Could a floor-maintenance subcontractor deduct service-for-resale receipts when the buyer delivered the Type 5 NTTC 72 days after the audit deadline?

Plain-English summary

Louis Ortega could not deduct $74,768.69 of floor-maintenance receipts because he obtained the required Type 5 nontaxable transaction certificate 72 days after the statutory audit deadline. His persistent efforts and the buyer's delay did not authorize the Department to accept a late certificate.

Ortega, doing business as Perfection Floor Maintenance, provided services throughout New Mexico. In 2006, Illinois company S.M.S. Assist (SMS) subcontracted with him to maintain floors at New Mexico Family Dollar stores.

Ortega believed the SMS receipts qualified as services sold for resale under Section 7-9-48. But he did not obtain a Type 5 NTTC when the 2006 returns were due.

The audit supplied one final 60-day opportunity

The Department sent a limited-scope audit notice on February 18, 2009. It expressly gave Ortega until April 19 to possess and execute any NTTCs needed for his deductions. A March 30 reminder repeated that deadline.

Ortega first asked SMS generally for state-tax forms on March 5. On April 14, less than a week before the deadline, he specifically requested a Type 5 NTTC and contacted the Department.

SMS initially misunderstood the request as involving personal-income-tax withholding and said it had no Type 5 “reporting form.” Ortega continued contacting SMS after the deadline. SMS eventually apologized for the delay and delivered the certificate on June 30, 2009.

That was 72 days after April 19.

Good-faith collection efforts could not extend the statute

Section 7-9-43 said sellers should possess required NTTCs when the return is due. After an audit notice, it gave them a second chance: 60 days to obtain missing certificates.

The statute then said deductions requiring NTTCs “shall be disallowed” if the seller did not possess them within that period. The decision treated that language as mandatory and found no authority for another extension or equitable leniency.

SMS could have responded more quickly, but the legal responsibility remained with Ortega as the seller claiming the deduction. The decision emphasized that sellers bear the incidence of gross receipts tax and must document their deductions.

Type 9 certificates did not cover nonprofit services

Ortega also provided floor-maintenance services to San Jose/San Ysidro Church and Holy Ghost Catholic School in 2005 and 2006. He held timely Type 9 NTTCs from those nonprofit charities.

Those certificates were still ineffective. Section 7-9-60 allowed a nonprofit-related deduction for sales of tangible personal property, not services, and Regulation 3.2.218.9 confirmed that limitation.

Ortega conceded the entire 2005 assessment and acknowledged that the nonprofit-service receipts were taxable in 2006. He continued the protest only over the late SMS Type 5 certificate.

Result: protest denied. The final order stated that Ortega owed:

• for 2005, $308.24 tax, $61.64 penalty, and $159.73 interest as of the hearing; and
• for 2006, $5,305.36 tax, $1,061.07 penalty, and $1,953.60 interest as of the hearing.

Interest continued to accrue until payment of the tax principal.

What this means for you

Subcontractors claiming a resale deduction

Obtain the buyer's correct NTTC when the transaction occurs, not after an audit begins. The audit's 60-day window was a final statutory opportunity, not the ordinary time to start documenting the deduction.

Businesses waiting on a customer or prime contractor

The buyer's delay did not transfer responsibility away from the seller. Follow up early and verify that the buyer understands the exact certificate type requested.

Service providers working for nonprofits

Nonprofit status does not make every purchase deductible. The Type 9 certificates in this decision did not cover floor-maintenance services because the cited deduction applied to tangible personal property.

Common questions

Q: Did the work actually qualify as a service for resale?
A: Ortega performed subcontracted services for SMS, but Section 7-9-48 also required the buyer to deliver an NTTC. The missing timely certificate defeated the deduction.

Q: When did the 60-day period end?
A: April 19, 2009, based on the Department's February 18 audit notice.

Q: When did Ortega receive the Type 5 NTTC?
A: June 30, 2009, 72 days after the deadline.

Q: Did his repeated requests to SMS help?
A: They showed persistent effort, but the statute gave the Department no discretion to accept the late certificate.

Q: Why were the Type 9 NTTCs invalid?
A: The underlying nonprofit deduction covered tangible personal property, while Ortega sold floor-maintenance services.

