Could ADC deduct receipts for security and clerical support without a timely NTTC, or defeat the assessment because the Department waited years to request a hearing?

Plain-English summary

ADC could not deduct receipts for security and clerical-support services because it lacked a timely, applicable nontaxable transaction certificate (NTTC). The Department's long delay in moving the protest to a hearing did not erase the assessments because ADC failed to show that the delay prejudiced its case.

ADC, formerly Cordova Support Services, supplied temporary security personnel and clerical support to PSST/Comforce for work connected with the WEC and WIPP project sites. The Department audited tax periods beginning in January 1999 through May 2002 and gave ADC written notice on August 14, 2002 that it had 60 days—until October 15—to obtain the certificates supporting its deductions.

ADC did not produce an NTTC for the PSST/Comforce receipts by that deadline. The Department also rejected Type 6 and Type 7 construction certificates that ADC had supplied for other claimed deductions. It assessed unpaid gross receipts tax, compensating tax, withholding tax, and interest on December 4, 2002.

The missing certificate could not be supplied late

Section 7-9-43(A) required disallowance when a seller did not possess a required NTTC within 60 days after the Department's notice. ADC believed PSST/Comforce was supposed to provide the certificate and pointed to contract language describing the WEC project as exempt from New Mexico gross receipts tax.

The decision held that those circumstances did not excuse the statutory deadline. Gross receipts tax fell on ADC as the seller of the services, and ADC bore responsibility for the documentation supporting its deductions. Whether PSST/Comforce had contractually promised a certificate did not change ADC's failure to possess it by October 15, 2002.

Security and clerical support were not construction services

Type 6 and Type 7 NTTCs applied to construction materials and construction services under Sections 7-9-51 and 7-9-52. Regulation 3.2.210.8 excluded indirect services from construction services and listed examples such as accounting, architecture, engineering, drafting, bid-depository, and plan-room services.

The hearing officer treated ADC's security and clerical personnel as comparable indirect support services. Their connection to a construction project did not turn them into construction services, so the certificates did not support those deductions.

The hearing delay caused no legally relevant prejudice

ADC protested in December 2002, and the Department acknowledged the protest in February 2003. The Department offered no explanation for waiting until June 2010 to request a hearing—about 7.5 years after the protest.

ADC argued that the delay violated procedural due process because its later controller, Paul Worley, had died, making it harder to locate certificates. The decision rejected that argument for two reasons:

• The decisive failure had already occurred when ADC missed the October 2002 certificate deadline. Producing a certificate at a later hearing would not have changed that result.
• Worley became controller only after the audit and assessment, so he did not have the specialized knowledge of the relevant period that the controller who received the 60-day notice would have had.

The decision also applied New Mexico precedent that tardiness by public officers does not defeat the state's enforcement of a public right. ADC received no written notice that the assessment had been abated and took no shown steps to pursue the unresolved protest during the dormant period.

Interest continued throughout the protest

Section 7-1-67 made interest mandatory from the tax's original due date until payment. The Department's 2003 acknowledgment warned ADC that interest would keep accruing and that it could pay the assessment to stop further accrual while the protest was pending. ADC did not do so.

Result: the protest was denied, and ADC was ordered to pay the assessments.

What this means for you

Sellers claiming NTTC-based deductions

Treat a Department certificate notice as a hard deadline. A buyer's promise to provide an NTTC does not shift the seller's responsibility to possess the required documentation on time.

Contractors providing support services

Working at or for a construction project does not by itself make a service a construction service. Security, clerical, and similar indirect support work may fall outside construction deductions even when the project itself is construction-related.

Taxpayers with dormant protests

An unexplained agency delay may be regrettable without invalidating an assessment. This decision required actual prejudice tied to the legal or evidentiary issues, and it found none because the missed certificate deadline predated the protest.

Common questions

Q: Why was the PSST/Comforce deduction denied?
A: ADC did not possess the required NTTC by October 15, 2002, the end of the statutory 60-day period following the Department's notice.

