Could a counselor deduct services actually resold by a treatment center without obtaining that buyer's NTTC within New Mexico's 60-day audit deadline?

Subject

Eileen P. Cahoon (D&O 98-38)

Plain-English summary

Eileen Cahoon, Ph.D., provided counseling services as an independent contractor to Desert Hills, a licensed diagnostic and treatment center. Desert Hills resold her services to insurers and paid gross receipts tax on its receipts, but it never gave Cahoon a nontaxable transaction certificate. Cahoon reported the income on federal Schedule C and did not pay New Mexico gross receipts tax.

After a 1997 audit notice gave her 60 days to produce NTTCs, Cahoon consulted a CPA. The CPA incorrectly told her that individuals working for licensed health-care entities were not taxable and did not explain the certificate requirement. Cahoon instead submitted documents showing the actual resale and tax payment. The auditor told her four days before the deadline that only an NTTC would work.

By then Desert Hills had been sold twice, its tax identification number had been deactivated, and Youth Services International of New Mexico (YSI) operated the business under a different number. YSI offered a certificate, but the auditor said it had to come from Desert Hills, the actual buyer. Desert Hills' former owner began reactivation paperwork, but the certificate could not be completed before the December 22 deadline.

Hearing Officer Margaret B. Alcock held that the deduction failed. Section 7-9-48 required the person buying the services to deliver an NTTC; proof of actual resale was not a substitute. YSI was not shown to be the same legal entity as Desert Hills, so its certificate could not document Cahoon's 1994 sales. And Section 7-9-43 made the 60-day deadline mandatory regardless of why the certificate was unavailable.

The Department corrected the assessment to remove receipts from services performed outside New Mexico, leaving $985 tax, $98.50 penalty, and $554.40 interest. Cahoon's reasonable reliance on the CPA did not eliminate tax or interest, but it established that she was not negligent. The protest was GRANTED as to the $98.50 penalty and DENIED on all other issues.

What this means for you

• Actual resale alone did not prove the deduction. The statute required the buyer's NTTC in addition to the underlying facts.
• The certificate must come from the actual buyer. A later business owner using another name and tax identification number could not document Desert Hills' purchase without proof it was the same entity.
• The seller bears responsibility for deduction records. Cahoon could not shift that duty to Desert Hills, even though Desert Hills failed to provide a certificate and later sold the business.
• The 60-day audit window was mandatory. The decision treated the reason for missing it as irrelevant to tax liability.
• Reasonable professional reliance can affect penalty without affecting tax or interest. The CPA's bad advice excused negligence but did not create the statutory documentation needed for the deduction.

Key questions answered

Why wasn't proof that Desert Hills resold the counseling services enough?
Section 7-9-48 specifically conditioned the deduction on delivery of an NTTC by the buyer. A taxpayer who did not follow that statutory method waived the deduction.

Could YSI issue the certificate instead?
No. YSI was the second purchaser of the business, operated under a different name and tax ID, and was not shown to be the same legal entity that bought Cahoon's services in 1994.

Did circumstances outside Cahoon's control extend the deadline?
No. Section 7-9-43 required disallowance if the certificate was not obtained within 60 days after notice, regardless of the reason.

Why was the penalty abated?
Cahoon promptly consulted a CPA and reasonably followed the CPA's incorrect advice. The Department's regulation recognized reasonable reliance on an accountant as a defense to negligence penalty.

Verbatim citations

The services-for-resale deduction:

Receipts from selling a service for resale may be deducted from gross receipts ... if the sale is made to a person who delivers a nontaxable transaction certificate to the seller (emphasis added) ....

The decision on proof of actual resale:

The fact that Ms. Cahoon can prove her services were sold to Desert Hills for resale is not sufficient to support a deduction under Section 7-9-48.

The mandatory consequence of missing the 60-day period:

Ms. Cahoon's failure to obtain an NTTC within the 60-day period provided in Section 7-9-43 leaves the Department no choice but to disallow her deductions.

The final result:

IT IS THEREFORE ORDERED that the Taxpayer's protest is granted as to the assessment of penalty in the amount of $98.50. On all other issues, the Taxpayer's protest is denied.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Eileen P. Cahoon
• Decision PDF: D&O 98-38

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 EILEEN P. CAHOON 98-38
ID. NO. 02-246724-00-6
ASSESSMENT NO. 2205089

DECISION AND ORDER

A formal hearing on the taxpayer's protest was held on July 13, 1998, before Margaret B.

