An independent contractor sold his services for resale but got the resale certificates a few months late. Can he still claim the deduction and a refund of the gross receipts tax he paid?

Subject

George Tucker (D&O 99-25)

Plain-English summary

George Tucker spent 36 years in ionizing-radiation safety before retiring from a Department of Energy contractor. Because of his specialized knowledge and security clearance, he agreed to keep working after retirement as an independent contractor for two DOE contractors, EASI and ASI. He knew he owed income and self-employment taxes but did not realize he also owed New Mexico gross receipts tax — he assumed the contractors' payment of gross receipts tax on their own contracts covered him.

In July 1997 the Department notified him of the discrepancy and told him he had 60 days to obtain any nontaxable transaction certificates (NTTCs) supporting deductions, or those deductions would be disallowed. He promptly registered, and diligently pursued NTTCs from EASI and ASI to claim the "sale of services for resale" deduction under Section 7-9-48. But the certificates came late — EASI's in January 1998, ASI's in February 1998 — well past the September 21, 1997 deadline. He paid the 1994 assessment ($1,826.55) and then applied for a refund, which the Department denied.

The Hearing Officer denied the protest:

• The deduction would have applied — but for timing. The Department did not dispute that Tucker's services qualified as services sold for resale. The only problem was that he did not possess the NTTCs when required.
• The 60-day rule is absolute. Section 7-9-43(A) says that if a seller lacks the required NTTCs within 60 days of the Department's notice, deductions "shall be disallowed." The Hearing Officer stressed that the Legislature deliberately used the mandatory "shall" (contrasted with "should" in the prior sentence), so no exceptions are contemplated — not for good faith, not for delays outside the taxpayer's control, not for the contractors' failure to explain his obligations.
• No double taxation / pyramiding claim. Tucker argued the state was taxing the same work twice (once to him, once to EASI/ASI). The Hearing Officer explained these were two separate taxable transactions by two different taxpayers. New Mexico provides resale-type deductions (Sections 7-9-47, 7-9-48) precisely to avoid pyramiding — but only if the certificate requirements are met, which they were not.

The Hearing Officer expressly recognized Tucker "never had any intention to avoid the payment of taxes" — he simply misunderstood the system, and the contractors never told him he could deduct with the right NTTC. But by the time the certificates arrived, it was too late.

What this means for you

• The NTTC 60-day deadline is unforgiving. If the Department notifies you to produce nontaxable transaction certificates, you must hold them within 60 days. Good faith, diligence, and delays caused by the other party do not excuse a late certificate — the deduction is disallowed.
• A valid-in-substance deduction still fails without the paperwork on time. Tucker's work genuinely qualified as services for resale, yet he lost the deduction purely because the certificates were late. Chase your NTTCs immediately when you get a notice.
• "They already paid tax on the same job" is not a defense. Your sale to a customer and your customer's resale are separate taxable transactions. The resale deductions exist to prevent pyramiding, but you have to claim them correctly and on time.
• Independent contractors owe gross receipts tax on their own receipts. Being paid by a company that itself pays gross receipts tax does not relieve you. Register and either pay the tax or secure the proper NTTCs promptly.

Key questions answered

Tucker's services really were for resale — why did he still lose?
Because the deduction requires possessing the buyer's NTTC within 60 days of the Department's notice (Section 7-9-43(A)). His EASI and ASI certificates arrived months after the September 1997 deadline, so the deduction was disallowed regardless of its underlying merit.

Doesn't it matter that the delay wasn't his fault?
No. The Hearing Officer held the 60-day requirement is mandatory and admits no exceptions — "the reason a taxpayer does not obtain an NTTC is irrelevant." Even diligent efforts and delays by the contractors could not save the deduction.

Wasn't he taxed twice on the same work?
No. His sale of services to EASI/ASI and their sale of services to the Department of Energy are two separate taxable transactions by two separate taxpayers. New Mexico's resale deductions prevent pyramiding, but only when the certificate rules are satisfied.

Because he paid first and then asked for a refund, was his claim treated differently?
No. Whether framed as a deduction on assessment or as a refund of tax already paid, the result depends on the same requirement — timely possession of the NTTCs. Having missed the 60-day window, he had no basis for the deduction and therefore no basis for the refund.

Verbatim citations

The resale deduction:

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

The mandatory 60-day rule:

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.

No exceptions:

Thus, it is clear that the requirement to possess the appropriate NTTC to support a claim of deduction within sixty days after notice is absolute and no exceptions to this requirement are contemplated by the Legislature.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: George Tucker
• Decision PDF: D&O 99-25

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
GEORGE TUCKER, NO. 99-25
ID. NO. 02-34912-00 8, PROTEST TO
DENIAL OF CLAIM FOR REFUND

DECISION AND ORDER

This matter came on for formal hearing on July 14, 1999 before Gerald B. Richardson,

Hearing Officer. Mr. George Tucker, hereinafter, “Taxpayer”, represented himself at the hearing.

