5,252.29 in interest for a total of $17,119.19. The

assessment was mailed to Manufacturing on December 30, 1994.

24. The audit period covered by Assessment No. 1885510 was January, 1988, through

June, 1992.

25. Following an audit, the Department issued Assessment No. 1870629 to Buildings

& Spas. The assessment assessed $60,520.30 in gross receipts tax, $508.60 in compensating tax,
$6,103.09 in penalty and $36,330.33 in interest for a total of $103,546.32. The assessment was

mailed to Buildings & Spas on November 18, 1994.

26. The audit period covered by Assessment No. 1870629 was January, 1989, through

June, 1992.

27. On December 30, 1994, Manufacturing filed a timely, written protest to

Assessment No. 1885510.

28. On November 28, 1994, Buildings & Spas requested an extension of time to

protest Assessment No. 1870629. The Department granted the request and gave Buildings &

Spas until February 16, 1995, to file its protest.

29. On February 16, 1995, Buildings & Spas filed a timely, written protest to
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Assessment No. 1870629.

30. Buildings & Spas had issued Manufacturing a type 2 nontaxable transaction

certificate for the purchase of tangible personal property for resale. The Department's auditors

honored the certificate and did not assess Manufacturing for its gross receipts from sales to

Buildings and Spas except for the period of January 1, 1992, through June 30, 1992, which was a

time period for which the type 2 certificate was no longer valid. Manufacturing did not have a

new 1992 series NTTC from Buildings & Spas to support a claim for deduction for sales after

January 1, 1992, and it failed to obtain one within the time frame of the Department's 60 day

notice referenced in the paragraph below. For that period, Manufacturing was assessed gross

receipts tax and the tax assessed upon its sales to Buildings & Spas represents the vast majority of

the gross receipts tax assessed to Manufacturing.

31. As part of the Department's standard audit procedures, it issued a 60 day letter to

Buildings & Spas and to Manufacturing, on September 22, 1992. The 60 day letter gave
Building & Spas and Manufacturing 60 days from the date of the notice to demonstrate possession

of all NTTCs it relied upon when claiming deductions from tax. The letter further informed
Buildings & Spas and Manufacturing that if any required NTTCs were not in its possession within

the 60 days, that deductions previously claimed relating to those NTTCs would be disallowed.

32. On November 7, 1991, Buildings & Spas entered into a custom building purchase

agreement with Sandia National Laboratories to purchase a double wide building, 24'x60', to be

delivered within 120 days. As a custom building, it would need to be built to the custom

specifications. The purchase price was $123,776.00. The two parts of the building were

delivered to Sandia on March 10 and March 13, 1992, and were invoiced to Sandia on March 18

and March 27, 1992, respectively. Buildings & Spas is an accrual basis taxpayer and it reported
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its receipts from this sale to the Department on its March, 1992, return. Buildings & Spas had

NTTCs from Sandia on file at the time of the audit, but they were pre-1992 NTTCs which became

void as of January 1, 1992. Buildings & Spas did not obtain a 1992 series NTTC from Sandia

within 60 days of receiving notice from the Department of its need to have all NTTCs in its

possession to support any claimed deductions.

33. During the audit period of January 1, 1989, through June 30, 1992, Buildings &

Spas had four sales in excess of $60,000.00. They were as follows:

Sandia National Laboratories $123,776.00

Lincoln County Medical Center $ 64,995.00

N.M. Department of Corrections $300,382.00

Miner's Colfax Regional Hospital $ 65,000.00

All but the Miner's Colfax Regional Hospital sale were picked up as audit exceptions and used in

calculating a percentage of error.

34. The Department's auditor used an audit sampling method when it audited

Buildings & Spas. The method used was the auditor selected the high sales month, the low sales
month and the average sales month for each year audited. The auditor did a detailed audit for

each of the sample months, determining which deductions claimed were, in the Department's
opinion, not deductible. These are called audit exceptions. The audit exceptions for each year

were totalled and compared with the total deductions claimed for each year by the taxpayer to

arrive at a percentage of error. The percentage of error was then applied to all months of each tax

year except for the actual months audited to arrive at an amount of disallowed deductions. For

the months actually audited, the actual amount of disallowed deductions was used. The gross

receipts tax was then calculated on the disallowed deductions and assessed.
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35. In March of 1992, Buildings & Spas sold another portable building to Sandia

National Laboratories for $7,992.00. The building was delivered that same month and Buildings

& Spas reported the sale and claimed a deduction for that month. Buildings & Spas did not

present a 1992 series NTTC to the Department's auditors to support its claim of deduction on

that transaction.