Citations and references

Statutes and regulation:

• NMSA 1978, § 7-9-48 — receipts from selling services for resale
• NMSA 1978, § 7-9-43 — NTTC possession and mandatory 60-day audit deadline
• NMSA 1978, § 7-9-60 — nonprofit deduction for tangible personal property
• NMSA 1978, § 7-1-17(C) — presumption that assessments are correct
• NMSA 1978, § 7-1-67 — interest until tax principal is paid
• Regulation 3.2.218.9 NMAC — nonprofit deduction does not extend to services

Cases:

• Archuleta v. O'Cheskey, 84 N.M. 428, 431, 504 P.2d 638, 641 (Ct. App. 1972) — taxpayer's burden to overcome an assessment
• Wing Pawn Shop v. Taxation and Revenue Department, 111 N.M. 735, 740, 809 P.2d 649, 654 (Ct. App. 1991) — strict proof of deductions
• Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976) — taxpayer duty under self-reporting

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Louis Ortega dba Perfection Flooring Maintenance
• Decision PDF: D&O 12-16

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
LOUIS ORTEGA d/b/a PERFECTION FLOOR MAINTENANCE No. 12-16
TO ASSESSMENT ISSUED UNDER LETTER
ID NO. L2030277504 and L0606507904

DECISION AND ORDER

A protest hearing occurred on the above captioned matter on June 19, 2012 before Brian

VanDenzen, Esq., Tax Hearing Officer, in Santa Fe. Mr. Louis Ortega (“Taxpayer”) appeared

pro se. Staff Attorney Ida M. Lujan appeared representing the Taxation and Revenue Department

of the State of New Mexico (“Department”). Protest Auditor Andrea Umpelby appeared as a

witness for the Department. Taxpayer Exhibits #1-3, 5, 6, and 12-16 were admitted into the

record. Department Exhibits A-N are admitted into the record. All exhibits are more thoroughly

described in the Administrative Exhibit Log. Although Taxpayer initially protested assessments

for tax years 2005 and 2006, Taxpayer conceded at hearing that he did not contest the assessment

related to tax year 2005. Based on the evidence and arguments presented, IT IS DECIDED AND

ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. Taxpayer provides floor maintenance services across New Mexico.

2. In 2005, Taxpayer performed services for San Jose/San Ysidro Church and Holy

Ghost Catholic School (“non-profit charities”).

3. Taxpayer did not pass on the incidence of tax to the non-profit charities because

the non-profit charities provided him with Type 9 NTTCs for the services he provided in 2005.
Taxpayer consequently did not pay any gross receipts taxes in 2005 for his receipts from the non-

profit charities.

4. Based on a Schedule C mismatch, the Department conducted a limited scope audit

of Taxpayer’s 2005 gross receipts.

5. During that audit of 2005 gross receipts, the Department concluded that the Type

9 NTTC was invalid for the services Taxpayer performed for the non-profit charities, and

disallowed Taxpayer’s claimed deductions.

6. On May 20, 2009, the Department assessed Taxpayer for $308.26 in 2005 gross

receipts tax, $61.65 in penalty, and $112.87 in interest. [Department C]

7. Taxpayer originally protested the 2005 gross receipts assessment on June 5, 2009.

8. At hearing, Taxpayer conceded that the Type 9 NTTC he relied upon was invalid

for the claimed deduction for services he provided to the non-profit charities in 2005. Taxpayer

agreed that the Department’s 2005 assessment for gross receipts tax was correct, and that he

owed the outstanding liability under that assessment. Consequently, tax year 2005 is no longer at

issue in this protest.

9. In 2006, an Illinois company, S.M.S. Assist (“SMS”), subcontracted with

Taxpayer to provide floor maintenance services to Family Dollar stores in New Mexico.

10. In tax year 2006, Taxpayer had $74,768.69 in receipts from his subcontracting

work with SMS. [Department G.6]

11. Taxpayer believed that he was entitled to a gross receipts tax deduction for his

2006 receipts from SMS as subcontractor performing services for resale.

12. Taxpayer also performed services for the non-profit charities in tax year 2006, for

which he timely received Type 9 NTTCs.

In the Matter of the Protest of Louis Ortega d/b/a Perfection Floor Maintenance, page 2 of 10

13. Based on the Schedule C mismatch, the Department also conducted a limited

scope audit of Taxpayer’s 2006 gross receipts.

