A survey company did construction staking for road contractors and deducted the receipts using the contractors' exemption certificates. Was the deduction valid even though the tax department first said no?

Subject

Dawson Surveys, Inc. (D&O 97-42)

Plain-English summary

Dawson Surveys does two different things. Boundary surveying (locating property lines by metes and bounds) must be done by a licensed surveyor. Construction staking — accurately locating a construction site and setting the elevations and grades a project needs (for example, how deep to lay a sewer line) — does not require a licensed surveyor. This case is only about the construction staking.

Dawson performed construction staking for three road contractors (K.R. Swerdferger, Romero Construction, and Olmstead Building Services) building roads in the Las Campanas subdivision in Santa Fe County. The contractors gave Dawson Type 7 NTTCs — the certificate the Department issues so a contractor's subcontractor can sell construction services tax-free and avoid pyramiding the gross receipts tax on a construction project. Relying on those certificates, Dawson deducted the receipts under Section 7-9-52.

On audit (October 1993–February 1996) the Department disallowed the deduction, taking the position that surveying and related services are not "construction" under Section 7-9-3(C), and assessed $16,247.73 gross receipts tax, $881.84 compensating tax, $1,670.28 penalty, and $2,204.35 interest (Assessment No. 2040143). Dawson protested. Hearing Officer Gerald B. Richardson granted the protest:

• The Department changed its own position. After issuing the assessment, it filed Regulation 3 NMAC 2.52.23 (May 15, 1997) stating flatly that "construction staking is a construction service," and amended an example in 3 NMAC 2.51.8.2 (October 31, 1997) to make clear that while surveying for a contractor is not a construction service, construction staking is not part of that surveying exclusion.
• The new regulations reflect what the unchanged statute always meant. The regulations apply only prospectively (Section 9-11-6.2(H)), but the statutory definitions in Sections 7-9-52 and 7-9-3(C) never changed between the audit period and the new rules. Because a regulation is presumed to be a correct implementation of the law (Section 9-11-6.2(G)) — and the Department had abandoned its prior contrary reading — the Hearing Officer concluded construction staking was a construction service even before the regulation's effective date.
• The NTTCs did their job. Since staking was a construction service, the Type 7 NTTCs properly supported the deduction during the audit period, so the assessment was "improper as a matter of law." The Department was ordered to abate the tax, penalty, and interest tied to the disallowed deductions.

What this means for you

• Construction staking qualifies for the Section 7-9-52 construction-services deduction. If you stake sites, set grades, or establish elevations for a contractor on a taxable construction project, your receipts can be deducted when the contractor gives you a Type 7 NTTC — even though staking is not "surveying" and does not require a survey license.
• Get and keep the Type 7 NTTC. The deduction depends on holding the right certificate from a contractor engaged in the construction business on a project that will itself be taxable. Without it, the deduction fails.
• A later clarifying regulation can help an open assessment. When an agency files a regulation that merely interprets a statute that has not changed, it can reflect what the law meant all along — which can support a deduction for periods before the regulation's effective date. That is different from a substantive law change, which generally applies only going forward.
• When the Department reverses its own reading, its old position loses its presumption of correctness. Here, the Department's abandonment of its "surveying isn't construction" stance meant the prior interpretation no longer carried weight against the taxpayer.
• Watch the surveying-vs-staking line. Ordinary boundary surveying for a contractor is not a construction service; construction staking is. The label on your invoice matters less than what the work actually is.

Key questions answered

Why did the Department first deny the deduction?
Because it treated construction staking as a form of surveying, and it viewed surveying as outside the definition of "construction" in Section 7-9-3(C). On that view, Section 7-9-52 could not apply, so it disallowed the deduction and assessed tax.

What changed the outcome?
After the assessment, the Department itself filed a 1997 regulation declaring that construction staking is a construction service and amended a contrary example. That reflected the correct meaning of the unchanged statute, so the deduction was valid for the audit period too.

Didn't the new regulations only apply going forward?
Yes — they operate prospectively. But because they merely interpreted statutes (Sections 7-9-52 and 7-9-3(C)) that had not changed, the Hearing Officer treated them as evidence of what the law always meant, allowing the deduction for the earlier audit years.