36. In May of 1989, Buildings & Spas entered into an agreement with Inhalation

Toxicology and Research Institute to move a Morgan portable building from Albuquerque to

Brooks Air Force Base in Texas for $3,661.99, for which Buildings & Spas had claimed a

deduction from gross receipts tax as a transaction in interstate commerce. The Department's

auditor denied the deduction because the invoice did not reflect where the building was being

moved to or from.

37. On October 30, 1991, Buildings & Spas sold a stock building to Albuquerque

Development for $797.00. Buildings & Spas had claimed a deduction, but upon audit, was
unable to produce a NTTC to support its claim for deduction within 60 days of the Department's

notice requiring that it demonstrate possession of the NTTC. The Department's audit disallowed
the deduction. At the formal hearing, Buildings & Spas produced a NTTC from Albuquerque

Development dated October 30, 1991.

38. In March of 1992, Buildings & Spas sold a stock portable building to the

Northeastern Regional Hospital in Las Vegas, New Mexico for $9,930.00. Although the

purchase agreement reflects a number for some sort of NTTC, upon audit, and through the close

of evidence at the hearing, Buildings & Spas has been unable to produce the NTTC. The

Department's audit disallowed the deduction.

39. In April of 1992, Buildings & Spas sold a stock portable building to the Canoncito
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Senior Center in Canoncito, New Mexico for $1341.00. The purchase agreement makes no

reference to a tax exemption certificate. Buildings & Spas has produced a copy of a NTTC

which is completely illegible in support of its claimed deduction. The Department's audit

disallowed the deduction.

40. Sun Country Housing was an independent dealer for Morgan portable buildings

during portions of the audit period. The Department's audit disallowed the deductions claimed by

Buildings & Spas for sales to Sun Country Housing because a NTTC to support the deductions

was never presented by Buildings & Spas. Although Morgan claims that it would have had such

an NTTC, it has never presented one to the Department.

DISCUSSION

The primary issue to be determined herein is the nature of what Buildings & Spas sells

when it sells portable buildings. Buildings & Spas contends that when it sells portable buildings,
it is selling tangible personal property. The Department, in reliance on Regulation GR 3(C):6

contends that a construction service is being sold. This distinction is critical to this case because
the majority of the audit exceptions picked up by the Department's auditor are for sales of portable

buildings to governmental agencies or to organizations granted 501(C)(3) tax exempt status by the
Internal Revenue Service. NMSA 1978, § 7-9-54 allows a deduction for sales of tangible

personal property to governmental agencies and NMSA § 7-9-60 allows a deduction for sales of

tangible personal property to 501(C)(3) organizations. Both statutes, however, deny the

deduction where the tangible personal property will become an ingredient or component part of a

construction project.

Construction is defined at NMSA 1978 § 7-9-3 in pertinent part as follows:
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"construction" means building, altering, repairing or demolishing in the ordinary course
of business any:

(2) building, stadium or other structure;
The Gross Receipts and Compensating Tax Act, Chapter 7, Article 9 NMSA 1978, also defines

construction to be a service. Specifically, NMSA 1978, §7-9-3(K) defines service as follows:
"service" means all activities engaged in for other persons for a consideration which
activities involve predominantly the performance of a service as distinguished from
selling or leasing property. "Service" includes activities performed by a person for
its members or shareholders. In determining what is a service, the intended use,
principal objective or ultimate objective of the contracting parties shall not be
controlling.

