If you're an independent contractor whose services get resold, can you still claim the resale deduction after presenting the wrong type of certificate — or one that arrives too late?

Subject

Bret A. Bishop (D&O 99-14)

Plain-English summary

Bret Bishop worked in 1994 as a fly-fishing guide in New Mexico. He did it as an independent contractor for an outfitter called The Solitary Angler, and reported the income on federal Schedule C. He did not know New Mexico's gross receipts tax applied to him, so he never registered or paid it — he assumed the outfitter's taxes covered everything.

Through its information-sharing agreement with the IRS, the Department learned about his 1994 business income and, in November 1997, opened a limited-scope audit. Its letter told him about the nontaxable transaction certificate (NTTC) requirement and warned that any deduction had to be backed by a certificate delivered within 60 days. When he called the Department employee named in the letter (Francisco), they discussed his liability but apparently not the NTTC issue; Francisco just told him to file a protest. He tried, but no assessment had been issued yet, so it was rejected. In January 1998 the Department issued Assessment No. 2205099 for $810.84 in gross receipts tax, plus penalty and interest.

Two problems doomed the deduction the guide otherwise qualified for:

• He was a separate taxpayer. The outfitter resold his guide services and charged its own customers gross receipts tax, but Bishop was independently taxable on what the outfitter paid him. New Mexico's self-reporting system put the duty to know this on him; not understanding the law is not an excuse (Tiffany Construction Co. v. Bureau of Revenue).
• The certificate was wrong, then late. Services sold for resale are deductible under Section 7-9-48, but only with a proper Type 5 NTTC. Bishop first submitted a Type 2 certificate — which is for goods, not services — and the correct Type 5 was not issued until January 1999 and delivered in February 1999, far past the 60-day deadline that ran out in January 1998.

Under Section 7-9-43, a deduction that requires an NTTC "shall be disallowed" if the certificate is not in hand within 60 days of the Department's notice. A protest officer had even given Bishop extra chances to cure the problem (out of concern he might have been misled), but the correct certificate still never arrived in time. The protest was denied.

What this means for you

• If your work is resold, you are still your own taxpayer. An outfitter, agency, or general contractor paying gross receipts tax on what it charges its customers does not cover the tax on what it pays you. Register and report on your own receipts.
• The resale deduction lives or dies on the right NTTC, delivered on time. For services sold for resale you need a Type 5 NTTC — not the Type 2 used for goods. Substantively qualifying is not enough; the certificate is the proof the statute requires.
• The 60-day clock is strict. Once the Department notifies you, you have 60 days to produce the certificate or the deduction "shall be disallowed." Getting the right certificate later — even a year later — does not revive the deduction.
• A good-faith misunderstanding won't erase the tax. The Hearing Officer accepted that Bishop never meant to dodge tax, but ignorance of the requirement does not excuse non-payment in a self-reporting system.
• Confirm certificate types with the Department, not just your customer. Here neither the guide nor the outfitter understood the Type 2 vs. Type 5 distinction, and the mistake cost the deduction.

Key questions answered

Why did the guide owe tax when the outfitter already paid gross receipts tax?
Because he was a separate taxpayer. The outfitter paid tax on what it charged its customers; Bishop was independently taxable on the receipts the outfitter paid him for his guide services.

Did he actually qualify for a deduction?
In substance, yes — his services were resold, which is deductible under Section 7-9-48. But the deduction requires a proper Type 5 NTTC, and he never delivered one within the statutory time.

What went wrong with the certificate?
He first submitted a Type 2 NTTC, which covers tangible personal property for resale, not services. The correct Type 5 certificate was not issued until January 1999 and delivered in February 1999 — long after the 60-day deadline expired in January 1998.

Didn't the Department give him more time?
A protest officer, worried Bishop might have been misled by an earlier phone call, did give him further opportunities to cure the problem. But even with that leeway, the correct certificate never arrived within the period the statute allows, and Section 7-9-43 makes disallowance mandatory.

Verbatim citations

Only a Department-prescribed NTTC will prove the deduction (Regulation 3 NMAC 2.43.1.8.4):

The department issues different types of NTTCs. Each type is of limited usage and relates to a particular deduction allowed by possession of that certificate.... All other types of proof of deductibility are invalid and will not be accepted by the Department, unless the deduction provision explicitly permits other proof.