14. On February 18, 2009, the Department sent a “Notice of Limited Scope Audit

Commencement-Schedule C Gross Receipts” to Taxpayer, advising Taxpayer that he had 60-

days (until April 19, 2009) to possess and execute any NTTC’s necessary to support claimed

deductions. [Department B.1]

15. On March 5, 2009, Taxpayer emailed Ms. Lauren Gegg of SMS to ask for the

correct forms for his 2005 and 2006 state taxes. On that same date, SMS’ Ms. Georgie Socha

Kwit emailed a response to Taxpayer indicating that SMS remitted state “sales tax” to New

Mexico, but had no forms for Taxpayer since it did not withhold any personal income tax on

Taxpayer’s behalf. [Taxpayer # 1 & Department I.2]

16. On March 30, 2009, the Department sent Taxpayer a “Reminder Notice of

Limited Scope Audit”, again informing Taxpayer that he had until April 19, 2009 to possess and

execute any required NTTCs or the deduction related to the missing NTTCs would be

disallowed. [Department B.4]

17. On April 14, 2009, less than seven-days before the 60-day NTTC deadline,

Taxpayer contacted the Department’s Tom Russell, the contact person listed on the Department’s

“Notice of Limited Scope Audit” and the “Reminder Notice of Limited Scope Audit”.

18. On April 14, 2009, Taxpayer again emailed SMS’ Ms. Georgie Socha Kwit and

specifically asked for a Type 5 NTTC from SMS. SMS’ Ms. Georgie Socha Kwit responded that

since SMS did not withhold state tax for Taxpayer’s independent contractor work, Taxpayer was

responsible for any states taxes and that SMS did not have a Type 5 “reporting form.”

[Department I.5-I.6]

In the Matter of the Protest of Louis Ortega d/b/a Perfection Floor Maintenance, page 3 of 10

19. On the 60-day deadline for possession of the NTTC, Taxpayer possessed a Type 9

NTTC from services performed in 2006 for the non-profit charities, but did not possess the Type

5 NTTC from SMS. The Department disallowed Taxpayer’s deductions for receipts from SMS

for failure to timely possess the Type 5 NTTC. The Department also disallowed the 2006

deductions for Taxpayer’s receipts from the non-profit charities because the Type 9 NTTC was

invalid.

20. On May 20, 2009, the Department assessed Taxpayer for $5,350.76 in 2006 gross

receipts tax, $1,070.15 in penalty, and $1,158.39 in interest. [Department D]

21. On June 5, 2009, Taxpayer filed a protest to the Department’s assessments.

[Taxpayer #12 and Department E]

22. On June 24, 2009, the Department acknowledged timely receipt of Taxpayer’s

protest. [Department F]

23. After the April 19, 2009 60-day NTTC deadline, Taxpayer made numerous other

attempts to obtain a Type 5 NTTC from SMS:

a. April 21, 2009 Taxpayer email to SMS’ Ms. Georgie Socha Kwit.

[Department I.5]

b. May 6, 2009 Taxpayer email to SMS’ Ms. Georgie Socha Kwit.

[Department I.7]

c. May 26, 2009 Taxpayer email to SMS’ Ms. Gail Heiteen. [Department

I.11]

d. On June 11, 2009, Taxpayer received an email response from SMS’ Ms.

Georgie Socha Kwit acknowledging Taxpayer’s numerous attempts to reach her

about the NTTC issue. [Department I.8]

In the Matter of the Protest of Louis Ortega d/b/a Perfection Floor Maintenance, page 4 of 10
e. On June 19, 2009, Taxpayer emailed SMS’ Ms. Georgie Socha Kwit to

offer further assistance in obtaining the Type 5 NTTC. [Department I.12]

f. On June 25, 2009, SMS’ Ms. Georgie Socha Kwit emailed Taxpayer to

inform him that she was working with the Department to obtain the NTTC. SMS’

Ms. Georgie Socha Kwit apologized to Taxpayer for the delay. [Department I.15]

24. On June 30, 2009, more than two-months after the 60-day deadline, SMS

provided Taxpayer with a Type 5 NTTC. [Taxpayer #14]

25. Taxpayer submitted SMS’ Type 5 NTTC to the Department. The Department

informed Taxpayer that it could not honor the Type 5 NTTC because it had not been timely

executed by the 60-day deadline. [Department H]

26. Taxpayer acknowledged in writing that he owed the state tax for his 2006 receipts

from the non-profit charities because the Type 9 NTTC was invalid. Taxpayer still continued his

protest regarding the SMS Type 5 NTTC given his persistent efforts to obtain the NTTC in a

timely manner. [Taxpayer #16]

27. On March 26, 2012, the Department filed a request for hearing in this matter.

28. On March 27, 2012, the Department’s Hearing Bureau sent notice of

administrative hearing, scheduling this matter for June 19, 2012.