"Service" includes construction activities and all tangible personal property that
will become an ingredient or component part of a construction project. Such
tangible personal property retains its character as tangible personal property until it
is installed as an ingredient or component part of a construction project in New
Mexico. However, sales of tangible personal property that will become an
ingredient or component part of a construction project to persons in the construction
business are sales of tangible personal property. (emphasis added)

Under the definition of service, tangible personal property which becomes incorporated

into a construction project becomes a part of the construction service, but it retains its character as

tangible personal property until it is installed as an ingredient or component part of a construction

project.1 Thus, in order for the sales at issue to be taxable, the sale of the portable buildings on an

1
The purpose of the language which provides that tangible personal property retains its character as tangible
personal property until it is incorporated into a construction project and that it is tangible personal property when sold to
persons engaged in the construction business is to allow construction contractors to issue suppliers of materials a type 6
nontaxable transaction certificate when purchasing construction materials. This enables the materials suppliers to claim
the deduction provided at NMSA 1978 § 7-9-51 and the construction contractor to purchase the materials free of gross
receipts tax. The construction contractor will be subject to gross receipts tax upon his receipts from performing
construction services, which includes the materials incorporated into the construction project, but it prevents the
pyramiding or stacking of the gross receipts tax on the construction project.
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installed basis must either qualify as construction, or the buildings must, when installed, become

an ingredient or component part of a construction project.

Building & Spas presented substantial evidence to support its contention that when it sold

portable buildings, it was selling tangible personal property and not construction services. In the

first place, it does not build the portable buildings itself, since receives them, in a 100% complete

condition, on a consignment basis from Manufacturing. All it does is sell them, deliver them, set

them on blocks and level them. This falls far short of the types of activities described in the

definition of construction, so the only basis to deny the deduction is on the basis that the buildings

become ingredient or component parts of a construction project. Buildings & Spas presented

evidence that its buildings are constructed on skids so as to be moveable and that they are merely

set upon blocks, rather than permanently affixed to property. It presented evidence that

relocatability is a significant factor in many customer's decisions to purchase a Morgan building.

The buildings are built so that they can be moved many times without damage to the building. It
presented evidence that in the industry, prefabricated and portable buildings are different.

Prefabricated buildings are pre-engineered and erected on site and are permanently affixed to the
land on which they sit, while portable buildings are built off-site and are complete when they

leave the plant where they are built. They are delivered to a site and are not permanently affixed
to the land. It also presented evidence that the cost of delivering the buildings and setting them

on blocks and leveling them is incidental to the cost of the building itself. Finally, it presented

evidence that there is a re-sale market for its portable buildings.

Morgan also presented substantial authority from other jurisdictions which indicates that

portable buildings are tangible personal property, both for Uniform Commercial Code purposes

and for federal tax purposes. See, Morgan's Brief in Chief, pp. 10-11. Morgan could even point
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to a decision of the United States Court of Appeals for the 7th Circuit, Cates v. Morgan Portable

Building Corp., 591 F.2d 17 (7th Cir. 1979), which affirmed the lower court ruling that Morgan

portable buildings were "goods" for purposes of Article 2 of the Uniform Commercial Code. The

decision cited to the UCC definition of goods mean, "all things (including specially manufactured

goods) which are moveable at the time of identification to the contract for sale..." (emphasis

added). This is the same definition adopted by New Mexico. See, NMSA 1978, § 55-2-105(1).

Although there is a presumption of correctness which attaches to an assessment of taxes

by the Department pursuant to NMSA 1978, § 7-1-16, this evidence was sufficient to rebut the

presumption of correctness with respect to the deductions claimed for sale of tangible personal

property and shifts the burden to the Department to prove that the buildings were not tangible

personal property or were incorporated into a construction project. This, the Department did not

do, instead relying upon Regulation GR 3(C):6, which provides as follows:
The sale of prefabricated buildings, whether constructed from metal or other
material, is the sale of construction services irrespective of whether the building is
permanently affixed to land.

If a structure is a building, in the ordinary sense of that word, and is designed to

serve the function of housing or sheltering persons or property, the manner in which

that structure comes into existence has no significance. Sale of mobile homes or

trailers, which are defined as vehicles by Section 66-1-4(B), are not within the scope

of this regulation.

While normally, a reviewing authority will accord substantial weight to the interpretation

given a statute by the body charged with administering the statute, State ex rel. Battershell v. City

of Albuquerque, 108 N.M. 658, 777 P.2d 386 (Ct. App. 1989), an administrative agency has no
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In the Matter of Morgan

Building and Spas, Inc.

