If a carpet installer holds the wrong type of nontaxable transaction certificate and can't get the right one within the Department's 60-day deadline, can he still deduct his resale receipts — and do 'double taxation' or 'another installer got the deduction' arguments help?

Plain-English summary

A carpet installer lost the deduction for the services he sold to one retailer because he held the wrong type of certificate and could not get the right one within the Department's 60-day deadline. His confusion, double-taxation, and "another installer got it" arguments all failed. Protest DENIED.

Scott Dole's business installed carpet for carpet retailers, which resold the installation to their own customers and charged gross receipts tax on it. New Mexico lets a service seller deduct receipts from services that are resold (Section 7-9-48), but only if the seller has the correct nontaxable transaction certificate (NTTC) from the buyer. Dole obtained NTTCs from his two customers but did not realize there are different types for different transactions, and he lost his original certificates during several moves. After a limited-scope audit, the Department sent a "60-day letter" requiring him to produce his NTTCs. Home Furniture reissued a proper Type 5 ("service for resale") certificate in time, so the Department allowed the deduction for the roughly $14,067 from Home Furniture. But Showcase Carpets had given only a Type 2 ("resale") certificate — the wrong type — and did not have any Type 5 certificates to issue until after the deadline. The Department disallowed the roughly $42,379 deduction for the Showcase receipts and assessed about $2,622 in tax, plus penalty and interest.

The 60-day NTTC deadline is mandatory, and the wrong type does not count

Section 7-9-43 says that if the seller is not in possession of the appropriate type of NTTC within 60 days of the Department's notice, the deduction "shall be disallowed." A Type 2 resale certificate did not cover Dole's service-for-resale transactions, and the correct Type 5 arrived after the deadline. Dole argued the certificate types are hard to tell apart — and the hearing officer agreed the front of the form shows only a terse code (the Type 2 reads "02 RESALE," the Type 5 "05 SERVICE FOR RESALE"). But the back of each certificate lists the types and the CRS filer's kit explains them, and taxpayers are required to learn the tax consequences of their actions (Tiffany Construction). "The system is too complicated" is an argument for the Legislature, not a defense to the tax.

The Department's mistake with another installer was no defense

Dole pointed out that another carpet installer had been allowed the deduction using only a Type 2 certificate plus proof that Showcase charged its customers tax. The hearing officer held that even if true, it would have been improper for the Department to allow that deduction — and the Department's errors with other taxpayers do not excuse proper enforcement here.

Taxing both the installer and the retailer is not unconstitutional double taxation

Dole argued that taxing his installation receipts and Showcase's resale of the same work was double taxation. There is no constitutional bar on double taxation (Ft. Smith Lumber Co. v. Arkansas), and in any event there is no double taxation when the tax falls on different taxpayers (House of Carpets). The resale deduction is the Legislature's mechanism to avoid this stacking — but Dole did not meet its NTTC requirement.

Neither the hearing delay nor the age of the tax helped

A 14-month wait for the hearing did not require abatement, because the tardiness of public officers is not a defense (Ranchers-Tufco). And although the normal assessment period is three years, the six-year period in Section 7-1-18(D) applied because Dole understated his liability by more than 25% (by deducting all his receipts), so the June 2000 assessment of 1996 tax was timely.

Result: protest DENIED.

What this means for you

Get the right type of NTTC — and meet the 60-day deadline

The resale-of-services deduction (Section 7-9-48) requires a Type 5 "service for resale" certificate, not a Type 2 "resale" certificate. When the Department sends a 60-day letter, you must have the correct type in hand within 60 days, or the deduction is disallowed by statute. Confirm the type on every certificate you accept, and keep your originals safe.

"The rules are confusing" is not a defense

Even where certificate types look nearly identical, you are responsible for understanding them. The explanations are on the back of the certificate and in the CRS filer's kit. If you are unsure, ask before you rely on a certificate.

Another taxpayer's break does not bind the Department

If the Department mistakenly gave someone else a deduction they were not entitled to, that does not entitle you to the same treatment. Each case is judged on the correct application of the law.

Deducting everything can extend the audit window to six years

The normal three-year assessment period stretches to six years when you understate your liability by more than 25% (Section 7-1-18(D)). Claiming a deduction for all of your receipts and getting it disallowed can put you in that six-year window, so old years can still be assessed.

Common questions

Q: Why was the Home Furniture deduction allowed but the Showcase one denied?
A: Home Furniture provided a proper Type 5 "service for resale" certificate within the 60 days. Showcase had given only a Type 2 "resale" certificate — the wrong type — and could not supply a Type 5 before the deadline, so that deduction was disallowed.