The 60-day rule (Section 7-9-43):

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.

Ignorance of the tax is no excuse in a self-reporting system:

[T]he Taxpayer's ignorance of the requirements of the tax statutes cannot excuse his failure to pay tax. This is because New Mexico has a self reporting tax system which places the responsibility to determine tax consequences and report and pay taxes upon taxpayers themselves.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Bret A. Bishop
• Decision PDF: D&O 99-14

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
BRET A. BISHOP, NO. 99-14
ID. NO. 02-351818-00 9, PROTEST TO
ASSESSMENT NO. 2205099

DECISION AND ORDER

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

February 17, 1999. Mr. Bret Bishop, hereinafter, “Taxpayer”, represented himself at the hearing.

The Taxation and Revenue Department, hereinafter, “Department”, was represented by Gail

MacQuesten, Special Assistant Attorney General. Based upon the evidence and arguments

presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. During calendar year 1994, the Taxpayer worked as a fly fishing guide in New

Mexico. He did so as an independent contractor performing guide services for a business called

the Solitary Angler, which was owned by Mr. Van Beacham.

2. The Taxpayer reported his income from performing fishing guide services on

federal Schedule C of his 1994 federal income tax return, which is the form for reporting profit

or loss from a business which is a sole proprietorship.

3. The Taxpayer was not aware of New Mexico’s gross receipts tax and that it would

apply to him for his receipts from performing fishing guide services. Consequently, the Taxpayer

was not registered with the Department for gross receipts tax reporting purposes and did not

report and pay gross receipts tax upon his gross receipts from performing fishing guide services.

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4. The Department has an information sharing agreement with the Internal Revenue

Service (“IRS”) under which the IRS provides the Department with tax filing information about

New Mexico residents who file returns with the IRS.

5. As a result of information the Department received from the IRS about the

Taxpayer, on November 17, 1997, the Department wrote to Mr. Bishop informing him that

although he had reported to the IRS receipts from a business in New Mexico in 1994, the

Department had no records to indicate that the Taxpayer was reporting gross receipts to the

Department. The Department’s letter also informed the Taxpayer that it was conducting a

limited scope audit to resolve this discrepancy. The Department’s letter informed the Taxpayer

of the requirement to possess New Mexico nontaxable transaction certificates (“NTTCs”) to

substantiate deductions, if any, which might be claimed by the Taxpayer. The letter also

provided notice to the Taxpayer that it must produce and deliver to the Department copies of any

NTTCs it had within sixty days or any deductions claimed relating to the NTTCs would be

disallowed. Additionally, the Department’s letter provided a phone number and the name of an

employee, Francisco, in the Department’s support office who the Taxpayer could call if further

information was needed.

6. The day following the day on which the Taxpayer received the Department’s

letter, the Taxpayer telephoned Francisco. The Taxpayer did not believe he was subject to gross

receipts tax because he understood that the Solitary Angler paid taxes on its receipts from the

fishing guide services he performed. The Taxpayer tried to explain this to Francisco. Francisco

told the Taxpayer that if he did not agree he was subject to gross receipts tax, he should file a

protest. Francisco did not inform the Taxpayer about NTTCs and how they might apply to allow

the Taxpayer to claim a deduction for its receipts from the Solitary Angler.

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7. The Taxpayer wrote the Department and attempted to file a protest as advised by

Francisco. Because no assessment had yet been issued by the Department which could be

protested, the Department rejected the Taxpayer’s protest.

8. On January 1, 1998, the Department issued Assessment No. 2205099 (“the

assessment”) to the Taxpayer, assessing $810.84 in gross receipts tax, $81.09 in penalty and

$395.29 in interest for the January through December, 1994 reporting periods. Because January

1 is the New Year’s Day holiday, the assessment would not have been mailed until January 2nd.

9. On February 2, 1998, the Taxpayer filed a written protest with the Department to

the assessment.