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power to create a rule or regulation that is not in harmony with its statutory authority. Rivas v.

Board of Cosmetologists, 101 N.M. 522, 686 P.2d 934 (1984). My review of the entire

definition of "construction" and of some of the Department's other regulations with respect to

ingredient or component parts of a construction project has convinced me that, to the extent that

Regulation GR 3(C):6 defines prefabricated buildings to be construction, without regard to

whether the building becomes a permanent fixture, the regulation is overbroad and exceeds the

Department's authority to interpret statutes.

The full definition of "construction", as defined at NMSA 1978, § 7-9-3(C) follows:
"construction" means building, altering, repairing or demolishing in the ordinary course
of business any:
(1) road, highway, bridge, parking area or related project;
(2) building, stadium or other structure;
(3) airport, subway or similar facility;
(4) park, trail, athletic field, golf course or similar facility;
(5) dam, reservoir, canal, ditch or similar facility;
(6) sewerage or water treatment facility, power generating plant, pump station, natural
gas compressing station, gas processing plant, coal gasification plant, refinery,
distillery or similar facility;
(7) sewerage, water, gas or other pipeline;
(8) transmission line;
(9) radio, television or other tower;
(10) water, oil or other storage tank;
(11) shaft, tunnel or other mining apurtenance;
(12) microwave station or similar facility; or
(13) similar work;
"construction" also means:
(14) leveling or clearing land;
(15) excavating earth;
(16) drilling wells of any type, including seismograph shot holes or core drilling; or

(17) similar work;

A review of this definition reveals that construction means either some alteration of the
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In the Matter of Morgan

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land itself, or it involves the building, altering, repairing or demolishing of some sort of structure,

facility or building which, in our ordinary understanding, would be a permanent structure to the

land itself. This understanding is further enforced by the ordinary meaning of a "building", as

found in Webster's Third New International Dictionary, which defines a building as follows:
1: a thing built; a: a constructed edifice designed to stand more or less
permanently, covering a space of land, usually covered by a roof and more or less
completely enclosed by walls, and serving as a dwelling, storehouse, factory, shelter
for animals, or other useful structure--distinguished from structures not designed for
occupancy (as fences or monuments) and from structures not intended for use in one
place (as boats or trailers) even though subject to occupancy.

The concept that "construction" involves more or less permanent improvement of real

property draws further support from the Department's regulations promulgated under Section

7-9-51, which is the deduction for the sale of tangible personal property to persons engaged in the

construction business when the tangible personal property will become an ingredient or
component part of a "construction project". Regulation GR 51:16 provides as follows:
In determining whether tangible personal property will become an ingredient or
component part of a construction project, the department will use the following
criteria, but not exclusively:

(1) Did the tangible personal property become "fixtures" as defined under GR 3(C):9?
(2) Was the person performing the work using tangible personal property required to be
licensed under the Construction Industries Licensing Act, Section 60-13-1 to
60-13-59?
(3) Did the work for which the tangible personal property was used required a permit
from one or more of the trade boards established by the Construction Industries
Licensing Act or from a municipal building or mechanical department?

As referenced by the above regulation, Regulation GR 3(C):9 provides the following

guidance about "fixtures":
Construction includes the sale and installation of "fixtures" such as kitchen
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In the Matter of Morgan

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equipment, library equipment, science equipment and other miscellaneous equipment
installed so that it becomes firmly attached to the realty. Fixtures are considered to
be items of tangible personal property which are necessary or essential to the intended
use of a construction project and which are so firmly attached to the realty as to
constitute a part of the construction project".
Receipts from the sale of furniture, kitchen equipment, library shelves and other
furniture or equipment sold on an assembled basis that does not become a "fixture" is
a sale of tangible personal property and not construction. (emphasis added).

Although this regulation speaks of equipment, it makes it clear that the sale of tangible

personal property that does not become a fixture which is permanently attached to real estate is

tangible personal property and not a construction service.

In this case, the Department never presented evidence to establish that the portable

buildings became permanently affixed to any real property. If that had been the case, the

Department would have provided evidence that the portable buildings could be considered part of

a construction service as ingredient or component parts of a construction project. In the absence

of any such evidence, and because it is apparent that the Regulation GR 3(C):6 is overbroad to the

extent that it declares prefabricated buildings to be construction without respect to whether the

buildings become permanently affixed to real property, the Department's assessments are

erroneous in that they deny deductions for the sale of tangible personal property to governmental

agencies and 501(C)(3) organizations.