Q: He had a certificate from Showcase — why didn't it count?
A: It was a Type 2 resale certificate, which does not cover a service-for-resale transaction. Section 7-9-43 requires the appropriate type of certificate within 60 days, and the correct Type 5 came too late.

Q: Isn't taxing both the installer and the retailer double taxation?
A: No. There is no constitutional prohibition on double taxation, and there is no double taxation when the tax is imposed on different taxpayers. The resale deduction exists to prevent the stacking, but only if its NTTC requirement is met.

Q: The tax was from 1996 and the assessment came in 2000 — wasn't that too late?
A: No. Because Dole understated his liability by more than 25%, the six-year assessment period in Section 7-1-18(D) applied, and the June 2000 assessment was within it.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-9-48 — deduction for selling a service for resale when the buyer delivers an NTTC and resells the service subject to tax
• NMSA 1978, § 7-9-43 — NTTC of the appropriate type must be in the seller's possession within 60 days of the Department's notice, or the deduction is disallowed
• NMSA 1978, § 7-9-3(F) — definition of gross receipts
• NMSA 1978, § 7-1-24(D) — Department or hearing officer to set a hearing promptly
• NMSA 1978, § 7-1-18(A) — normal three-year assessment period
• NMSA 1978, § 7-1-18(D) — six-year assessment period when a return understates liability by more than 25%

Cases cited:

• 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)
• Ft. Smith Lumber Co. v. Arkansas, 251 U.S. 532, 40 S. Ct. 304 (1920)
• New Mexico State Board of Public Accountancy v. Grant, 61 N.M. 287, 299 P.2d 464 (1956)
• Amarillo-Pecos Valley Truck Line, Inc. v. Gallegos, 44 N.M. 120, 99 P.2d 447 (1940)
• State ex rel. Attorney General v. Tittmann, 42 N.M. 76, 75 P.2d 701 (1938)
• House of Carpets, Inc. v. Bureau of Revenue, 87 N.M. 747, 507 P.2d 1078 (Ct. App. 1973)
• New Mexico Sheriffs & Police Association v. Bureau of Revenue, 85 N.M. 565, 514 P.2d 616 (Ct. App. 1973)
• Rancher's Tufco Limestone Project Joint Venture v. Revenue Division, 100 N.M. 632, 674 P.2d 522 (Ct. App. 1983)
• State ex rel. Department of Human Services v. Davis, 99 N.M. 138, 654 P.2d 1038 (1982)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Scott & Rebecca Dole D/B/A SW Flooring Installation
• Decision PDF: D&O 01-28

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
SCOTT & REBECCA DOLE, D/B/A
SOUTHWEST FLOORING INSTALLATIONS NO. 01-28
ID. NO. 02-269529-00-0, PROTEST TO
ASSESSMENT NO. 253647

DECISION AND ORDER

This matter came on for formal hearing on September 28, 2001 before Gerald B.

Richardson, Hearing Officer. Southwest Flooring Installations, hereinafter, “Taxpayer”, was

represented by Mr. Scott Dole. The Taxation and Revenue Department, hereinafter,

“Department”, was represented by Mónica M. Ontiveros, 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 is in the business of providing carpet installation services to companies

who sell carpet.

2. The Taxpayer commenced business in the last quarter of 1993. At first, the Taxpayer

provided carpet installation services to one carpet business, Showcase Carpets. In subsequent

years, the Taxpayer also provided carpet installation services to other carpet businesses.

3. When the Taxpayer started business, Mr. Dole went to the Department to find out

what he needed to operate a business in this state. He learned that he needed to obtain non-

taxable transaction certificates (“NTTCs”) from his customers to support a claim of deduction

for his receipts from selling carpet installation services.

1

4. Showcase Carpets provided the Taxpayer with a Type 2 NTTC. Home Furniture,

Inc., provided the Taxpayer with a Type 5 NTTC.

5. Mr. Dole did not understand that there were different types of NTTCs for different

types of deductible transactions and did not notice the difference in the types of NTTCs which

his customers had provided him.

6. On March 7, 2000, the Department notified the Taxpayer that it was conducting a

limited scope audit based upon a comparison of the $59,068 in gross receipts which had been

reported by Mr. and Mrs. Dole on Schedule C of their 1996 federal income tax return and the $0

receipts reported to the Department according to the Department records. The March 7th letter

(hereinafter, the “60-day letter”) also informed the Taxpayer that it must deliver to the

Department, within 60 days of the date of the letter, any NTTCs which it had to support any

deductions from gross receipts which it may have claimed.