10. The Taxpayer’s protest was assigned to Mr. Tom Dillon of the Department’s

Protest Office. On May 5, 1998, Mr. Dillon wrote the Taxpayer and explained why the

Department believed that the Taxpayer was subject to gross receipts tax. The letter further

explained that the Taxpayer was a separate taxpayer from the outfitter who resold the Taxpayer’s

services and charged its customers gross receipts tax. The letter explained that the outfitter (the

Solitary Angler) could have issued the Taxpayer a type 5 NTTC, which would have entitled the

Taxpayer to claim a deduction for services which would be resold, but since more than sixty days

had expired from the Department’s November 17, 1997 letter, it was too late to present a NTTC

to support a claim of deduction.

11. On May 11, 1998, the Taxpayer called Mr. Dillon and discussed his telephone

conversation with Francisco. As a result of this conversation, Mr. Dillon became concerned that

a Department employee might have misled the Taxpayer about the requirement to have a NTTC

from the Solitary Angler.

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12. On May 12, 1998, Mr. Dillon wrote the Taxpayer asking for a letter documenting

the Taxpayer’s conversation with Francisco and requesting that the Taxpayer secure a type 5

NTTC and provide it to the Department for review.

13. On June 17, 1998, Mr. Dillon again wrote the Taxpayer, stating that no response

had been received to the requests made in the May 12, 1998 letter and asking for a response by

June 30, 1998.

14. By an undated letter which Mr. Dillon received on August 27, 1998, the Taxpayer

responded to Mr. Dillon’s letter of June 17, 1998. The letter enclosed a copy of a type 2 NTTC

the Taxpayer had received from the Solitary Angler. Type 2 NTTCs are for the sale of tangible

personal property for resale and do not cover the sale of services for resale.

15. The Taxpayer did not understand the difference between a type 2 NTTC and a

type 5 NTTC and neither did Mr. Beacham, the owner of the Solitary Angler.

16. On February 16, 1999, the Department received a copy of a type 5 NTTC which

the Solitary Angler had issued to the Taxpayer on January 8, 1999.

DISCUSSION

The Taxpayer disputes the assessment on the basis that his failure to report and pay taxes

was based upon an innocent mistake of not understanding that he was a business subject to tax

independently of the Solitary Angler. The Taxpayer also disputes the assessment on the basis

that he should not be denied a deduction from tax based upon the technicality that he did not

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have a proper type of NTTC within sixty days of the Department’s notice of the need for such a

certificate.

While I have no doubt whatsoever that the Taxpayer never intended to avoid any

applicable taxes and that his failure to report and pay gross receipts tax was based upon a

misunderstanding that the Solitary Angler was paying all applicable taxes with respect to his

fishing guide services, nonetheless, the Taxpayer’s ignorance of the requirements of the tax

statutes cannot excuse his failure to pay tax. This is because New Mexico has a self reporting tax

system which places the responsibility to determine tax consequences and report and pay taxes

upon taxpayers themselves. Thus, it is well settled that every person is charged with the

reasonable duty to ascertain the possible tax consequences of his actions. Tiffany Construction

Company 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 Taxpayer also argues that since there is no dispute that his services were resold by

the Solitary Angler or that he would have been eligible for the deduction provided at § 7-9-48

had he obtained the proper NTTC in a timely manner and since Mr. Dillon of the Department’s

protest office had given him additional time to obtain a NTTC, that the Department should have

the ability to grant additional time once again and to accept the type 5 NTTC which the Taxpayer

presented to the Department the day before the formal hearing and allow him the deduction. To

address these arguments, we must first review the statutory provisions governing the manner of

claiming the deduction at issue herein. There is a deduction, found at §7-9-48 NMSA 1978,

which enables persons who sell their services to others who resell those services, to claim a

deduction from gross receipts tax for their receipts from performing such services. To be

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deductible, the sale of services must be made to a buyer who delivers a NTTC to the seller. As

provided by Regulation 3 NMAC 2.43.1.8.4:

The department issues different types of NTTCs. Each type is of
limited usage and relates to a particular deduction allowed by
possession of that certificate. An NTTC is valid only if it contains
the information and is in a form prescribed by the department. All
other types of proof of deductibility are invalid and will not be
accepted by the Department, unless the deduction provision
explicitly permits other proof.1

Pursuant to this regulation, the Department has designated type 5 NTTCs as the type required to

support a claim of deduction for services which are resold pursuant to § 7-9-48.