Resolution of the issue of the characterization of the sale of the portable buildings resolves

a number of other issues presented. Thus, there is no need to discuss whether Buildings & Spas

accepted nontaxable transaction certificates ("NTTC's") in good faith for the purchase of tangible

personal property, or whether penalty was properly assessed upon its sales to governmental

agencies, and 501(C)(3) organizations from whom it had proper nontaxable transaction
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certificates. There remain a number of discrete transactions which still need to be discussed,

however, to determine their taxability and proper treatment.

The only remaining issue with respect to the assessment issued to Manufacturing is the

Department's denial of the deduction claimed for sales to Buildings & Spas. The Department

allowed those deductions from the beginning of the audit period through December 31, 1991,

based upon Buildings & Spas issuance of a type 2 nontaxable transaction certificate ("NTTC") to

Manufacturing. Deductions for sales by Manufacturing to Buildings & Spas were disallowed for

the remainder of the audit period, January 1, 1992, through June 30, 1992, because Manufacturing

did not have one of the new 1992 series NTTCs from Buildings and Spas and it failed to obtain

one in the 60 day time frame allowed in the Department's 60 day notice letter. This disallowance

of the deduction was based upon the 1991 amendments to Section 7-9-43. Laws 1991, Ch. 9

§29, effective July 1, 1991, enacted a new subsection D to Section 7-9-43 which provided that,

"[A]fter January 1, 1992, any nontaxable transaction certificate issued prior to that date shall be
void." (emphasis added). As a result, Manufacturing no longer had a valid NTTC to support its

claim of deduction on its sales to Buildings & Spas. The Department properly denied the
deduction for sales to Buildings & Spas after January 1, 1992. Manufacturing was claiming

deduction pursuant to NMSA 1978, Section 7-9-47, which requires a NTTC to support a claim of
deduction. NMSA 1978, §7-9-43(A), 1990 Supp., which applied to the sales at issue

unequivocally provides:

If the seller or lessor is not in possession of these nontaxable transaction certificates 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, deductions

claimed by the seller or lessor that require delivery of these nontaxable transaction
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In the Matter of Morgan

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certificates shall be disallowed. (emphasis added).

Apparently, the Department's assessment also disallowed deductions claimed with respect

to some other sales by Manufacturing for which it failed to possess timely NTTCs.

Manufacturing presented no evidence regarding those transactions and the Department's denial of

those deductions is upheld.

Buildings & Spas made two sales to Sandia National Laboratories which were picked up as

audit exceptions. The largest was a sale of a custom made double-wide portable building for

$123,776.00. The purchase agreement for this building was entered into in November of 1991,

but the building needed to be built. The delivery took place in two phases (each half of the

building was delivered separately), on March 10, and March 13, 1992, and the two buildings were

separately invoiced on March 18 and March 27, 1992. As an accrual basis taxpayer, Buildings &

Spas recognized the receipts from the sale in the month it was invoiced and delivered and reported

the receipts and claimed a deduction therefor on its March, 1992, return filed with the
Department. Although Buildings & Spas had NTTCs from Sandia when it was audited, they

were the earlier (pre-1992) NTTCs which became void as of January 1, 1992. Buildings & Spas
did not obtain a 1992 series NTTC to support the deduction it claimed in March of 1992. The

second sale to Sandia, in the amount of $7,992.00, was also in March of 1992, but the purchase
order and the sale and delivery all occurred in March of 1992. As with the other sale to Sandia,

Buildings & Spas had no 1992 series NTTC from Sandia to support its deduction.

With respect to the first sale, Buildings & Spas argues that since the purchase agreement

was entered into in 1991, that the sale should be deductible because it has earlier series NTTCs to

support its deduction. The Department argues that Buildings & Spas would have needed to

demonstrate possession of the new 1992 series NTTCs to support its deduction. As noted above,
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In the Matter of Morgan

Building and Spas, Inc.

