Can a building-supply store accept a government or nonprofit customer's Type 9 tax certificate to sell construction materials tax-free in New Mexico?

Plain-English summary

A building-supply store could not use its customers' Type 9 tax certificates to sell construction materials tax-free to government agencies and nonprofits — those deductions exclude materials that become part of a construction project, "construction" includes repairs, and a certificate is not conclusive if it does not actually cover the sale. Protest DENIED.

Roswell Lumber Co. runs building-materials stores in Roswell and Artesia. It kept its customers' nontaxable transaction certificates (NTTCs) on file and, when a government or nonprofit customer had a Type 9 NTTC, sold to them without charging gross receipts tax. A February 2000 audit found no problems except this: the store had used Type 9 certificates to deduct sales of construction materials to government and nonprofit buyers. The Department disallowed those deductions and assessed $5,234.36 for 1997–1999. The store protested on three grounds; all failed.

1. "Construction" includes repairs

The store argued that materials that could be used for repairs were not for a "construction project," so Type 9 certificates were fine. But the deductions in Section 7-9-54 (government sales) and Section 7-9-60 (501(c)(3) nonprofit sales) each expressly exclude tangible personal property that becomes an ingredient or component part of a construction project — and New Mexico defines "construction" in Section 7-9-3(C) broadly to include "building, altering, repairing or demolishing" structures. The Court of Appeals settled this exact argument in Arco Materials: repairs are construction, and the deduction does not apply to materials used in them.

2. A Type 9 NTTC is not conclusive proof

The store argued it should be able to treat a tendered Type 9 certificate as conclusive proof the sale was deductible. Arco Materials rejected that too: a seller has a continuing duty to verify that goods delivered under a certificate are actually of the type the certificate covers (Regulation 3 NMAC 2.43.1.14). A Type 9 certificate does not cover construction materials "regardless of what the NTTCs represented on their face," and the "conclusive evidence" protection applies only when the certificate actually covers the receipts in question (McKinley Ambulance).

3. Customers' misunderstanding is no defense

Finally, the store said it faced hardship because government and nonprofit customers believe all their purchases are exempt and deduct the tax from their payments or take their business elsewhere. The hearing officer was sympathetic but unmoved: a buyer's misunderstanding is no basis for ignoring the law, the Department's own CRS-1 Filer's Kit spells out that Type 9 certificates cannot be used to buy construction materials, and the store may report noncompliant competitors for audit. The hearing officer also explained the flip side — Type 9 certificates do properly cover construction-related items that do not become part of the structure (tools, work gloves, construction equipment); only items designed to become part of the project (doors, drywall, studs, counter tops, ceiling panels) are excluded. It is the seller's job to train employees on the difference.

Result: protest DENIED — the store owed gross receipts tax on the construction materials sold under Type 9 certificates.

What this means for you

Type 9 certificates do not exempt construction materials

Government agencies and 501(c)(3) nonprofits can buy ordinary tangible personal property tax-free with a Type 9 NTTC, but not materials that become part of a construction project. Sales of lumber, drywall, doors, studs, and similar items to these buyers are taxable even with a Type 9 certificate on file.

"Construction" includes repair work

Do not assume that materials for repairs escape the exclusion. New Mexico's definition of construction covers building, altering, repairing, and demolishing, so repair materials are treated the same as new-construction materials for this purpose.

Accepting a certificate does not end your responsibility

An NTTC is not a free pass. You have a continuing duty to confirm the goods you sell are actually the type the certificate covers. If a certificate does not cover the transaction, you cannot rely on it — and you, the seller, are liable for the tax.

Know which construction-related items a Type 9 does cover

The certificate still works for construction-related tangible personal property that does not become part of the structure — tools, equipment, work gloves. Train your staff to separate those from materials that go into the project, which remain taxable.

Common questions

Q: A government or nonprofit customer gave me a Type 9 certificate for lumber and drywall. Can I skip the tax?
A: No. The government and nonprofit deductions exclude materials that become part of a construction project, so sales of construction materials are taxable even with a Type 9 certificate.

Q: What if the materials are only for repairs, not new construction?
A: Still taxable. New Mexico defines "construction" to include repairing and altering structures, so repair materials fall within the same exclusion (Arco Materials).

Q: Isn't a certificate conclusive proof that a sale is deductible?
A: Only if the certificate actually covers the sale. You have a continuing duty to verify coverage, and a Type 9 certificate does not cover construction materials no matter what it appears to say.