Section 7-9-43 NMSA 1978 (1997 Cum. Supp.) governed the use of NTTCs to entitle

persons to claim deductions from gross receipts tax at the time the Department issued the

assessment at issue. Specifically, it provided in pertinent part:

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. The nontaxable transaction certificates shall
contain the information and be in a form prescribed by the
department.

Thus, while a seller “should” have NTTCs of the proper type when its tax return is due and the

deduction would normally be claimed, a seller is allowed 60 days after notice from the

Department to obtain the certificate, or the deduction “shall be disallowed.”

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In the case of the deduction provided at § 7-9-48, the statutes requires the delivery of an NTTC. No other form of
proof of eligibility for the deduction is permitted by the statute.

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In this case, the Department’s letter of November 17, 1997 gave the Taxpayer notice that

he must deliver to the Department any NTTCs he relied upon to claim deductions by January 16,

1998. Upon receipt of the letter, the Taxpayer contacted the Department employee referenced in

the letter, Francisco. Apparently, the Taxpayer and Francisco did not discuss the need for

NTTCs, but rather, Francisco informed the Taxpayer that if it disputed its liability for tax, a

protest must be filed. The Taxpayer promptly attempted to do this, but because no assessment

had yet been issued, there was no assessment to be protested. After the assessment was issued,

the Taxpayer was able to file a protest and the matter was assigned to Mr. Tom Dillon of the

Department’s protest office. On May 4, 1998, Mr. Dillon wrote a letter to the Taxpayer

explaining that it was a separate taxpayer from the outfitter which resold its services and that a

type 5 NTTC was necessary to support a claim of deduction for the services the Taxpayer sold to

the outfitter to be resold. Mr. Dillon’s letter also explained that since the Taxpayer did not

present such NTTCs before the sixty day deadline of January 16, 1998, that no adjustments to the

assessment could be made. Upon receipt of Mr. Dillon’s letter, the Taxpayer telephoned Mr.

Dillon to discuss the matter further. After those discussions, Mr. Dillon became concerned that

the Taxpayer may have been misled by his discussion with Francisco into thinking that a protest

would legally protect him and be lulled into complacency with respect to obtaining the necessary

NTTCs. If the Taxpayer had been misled by a Department employee, that could provide the

Taxpayer a basis for claiming that the Department would be estopped from denying a deduction

for failure to provide the NTTC within the sixty day statutory period. For that reason, Mr. Dillon

wrote to the Taxpayer on May 12, 1998 requesting that the Taxpayer send a letter documenting

his conversation with Francisco and that the Taxpayer secure a type 5 NTTC from the outfitter.

When Mr. Dillon had not heard from the Taxpayer, he wrote again on June 17, 1998. Finally, the

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Taxpayer responded in late August, enclosing an incorrect type 2 NTTC he had gotten from the

Solitary Angler. Although eventually, the Taxpayer obtained the correct type 5 NTTC, that was

not issued to the Taxpayer until January 8, 1999 and was delivered to the Department on

February 16, 1999.

While it is unfortunate that the Taxpayer did not understand the significance of the

correct type of NTTC and may not have understood the importance of presenting such

certificates after its discussion with a Department employee, even when the Taxpayer eventually

presented an NTTC to the Department, it was of a type which was not proper to support a

deduction given the fact that the Taxpayer provided services and not tangible personal property

to the Solitary Angler and it was presented well beyond the statutory time period for producing

the documentation to support a claim of deduction. Because the requirements of § 7-9-43 were

not met by the Taxpayer, the Department properly denied the Taxpayer’s claim of deduction for

its gross receipts.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest, pursuant to § 7-1-24 NMSA 1978 to

the assessment and jurisdiction lies over both the parties and the subject matter of this protest.

2. Because the Taxpayer failed to produce a correct type of NTTC to support its

claim of deduction within the time requirements of § 7-9-43 NMSA 1978, the Department

properly denied the Taxpayer’s claim of deduction for its receipts from the Solitary Angler.

For the following reasons, the Taxpayer’s protest IS HEREBY DENIED.

DONE, this 26th day of February, 1999.

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