What happened to the assessment?
The Department was ordered to abate the portion of Assessment No. 2040143 — gross receipts tax, penalty, and interest — that was based on disallowing the construction-staking deductions supported by the Type 7 NTTCs.

Verbatim citations

The construction-services deduction (Section 7-9-52(A)):

Receipts from selling a construction service may be deducted from gross receipts if the sale is made to a person engaged in the construction business who delivers a nontaxable transaction certificate to the person performing the construction service.

The Department's new regulation and its retroactive reasoning:

On May 15, 1997 the Department filed Regulation 3 NMAC 2.52.23 which provides that, "[C]onstruction staking is a construction service."

Since neither the definition of construction in Section 7-9-3(C) nor the terms of Section 7-9-52 were changed in any way between the commencement of the audit period and the adoption of the new or amended regulations, and the new and amended regulations also have a presumption of correctness, it must be concluded that they are a proper interpretation of the law, even prior to the effective date of the regulations.

The result:

For the foregoing reasons, the Taxpayer's protest IS HEREBY GRANTED. The Department IS HEREBY ORDERED to abate that portion of Assessment No. 2040143 which assessed gross receipts tax, penalty and interest based upon the denial of the deductions claimed by the Taxpayer for its receipts from performing construction staking services which were supported by type 7 NTTCS.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Dawson Surveys, Inc.
• Decision PDF: D&O 97-42

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
DAWSON SURVEYS, INC.,
ID. NO. 02-2-3199-00 5 NO. 97-42
PROTEST TO ASSESSMENT NO. 2040143

DECISION AND ORDER

This matter came on for formal hearing before Gerald B. Richardson, Hearing Officer, on

August 21, 1997. Dawson Surveys, Inc., hereinafter, "Taxpayer", was represented by Gary Dawson

and Peter Smith, employees or officers of the Taxpayer. The Taxation and Revenue Department,

hereinafter, "Department", was represented by Frank D. Katz, Chief Counsel. Based upon the

evidence and arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer performs surveying services, which are performed to locate property

boundaries by metes and bounds. These services may only be performed by persons holding a

license as a surveyor.

2. The Taxpayer also performs construction staking services. Construction staking is

different than boundary surveying in that it is done in order to accurately locate the site and to

establish elevations of a construction project, such as a road, and to establish grades for various

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aspects of a construction project, such as the depth to lay sewer lines. Persons performing

construction staking are not required to be licensed surveyors.

3. The Taxpayer was engaged by three different construction contractors, K.R.

Swerdferger, Romero Construction and Olmstead Building Services to perform construction

staking in the Las Campanas subdivision in Santa Fe County, New Mexico. The three contractors,

in turn, were engaged by Las Campanas to build and construct roads.

4. The three construction contractors referenced in finding three provided the Taxpayer

with type 7 non-taxable transaction certificates ("NTTCs"). Accordingly, when billing the

contractors for the construction staking services it provided, the Taxpayer did not seek to recover

the cost of gross receipts taxes on the value of the services it performed. Additionally, the Taxpayer

claimed a deduction from its gross receipts for its receipts from the three construction contractors

when reporting its gross receipts taxes to the Department.

5. The Taxpayer was audited by the Department for the reporting period of October,

1993 through February, 1996. The Department's auditor disallowed the deductions claimed by the

Taxpayer from the three construction contractors referenced in finding three and assessed gross

receipts tax, penalty and interest upon the Taxpayer's receipts from the three contractors.

6. On June 21, 1996 the Department issued Assessment No. 2040143 to the Taxpayer,

assessing $16,247.73 in gross receipts tax, $881.84 in compensating tax, $1,670.28 in penalty and

$2,204.35 in interest.

7. On July 29, 1996 the Taxpayer requested an extension of time to file a protest to the

Department's assessment and included a copy of the protest the Taxpayer wished to file.

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8. On August 14, 1996 the Department granted the Taxpayer a retroactive extension of

time to file its protest to the Department's assessment.

9. All issues other than the deductibility of the Taxpayer's receipts for performing

construction staking services for the three contractors referenced in finding three have been

resolved between the parties.