Q: My customers insist they're tax-exempt and refuse to pay. Isn't that a hardship?
A: The law still applies. A customer's mistaken belief that everything it buys is exempt does not authorize you to omit the tax; the Department's filer's kit is explicit that Type 9 certificates cannot buy construction materials.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-9-54 — deduction for receipts from selling tangible personal property to the United States, New Mexico, or their governmental units
• NMSA 1978, § 7-9-54(C)(3) — the government-sales deduction does not apply to property that becomes an ingredient or component part of a construction project
• NMSA 1978, § 7-9-60 — deduction for receipts from selling tangible personal property to 501(c)(3) organizations that deliver an NTTC
• NMSA 1978, § 7-9-60(B) — the nonprofit-sales deduction does not apply to construction-project materials (or metalliferous mineral ore)
• NMSA 1978, § 7-9-3(C) — defines "construction" to include building, altering, repairing, or demolishing structures and related work
• NMSA 1978, § 7-1-17(C) — an assessment of tax is presumed correct
• Regulation 3 NMAC 2.43.1.14 — a seller accepting an NTTC in good faith remains responsible that goods delivered later are of the type the certificate covers

Cases cited:

• Arco Materials, Inc. v. New Mexico Taxation and Revenue Department, 118 N.M. 12, 878 P.2d 330 (Ct. App.), rev'd on other grounds, 118 N.M. 647, 884 P.2d 803 (1994) — "construction" includes repairs, and a taxpayer has a continuing duty to assess the validity of deductions taken on NTTCs
• McKinley Ambulance Serv. v. Bureau of Revenue, 92 N.M. 599, 592 P.2d 515 (Ct. App. 1979) — the conclusive-evidence provision applies only if the certificate covers the receipts in question
• Wing Pawn Shop v. Taxation and Revenue Department, 111 N.M. 735, 809 P.2d 649 (Ct. App. 1991) — deductions are construed strictly in favor of the taxing authority and must be clearly established by the taxpayer

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Roswell Lumber Co.
• Decision PDF: D&O 00-33

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
ROSWELL LUMBER CO. No. 00-33
ID NO. 02-144747-00-0
ASSESSMENT NO. 2550044

DECISION AND ORDER

A formal hearing on the above-referenced protest was held October 31, 2000, before

Margaret B. Alcock, Hearing Officer. Roswell Lumber Co. (“Taxpayer”) was represented by Bruce

W. Ellis, its president. The Taxation and Revenue Department ("Department") was represented by

Lewis Terr, Esq. Based on the evidence and arguments presented, IT IS DECIDED AND

ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer operates retail businesses in Roswell and Artesia, New Mexico, selling

building materials, lumber, plumbing and electrical supplies, tools, and similar items.

2. The Taxpayer’s customers include large contractors, commercial businesses,

government agencies, nonprofit organizations, and individuals purchasing items for personal use.

3. The Taxpayer maintains a file of nontaxable transaction certificates (“NTTCs”)

provided by its customers on a hard drive that is tied to the Taxpayer’s computer system.

4. When a customer has an account with the Taxpayer, the certificate type and

certificate number of any NTTC on file are automatically recorded on the account and no gross

receipts tax is charged on the value of the products purchased.

5. When a customer does not have an account with the Taxpayer, the customer must tell

the salesperson there is an NTTC on file and the salesperson will then check the Taxpayer’s records.

If the records indicate an NTTC is on file, no gross receipts tax is charged to the customer.

6. The Taxpayer has a number of Type 9 NTTCs on file for various government

agencies and nonprofit organizations.

7. Type 9 NTTCs may be executed by government agencies and nonprofit organizations

for the purchase of tangible personal property, but may not be used for the purchase of construction

materials to be incorporated into construction projects. This information is contained in the CRS-1

Filer’s Kit the Department provides to all taxpayers registered for payment of gross receipts,

compensating and withholding taxes.

8. On several occasions when the Taxpayer charged gross receipts tax on sales to

government agencies and nonprofit organizations, those entities deducted the tax from their

payments to the taxpayer, stating they were tax exempt.

9. In February 2000, the Department conducted a field audit of the Taxpayer’s books

and records for the period January 1997 through December 1999.

10. The auditor found no exceptions in the Taxpayer’s reporting of compensating tax,

withholding tax or income tax.

11. The only gross receipts tax exceptions found by the auditor related to the Taxpayer’s

acceptance of Type 9 NTTCs; the Department disallowed the Taxpayer’s deduction of receipts from

the sale of construction materials to government agencies and nonprofit organizations that had

provided Type 9 NTTCs to the Taxpayer.