7. As it turns out, the Taxpayer had reported the entire $59,068 in gross receipts to the

Department, and then claimed a deduction from gross receipts in the same amount. The

Department, however, did not discover this when it selected the Taxpayer for its limited scope

audit because the Department showed the Taxpayer’s business in its registration records as a

partnership rather than a proprietorship which would report its receipts on federal Schedule C.

8. The Department’s registration records for the Taxpayer were based on the Taxpayer’s

application for registration which was filled out by Mrs. Dole. In filling out the registration form

she checked the boxes for both a proprietorship and partnership/joint venture, and she signed the

registration form, giving her title as “partner”.

2

9. Upon receipt of the 60-day letter, Mr. Dole immediately contacted his customers,

Showcase Carpets and Home Furniture, Inc., to secure copies of the NTTCs they had previously

issued. Mr. Scott was unable to locate his originals because of several moves he had made.

10. Home Furniture, Inc., issued a new Type 5 NTTC to the Taxpayer which the

Taxpayer provided to the Department within the time allowed by the Department’s 60-day letter.

Based upon the Taxpayer’s possession of a proper and timely Type 5 NTTC from Home

Furniture, Inc., the Department allowed the Taxpayer’s claim for deduction for the $14,067.07 in

gross receipts it received from Home Furniture, Inc.

11. Showcase Carpets provided a Type 2 NTTC to the Taxpayer which the Taxpayer

provided to the Department within the time allowed by the Department’s 60-day letter.

12. On the last day for presenting NTTC’s under the Department’s 60-day letter, a

Department representative contacted Mr. Dole to inform him that the Department would not

accept the NTTC issued by Showcase Carpets because a Type 2 NTTC did not apply to the

Taxpayer’s transactions with Showcase Carpets.

13. Mr. Dole was unable to secure a Type 5 NTTC from Showcase Carpets until June 26,

2000, which was after the time allowed by the Department’s 60-dayletter. Showcase Carpets

was not able to provide a Type 5 NTTC to Mr. Dole because they did not have any Type 5

NTTCs and did not secure any until after the 60-day letter had expired.

14. Showcase Carpets charged gross receipts tax to its customers on the carpet

installation services the Taxpayer provided to Showcase Carpets for its customers.

15. In another matter involving another carpet installer, the Department accepted proof

from Showcase Carpets that it charged gross receipts tax on the carpet installation charges of the

other carpet installer as a basis for either abating or not assessing gross receipts tax on the gross

3
receipts of the other carpet installer even though the carpet installer was unable to produce a

timely Type 5 NTTC from Showcase Carpets.

16. On June 9, 2000, the Department issued Assessment No. 2539647 to the Taxpayer,

assessing $2,622.18 in gross receipts tax, $262.22 in penalty and $1,442.20 in interest based

upon the Department’s disallowance of the Taxpayer’s claim for deduction for $42,378.82 of

gross receipts from Showcase Carpets received during the 1996 tax year.

17. On June 28, 2000, the Taxpayer filed a protest to Assessment No. 2539647.

DISCUSSION

The Taxpayer challenges its liability for gross receipts tax, penalty and interest based

upon the Department’s denial of its claim of deduction for the Taxpayer’s receipts from

Showcase Carpets. First, the Taxpayer argues that the different types of Department NTTCs are

practically indistinguishable and that it is confusing and difficult for taxpayers to understand the

different types and the consequences of accepting the wrong type of NTTC.

Mr. Dole acknowledged that from the outset of starting his business, he understood that

he could claim a deduction for his gross receipts because he was performing services only for

carpet businesses who charged their customers gross receipts tax on his installation services

when his services were resold to the carpet purchasers. Additionally, Mr. Dole acknowledged

that he understood that he needed to have a NTTC from his customers (the carpet businesses) to

support his claim for deduction and he obtained NTTCs from his customers. The problem arose

because he did not keep track of his copies of the NTTCs through several moves and he did not

understand that there were different types of NTTCs for different types of nontaxable

transactions. When the Department notified him of the limited scope audit and provided him 60

4
days to produce the NTTCs to support his claimed deductions, he was not able to get a NTTC of

the proper type from his largest customer in a timely manner.

Section 7-9-48 NMSA 1978 is the statute which authorizes the deduction from gross

receipts tax for services which are resold. The statute requires that the seller of the services

receive a NTTC from the purchaser, the purchaser is required to resell the services and those

services be subject to the gross receipts tax upon their resale. Section 7-9-43 NMSA 1978

provides in pertinent part that:

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. (emphasis added.)