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§ 7-9-43 governing the use and applicability of NTTCs was amended by Laws 1991, Ch. 9, §29,

effective July 1, 1991, and found in NMSA 1978, § 7-9-43, 1991 Supp. In addition to enacting a

new Subsection D which provided that after January 1, 1992, any NTTC issued prior to that date

was void, Subsection A was amended to read, "Subject to the provisions of Subsection D of this

section, all nontaxable transaction certificates executed by buyers or lessees should be in the

possession of the seller or lessor for nontaxable transactions at the time the nontaxable

transactions occur." (emphasis added). The statute then further provided a 60 day grace period

for taxpayers to obtain such certificates, once the Department had issued its 60 day notice letter.

In this case, deductibility turns on when the transaction for which the deduction was claimed

occurred. If it occurred at the time the purchase order was made, the old series NTTCs would be

valid to support the deduction. If it occurred when the buildings were delivered and invoiced and

the sales were reported, then Buildings & Spas did not have a proper NTTC to support its claim of

deduction. Buildings and Spas provided no authority on this issue to support its position that the
transactions occurred when the purchase order was entered into. In making this determination, I

am persuaded by the actions of Buildings and Spas in how it treated the transaction. Buildings &
Spas did not recognize the sale itself for tax purposes until it invoiced and delivered the buildings,

even though it reports taxes on an accrual basis. On this basis I conclude that the transaction
occurred when it was recognized by Buildings & Spas, in March of 1992. With respect both this

sale and to the second sale to Sandia in March of 1992, Buildings & Spas must be denied the

deduction based upon its failure to demonstrate possession of a valid NTTC from Sandia.

Buildings & Spas has raised a secondary issue with respect to the first sale to Sandia. It

argues that the sale is an unusually large sale, and that during the three and one-half year audit

period, it only had four sales in excess of $60,000.00. It argues that to include this sale in the
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In the Matter of Morgan

Building and Spas, Inc.

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percentage of error and apply it to all other months other than those actually audited would skew

the percentage of error and assess an improper amount of tax.2 Although the Taxpayer never

explained how it arrived at the $60,000.00 figure, my own review of the audit exceptions for the

test months audited reveals that the $123,000.00 sale to Sandia is highly unusual, with most sales

ranging in the $4,000.00 to $15,000.00 range and a rare sale in the $20,000.00 to $30,000.00

range. Buildings & Spas argument is well taken. The proper way to handle transactions which

are so out of scale with a taxpayer's normal operations is to exclude them from the calculation of

error and to assess them separately if they should have been taxable.

In May of 1989, Buildings & Spas entered into a contract to move a Morgan Portable

Building for Inhalation Toxicology Research Institute from Albuquerque, New Mexico to Brooks

Air Force Base in Texas for $3,661.99. Buildings & Spas had claimed a deduction from gross

receipts tax for its receipts from this contract on the basis of the deduction at NMSA 1978,

§7-9-55, which provides a deduction for transactions in interstate commerce. The Department's
auditor had denied the deduction because the contract did not show on its face where the building

was being either moved from or to. At the hearing, Building & Spas provided testimony about
the building move to support its claim for deduction. While there was a basis for the

Department's auditor to assess this item, this is the sort of factual issue which the parties should be
able to sufficiently document on an informal basis so that the Hearing Officer's time is not wasted

addressing such issues. There is no legal issue in dispute here. Buildings & Spas has

demonstrated its entitlement to the deduction taken.

On October 30, 1991, Buildings & Spas sold a stock building to Albuquerque
2
The percentage of error will already need to be recalculated as a result of this decision. The two other sales in
excess of $60,000 which were included in the audit exceptions will need to be deleted as those sales, as well as many
others would be deductible as sales of tangible personal property.
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In the Matter of Morgan

Building and Spas, Inc.

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Development for $797.00. Buildings & Spas had claimed a deduction, but upon audit, was

unable to produce a NTTC to support its claim for deduction within 60 days of the Department's

notice requiring that it demonstrate possession of the NTTC. The Department's audit disallowed

the deduction. At the formal hearing, Buildings & Spas produced a NTTC from Albuquerque

Development dated October 30, 1991. Under the applicable provisions of Section 7-9-43 at the

time of this transaction, deductions are disallowed of the seller was not in possession of the NTTC

within the 60 day notice period. At the hearing, Mr. Morgan testified that Buildings & Spas

acquired the NTTC at the time of the sales transaction. The date on the certificate confirms this.

