If an auto body shop didn't get the required certificates from dealer customers and never charged them tax, does it still owe gross receipts tax — and does its accountant's bad advice at least waive the penalty?

Plain-English summary

Justino Martinez ran JM Body Shop, a paint-and-body shop in Roswell, from 1997 to 1999. His accountant told him he could deduct receipts from work he did for auto dealerships (New Mexico treats a dealer refurbishing used cars for resale like a manufacturer), so he never charged those customers gross receipts tax. But the accountant never explained that the deduction only works if the customer gives you a nontaxable transaction certificate (NTTC) — and Martinez usually didn't get one. On audit, the Department disallowed the undocumented deductions and, after a "60-day letter," Martinez tried to collect NTTCs from customers. They came in too late (and under the new owner's tax ID after he sold the shop). The Department assessed about $8,975: roughly $5,813 tax, $2,581 interest, and $581 penalty.

The Hearing Officer split the decision — granting the penalty relief but denying the rest.

Tax and interest: owed. The deduction under Section 7-9-75 requires the buyer to deliver an NTTC, and under Section 7-9-43 the seller must have it within 60 days of the Department's notice. That deadline is mandatory; late certificates don't count, so the deductions were disallowed. Martinez's fairness argument — that he shouldn't owe tax he never collected — misunderstands the tax: New Mexico's gross receipts tax is imposed on the seller, not collected from the buyer like a sales tax. Passing it on to customers is common but optional; not charging it doesn't erase your liability.

Penalty: abated. The 10% negligence penalty is excused when a taxpayer reasonably relied on a competent advisor's advice about the specific liability after full disclosure (Regulation 3.1.11.11(D)). Martinez had engaged the accountant to handle his gross receipts tax returns and followed the accountant's specific (if incomplete) advice about deducting the dealer work. The Department conceded this was reasonable reliance, so the penalty came off — while the tax and interest remained.

What this means for you

Service businesses that deduct "sale-for-resale" or manufacturer work

A deduction like Section 7-9-75 (services on a product a buyer is manufacturing/refurbishing for sale) is only valid if you hold the customer's NTTC. Collect the certificate at the time of the work, not after an audit. Once the Department sends a 60-day letter, you have 60 days — certificates that arrive later, or under the wrong tax ID, won't be accepted.

Understand that gross receipts tax is your liability, not the customer's

Unlike a sales tax, New Mexico's gross receipts tax is on the seller. If you choose not to bill the customer for it and later find the receipts were taxable, you still owe it out of your own pocket. Build the tax into your pricing unless you're certain a documented deduction applies.

When accountant reliance actually waives the penalty

This case is the flip side of decisions where reliance failed. It worked here because the accountant gave specific advice about this exact deduction and the shop followed it after disclosing the facts — and the Department agreed. General "my accountant does my taxes" delegation, without specific advice on the issue, does not get the penalty abated. Either way, reliance never excuses the tax or interest.

Common questions

Q: I never charged my customers the tax — do I still owe it?
A: Yes. New Mexico's gross receipts tax is imposed on the seller, not collected from the buyer. Choosing not to pass it on doesn't remove your obligation to pay it.

Q: I got the NTTCs eventually — why weren't they accepted?
A: They arrived after the mandatory 60-day deadline in Section 7-9-43 (and under the new owner's tax ID). Late certificates can't support the deduction, so the receipts stayed taxable.

Q: My accountant told me it was deductible — does that at least waive the penalty?
A: It can. If you reasonably relied on a competent advisor's specific advice about that liability after full disclosure, the negligence penalty may be abated — as it was here. But you still owe the tax and interest.

Q: Does this decision apply to my situation?
A: Not automatically. A Decision and Order resolves one taxpayer's protest on its own facts and the law in effect at the time. It illustrates NTTC deadlines and accountant reliance, but your facts may differ.

Citations and references

Statutes and regulations:

• Section 7-9-75 NMSA 1978 — deduction for services on a product the buyer is manufacturing (NTTC required)
• Section 7-9-43(A) NMSA 1978 — NTTC possession requirement and mandatory 60-day rule
• Section 7-1-69(A) NMSA 1978 — 10% negligence penalty; Regulation 3.1.11.11(D) NMAC (reasonable reliance on a competent advisor)
• Section 7-1-17(C) NMSA 1978 — assessment presumed correct

Cases cited:

• Wing Pawn Shop v. Taxation and Revenue Dep't, 111 N.M. 735 (deductions strictly construed against the taxpayer)
• Proficient Food Co. v. Taxation & Revenue Dep't, 107 N.M. 392 (failure to follow the prescribed method waives the deduction)
• Archuleta v. O'Cheskey, 84 N.M. 428 (presumption of correctness)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: JM Body Shop
• Decision PDF: D&O 02-13

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
JM BODY SHOP No. 02-13
ID NO. 02-249518-00-5
ASSESSMENT NO. 2654206

DECISION AND ORDER

A formal hearing on the above-referenced protest was held May 6, 2002, before Margaret B.