2

12. On June 30, 2000, the Department issued Assessment No. 2550044 to the Taxpayer

in the total amount of $5,234.36, representing gross receipts tax, penalty and interest for the period

January 1997 through December 1999.

13. On July 18, 2000, the Taxpayer filed a written protest to the Department’s

assessment.

DISCUSSION

The Taxpayer protests the Department’s disallowance of deductions taken on sales of

construction materials to government agencies and nonprofit organizations that provided Type 9

NTTCs to the Taxpayer. The Taxpayer raises the following arguments in support of its protest: (1)

the Taxpayer was entitled to accept Type 9 NTTCs on sales of construction materials because the

materials could be used for repairs as well as for new construction; (2) the Taxpayer was entitled to

accept Type 9 NTTCs as conclusive proof that it was entitled to the deductions taken; and (3)

requiring the Taxpayer to refuse Type 9 NTTCs on sales of construction materials would create a

hardship on the Taxpayer because government and nonprofit entities do not understand the law and

believe that all of their purchases are tax exempt.

Burden of Proof. Section 7-1-17(C) NMSA 1978 provides that any assessment of taxes

made by the Department is presumed to be correct. Where a deduction from tax is claimed, the statute

must be construed strictly in favor of the taxing authority, the right to the 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 the Taxpayer’s burden to come forward with evidence to show that it is

entitled to the deductions claimed and the Department’s assessment is incorrect.

3
Applicable Statutes. There are two statutes at issue in this case: Section 7-9-54 NMSA

1978 and Section 7-9-60 NMSA 1978. The pertinent provisions of Section 7-9-54 NMSA 1978 in

effect during the audit period read as follows:

A. Except as provided otherwise in Subsection C of this section, receipts
from selling tangible personal property to the United States or New Mexico
or any governmental unit or subdivision, agency, department or
instrumentality thereof may be deducted from gross receipts or from
governmental gross receipts.
...
C. Unless contrary to federal law, the deduction provided by this section
does not apply to... (3) receipts from selling tangible personal property that
will become an ingredient or component part of a construction project;
...(emphasis added)

The pertinent provisions of Section 7-9-60 NMSA 1978 reads as follows:

A. Except as provided otherwise in Subsection B of this section, receipts
from selling tangible personal property to organizations that have been
granted exemption from the federal income tax by the United States
commissioner of internal revenue as organizations described in Section
501(c)(3) of the United States Internal Revenue Code of 1986, as amended or
renumbered, may be deducted from gross receipts or from governmental
gross receipts if the sale is made to an organization that delivers a nontaxable
transaction certificate to the seller....

B. The deduction provided by this section does not apply to receipts from
selling tangible personal property that will become an ingredient or
component part of a construction project or from selling metalliferous
mineral ore. (emphasis added)

These two statutes provide a general deduction for sales of tangible personal property to government

agencies and nonprofit organizations, but specifically disallow the deduction on sales of tangible

personal property that will become an ingredient or component part of a construction project.

Acceptance of Type 9 NTTCs on Sales of Construction Materials that Could be Used

for Repairs. At the hearing, the Taxpayer expressed his belief that repair work did not come within

the meaning of the term “construction project” and so the Taxpayer was entitled to accept Type 9

4
NTTCs on sales of materials that could be used for repairs. This same argument was raised—and

rejected—in Arco Materials, Inc. v. New Mexico Taxation and Revenue Department, 118 N.M. 12,

14-15, 878 P.2d 330, 332-333 (Ct. App.), rev’d on other grounds, 118 N.M. 647, 884 P.2d 803

(1994):

In rejecting Taxpayer’s argument, we rely primarily on the legislative
definition of "construction" contained in NMSA 1978, Section 7-9-3(C)
(Repl. Pamp. 1993). This definition includes, among other things, "building,
altering, repairing or demolishing" any road, highway, bridge, parking area,
or related project; building or other structure; airport; park, trail, athletic
field, golf course, or similar facility; sewage or water treatment facility;
pipeline; transmission line; storage tank; or similar work. Id. It also
includes leveling or clearing land, excavating earth, and similar work. Id.
Given this broad definition of "construction," which encompasses a wide
variety of construction activities, including repairs and projects, we are not
persuaded by Taxpayer's argument that the legislature intended to
distinguish "construction project" from construction activities generally.

