Could Driscoll Woodworking deduct $8,175.38 of services sold through a general contractor when the buyer never delivered an NTTC within the Department's 60-day audit deadline?

Plain-English summary

Driscoll Woodworking could not deduct $8,175.38 of woodworking services sold through a general contractor because it never obtained the required nontaxable transaction certificate within the statutory 60-day period. The buyer's failure to cooperate and later bankruptcy were unfortunate but did not permit the hearing officer to disregard the deadline.

Jonathan Driscoll moved from employee work to independent contracting in 1999. He earned $8,175.38 from United West Group-Cohen, an Arizona general contractor on a Santa Fe construction project, and $9,711.62 from other customers.

He did not know independent-contractor service receipts were subject to New Mexico gross receipts tax and did not ask any customer for an NTTC. An IRS information match later led to a limited-scope audit.

The resale deduction required an NTTC

Section 7-9-48 allowed a deduction for selling a service for resale only when the buyer delivered an NTTC to the seller.

Even if United West resold Driscoll's services to the final customer, resale alone did not establish the deduction. The certificate was an express statutory requirement.

The audit notice created a final 60-day opportunity

The Department's January 23, 2002 notice told Driscoll that Section 7-9-43 required possession of supporting NTTCs within 60 days. The deadline was March 24, 2002.

Driscoll located United West in Arizona and repeatedly spoke with a secretary named Susan, who promised to arrange the certificate but did not send it. On the last day, a Department employee called Susan, explained how to download the form, and asked her to fax it directly before the deadline.

Driscoll left believing the issue had been resolved, but United West never transmitted the NTTC.

Circumstances outside the seller's control did not extend the deadline

The decision recognized that United West failed to provide the certificate and later went out of business and declared bankruptcy. Section 7-9-43 nevertheless used mandatory language: deductions requiring certificates "shall be disallowed" when the seller lacked them after 60 days.

New Mexico's self-reporting system placed responsibility for substantiating the deduction on Driscoll as the seller. He could not shift that responsibility to the buyer, even when the buyer's conduct caused the failure.

The assessment presumption remained unrebutted

Section 7-1-17(C) presumed the Department's assessment correct. Tax deductions were also construed strictly, and Driscoll had to clearly establish every statutory requirement.

Without the NTTC, he could not meet that burden.

Result: protest DENIED. The service-resale deduction for United West receipts was disallowed. The full-year assessments stated $982.56 of gross receipts tax, $98.26 of penalty, and $392.65 of interest.

What this means for you

Subcontractors selling services for resale

Request the correct NTTC before performing or invoicing the work. Do not rely on a later promise from the general contractor.

Sellers receiving an audit notice

Treat the 60-day period as a hard deadline. Escalate certificate requests immediately and document every contact.

Businesses dealing with a closing or bankrupt customer

Customer insolvency may make late collection impossible but does not itself excuse the certificate requirement.

New independent contractors

Moving from employee status to self-employment changes tax responsibilities. Determine gross receipts tax registration, reporting, and documentation requirements at the start.

Common questions

Q: How much did Driscoll receive from United West?
A: $8,175.38 in 1999.

Q: Were the services apparently resold?
A: Driscoll asserted that United West resold them, but resale did not eliminate the NTTC requirement.

Q: Did the Department help request the certificate?
A: Yes. An employee called United West on the final day and explained how to send it.

Q: Why was the deduction still denied?
A: The NTTC was never delivered within the mandatory 60-day period.

Q: Who bore responsibility for the documentation?
A: Driscoll, as the seller claiming the deduction.

Citations and references

Statutes:

• NMSA 1978, § 7-1-17(C) — presumption that a Department assessment is correct
• NMSA 1978, § 7-9-48 — deduction for services sold for resale when the buyer delivers an NTTC
• NMSA 1978, § 7-9-43 — possession of required NTTCs within 60 days after Department notice

Cases cited:

• Archuleta v. O'Cheskey, 84 N.M. 428, 504 P.2d 638 (Ct. App. 1972)
• Wing Pawn Shop v. Taxation and Revenue Department, 111 N.M. 735, 809 P.2d 649 (Ct. App. 1991)
• Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Driscoll Woodworking
• Decision PDF: D&O 03-11

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
DRISCOLL WOODWORKING No. 03-11
ID NO. 02-488187-00 2
ASSESSMENT NOS. 3875791 & 3875792

DECISION AND ORDER

A formal hearing on the above-referenced protest was held June 12, 2003, before Margaret

B. Alcock, Hearing Officer. The Taxation and Revenue Department ("Department") was represented

by Bruce J. Fort, Special Assistant Attorney General. Driscoll Woodworking was represented by

Jonathan Driscoll, its owner (“Taxpayer”). Based on the evidence and arguments presented, IT IS

DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer is a woodworker who worked as an employee for a cabinet making

company until 1999.

2. In 1999, work had slowed at the Taxpayer’s employer and he was offered work as an

independent contractor by United West Group-Cohen, Inc. (“United West”), an Arizona company

that was the general contractor on a construction project in the Las Campanas development in Santa

Fe, New Mexico.

3. During 1999, the Taxpayer earned $8,175.38 for his work for United West and

$9,711.62 for his work for other customers.