Based upon this evidence, Buildings & Spas has demonstrated that it possessed the certificate in a

timely manner and the deduction will be allowed. Once again, this is the type of factual matter

which counsel for both the taxpayers and the department should have resolved well in advance of

the hearing date.

Buildings & Spas also claimed a deduction for the sale of a stock portable building to the
Northeastern Regional Hospital in March of 1992. The invoice reflects a tax exemption

certificate number but Buildings & Spas has never been able to produce the certificate. This is
insufficient to demonstrate possession of a proper NTTC. In the first place, a certificate number

is not proof that the type of certificate is one which would support a deduction for the sale of
tangible personal property. Nor does it demonstrate the certificate to be a 1992 series certificate,

as it would need to be to validly support a deduction. Buildings & Spas has failed to carry its

burden of proving entitlement to this deduction. Similarly, Buildings & Spas has produced an

absolutely illegible certificate in support of a claimed deduction for a sale to the Canoncito Senior

Center. This does not carry Buildings & Spas burden of proof with respect to this deduction is

denied.
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In the Matter of Morgan

Building and Spas, Inc.

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Finally, Sun Country Housing was an independent dealer for Morgan portable buildings

during portions of the audit period. The Department's audit disallowed the deductions claimed by

Buildings & Spas for sales to Sun Country Housing because a NTTC to support the deductions

was never presented by Buildings & Spas. Although Morgan claims that it would have had such

an NTTC, it has never presented one to the Department. The deduction claimed for these sales

was the deduction provided at §7-9-47 for sales of tangible personal property for resale. The

statute requires that the seller possess a NTTC in order to claim the deduction. By failing to

present a copy of the certificate, Buildings & Spas has failed to demonstrate its entitlement to the

deductions claimed and the deduction must be denied. Section 7-9-43(A). The last issue

to be addressed is whether penalty is properly imposed with respect to those transactions which

will not be adjusted as a result of the rulings in this decision. Those transactions fall into two

categories, transactions where deduction was denied due to the failure to possess a NTTC to

support the claim of deduction and transactions where the deduction was denied due to the failure
to possess a proper form of NTTC due to the change in law which rendered the old NTTCs void.

The imposition of penalty is governed by the provisions of NMSA 1978, Section
7-1-69(A) NMSA 1978 (1995 Repl. Pamp.), which imposes a penalty of two percent per month,

up to a maximum of ten percent:
In the case of failure, due to negligence or disregard of rules and regulations, but without intent
to defraud, to pay when due any amount of tax required to be paid or to file by the
date required a return regardless of whether any tax is due,....

This statute imposes penalty based upon negligence (as opposed to fraud) for failure to

timely pay tax. Thus, there is no contention that the failure to report and pay taxes was based

upon any conscious attempt by the Taxpayer to underreport taxes. What remains to be determined
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In the Matter of Morgan

Building and Spas, Inc.

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is whether the Taxpayer was negligent in failing to report its taxes properly. Taxpayer

"negligence" for purposes of assessing penalty is defined in Regulation TA 69:3 as:
1) failure to exercise that degree of ordinary business care and prudence which reasonable
taxpayers would exercise under like circumstances;
2) inaction by taxpayers where action is required;
3) inadvertence, indifference thoughtlessness, carelessness, erroneous belief or inattention.

In this case the failure of Buildings & Spas and Manufacturing to possess NTTCs to

support their claim of deduction amounts to negligence in that it can be fairly characterized to be

due to inadvertence, carelessness, inaction or inattention. With respect to their failure to possess

the proper form of NTTC due to the change in the tax laws, in Arco Materials, Inc. v. State,

Taxation and Revenue Department, 118 N.M. 12, 15, 878 P.2d 330 (Ct. App. 1994), reversed on

other grounds, Blaze Construction Co. v. Taxation and Revenue, 118 N.M. 647, 884 P.2d 803

(1994), the Court of Appeals had this to say about a taxpayer's duty with respect to deductions

claimed in reliance upon NTTCs:
We are not persuaded by Taxpayer's argument that a taxpayer has no continuing duty to
assess the validity of deductions made in reliance on NTTCs issued. We interpret
Section 7-9-43(A) as protecting a taxpayer when the purchaser who provided the
NTTC has failed to live up to the promise that the actual transaction was nontaxable.
As Taxpayer notes, it would create a tremendous burden to require a taxpayer to
monitor the purchaser's activities. However, we do not interpret the statute as
protecting taxpayers from changes in the law that render formerly nontaxable
transactions taxable.