DISCUSSION

The issue in this protest is whether the Department should have accepted Taxpayer’s

untimely Type 5 NTTC for the claimed 2006 tax deductions, and whether Taxpayer’s continuing

efforts to secure that NTTC from SMS excuse his tardiness in possessing the NTTC. In brief

answer, because of the clear language of the statute, the Department has no authority to accept

the untimely NTTC, or to excuse that tardiness based on Taxpayer’s efforts to obtain the NTTC.

In the Matter of the Protest of Louis Ortega d/b/a Perfection Floor Maintenance, page 5 of 10
Presumption of Correctness and Burden of Proof.

Under NMSA 1978, Section 7-1-17(C) (2007), both assessments issued in this case are

presumed to be correct. Consequently, the Taxpayer has the burden to overcome the assessments

and establish that he was entitled to deductions claimed in 2005 and 2006. See Archuleta v.

O'Cheskey, 84 N.M. 428, 431, 504 P.2d 638, 641 (NM Ct. App. 1972).

Moreover, this case involves Taxpayer’s protest over a claim of a deduction. “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).

Taxpayer conceded during the hearing that he owed the assessed 2005 taxes.

Consequently, in light of the concession and the presumption of correctness, Taxpayer owes the

assessed taxes under letter identification number L2030277504 for tax year 2005.

The Deduction 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. The Taxpayer is

seeking to qualify for the deduction provided in NMSA 1978, Section 7-9-48 (2000), which states

in pertinent part that:

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....

Simply performing a service for resale, as the Taxpayer did in this instance as subcontractor for

SMS, is not enough to satisfy the requirements of the statute. In order to qualify for the statutory

deduction, the statute clearly and unambiguously requires that the seller claiming the deduction

In the Matter of the Protest of Louis Ortega d/b/a Perfection Floor Maintenance, page 6 of 10
receive a NTTC from the buyer of that seller’s service at the time the return for the receipts at issue

are due.

NMSA 1978, Section 7-9-43 (2005) 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 return is

due from the receipts 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 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). id.

Taxpayer’s failure to possess the NTTC by the statutory deadline precludes the deduction.

In this case, Taxpayer did not possess the Type 5 NTTC from SMS at the time the return

was due for the 2006 gross receipts, as required under NMSA 1978, §7-9-43 (2005). Consequently,

Taxpayer was relying on the 60-day second chance provision under NMSA 1978, §7-9-43 (2005).

On February 18, 2009, the Department sent Taxpayer notice of limited scope audit,

including explicit notice that Taxpayer had 60-days, until April 19, 2009, to obtain any necessary

NTTC’s necessary to support a claimed deduction. Taxpayer initiated conversations about the

In the Matter of the Protest of Louis Ortega d/b/a Perfection Floor Maintenance, page 7 of 10
needed NTTC with SMS on March 5, 2009. On March 30, 2009, the Department sent Taxpayer a

reminder of the pending 60-day, April 19, 2009, NTTC possession deadline under the statute.

For the first time, with less than a week until the NTTC deadline, Taxpayer contacted the

Department on April 14, 2009 about the matter. After that time, Taxpayer made repeated and

consistent efforts to obtain the NTTC from SMS. However, SMS was unable to provide Taxpayer

with the NTTC until after the April 19, 2009 60-day statutory deadline. Taxpayer finally received

the Type 5 NTTC from SMS on June 30, 2009, some 72-days after the statutory NTTC deadline.

The Taxpayer argues that he made good faith efforts to obtain the NTTC from SMS, and

that he should be granted leniency for the untimely NTTC because of these efforts. However, the

60-day statutory deadline to obtain the NTTCs after notice of an audit already serves as Taxpayer’s

statutory extension to obtain the NTTCs that by statute he was required to possess at the time the

CRS gross receipts tax returns were due. Regardless of the reason for non-possession of a required

NTTC, NMSA 1978, §7-9-43 (2005) provides no further extension of time beyond this 60-day

period. NMSA 1978, §7-9-43 (2005), with its mandatory “shall be disallowed” language, also does

not allow the Department any leniency to grant a deduction based on an untimely NTTC.