Q: Did PSST/Comforce's alleged promise to supply an NTTC excuse ADC?
A: No. The decision placed responsibility on ADC, as the seller subject to gross receipts tax, to obtain and retain the documentation supporting its deduction.

Q: Why did the Type 6 and Type 7 certificates fail?
A: ADC supplied security and clerical personnel. The decision classified those as indirect support services rather than construction services covered by the certificates.

Q: Was the Department's 7.5-year delay acceptable?
A: The decision called the delay unnecessary and regrettable, but it found no due-process remedy because ADC did not prove prejudice that could have changed the outcome.

Q: Did interest stop while the protest sat unresolved?
A: No. The cited statute made interest mandatory until payment, and ADC had been warned that it could pay the assessment to stop additional accrual while preserving the protest.

Citations and references

Statutes and regulation:

• NMSA 1978, § 7-1-17(C) (2007) — presumption that an assessment is correct
• NMSA 1978, § 7-9-43(A) (2001) — possession of required NTTCs within 60 days after notice
• NMSA 1978, §§ 7-9-51 and 7-9-52 — construction-material and construction-service deductions
• Regulation 3.2.210.8 NMAC — indirect services excluded from construction services
• NMSA 1978, § 7-1-67 (2001) — mandatory interest on unpaid tax

Cases cited:

• Archuleta v. O'Cheskey, 84 N.M. 428 (Ct. App. 1972)
• Wing Pawn Shop v. Taxation & Revenue Department, 111 N.M. 735 (Ct. App. 1991)
• Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16 (Ct. App. 1976)
• Kmart Properties, Inc. v. Taxation & Revenue Department, 139 N.M. 177 (Ct. App. 2006)
• Matter of Ranchers-Tufco Limestone Project, 100 N.M. 632 (Ct. App. 1983)
• State v. Lujan, 90 N.M. 103 (1977)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: ADC Ltd. NM Inc.
• Decision PDF: D&O 11-25

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
ADC LTD NM INC.
f/k/a CORDOVA SUPPORT SERVICES, INC. No. 11-25
TO ASSESSMENT ISSUED UNDER LETTER
ID NOs. L3988749 through L3988786

DECISION AND ORDER

A formal hearing on the above-referenced protest was held September 27, 2011, before

Brian VanDenzen, Tax Hearing Officer. The Taxation and Revenue Department ("Department")

was represented by Peter Breen, Staff Attorney for the Department. Ms. Silvia Sena also appeared

as a witness on behalf of the Department. Attorney Marshall Anguiler represented ADC Ltd. NM

Inc. (“Taxpayer”). Mr. Arthur Cordova and Brenda Cordova appeared as witnesses for the

Taxpayer. Taxpayer’s Exhibits #1, #3, and #5 are admitted into the record. Department’s Exhibits

A, C, D, and E are admitted into the record. Based on the evidence and arguments presented, IT

IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. Sometime around 1987, Arthur Cordova Jr. started a small auditing and security

firm as a sole proprietorship. This firm served as a contractor with the various National

Laboratories in New Mexico.

2. Mr. Cordova’s business was very successful and steadily grew. In 2000, Mr.

Cordova’s business incorporated in New Mexico as “Cordova Support Services.” The

corporation amended its name to “A.D.C. Ltd. NM Inc.” (“Taxpayer”) sometime thereafter.