4. The Taxpayer did not know that his receipts from performing services as an

independent contractor were subject to New Mexico gross receipts tax and did not report or pay

gross receipts tax on this income.

5. The Taxpayer was not given and did not ask for a nontaxable transaction certificate

(“NTTC”) from United West or any of the other customers for whom he performed work in 1999.

6. As part of an information-sharing program with the Internal Revenue Service, the

Department was notified of the business income reported on Schedule C to the Taxpayer’s 1999

federal income tax return. When the Department investigated, it found the Taxpayer was not

registered with the Department and had not reported or paid gross receipts tax on this income.

7. On January 23, 2002, the Department sent the Taxpayer a notice that it was

conducting a limited scope audit of his 1999 tax reporting and asked him to explain why he had not

paid gross receipts tax on the business income reported on Schedule C to his 1999 federal income tax

return.

8. The Department’s January 23, 2002 notice advised the Taxpayer that, pursuant to

Section 7-9-43 NMSA 1978, he must be in possession of all nontaxable transaction certificates

(“NTTCs”) required to support his deductions within 60 days from the date of the letter. The 60-day

period expired on March 24, 2002.

9. After receiving the Department’s notice, the Taxpayer tried to call United West, but

found that it was no longer doing business in New Mexico.

10. The Taxpayer located a telephone number for United West in Arizona and talked

with a secretary named Susan about his need for a New Mexico NTTC to support the deduction of

his receipts from United West.

11. Although Susan said she would take care of getting the NTTC, the Taxpayer never

heard back from her. He called Susan two more times, each time without success.

12. On the last day of the 60-day period, the Taxpayer met with a Department employee

named Kay and explained that he had been unable to obtain an NTTC from United West.

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13. Kay called United West and talked to Susan. Kay explained how to download an

NTTC from the computer and told Susan to complete the form and fax it directly to Kay at the

Taxation and Revenue Department before the end of the day.

14. The Taxpayer left the Department assuming that the NTTC problem was resolved.

15. Susan never sent the NTTC from United West to the Department, and on June 28,

2002, the Department assessed the Taxpayer for $982.56 gross receipts tax, $98.26 penalty, and

$392.65 interest for reporting periods January through December 1999.

16. On July 13, 2002, the Taxpayer filed a written protest to the tax, penalty and interest

assessed on his $8,175.38 of receipts from United West.

17. The Taxpayer was subsequently told by a former employee of United West that the

company was no longer in business and had declared bankruptcy.

DISCUSSION

The issue presented is whether the Taxpayer's failure to have an NTTC from United West in

his possession within the 60-day period provided in the Department's audit notice forecloses him

from deducting his receipts from performing services for United West during 1999. While

acknowledging that the Department’s assessment is legally correct, the Taxpayer asks the hearing

officer to consider the following facts in his favor: (1) United West resold his services to the final

consumer, which should allow the Taxpayer to claim the deduction for selling services for resale;

and (2) the Taxpayer’s inability to produce an NTTC from United West was due to circumstances

outside his control.

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 an exemption or deduction

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from tax is claimed, the statute must be construed strictly in favor of the taxing authority, the right to

the exemption or 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).

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

for taxpayers who meet the statutory requirements set by the legislature. The Taxpayer is seeking to

qualify for the deduction provided in Section 7-9-48 NMSA 1978, which states:

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

Based on this language, the fact that the Taxpayer’s services were sold to United West for resale is not

sufficient to support a deduction under Section 7-9-48. The requirements of the statute are very

specific. The buyer of services must deliver an NTTC to the seller before the seller is entitled to claim

a deduction from gross receipts. The requirements for obtaining NTTCs are set out in Section 7-9-43

NMSA 1978, which provides, in pertinent part:

All nontaxable transaction certificates...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.

While taxpayers “should” have possession of required NTTCs at the time of the transaction at issue, the

statute gives taxpayers audited by the Department a second chance to obtain these NTTCs. Taxpayers

who rely on this provision must recognize, however, that they run the risk of having their deductions

disallowed if they are unable to meet the 60-day deadline set by the legislature. The reason why a

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taxpayer cannot obtain an NTTC is irrelevant. 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 response, the Taxpayer points out that circumstances outside his control prevented him

from obtaining the NTTC required by Section 7-9-48. United West failed to provide the Taxpayer

with an NTTC at the time it purchased his services and then refused to respond to requests from both

the Taxpayer and the Department during the 60-day period allowed by the Department’s audit

notice. While this series of events is unfortunate, the Taxpayer's attempt to shift responsibility for

documenting his gross receipts tax deductions to the buyer of his services is inconsistent with New

Mexico's self-reporting tax system. Every person is charged with the reasonable duty to ascertain the

possible tax consequences of his or her 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). The

incidence of the gross receipts tax is on the seller, and it was the responsibility of the Taxpayer—not

United West—to determine whether he had the documentation needed to support his deductions. The

Taxpayer's failure to obtain an NTTC within the 60-day period provided in Section 7-9-43 NMSA 1978

leaves the Department no choice but to disallow his deductions.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment Nos. 3875791 and 3875792,

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

2. The Taxpayer is not entitled to a gross receipts tax deduction for receipts from selling

services to United West Group-Cohen, Inc. during 1999.

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

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DATED June 13, 2003.

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