The Taxation and Revenue Department, hereinafter, “Department”, was represented by Donald F.

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

presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer worked for more than 36 years in the field of Ionizing Radiation

Safety for companies working under contract with the Department of Energy. In 1993, the

Taxpayer retired from Sandia Corporation, a Department of Energy contractor.

2. Because of the Taxpayer’s knowledge in the specialized field of Ionizing

Radiation Safety, and the fact that the Taxpayer retained a security clearance, after his retirement,

the Taxpayer agreed to work, as an independent contractor, in his specialized field on an as

needed basis for two Department of Energy contractors, Enterprise Advisory Services

Incorporated (“EASI”) and Advanced Sciences, Inc., (“ASI”).

3. Although the Taxpayer was aware of the fact that as an independent contractor, he

was liable for his own state and federal income taxes, federal self- employment (social security)

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taxes, etc. the Taxpayer was not aware of his own liability for gross receipts tax upon his receipts

from engaging in business in New Mexico as an independent contractor. The Taxpayer

understood that EASI and ASI paid gross receipts tax upon their contract receipts in New Mexico

and the Taxpayer believed that this alleviated him from reporting and paying the same tax upon

the compensation he received from those companies.

4. On July 22, 1997 the Department wrote to the Taxpayer informing him that the

Internal Revenue Service had provided the Department information that the Taxpayer had

reported income to it as a sole proprietorship and that the Department’s records did not indicate

that the Taxpayer had reported any receipts for gross receipts tax reporting purposes to the

Department for tax year 1994. The Department’s letter requested an explanation of the

discrepancy. The Department’s letter further informed the Taxpayer that as part of the limited

scope audit its letter represented, that the Taxpayer was required to be in possession of any New

Mexico Nontaxable Transaction Certificates (NTTC’s) to support any deductions from his gross

receipts and that he was required to possess the NTTC’s within sixty days of the letter notifying

him of the requirement to have the NTTC’s. Finally, the Department’s letter informed the

Taxpayer that the consequence of not possessing the NTTC’s within the sixty day time limit

would be that any deductions claimed relating to the NTTC’s would be disallowed.

5. The sixty days within which the Taxpayer could produce NTTC’s to support a

claim of deduction for gross receipts tax purposes expired on September 21, 1997.

6. After receiving the Department’s letter, the Taxpayer registered with the

Department for gross receipts tax purposes and obtained a taxpayer identification number. The

Taxpayer also initiated actions with EASI and ASI to obtain NTTC’s to support a claim of

deduction for services sold for resale, pursuant to Section 7-9-48 NMSA 1978.

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7. Although the Taxpayer was diligent in attempting to obtain NTTC’s from EASI

and ASI, he did not obtain them within the sixty day time limit specified in the Department’s

letter of July 23, 1997. EASI issued the Taxpayer an NTTC on January 9, 1998. ASI issued the

Taxpayer an NTTC on February 23, 1998.

8. On November 12, 1997, the Department issued the Taxpayer an assessment of

gross receipts tax, penalty and interest upon its gross receipts for tax year 1994.

9. On April 6, 1998, the Taxpayer issued a check to the Department for $1,826.55 in

payment of the Department’s assessment of gross receipts tax, penalty and interest for the 1994

tax year.

10. On May 18, 1998, the Taxpayer applied to the Department for a refund of the

$1,826.55 it had paid for the 1994 tax year.

11. On August 18, 1998, the Department denied the Taxpayer’s application for tax

refund.

12. On September 12, 1998, the Taxpayer filed a formal protest with the Department

to the Department’s denial of its claim for tax refund.

DISCUSSION

The sole issue to be determined herein is whether the Taxpayer is entitled to claim a

deduction from gross receipts tax for his receipts from performing services for EASI and ASI

during tax year 1994, thus entitling the Taxpayer to a refund of the tax, penalty and interest for

which a claim was filed. The Taxpayer argues that the Department has already received its full

due of gross receipts taxes on the services that he performed for EASI and ASI because they paid

the Department gross receipts taxes on their gross receipts from performing services under their

contracts with the Department of Energy. The Taxpayer also asks that consideration be given to

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the fact his failure to report and pay tax or claim deductions from tax was not due to any attempt

to avoid paying taxes owing the state, but was based upon his failure to understand the

requirements that he either pay gross receipts tax or obtain NTTC’s to support his claimed

deductions. He also asks that consideration be given to the efforts he made to obtain the NTTC’s

and that his failure to obtain them within the sixty day time limit for producing them was due to

circumstances beyond his control, those being the failure of EASI and ASI to provide them to

him in a timely manner, in spite of his persistent efforts to obtain the NTTC’s.