DISCUSSION

The sole issue to be determined is whether the Taxpayer was entitled to claim a deduction,

pursuant to Section 7-9-52 NMSA 1978 for its receipts from performing construction staking

services for three construction contractors who provided the Taxpayer with type 7 NTTCs in

support of the deduction claimed by the Taxpayer.

Section 7-9-52(A) provides as follows:

Receipts from selling a construction service may be deducted from
gross receipts if the sale is made to a person engaged in the
construction business who delivers a nontaxable transaction
certificate to the person performing the construction service.

The type 7 NTTC is the type of certificate which the Department issues to contractors to issue to

their subcontractors who perform construction services in order to prevent the pyramiding of gross

receipts tax on construction projects. The contractor issuing the NTTC must have the construction

services performed on a construction project which is subject to the gross receipts tax upon its

completion or upon its sale in the ordinary course of business. Section 7-9-52(B).

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The Department’s auditors denied the deductions claimed by the Taxpayer for construction

staking on the basis of the Department’s position that surveying and related services are not

included in the definition of construction under Section 7-9-3(C) NMSA 1978. Thus, the

Department concluded that construction staking done by surveyors was not a construction service

and the deduction provided at Section 7-9-52 would not apply.

Since the issuance of the assessment at issue, the Department has re-examined the issue of

construction staking, which it distinguishes from surveying. On May 15, 1997 the Department filed

Regulation 3 NMAC 2.52.23 which provides that, “[C]onstruction staking is a construction

service.” Additionally, on October 31, 1997 the Department filed an amendment to Regulation 3

NMAC 2.51.8.2, example one, to clarify that while surveying done for a contractor is not a

construction service, construction staking is not included in its reference to surveying not being a

construction service. See, New Mexico Register, Vol. VIII, No. 20, Oct. 31, 1997. The previous

version of that example had included a reference to construction staking and characterized it as a

service related to surveying and had included it the category of services it considered not to be

construction services.

Because the Department has changed its position with respect to construction staking, the

issue here is what is the effect of that change of position? The regulations which were changed or

adopted apply prospectively, only, since there was no statement giving them retroactive effect. See,

Section 9-11-6.2(H) NMSA 1978, 1997 Cum. Supp. Nonetheless, any regulation issued by the

Department is presumed to be a proper implementation of the provisions of the laws that are

charged to the Department. See, Section 9-11-6.2(G) NMSA 1978, 1997 Cum. Supp. The

presumption of correctness which would normally apply to the Department’s prior version of

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example 1 of 3 NMAC 2.51.8.2, however, would no longer apply because the Department has

shown by its actions and the statement of counsel that it no longer believes the prior interpretation

to be a correct interpretation of the law. Since neither the definition of construction in Section 7-9-

3(C) nor the terms of Section 7-9-52 were changed in any way between the commencement of the

audit period and the adoption of the new or amended regulations, and the new and amended

regulations also have a presumption of correctness, it must be concluded that they are a proper

interpretation of the law, even prior to the effective date of the regulations. Since the Regulation 3

NMAC 2.52.23 establishes that construction staking is a construction service, the type 7 NTTCs

which the Taxpayer had in support of its claim of deduction for its receipts from the three

construction contractors for whom it performed construction services properly supported the

Taxpayer’s claim of deduction for the receipts in issue. Because the Department’s assessment was

based upon the denial of the claimed deductions, it was improper as a matter of law.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment No. 2040143 pursuant to

Section 7-1-24 NMSA 1978.

2. Construction staking is a construction service pursuant to Section 7-9-3 NMSA

1978.

3. Because the Taxpayer was in possession of proper type 7 NTTCs issued by

construction contractors for whom it performed construction staking services during the audit

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period, the Department’s disallowance of the deductions claimed by the Taxpayer pursuant to

Section 7-9-52 NMSA 1978 was improper.

For the foregoing reasons, the Taxpayer’s protest IS HEREBY GRANTED. The

Department IS HEREBY ORDERED to abate that portion of Assessment No. 2040143 which

assessed gross receipts tax, penalty and interest based upon the denial of the deductions claimed by

the Taxpayer for its receipts from performing construction staking services which were supported

by type 7 NTTCS .

DONE, this 12th day of November, 1997.

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