A taxpayer has an affirmative duty to keep informed about changes in the tax law
that might affect its liability. (citations omitted).

In this case, both taxpayers had an affirmative duty to keep informed about the changes in

the law affecting the validity of the NTTCs it had from its existing customers. In failing to obtain

the new series NTTCs, whether it was due to erroneous belief or mere carelessness or
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inattention,3the taxpayers were negligent and penalty was properly imposed.

CONCLUSIONS OF LAW

1. Both Buildings & Spas and Manufacturing filed timely, written protests to

Assessment Nos. 1870629 and 1885510 and jurisdiction lies over both the parties and the subject

matter of those protests.

2. "Construction" as defined in NMSA 1978, §7-9-3(C) contemplates some sort of

permanent improvement to real property. Regulation GR 3(C):6, which determines that the sale

of prefabricated buildings is the sale of construction services, regardless of whether the buildings

become permanently affixed to the land is overbroad and exceeds the Department's authority to

interpret the statutes it administers with respect to its statement that the buildings need not become

permanently affixed to the land. To that extent, the regulation is void.

3. Buildings & Spas overcame the presumption of correctness which attached to the

Department's assessment to the extent that it proved that the portable buildings it sells to
governmental agencies and to 501(C)(3) organizations are tangible personal property which is not

incorporated into a construction project. Thus, to the extent that the Department's assessment
denied deductions for sales of tangible personal property to governmental agencies, the

assessment is improper. The assessment is also improper to the extent that it denied deductions
for sales of tangible personal property to 501(C)(3) organizations for sales in which Buildings &

Spas has demonstrated timely possession of a proper NTTC.

4. To the extent that the Department's audit included in the calculation of a

percentage of error disallowance of a deduction for a $123,776.00 for the sale of a portable

3
Neither taxpayer presented any explanation as to why it didn't have the new NTTCs to support its claims of
deduction.
Decision & Order

In the Matter of Morgan

Building and Spas, Inc.

Page -24-

building to Sandia National Laboratories, the Department's audit methodology was improper and

resulted in a percentage of error which is not representative of all periods covered by the audit.

Although this deduction was properly disallowed for the failure of Buildings & Sales to possess

the proper form of NTTC, the proper way to handle the denial of this deduction is to simply

calculate the tax on the denied deduction separately from the calculation of the percentage of

error.

5. The Department properly denied the deductions claimed by Buildings & Spas for

its $7992.00 sale to Sandia National Laboratories, and for Buildings & Spas sales to the

Northeastern Regional Hospital and the Canoncito Senior Center.

6. Buildings & Spas proved its entitlement to its claims of deduction for its sales to

Inhalation Toxicology and Research Institute and Albuquerque Development.

7. Manufacturing has failed to demonstrate its entitlement to a deduction for sales to

Buildings & Spas for transactions occurring after January 1, 1992, and for any other transactions
for which the Department denied deduction based upon Manufacturing's failure to demonstrate

possession of proper and timely NTTCs.

8. With respect to all deductions claimed by Buildings & Spas or Manufacturing, the

disallowance of which have been upheld by this decision for failure to demonstrate possession of
proper and timely NTTCs, Buildings & Spas and Manufacturing were negligent and penalty was

properly assessed.

For the foregoing reasons, the protests of Buildings & Spas and Manufacturing are granted

in part and are denied in part.

DONE, this 20th day of March, 1997. The Department is hereby ordered to recalculate

the percentage of error to allow the deductions allowed herein, to deny the deductions denied
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herein, and to remove the $123,776.00 sale to Sandia National Laboratories from the calculation

of the percentage of error and to assess tax on that transaction separately. The Department is

hereby ordered to abate those portions of the assessments as herein provided.