3. Beginning in 1999, Taxpayer entered into a subcontractor agreement with Prime

Support Team (“PSST”), which itself was a division of Comforce Corporation, to provide

temporary security personnel and other clerical support personal to the WEC and WIPP project

sites in or near Carlsbad, NM. [Taxpayer Exhibit #1]

4. The contract included a provision stating “WEC is exempt from New Mexico

gross receipts Tax. A copy of the Nontaxable transaction Certificate shall be mailed to the

subcontractor under separate cover.” [Taxpayer Exhibit #1, page 4 of 12]

5. The Department of Energy (“D.O.E.”) was ultimately the end user of the

subcontractor services Taxpayer provided under the contract with PSST/Comforce. [Taxpayer

Exhibit #5]

6. On July 24, 2002, the Department selected Taxpayer for an audit of tax periods

January 1, 1999 through May 31, 2002. [Department Exhibit E]

7. During the audit period, Taxpayer’s controller was Elizabeth Lardizabal

8. On August 14, 2002, the Department notified Taxpayer in writing that it had 60-

days, or until October 15, 2002, to obtain the appropriate nontaxable transaction certificates

(“NTTC”) to support any claimed deductions. Taxpayer’s Ms. Larizabal received the 60-day

letter. [Department Exhibit C]

9. In an effort to obtain an NTTC from PSST/Comforce, Ms. Larizabal apparently

contacted Comforce. Comforce informed Taxpayer’s Ms. Larizabal via email that it believed it

had produced a reseller certificate to Taxpayer. [Taxpayer Exhibit #7]

10. However, according to the list of NTTCs presented at the time of the audit,

Taxpayer did not possess and/or provide the Department with any NTTCs related to the

In the Matter of the Protest of ADC Ltd. NM. Inc., page 2 of 11
subcontractor services it provided to PSST/Comforce and DOE by November 21, 2002.

[Department Exhibit C, C11]

11. During the audit, the Department allowed deductions related to the Taxpayer’s

Type 5 NTTC, but disallowed the Taxpayer’s Type 6 and Type 7 NTTCs for construction

services because security services and clerical support services are ancillary services not related

to construction.

12. Based on the audit, on December 4, 2002, the Department assessed Taxpayer for

unpaid gross receipts tax, compensating tax, withholding tax, and interest.

13. On December 19, 2002, Taxpayer filed a written protest to the assessment.

14. On February 7, 2003, the Department acknowledged Taxpayer’s protest letter.

15. Sometime after the audit, assessment, and protest, Mr. Paul Worley replaced Ms.

Elizabeth Larizabal as Taxpayer’s controller.

16. There was no further attempted contact between the Department and Taxpayer

until sometime in the spring of 2008, when the Department’s Mike Baca made four attempts to

contact Taxpayer over the telephone. The evidence is unclear whether Mr. Baca actually spoke

with Taxpayer or Taxpayer’s designated representative or simply left messages.

17. On June 16, 2010, the Department requested a hearing on Taxpayer’s protest.

18. On July 1, 2010, the Hearing Bureau of the Department sent notice of hearing,

scheduling an administrative protest hearing on December 1, 2010.

19. On November 23, 2010, the Hearing Bureau of the Department sent Amended

Notice of Administrative Hearing, rescheduling the hearing for March 25, 2011, upon

information and belief that an attorney was about to enter an appearance on behalf of Taxpayer

and the attorney would need more time to prepare.

In the Matter of the Protest of ADC Ltd. NM. Inc., page 3 of 11

20. Consistent with the Hearing Bureau’s information and belief about the entry of an

attorney, seven days later on November 30, 2010 attorney Marshall C. Aungier formally entered

his appearance on behalf of Taxpayer.

21. On March 17, 2011, Taxpayer moved to continue the scheduled March 25, 2011

hearing.

22. On March 17, 2011, Taxpayer’s unopposed Request for Continuance was granted,

and the hearing was rescheduled for September 27, 2011.

23. On September 16, 2011, Taxpayer filed a supplemental statement of protest

grounds.

DISCUSSION

There are two issues in this protest: first, whether Taxpayer was required to have the

requisite NTTCs for its claimed deduction within 60-days of the commencement of the

Department audit; and second, whether the lengthy delay between Taxpayer’s protest to the

assessment and the Department’s request for a formal protest hearing denied Taxpayer

procedural due process, necessitating abatement of the assessment. In brief answer, Taxpayer

failed to timely produce valid NTTCs within 60-days of commencement of audit, and Taxpayer

did not suffer a due process violation by the Department’s lengthy delay because Taxpayer

suffered no prejudice from the delay.