It was under this provision that the Department disallowed the Taxpayer’s deductions which had

been claimed for the Taxpayer’s receipts from Showcase Carpets. This statute requires that the

department disallow deductions where a taxpayer is unable to produce the proper NTTC within

sixty days. I agree that the different types of certificates are all printed on the same NTTC form

with only a slight difference indicated where the type of certificate and a cryptic description of

the type of transaction to which the certificate applies is noted on the certificate.1 Nonetheless

the back of the certificates contain a listing of the various types of certificates the Department

issues and a fuller explanation of the transactions to which they apply. Additionally, the CRS-1

Filer’s kits, which are mailed to all taxpayers who are registered with the Department for gross

1
The Type 2 NTTC the Taxpayer originally obtained from Showcase Carpets has only the notation “02 RESALE”
printed on it. The Type 5 NTTC the Taxpayer obtained from Home Furniture, Inc. has the notation “05 SERVICE
FOR RESALE” on it. Otherwise, the certificate forms are identical.

5
receipts tax purposes, explain to taxpayers how to report and claim deductions from tax, the

requirements for NTTCs, the various types of deductions available and the type of

documentation (NTTCs) required to substantiate the claim of deduction. Admittedly, it is a

somewhat complicated system, but it is the system which the legislature has provided and which

the Department is required to administer and enforce. It is well settled that taxpayers are

required to ascertain and understand the tax consequences of their 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). Thus, it is not a defense to an assessment of tax that the system is

too complicated and confusing. These arguments must be taken up with the legislature.

The Taxpayer also raised an argument that another local carpet installer had been audited

by the Department in an earlier year and that the Department allowed his claims of deduction for

his receipts from Showcase Carpets based on a Type 2 NTTC and proof from Showcase Carpets

that they charged their customers gross receipts tax on the carpet installation services.2 In this

case, the Taxpayer provided similar proof to the Department that Showcase Carpets charged its

customers gross receipts tax on the Taxpayer’s installation services. While it would have been

improper for the Department to allow the deduction claimed by the other carpet installer, the

errors or mistakes the Department makes with regard to the administration of the tax statutes

with respect to other taxpayers does not provide a defense to the proper administration of the tax

statutes with regard to the instant matter.

The Taxpayer also argues that to impose gross receipts tax on its receipts from

installing carpet amounts to prohibited double taxation, since Showcase Carpets also charged its

customers gross receipts tax upon the same installation services. It is a popular misconception that

2
Although Mr. Dole did not provide more specifics about this incident, the Department also did not question that
this occurred, so it will be assumed to be true.

6
there is something inherently illegal or unconstitutional with double taxation. Eighty years ago, in Ft.

Smith Lumber Co. v. Arkansas, 251 U.S. 532 (1920), the United States Supreme Court summarily

disposed of the plaintiff's argument that Arkansas had imposed a double tax on corporate stock in

violation of the federal constitution. As stated by Justice Oliver Wendell Holmes, writing for the

majority:

The objection to the taxation as double may be laid on one side. That is
a matter of State law alone. The Fourteenth Amendment no more
forbids double taxation than it does doubling the amount of a tax..."

251 U.S. at 533. New Mexico courts have also held, on numerous occasions, that there is no

constitutional prohibition against double taxation. New Mexico State Board of Public Accountancy v.

Grant, 61 N.M. 287, 299 P.2d 464 (1956); Amarillo-Pecos Valley Truck Line, Inc. v. Gallegos, 44

N.M. 120, 99 P.2d 447 (1940); State ex rel. Attorney General v. Tittmann, 42 N.M. 76, 75 P.2d 701

(1938).

It should also be noted that in construing the New Mexico Gross Receipts and Compensating

Tax Act, the New Mexico courts have held that there is no double taxation where the two taxes

complained of are imposed on the receipts of different taxpayers. See, e.g., House of Carpets, Inc. v.

Bureau of Revenue, 87 N.M. 747, 507 P.2d 1078 (Ct. App. 1973); New Mexico Sheriffs & Police

Association v. Bureau of Revenue, 85 N.M. 565, 514 P.2d 616 (Ct. App. 1973). That is the case here.

Gross receipts tax is imposed upon both the Taxpayer’s receipts from selling carpet installation services

and those of Showcase Carpets. The legislature did provide a means for avoiding this stacking of taxes,

by providing the deduction for resale of services, but as explained above, the Taxpayer failed to comply

with the requirements of a proper and timely NTTC to support its claim of deduction.