Alcock, Hearing Officer. Eileen P. Cahoon appeared at the hearing on her own behalf. The Taxation

and Revenue Department ("Department"), was represented by Frank D. Katz, Chief Counsel. Based on

the evidence in the record and the arguments presented, IT IS DECIDED AND ORDERED AS

FOLLOWS:

FINDINGS OF FACT

1. During 1994, Eileen P. Cahoon, Ph.D., performed counseling services as an

independent contractor for Desert Hills, a diagnostic and treatment center licensed by the New

Mexico Department of Health.

2. Desert Hills paid Ms. Cahoon for her services. Desert Hills then resold Ms. Cahoon's

services to insurance companies and paid gross receipts tax on the payments it received from the

insurance companies.

3. Desert Hills provided Ms. Cahoon with a Form 1099 showing the amount of money

Desert Hills paid Ms. Cahoon for her services during 1994.

4. Desert Hills did not provide Ms. Cahoon with a nontaxable transaction certificate

("NTTC") indicating that it was purchasing her services for resale.

5. Ms. Cahoon reported her receipts from performing services for Desert Hills on

Schedule C to her 1994 federal income tax return. Ms. Cahoon did not report or pay New Mexico

gross receipts tax on her receipts from Desert Hills.

6. In October 1997, the Department mailed notice of a limited scope audit to Ms.

Cahoon based on the discrepancy between the business income reported on her 1994 federal income

tax return and the receipts reported on her New Mexico gross receipts tax returns for the period

January 1-December 31, 1994.

7. The amount of the discrepancy shown on the Department's notice represented an

underreporting of greater than 25 percent.

8. The Department's notice stated that unless NTTCs or other documentation required

to support deductions from gross receipts were in Ms. Cahoon's possession within 60 days from the

date of the notice, the deductions would be disallowed. The 60-day period expired December 22,

1997.

9. When Ms. Cahoon received the Department's notice, she consulted a certified public

accountant ("CPA") to determine how she should respond.

10. The CPA was slow to get back to Ms. Cahoon and then incorrectly advised her that

individuals working for licensed health care entities were not subject to gross receipts tax. The CPA

did not explain the use of NTTCs and did not tell Ms. Cahoon that any deduction of receipts from

selling services for resale must be supported by an NTTC produced within the 60-day period

provided in the Department's notice.

11. Because she did not understand the statutory requirements governing the deduction

of receipts from performing services for resale, Ms. Cahoon did not make an effort to obtain an

2
NTTC from Desert Hills. Instead, she provided the Department with other documents to show that

Desert Hills had resold her services and had paid gross receipts tax on the resale amount.

12. On December 18, 1997, Francisco Donez, the Department's auditor, told Ms. Cahoon

that the documents she provided would not support her deductions and she must obtain an NTTC

from Desert Hills before the expiration of the 60-day period.

13. Between 1994 and 1997, the business operated by Desert Hills was sold twice and

Desert Hills' tax identification number was deactivated.

14. Ms. Cahoon does not know the details of the two transfers. Ms. Cahoon believes that

Desert Hills was a corporation, but does not know whether the new owners purchased the shares of

the corporation or simply purchased the corporation's assets.

15. In December 1997, the business was owned by Youth Services International of New

Mexico ("YSI") and was operated under a different tax identification number than that used by

Desert Hills.

16. In late December 1997, Ms. Cahoon located Dan Lopez, the former owner of Desert

Hills. Mr. Lopez called Francisco Donez and told him that YSI was willing to issue an NTTC to Ms.

Cahoon.

17. Mr. Donez told Mr. Lopez that Ms. Cahoon must have an NTTC issued under the tax

identification number of the business for which she worked during 1994 and could not substitute an

NTTC from YSI.

18. Mr. Donez advised Mr. Lopez to reactivate Desert Hills' tax identification number

and issue an NTTC to Ms. Cahoon under that number. Mr. Lopez completed the necessary

paperwork in January 1998, by which time the 60-day period within which Ms. Cahoon could

produce the required NTTC had expired.

3

19. The Department subsequently issued Assessment No. 2205089, dated January 1,

1998, to Ms. Cahoon assessing $1,303.04 gross receipts tax, $130.30 penalty and $635.23 interest for

the period January 1-December 31, 1994.

20. On January 10, 1998, Ms. Cahoon sent the Department a letter protesting the

assessment.

21. At the July 13, 1998 hearing on her protest, Ms. Cahoon produced an NTTC from

YSI. Ms. Cahoon said she did not obtain the NTTC during the 60-day period provided in the

Department's audit notice because Mr. Donez told her it would not support her deductions.

22. At the July 13, 1998 hearing, the Department indicated that its assessment may have

erroneously included tax on Ms. Cahoon's receipts from performing services outside New Mexico.