Presumption of Correctness and Burden of Proof.

Under NMSA 1978, §7-1-17(C) (2007), the assessments issued in this case are presumed

to be correct. Consequently, the Taxpayer has the burden to overcome the presumption and

establish that he was entitled to claimed deductions during the audit period. See Archuleta v.

In the Matter of the Protest of ADC Ltd. NM. Inc., page 4 of 11
O'Cheskey, 84 N.M. 428, 431, 504 P.2d 638, 641 (NM Ct. App. 1972). “Where an exemption or

deduction 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 Audit and NTTCs

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

receipts for taxpayers who meet the statutory requirements set by the legislature. Like at issue in

the present protest, some claimed deductions to gross receipts tax require a taxpayer claiming the

deduction to possess a nontaxable transaction certificate. See NMSA 1978, Section 7-9-43 (2001).

NMSA 1978, §7-9-43 (A) (2001) articulates the requirements for obtaining NTTCs:

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. See id. 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 taxpayer cannot obtain an NTTC is not relevant. The language of the

statute is mandatory: if a seller is not in possession of required NTTCs within 60 days from the

In the Matter of the Protest of ADC Ltd. NM. Inc., page 5 of 11
date of the Department's notice, "deductions claimed by the seller ... that require delivery of these

nontaxable transaction certificates shall be disallowed." (emphasis added). id.

In this protest, during the gross receipts reporting periods beginning January 1999 through

May 2002, Taxpayer claimed numerous deductions from gross receipts tax based on NTTCs. On

August 14, 2002, the Department notified Taxpayer that it had 60-days to obtain the relevant

NTTCs supporting its claimed deductions, or those claimed deductions would be disallowed during

the audit. While Taxpayer may have believed it was entitled to receive an NTTC from

PSST/Comforce for the “personal services” it provided as a subcontractor (based on the contract

admitted into the record as Taxpayer Exhibit #1, the email from Bruce Stephens of Comforce as

Taxpayer Exhibit #3, and Taxpayer’s own protest letter and testimony), Taxpayer failed to produce

an NTTC supporting its claimed deduction by October 15, 2002, the 60-day NTTC deadline.

Whether or not PSST/Comforce was contractually obligated to provide the NTTC to Taxpayer does

not excuse Taxpayer’s inability to produce and possess the relevant NTTC within the mandatory

statutory deadline. Under the clear language of NMSA 1978, §7-9-43 (A) (2001), the Department

had no choice but to disallow Taxpayer’s claimed deduction.

Taxpayer argues in its protest letter that it should not be held liable for PSST/Comforce’s

error in suggesting that the project was tax free. However, under 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. See 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 of the services, and it was the responsibility of the Taxpayer—not

PSST/Comforce—to determine whether it had the documentation needed to support its claimed

deductions. Taxpayer’s inability to timely provide an NTTC, even if PSST/Comforce indicated to

In the Matter of the Protest of ADC Ltd. NM. Inc., page 6 of 11
Taxpayer that such document would be provided, does not satisfy the minimum requirements of the

statute.

In addition to disallowing the claimed deduction where Taxpayer did not timely possess the

NTTC, the Department also disallowed a Type 6 NTTC and a Type 7 NTTC that Taxpayer

presented in support of additional claimed deductions. Type 6 and 7 NTTCs are appropriate for

sellers of construction materials and construction services to buyers engaged in the construction

business under NMSA 1978, Section 7-9-51 (2001) and NMSA 1978, Section 7-9-52 (2000).

However, under regulation 3.2.210.8 NMAC (5/31/01), indirect services, like “accounting,

architecture, engineering, drafting, bid depository services and plan room services are not

construction services.”