The Taxpayer tries to distinguish the cases cited above by arguing that even if there are separate

transactions being taxed, in effect, the same money or charges for carpet installation are being taxed

twice. The gross receipts tax is not imposed solely on money or charges. It is imposed upon

transactions which generate gross receipts. “Gross receipts” is defined to mean:

7
…the total amount of money or the value of other consideration
received from selling property in New Mexico, from leasing property
employed in New Mexico, from selling services performed outside New
Mexico the product of which is initially used in New Mexico or from
performing services in New Mexico.

Section 7-9-3 (F) NMSA 1978. Thus, it is the type of transaction generating the gross receipts which

determines whether a transaction is or is not subject to gross receipts tax.

Next, the Taxpayer argues that the assessment should be abated because although he filed his

protest to the assessment on June 28, 2000, it was more than a year before his protest was heard. While

§ 7-1-24 (D) provides that, “upon timely receipt of a protest, the department or hearing officer shall

promptly set a date for hearing and on that date hear the protest or claim”, I need not determine whether

a 14 month delay amounts to a “prompt” hearing. In Ranchers-Tufco Limestone Project Joint

Venture v. Revenue Division, New Mexico Taxation and Revenue Department, 100 N.M. 632,

674 P.2d 522, cert. denied 100 N.M. 505, 672 P.2d 1136 (1983), the court rejected the taxpayer’s

argument that the Department’s failure to set a formal hearing “promptly” as required by § 7-1-

24(D) NMSA 1978 should result in the abatement of the taxes assessed. Instead, the court

reasoned that:

[T]he general rule is that tardiness of public officers in the
performance of statutory duties is not a defense to an action by the
state to enforce a public right or to protect public interests. State,
ex rel. Dept. of Human Services v. Davis, 99 N.M. 138, 654 P.2d
1038 (1982). The general rule is applicable in these cases unless
Section 7-1-24 makes it inapplicable. Section 7-1-24 does not
make the general rule inapplicable.

100 N.M. at 635, 674 P.2d at 525. Thus, even if it were determined that the Taxpayer was not

given a prompt hearing, it is not a defense to an assessment of tax.

Finally, the Taxpayer questions the Department’s authority to issue an assessment for

taxes for tax periods occurring in 1996 when the assessment was not issued until June of 2000.

Section 7-1-18 NMSA 1978 provides for the limitation periods with respect to the assessment of

8
tax. Although the normal assessment period is three years from the end of the calendar year in

which payment of the tax was due, § 7-1-18(A), other sections of the statute provide longer

periods, depending upon the circumstances. Pertinent to this matter is Subsection D, which

provides:

If a taxpayer in a return understates by more than twenty-five
percent the amount of his liability for any tax for the period to
which the return relates, appropriate assessments may be made by
the department at any time within six years from the end of the
calendar year in which payment of the tax was due.

Section 7-1-18(D) NMSA 1978. In this case, the Taxpayer filed returns claiming a deduction for

all of his receipts based upon his claim of deduction under § 7-9-48 NMSA 1978. That statute

requires that a taxpayer have a proper NTTC to support a claim of deduction. In this case, the

Taxpayer had a proper NTTC from Home Furniture, Inc. to cover the $14,067.07 in receipts it

received from Home Furniture during 1996, but it failed to have a proper NTTC to cover the

$42,378.82 in receipts from Showcase Carpets. Because the Taxpayer’s receipts from Showcase

represented substantially more than 25% of its tax liability and the Taxpayer was not entitled to

claim the deduction for those receipts under the circumstances of this case, the Taxpayer falls

under the six year statute of limitations provided by § 7-1-18(D).

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment No. 2539647 and

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

2. The Taxpayer was not entitled to claim the deduction provided at § 7-9-48 NMSA

1978 for its receipts from Showcase Carpets for failure to possess a Type 5 NTTC within 60

days of March 7, 2000.

9

3. The delay in scheduling and hearing the Taxpayer’s protest hearing is not a defense to

Assessment No. 2539647.

4. The fact that Showcase Carpets was also subject to gross receipts tax on the resale of

the Taxpayer’s carpet installation services is not a defense to the imposition of gross receipts tax

upon the Taxpayer for those same installation services.

5. Assessment No. 2539647 was issued within the statute of limitations pursuant to § 7-

1-18(D) NMSA 1978.

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

DONE, this 29th day of October, 2001.

10