Alcock, Hearing Officer. JM Body Shop was represented by Justino Martinez (“Taxpayer”), its

owner. The Taxation and Revenue Department ("Department") was represented by Bridget A. Jacober,

Special Assistant Attorney General. Based on the evidence and arguments presented, IT IS

DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. From March 1997 through September 1999, the Taxpayer operated a paint and body

shop in Roswell, New Mexico.

2. When the Taxpayer began business, he consulted with an accountant concerning his

tax responsibilities and engaged the accountant to file quarterly gross receipts tax returns for the

business.

3. The accountant told the Taxpayer he could deduct his receipts from performing work

for auto dealerships and other legitimate businesses engaged in selling used cars on which the

Taxpayer performed paint and body work.

4. The accountant did not explain the use of nontaxable transaction certificates

(“NTTCs”) or advise the Taxpayer that no deduction could be taken unless the customer provided

the Taxpayer with an appropriate NTTC.

5. Based on the accountant’s advice, the Taxpayer did not charge gross receipts tax to

the auto dealerships for which he performed work, even when the dealership failed to provide the

Taxpayer with an NTTC. The Taxpayer listed his receipts from these transactions as deductible on

the records he provided to his accountant, which the accountant then used to prepare the Taxpayer’s

quarterly gross receipts tax returns.

6. In October 1999, the Taxpayer sold his business.

7. In 2000, the Department audited the Taxpayer for the period March 1997 through

September 1999.

8. The Department disallowed the Taxpayer’s deduction of receipts from transactions

where the Taxpayer did not have a valid NTTC from its customer. This included a number of

transactions where the identify of the customer was unknown and it was impossible for the

Department to determine whether the Taxpayer had a valid NTTC applicable to the transaction.

9. On October 13, 2000, the auditor gave the Taxpayer what is known as a “60-day

letter.” The letter advised the Taxpayer that, pursuant to Section 7-9-43 NMSA 1978, the Taxpayer

must be in possession of all required NTTCs within 60 days or deductions claimed relating to the

NTTCs would be disallowed. The sixty-day period expired on December 12, 2000.

10. After receiving the 60-day letter, the Taxpayer contacted his customers to try and

obtain the NTTCs needed to support the Taxpayer’s deductions.

11. Although the Taxpayer obtained NTTCs from B&R Motors, Inc. and Carb’s-N-

Tunes, the Department refused to accept the NTTCs because the Taxpayer did not receive them until

after the expiration of the 60-day period provided in Section 7-9-43 NMSA 1978. In addition, the

NTTCs were issued under the tax identification number of the new owners of JM Body Shop, rather

2
than under the tax identification number used by the Taxpayer during the period he owned the

business.

12. On April 28, 2001, the Department issued Assessment No. 2654206 to the Taxpayer

in the amount of $8,975.47, representing $5,812.85 of gross receipts tax, $2,581.33 of interest and

$581.29 of penalty for reporting periods March 1997 through September 1999.

13. On May 21, 2001, the Taxpayer filed a written protest to the assessment.

DISCUSSION

The Taxpayer does not dispute the correctness of the Department’s audit findings or the fact

that he was unable to demonstrate timely possession of NTTCs needed to support certain deductions

taken during the audit period. Nonetheless, the Taxpayer believes it is unfair to assess him for gross

receipts taxes he never collected from his customers, particularly when this failure resulted from his

lack of knowledge and his accountant’s failure to properly advise him concerning the use of NTTCs.

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). 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). Where a party claiming a right to a tax deduction fails to follow the method

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

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).