Taxpayer was providing security and clerical support personnel to the WIPP construction

project as a subcontractor with PSST/Comforce. These services do not qualify as a construction

service, but as indirect support services akin to the non-qualifying listed services under regulation

3.2.210.8 NMAC (5/31/01). Consequently, the Department correctly disallowed Taxpayer’s

claimed deduction under construction services.

Unnecessary Delay, Timeliness of Protest Hearing, and Due Process

Taxpayer’s main argument in this matter is that the delay between Taxpayer’s protest letter

and the time of contact by the Department in 2010 and the protest hearing in 2011 deprived

Taxpayer of procedural due process. Taxpayer did not hear from the Department after the

Department acknowledgement of protest on February 7, 2003. Taxpayer argued that it assumed its

protest letter resolved the issue in its favor. During the hearing, Taxpayer further argued it was

prejudiced by the unnecessary delay because its controller, Mr. Paul Worley has since passed on,

In the Matter of the Protest of ADC Ltd. NM. Inc., page 7 of 11
making it more difficult to locate the missing NTTCs by the time of the hearing in 2011. Because

of the Department’s delay, Taxpayer argues that the assessment should be abated.

The Department offered no explanation in the delay between acknowledging the protest and

requesting a hearing with the Department’s Hearing Bureau. New Mexico courts have held that in

administrative hearings under the Tax Administration Act, the general rule of tardiness still applies:

the “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.” See Kmart Props., Inc. v.

Taxation & Revenue Dep't, 139 N.M. 177, 192, 131 P.3d 27, 42, 2006 NMCA 26, 54 (N.M. Ct.

App. 2001); See also Matter of Ranchers-Tufco Limestone Project, 100 N.M 632, 635, 674 P.2d

522, 525, 1983 N.M. App. LEXIS 788 (N.M. Ct. App. 1983). While it is true that 7 ½ years passed

between Taxpayer’s protest and the Department’s request for hearing, Taxpayer is liable for taxes to

the State after audit and assessment because collection of taxes is the enforcement of public

right/interest. Therefore, despite the tardiness of its actions, the Department still had an obligation

to enforce a public right or protect a public interest under the rationale of Kmart Props., Inc.

Even aside from this general rule of tardiness, one of the touchstone questions under a

procedural due process analysis is what prejudice if any a party suffered as result of the unnecessary

delay. See In re Ranchers-Tufco Limestone Project Joint Venture at 635, 525. In this protest,

Taxpayer points to the death of Mr. Worley as the prejudice suffered in this matter. However, Ms.

Lardizabal was Taxpayer’s controller during the audit period, and accepted the Department’s 60-

day NTTC letter. Through Mr. Lardizabal, Taxpayer had an opportunity to produce the relevant

NTTCs during the audit period. Even if the Mr. Worley could have assisted Taxpayer in finding

and producing the relevant NTTCs for an earlier scheduled protest hearing, producing the NTTCs

during the protest hearing would not have changed the outcome of the assessment because the

In the Matter of the Protest of ADC Ltd. NM. Inc., page 8 of 11
relevant NTTCs needed to be produced during the audit period by October 15, 2002. In other

words, Taxpayer could not be prejudiced for the delay in this case because the failure to possess the

NTTC had occurred long before the protest letter, the delay, and the protest hearing.

Moreover, since Mr. Worley was not Taxpayer’s controller until after the audit period and

after the issuance of the assessment, it can fairly be assumed he had no specialized knowledge of

the facts surrounding the audit, the assessment, and the protest. The person with such specialized

knowledge would have been Mr. Cordova, who testified, and Ms. Lardizabal. While Mr. Cordova

mentioned that Ms. Lardizabel has since retired, Taxpayer still could have subpoenaed her as a

witness in this proceeding, but did not do so. Since Mr. Worley was not the controller during the

relevant period of time, and the production of NTTCs after the 60-day deadline would not

extinguish Taxpayer’s tax liability, his unfortunate death by the time of the protest hearing does not

affect the legal or evidentiary questions surrounding this protest.