Taxpayer had a statutory obligation at the time he performed the services for resale for SMS

in 2006 to obtain the relevant NTTC supporting his claim for a deduction. Perhaps the legislature

made this initial requirement under NMSA 1978, §7-9-43 (2005) precisely because the legislature

recognized the potential challenges of obtaining an NTTC after the transaction between the buyer of

the services and the seller had grown stale. The legislature certainly knew that with time, records of

transactions can accidently be lost, institutional memory of transactions can be forgotten, paperwork

can be misfiled, the motivating initiative to exchange services for a sum of money can be lost after

completion of the transaction, and disputes can develop between buyer and seller that preclude easy

In the Matter of the Protest of Louis Ortega d/b/a Perfection Floor Maintenance, page 8 of 10
cooperation. By waiting to obtain the NTTC until the 60-day period after notice of audit, the

Taxpayer subjected himself to myriad risks that some three-years after the transactions in question,

SMS would not timely be able to provide an NTTC to Taxpayer.

While SMS certainly could have been quicker and more responsive to Taxpayer’s persistent

efforts to obtain the NTTC, Taxpayer and not SMS had the obligation under the statute to

document his gross receipts tax deductions. 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. 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 SMS—to determine whether he

had the documentation needed to support his claimed deductions. The Taxpayer's failure to obtain

an NTTC within the 60-day period provided in NMSA 1978, §7-9-43 (2005) leaves the Department

no choice but to disallow the claimed deductions.

Taxpayer did timely posses Type 9 NTTCs for his receipts attributable to the non-profit

charities in 2006. However, just as Taxpayer conceded for 2005, those Type 9 NTTCs are

ineffective to support his claimed deduction for services rendered to the non-profit charities. Under

the underlying deduction found at NMSA 1978, Section 7-9-60 (2007), only the sale of tangible

personal property is deductible from gross receipts tax. See also Regulation 3.2.218.9 NMAC

(6/14/01). Therefore, the Department properly disallowed Taxpayer’s claimed deductions of

receipts for Taxpayer’s services to the non-profit charities in tax year 2006.

CONCLUSIONS OF LAW

A. Taxpayer filed a timely, written protest to the assessments L2030277504 and

L0606507904. Jurisdiction lies over the parties and the subject matter of this protest.

In the Matter of the Protest of Louis Ortega d/b/a Perfection Floor Maintenance, page 9 of 10
B. Taxpayer conceded he owes the liabilities for assessment L2030277504, 2005 gross

receipts tax, penalty, and interest.

C. Taxpayer did not possess the requisite NTTCs at the time he filed his 2006 CRS

returns, as required under NMSA 1978, §7-9-43 (2005).

D. Taxpayer did not possess the requisite NTTCs for 2006 within 60-days of the

Department’s Notice of Audit, as required under NMSA 1978, §7-9-43 (2005).

E. Under NMSA 1978, §7-9-43 (2005), the Department is not allowed to grant and

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

during tax year 2006.

F. Under NMSA 1978, § 7-9-60 (2007) and Regulation 3.2.218.9 NMAC (6/14/01),

services rendered to the non-profit charities are not permissible deductions, and therefore the Type 9

NTTC Taxpayer’s relies on to claim that deduction is not applicable and invalid.

For the foregoing reasons, the Taxpayer's protest IS DENIED. For tax year 2005,

Taxpayer owes $308.24 in gross receipts tax, $159.73 in interest (as calculated as of the date of

hearing), and $61.64 in penalty. For tax year 2006, Taxpayer owes $5,305.36 in gross receipts

tax, $1,953.60 in interest (as calculated as of the date of hearing), and $1,061.07 in penalty.

Pursuant to NMSA 1978, Section 7-1-67 (2007), interest continues to accrue until tax principal is

paid.

DATED: July 9, 2012.

Brian VanDenzen, Esq.
Tax Hearing Officer
Taxation & Revenue Department
Post Office Box 630
Santa Fe, NM 87504-0630

In the Matter of the Protest of Louis Ortega d/b/a Perfection Floor Maintenance, page 10 of 10