3
The Gross Receipts and Compensating Tax Act provides several deductions from gross receipts

for taxpayers who meet the statutory requirements set by the legislature. In this case, the Taxpayer

claimed the deduction provided in Section 7-9-75 NMSA 1978, which states:

Receipts from selling the service of combining or processing components
or materials may be deducted from gross receipts if the sale is made to a person
engaged in the business of manufacturing who delivers a nontaxable
transaction certificate to the seller. The buyer delivering the nontaxable
transaction certificate must have the service performed directly upon tangible
personal property which he is in the business of manufacturing or upon
ingredients or component parts thereof. (emphasis added)

Because an automobile dealer generally repairs, repaints and sometimes reupholsters used cars to

increase their value for sale in the ordinary course of the dealer’s business, the Department treats the

dealer as a manufacturer of the refurbished vehicles. Pursuant to Section 7-9-75 NMSA 1978, the

Taxpayer was entitled to deduct his receipts from performing services directly on used vehicles that a

dealer was preparing for sale only if the dealer delivered a Type 1 or 13 NTTC to the Taxpayer. As

quoted above, the requirements of the statute are very specific. The buyer of services performed on a

manufactured product must deliver an NTTC to the seller before the seller is entitled to claim a

deduction from gross receipts.

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

Section 7-9-43(A) NMSA 1978. At the time of the audit, this section provided, in pertinent part:

A. 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....

4
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). In this case, the

60-day period expired on December 12, 2000. Although the Taxpayer subsequently obtained

NTTCs from two of his customers, these NTTCs were not in the Taxpayer’s possession until after

December 12, 2000. To the extent the Taxpayer did not have timely NTTCs from his customers, he is

foreclosed from claiming a deduction under Section 7-9-75 NMSA 1978.

The Taxpayer does not dispute his failure to obtain timely NTTCs, but argues that he should

not be required to pay gross receipts tax that he never collected from his customers and that it is now

impossible for him to recover. The problem with this argument is that, unlike other states, New

Mexico does not have a sales tax that is charged to and collected from the buyer. New Mexico has a

gross receipts tax that is imposed directly on the seller of goods and services. In effect, the gross

receipts tax is part of the seller’s cost of doing business. Although it is common practice for a seller

to pass the gross receipts tax on to the buyer, the seller’s ability to separately charge or obtain

reimbursement of the tax does not affect his legal obligation to report and pay gross receipts tax to

the state. Here, the Taxpayer was legally liable for payment of gross receipts tax on his receipts from

performing services for his customers. The fact that he did not charge or collect the tax from his

customers does not relieve him of this liability.

The final issue concerns the imposition of penalty. Section 7-1-69(A) NMSA 1978 imposes a

penalty of two percent per month, up to a maximum of ten percent, when a taxpayer fails “due to

negligence or disregard of rules and regulations” to pay taxes in a timely manner. Regulation

3.1.11.11(D) NMAC, provides that a taxpayer will not be considered negligent where:

5
D. the taxpayer proves that the failure to pay tax or to file a return
was caused by reasonable reliance on the advice of competent tax counsel or
accountant as to the taxpayer’s liability after full disclosure of all relevant
facts....

In this case, the Taxpayer consulted with an accountant concerning his tax responsibilities and

engaged the accountant to file quarterly gross receipts tax returns for the business. The accountant

told the Taxpayer he could deduct his receipts from performing work for auto dealerships and other

legitimate businesses engaged in selling used cars on which the Taxpayer performed paint and body

work. The accountant did not explain the use of NTTCs or advise the Taxpayer that no deduction

could be taken unless the customer provided the Taxpayer with an appropriate NTTC. Based on the

accountant’s advice, the Taxpayer did not charge gross receipts tax to the auto dealerships for which

he performed work, even when the dealerships failed to provide the Taxpayer with an NTTC.

At the hearing, the Department conceded that the Taxpayer’s failure to properly report gross

receipts tax was attributable to his reasonable reliance on the advice of his accountant. Although this

reliance does not excuse the Taxpayer from payment of the tax principal or interest due to the state, it

does establish that the Taxpayer is not liable for the negligence penalty imposed pursuant to Section 7-

1-69 NMSA 1978.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment No. 2654206, and

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

2. The Taxpayer is liable for gross receipts tax and interest on the disallowed deductions

set out in the Department’s audit.

3. The Taxpayer reasonably relied on the advice of his accountant and was not negligent

in failing to report gross receipts tax during the period at issue.

6
For the foregoing reasons, the Taxpayer's protest IS GRANTED IN PART AND DENIED IN

PART. The Department is ordered to abate the $581.29 of penalty assessed against the Taxpayer. The

Taxpayer remains liable for payment of tax principal and interest.

DATED May 8, 2002.

7