Finally, Taxpayer claims that he assumed his protest had been resolved based on the

submission of his protest letter. This assumption was not reasonable given New Mexico’s self-

reporting tax regime, which places the responsibility on a taxpayer to determine their possible tax

liabilities. See Tiffany Construction Co. At no point did Taxpayer receive any written notification

that the Department was considering abatement based on its protest letter or that the assessment had

been abated based on that protest letter. While Taxpayer did present evidence that the Department

did not initiate any contact about the protest from 2003 until at least 2008 (the phone calls of Mr.

Baca) if not 2010, Taxpayer did not present any evidence of steps it took to contact the Department

to resolve the assessment and protest during that same period of time. Given that Tiffany

Construction Co. places the responsibility on a taxpayer to determine their own tax liabilities, that

same rationale made it incumbent upon this Taxpayer to also maintain contact with the Department,

In the Matter of the Protest of ADC Ltd. NM. Inc., page 9 of 11
even when the Department itself had not contacted Taxpayer, in an effort to resolve the protest of

the contested assessments. While the unnecessary delay was regrettable, it did not materially alter

the factual and legal analysis of this protest.

Assessment of Interest

Although Taxpayer made no arguments about the imposition of interest, there was

testimony from the Department’s Ms. Sena about Taxpayer’s reluctance to withdraw the protest

in light of the high amount of accumulated interest. Because of this testimony, the issue of

interest merits a brief discussion.

When a taxpayer fails to make timely payment of taxes due to the state, “interest shall be

paid to the state on that amount from the first day following the day on which the tax becomes

due...until it is paid.” NMSA 1978, Section 7-1-67 (2001). Under the statute, the Department has

no discretion in the imposition of interest, as the statutory use of the word “shall” makes the

imposition of interest mandatory regardless of the explanation provided by a taxpayer. See State

v. Lujan, 90 N.M. 103, 105, 560 P.2d 167, 169 (1977). The language of the statute also makes it

clear that interest begins to run from the original due date of the tax and continues until the tax

principal is paid in full. The assessment of interest is not designed to punish taxpayers, but to

compensate the state for the time value of unpaid revenues.

Taxpayer was informed in the Department’s February 7, 2003 acknowledgement of

protest letter that interest would continue to accrue throughout the protest period, but that

Taxpayer had the option to pay the assessment to stop accrual of further interest pending the

outcome of the protest. Because no such payment was made, interest continued to accrue in

accord with the statutory mandate.

In the Matter of the Protest of ADC Ltd. NM. Inc., page 10 of 11
CONCLUSIONS OF LAW

A. Taxpayer filed a timely, written protest to Assessment Nos. # L3988749 through

L3988786, and jurisdiction lies over the parties and the subject matter of this protest.

B. Because Taxpayer did not possess the relevant NTTC at the time of the transaction

or within 60-days of the NTTC letter as required by NMSA 1978, Section 7-9-43 (2001), Taxpayer

is not entitled to a gross receipts tax deduction for receipts for contract services rendered to

PSST/Comforce during tax years 1999 through 2003.

C. Taxpayer was not entitled to Type 6 and Type 7 NTTCs because under regulation

3.2.210.8 NMAC (5/31/01), Taxpayer was providing indirect support services rather than

construction services.

D. Taxpayer was not prejudiced by the lengthy delay between Taxpayer’s protest

letter and the time of the Department’s request for protest hearing.

For the foregoing reasons, the Taxpayer's protest IS DENIED. The Taxpayer is ordered to

pay the assessments.

DATED: October 18, 2011.

BRIAN VANDENZEN
Hearing Officer
Taxation & Revenue Department
Post Office Box 630
Santa Fe, NM 87504-0630

In the Matter of the Protest of ADC Ltd. NM. Inc., page 11 of 11