On July 14, 1998, Gay Romero, Senior Tax Auditor in the Department's Protest Office, provided a

letter stating that tax principal assessed should be reduced by $318.04, plus related penalty and

interest. The amount remaining in dispute, including penalty and interest calculated through July 25,

1998, is $985.00 gross receipts tax, $98.50 penalty, and $554.40 interest for a total of $1,637.90.

DISCUSSION

The issue presented is whether Ms. Cahoon's failure to have an NTTC from Desert Hills in

her possession within the 60-day period provided in the Department's audit notice forecloses her

from deducting her receipts from performing services for Desert Hills during 1994. Ms. Cahoon

raises the following arguments in support of her claim to the deduction: (1) she provided the

Department with documentation that Desert Hills resold her services and paid gross receipts tax on

the resale amount; (2) she offered to produce an NTTC from YSI, but this offer was rejected; (3) her

inability to produce an NTTC from Desert Hills in a timely manner was due to circumstances outside

4
her control; and (4) she acted reasonably in seeking the advice of a certified public accountant and

should not be penalized for the accountant's errors.

Section 7-1-17(C) NMSA 1978 states that any assessment of taxes made by the Department

is presumed to be correct, and it is the taxpayer's burden to overcome this presumption. Archuleta v.

O'Cheskey, 84 N.M. 428, 431, 504 P.2d 638, 641 (Ct. App. 1972). Further, Section 7-9-5 NMSA 1978

creates a statutory presumption "that all receipts of a person engaging in business are subject to the

gross receipts tax." Where an exemption or deduction from tax is claimed, the statute must be

construed strictly in favor of the taxing authority, the right to the exemption or deduction must be

clearly and unambiguously expressed in the statute, and the right must be clearly established by the

taxpayer. Wing Pawn Shop v. Taxation and Revenue Department, 111 N.M. 735, 740, 809 P.2d 649,

654 (Ct. App. 1991). Accordingly, it is Ms. Cahoon's burden to come forward with evidence to show

that she was entitled to the deductions taken and that the Department's assessment is incorrect.

Issue 1: Evidence Required to Support Deductions under Section 7-9-48. The Gross

Receipts and Compensating Tax Act provides several deductions from gross receipts for taxpayers who

meet the statutory requirements set by the legislature. Ms. Cahoon claims the deduction provided in

Section 7-9-48:

Receipts from selling a service for resale may be deducted from gross receipts
... if the sale is made to a person who delivers a nontaxable transaction
certificate to the seller (emphasis added) ....

The fact that Ms. Cahoon can prove her services were sold to Desert Hills for resale is not sufficient to

support a deduction under Section 7-9-48. The requirements of the statute are very specific. The buyer

of services must deliver an NTTC to the seller before the seller is entitled to claim a deduction from

gross receipts. Where a party claiming a right to a tax exemption or deduction fails to follow the

method prescribed by statute or regulation, he waives his right thereto. Proficient Food v. New Mexico

5
Taxation & Revenue Department, 107 N.M. 392, 397, 758 P.2d 806, 811 (Ct. App.), cert. denied, 107

N.M. 308, 756 P.2d 1203 (1988). By failing to obtain possession of the NTTC required by the statute,

Ms. Cahoon waived her right to claim a deduction under Section 7-9-48.

Issue 2: NTTC from YSI. To be deductible under Section 7-9-48, the sale of services must be

"made to a person who delivers a nontaxable transaction certificate to the seller." A deduction cannot

be taken based on an NTTC issued by someone other than the person to whom the taxpayer sold the

services. In this case, Ms. Cahoon sold her services to Desert Hills, not YSI. Ms. Cahoon has not

provided any evidence to show that Desert Hills and YSI are the same entity. To the contrary, the fact

that YSI is the second purchaser of the business, that Desert Hills' tax identification number was

deactivated, and that YSI is operating under its own name and tax identification number supports the

conclusion that YSI is a separate entity that merely acquired the assets of the business formerly owned

by Desert Hills. Based on the evidence presented, an NTTC issued by YSI will not support deductions

taken for receipts from selling services to Desert Hills.

Issue 3: Taxpayer Responsibility for Documenting Deductions. Ms. Cahoon maintains that

circumstances outside her control prevented her from obtaining the NTTC required by Section 7-9-

48. Ms. Cahoon points out that Desert Hills failed to provide her with an NTTC at the time it

purchased her services and that Desert Hills' sale of its business prevented her from obtaining an

NTTC within the 60-day time period required by the Department's audit notice. While this series of

events is unfortunate, Ms. Cahoon's attempt to shift responsibility for documenting her gross receipts

tax deductions to Desert Hills is inconsistent with New Mexico's self-reporting tax system. Every

person is charged with the reasonable duty to ascertain the possible tax consequences of his or her

actions. Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976),

cert. denied, 90 N.M. 255, 561 P.2d 1348 (1977). The incidence of the gross receipts tax is on the

6
seller, and it was the responsibility of Ms. Cahoon—not Desert Hills—to determine whether she had

the documentation needed to support her deductions.