Section 7-9-48 NMSA 1978 (1993 Repl. Pamp.) provided that:

Receipts from selling a service for resale may be deducted from
gross receipts or from governmental gross receipts if the sale is
made to a person who delivers a nontaxable transaction certificate
to the seller. The buyer delivering the nontaxable transaction
certificate must separately state the value of the service purchased
in his charge for the service on its subsequent sale, and the
subsequent sale must be in the ordinary course of business and
subject to the gross receipts tax or governmental gross receipts tax.

The Department does not dispute that if the Taxpayer had possessed the NTTC’s in a timely

manner from EASI and ASI, that he would have been entitled to take advantage of the deduction

provided above. The Department argues, however, that because the Taxpayer did not have the

NTTC’s in a timely manner pursuant to Section 7-9-43(A) NMSA 1978, that the Taxpayer is not

entitled to claim the deduction and thus he was not entitled to a refund of the taxes he paid.

Section 7-9-43(A) NMSA 1978 (1997 Cum. Supp.)1 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

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Because the Department’s assessment denying the Taxpayer a deduction from gross receipts tax was issued in
November, 1997, this is the version of Section 7-9-43 which was applied to deny the applicable deduction which the
Taxpayer sought to claim.

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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.

It is a well settled rule of statutory construction that the use of the word "shall" in a statute indicates

that the provisions are intended to be mandatory rather than discretionary, unless a contrary

legislative intent is clearly demonstrated. State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977). It is

especially appropriate to apply this rule to the provisions of Section 7-9-43(A) NMSA 1978, since

the legislature’s use of the word “should” in the previous sentence regarding possession of the

NTTC’s at the time the deduction is claimed demonstrates even more clearly that the legislature

was choosing its words carefully when it chose to use the more directory word, “shall” in the

following sentence. Thus, it is clear that the requirement to possess the appropriate NTTC to

support a claim of deduction within sixty days after notice is absolute and no exceptions to this

requirement are contemplated by the Legislature. Given this interpretation, notwithstanding the

Taxpayer’s good faith efforts to obtain the NTTC’s, the fact that the delays were not within the

control of the Taxpayer and the Taxpayer’s good faith belief that the payment of gross receipts

taxes by EASI and ASI relieved him of any gross receipts tax obligation, the Taxpayer is simply

barred from claiming the deduction.

The Taxpayer also raises the argument that if he is not refunded the taxes he paid, that the

state, in effect, will receive tax twice on the receipts generated by his efforts, since it will receive

tax from him and also tax from ASI and EASI. This argument misperceives the manner in which

the Gross Receipts and Compensating Tax Act; Chapter 7, Article 9 NMSA 1978, operates. The

gross receipts tax is imposed on every person engaging in business in New Mexico for the privilege

of engaging in business. Section 7-9-4 NMSA 1978. Gross receipts includes the amount of money

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or other compensation received from performing services in New Mexico. Section 7-9-3(F) NMSA

1978. Thus, the Taxpayer, who was engaging in business as a sole proprietorship, and EASI and

ASI, who were also engaging in business in New Mexico, were all subject to gross receipts tax

upon the money they received from performing services in New Mexico under their contracts.

There were two separate taxable transactions in each instance. The Taxpayer’s sale of services to

either EASI or ASI and the sale of services to the Department of Energy by ASI or EASI.

The Gross Receipts and Compensating Tax Act does provide certain deductions to avoid

the pyramiding of taxes. For instance, in addition to the deduction for the sale of services for resale,

deductions are provided for receipts from the sale of tangible personal property for resale, Section

7-9-47, and for sales to manufacturers who incorporate the property into manufactured, products,

Section 7-9-46. As noted above, the pyramiding of taxes could have been avoided in the

Taxpayer’s case had the requirements for claiming the deduction at issue been met.

Before closing, it should be noted that I have absolutely no doubt that Mr. Tucker never had

any intention to avoid the payment of taxes with regard to his receipts from EASI and ASI. He

simply failed to understand how the gross receipts tax statutes operated and applied to him.

Unfortunately, apparently neither EASI or ASI informed him of his tax obligation or the fact that he

could claim a deduction from the tax if they provided him with the proper NTTC. By the time he

did receive the NTTC’s, it was simply too late to claim the deductions provided.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to the Department’s denial of his claim

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

2. Because the Taxpayer failed to submit NTTC’s to support his claim of deduction

pursuant to Section 7-9-48 NMSA 1978 within the time limit specified by Section 7-9-43(A)

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NMSA 1978, the Taxpayer’s claim of deduction and his resultant claim for refund based upon that

claim were properly denied by the Department.

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

DONE, this 30th day of July, 1999.

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