The court’s decision is conclusive on this issue. The deduction provided in Section 7-9-54 NMSA

1978 and, by extension, in Section 7-9-60 NMSA 1978, does not apply to receipts from the sale of

materials that can be used in building, repairing, altering or demolishing any building or other

structure listed in the definition of “construction” set out in Section 7-9-3(C) NMSA 1978.

Effect of a Customer’s Tender of a Type 9 NTTC. The Taxpayer argues that it should not

be required to determine whether a Type 9 NTTC tendered by a government agency or nonprofit

organization actually covers the sale at issue, but should be able to accept the NTTC as conclusive

proof that receipts from the transaction are deductible. This argument, too, was raised—and

rejected—in the Arco Materials case, where the court found that taxpayers have a continuing duty to

assess the validity of deductions made in reliance on NTTCs. 118 N.M at 15, 878 P.2d at 333. In

making its decision, the court relied on the following language in Regulation 3 NMAC 2.43.1.14

(formerly GR 43:9):

5
Acceptance of nontaxable transaction certificates (NTTCs) in good faith that
the property or service sold thereunder will be employed by the purchaser in
a nontaxable manner is determined at the time the certificates are initially
accepted. The taxpayer claiming the protection of a certificate continues to
be responsible that the goods delivered thereafter are of the type covered by
the certificate.

The court concluded that Type 9 NTTCs do not cover receipts from sales of construction materials to

government entities “regardless of what the NTTCs represented on their face.” See also, McKinley

Ambulance Serv. v. Bureau of Revenue, 92 N.M. 599, 601, 592 P.2d 515, 517 (Ct. App. 1979)

(conclusive evidence provision only applies if the certificate covers the receipts in question). The

decision in Arco Materials applies equally to the facts of this case. Based on the clear language of

Sections 7-9-54 and 7-9-60 NMSA 1978, the Taxpayer may not rely on Type 9 NTTCs to deduct

receipts from selling construction materials to government and nonprofit entities.

Customers’ Misunderstanding of the Law. Finally, the Taxpayer argues that it will suffer

a hardship if it cannot accept Type 9 NTTCs because the Taxpayer is unable to collect gross receipts

tax on sales to government and nonprofit entities. At the hearing, Mr. Ellis testified that when the

Taxpayer attempts to charge tax to these entities, they deduct the tax from their payments, insisting

they are tax exempt. He predicted that government and nonprofit customers required to pay the tax

will simply take their business to another vendor. Mr. Ellis also questioned why the Department

allows these entities to give Type 9 NTTCs to businesses that sell construction materials.

While it may be true that some government and nonprofit entities do not understand that

purchases of construction materials are subject to gross receipts tax, this does not provide a basis for

ignoring the law. As discussed above, the language of the statutes on this issue is quite clear. In

addition, the instructions contained in the Department’s CRS-1 Filer’s Kit specifically state that

“neither governmental agencies nor 501(c)(3) organizations may use these [Type 9] certificates to

6
purchase construction materials to be used in construction projects.” The only way for the

Department to obtain compliance is to enforce the tax laws as written. If Mr. Ellis believes other

vendors are not complying with the law and thereby have a competitive advantage over the

Taxpayer, he is welcome to forward those names to the Department for audit.

In answer to Mr. Ellis’s question as to why government agencies and nonprofit organiza-

tions are allowed to give Type 9 NTTCs to building supply companies, there are certain

construction-related items to which a Type 9 NTTC properly applies. For example, a Type 9 NTTC

may be accepted for the sale of work gloves, tools, construction equipment and other items of

tangible personal property that are used in building or repairing a structure, but do not become an

ingredient or component part of the structure itself. Only sales of tangible personal property

designed or intended to become part of the construction project, including doors, ceiling panels,

counter tops, drywall, studs, etc., are excluded from the deductions provided in Sections 7-9-54 and

7-9-60 NMSA 1978. It is up to the Taxpayer to educate its employees as to which items are covered

by Type 9 NTTCs and which items are subject to gross receipts tax.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment No. 2550044, and

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

2. The deductions provided in Sections 7-9-54 and 7-9-60 NMSA 1978 do not apply to

sales of construction materials to government agencies and nonprofit organizations, and the Taxpayer is

subject to gross receipts tax on these transactions.

3. The Taxpayer is not entitled to accept or rely on Type 9 NTTCs to support a deduction

of receipts from sales of construction materials to government agencies and nonprofit organizations.

For the foregoing reasons, the Taxpayer's protest IS DENIED.

7
DATED November 21, 2000.

8