The requirements for obtaining NTTCs to support deductions from gross receipts are set out in

Section 7-9-43 NMSA 1978. During 1994, when Ms. Cahoon was performing services for Desert

Hills, the statute provided, in pertinent part:

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....
(emphasis added).

The word "shall" indicates that the provisions of a statute are mandatory and not discretionary. State v.

Lujan, 90 N.M. 103, 105, 560 P.2d 167, 169 (1977). Ms. Cahoon did not have an NTTC from Desert

Hills in her possession at the time her 1994 gross receipts tax returns were due. She did not meet the

statutory requirements of Section 7-9-43 then in effect and was not entitled to claim a deduction. At

that point, it was well within her control to either request an NTTC from Desert Hills or pay the gross

receipts tax due to New Mexico. No action of Desert Hills or the Department prevented her from doing

so.

In 1997, the legislature amended Section 7-9-43 to allow taxpayers additional time within

which to obtain required NTTCs. Laws 1997, Chapter 72, Section 1. This version of the statute,

effective July 1, 1997, provides:

All nontaxable transaction certificates of the appropriate series executed by
buyers or lessees should 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 is not in possession of the required
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 certificates shall be
disallowed.

7
The amendment gave taxpayers audited after its effective date a second chance to obtain NTTCs that

should have been in their possession at the time their deductions from gross receipts tax were taken.

Taxpayers who rely on this provision must recognize, however, that they run the risk of having their

deductions disallowed if they are unable to obtain required NTTCs within the 60-day period provided

by the legislature. The reason a taxpayer cannot obtain an NTTC is irrelevant. The language of the

statute is mandatory: if a seller is not in possession of required NTTCs within 60 days from the date of

the Department's notice, "deductions claimed by the seller ... that require delivery of these nontaxable

transaction certificates shall be disallowed." (emphasis added). Ms. Cahoon's failure to obtain an

NTTC within the 60-day period provided in Section 7-9-43 leaves the Department no choice but to

disallow her deductions.

Issue 4: Reliance on the Advice of an Accountant. When Ms. Cahoon received the

Department's audit notice, she consulted a CPA. The CPA gave Ms. Cahoon erroneous advice that led

her to believe she did not need to provide documentation to support her deductions. By the time Ms.

Cahoon received the correct advice from the Department's auditor and located Mr. Lopez, the former

owner of Desert Hills, it was mid-December. Although Mr. Lopez acted promptly to reactivate his tax

identification number and apply for a new NTTC to give Ms. Cahoon, the paperwork was not

completed until January 1998. The 60-day notice period expired December 22, 1997. Had Ms.

Cahoon received correct advice from her CPA and called Mr. Lopez as soon as she received the 60-day

notice, it is more than likely that Mr. Lopez could have provided Ms. Cahoon with a timely NTTC to

support her gross receipts tax deductions.

Ms. Cahoon's reliance on the erroneous advice of her CPA does not excuse Ms. Cahoon from

her liability for tax and interest due to the state. It does indicate, however, that Ms. Cahoon was not

negligent in failing to obtain the documents needed to support her deductions. In this case, the

8
Department imposed the ten percent negligence penalty provided in Section 7-1-69(A) NMSA 1978.

Department Regulation 3 NMAC 1.11.11(4) states that a taxpayer's reasonable reliance on the advice of

an accountant may be a defense to the imposition of penalty. Ms. Cahoon reasonably relied on the

advice of her CPA in failing to take the action necessary to obtain a timely NTTC from Desert Hills.

Accordingly, the negligence penalty should be abated.

CONCLUSIONS OF LAW

1. Ms. Cahoon filed a timely, written protest to Assessment No. 2205089, and jurisdiction

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

2. Ms. Cahoon is not entitled to a gross receipts tax deduction for receipts from selling

services to Desert Hills during 1994.

3. Ms. Cahoon reasonably relied on the advice of her CPA and was not negligent in failing

to obtain an NTTC from Desert Hills within the 60-day period provided in the Department's audit

notice.

IT IS THEREFORE ORDERED that the Taxpayer's protest is granted as to the assessment of

penalty in the amount of $98.50. On all other issues, the Taxpayer's protest is denied.

Entered July 17, 1998.

9