Which resale deductions survived when a valve seller held multistate certificates for two buyers, received Intel's NTTC late, and held the wrong certificate for KSL?

Plain-English summary

Albuquerque Valve & Fitting won deductions supported by timely multijurisdictional certificates from Kinetic Systems and Grainger, but lost deductions tied to Intel's late NTTC and KSL's wrong certificate type. The Department had to recalculate the sampled audit and resulting gross receipts tax liability.

The company sold valves, fittings, and related gas- and liquid-system components. The Department audited July 2004 through August 2007 and used three invoice strata: two random samples below $15,000 and a full review above $15,000.

The formal NTTC notice gave the company until December 28, 2007 to possess certificates supporting its deductions.

The two multistate certificates were valid evidence

Albuquerque Valve timely held multijurisdictional tax certificates for:

• $1,868.80 of Kinetic Systems invoices; and
• $68,474.40 of Grainger invoices.

The Department rejected them because each buyer listed a New Mexico tax identification number, reasoning that the buyer therefore had to be registered in New Mexico and needed a state NTTC.

The decision applied Siemens Energy & Automation. Merely possessing a New Mexico identification number did not prove that a buyer was required to register for gross receipts tax. Once Albuquerque Valve produced timely MTC certificates, the burden shifted to the Department to establish invalidity.

The Department offered nothing beyond the numbers printed on the certificates. It therefore had to honor both certificates, allow the deductions, recalculate the error rates in the two sampled strata, and reduce actual exceptions in the fully reviewed stratum.

Intel's certificate arrived after the mandatory deadline

The company had an Intel purchase order stating that a $30,583.80 purchase was tax exempt, but no valid state NTTC by December 28. Intel delivered a Type 9 certificate on March 4, 2008.

Section 7-9-43 required disallowance when a seller lacked the certificate 60 days after audit notice. The purchase order could not replace the statutory certificate, and the Department had no discretion to accept the late NTTC.

KSL delivered a certificate for services, not products

Albuquerque Valve timely held a Type 5 NTTC for $211.24 of KSL invoices. But Type 5 covered services, while the company sold KSL tangible personal property and performed no installation or maintenance.

Good-faith acceptance did not protect an inapplicable certificate. The seller remained responsible for ensuring that the goods or services actually transferred were of the type covered.

Audit and hearing delay did not create further relief

The company argued that the audit focused on liabilities rather than credits and that it was unfair for the Department to enforce a 60-day deadline after waiting nearly four years to request a hearing.

The decision found no improper audit conduct and no prejudice to presentation of the protest. Administrative delay did not authorize deductions forbidden by the certificate statute.

Result: protest granted in part and denied in part. The Department had to allow the Kinetic Systems and Grainger deductions and recompute the audit. Intel and KSL remained disallowed. The decision did not state the final recalculated tax and interest.

What this means for you

Sellers accepting multistate certificates

A New Mexico identification number on the buyer's certificate did not, by itself, prove that the buyer was required to register for gross receipts tax. Preserve the timely certificate and require the Department to support any invalidity finding.

Businesses under a sampled audit

One allowed or disallowed invoice can affect more than its face amount when the Department extrapolates an error percentage across a sample stratum. Trace each disputed certificate to the audit calculation.

Sellers collecting NTTCs

Timing and certificate type are separate requirements. Obtain the certificate within the statutory period and confirm that it covers products rather than services, or vice versa.

Common questions

Q: Why did the Kinetic Systems and Grainger deductions survive?
A: Their MTC certificates were timely, and the Department presented no evidence of invalidity beyond New Mexico identification numbers printed on them.

Q: Did Intel's tax-exempt purchase order suffice?
A: No. The required Type 9 NTTC arrived after the December 28 deadline.

Q: Why was KSL's timely certificate rejected?
A: It was a Type 5 certificate for services, while Albuquerque Valve sold valves, fittings, and components without installation or maintenance.

Q: What did the Department have to recalculate?
A: The error rates and extrapolated liabilities for the two sampled strata and the actual exceptions in the fully reviewed stratum.

Q: Did the ruling set a final dollar liability?
A: No. It ordered a new calculation after allowing the two MTC-supported deductions.

Citations and references

Statute and regulations:

• NMSA 1978, § 7-9-43 — NTTC possession deadline and authority to accept multistate certificates
• NMSA 1978, § 7-1-17(C) — presumption of assessment correctness
• Regulations 3.2.201.8 and 3.2.201.13 NMAC — certificate timing and MTC-certificate equivalence
• Regulation 3.2.201.14 NMAC — good-faith acceptance and responsibility for transaction type

Cases:

• Siemens Energy & Automation, Inc. v. New Mexico Taxation and Revenue Department, 119 N.M. 316, 889 P.2d 1238 (Ct. App. 1994) — MTC certificate and burden of proving invalidity
• Gas Co. v. O'Cheskey, 94 N.M. 630, 632, 614 P.2d 547, 549 (Ct. App. 1980) — certificate cannot transform a taxable transaction
• McKinley Ambulance Service v. Bureau of Revenue, 92 N.M. 599, 601-602, 592 P.2d 515, 517-518 (Ct. App. 1979) — safe harbor requires an applicable certificate
• Kmart Properties, Inc. v. Taxation & Revenue Department, 2006-NMCA-026, ¶ 54, 139 N.M. 177, 131 P.3d 27 — administrative tardiness did not bar tax enforcement

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Albuquerque Valve & Fitting Co.
• Decision PDF: D&O 12-17

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
ALBUQUERQUE VALVE & FITTING CO.
TO ASSESSMENT ISSUED UNDER LETTER No. 12-17
ID NO. L0246638976

DECISION AND ORDER

A protest hearing occurred on the above captioned matter on July 5, 2012 before Brian

VanDenzen, Esq., Tax Hearing Officer, in Santa Fe. Mr. John Steigerwald, general manager of

Albuquerque Valve and Fitting Co. (“Taxpayer”), appeared pro se on behalf of Taxpayer. Staff

Attorney Ida M. Lujan appeared representing the Taxation and Revenue Department of the State

of New Mexico (“Department”). Protest Auditor Sylvia Sena appeared as a witness for the

Department. Taxpayer Exhibits #1 and 1.1 through 1.11 are admitted into the record. Department

Exhibits A-M are admitted into the record. All exhibits are more thoroughly described in the

Administrative Protest Hearing Exhibit Log. Based on the evidence and arguments presented, IT

IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. Taxpayer sells tangible property in the form of valves, fittings, and related gas

and liquid system components in New Mexico.

2. On August 30, 2007, the Department notified Taxpayer of audit for gross receipts,

compensating tax, and worker’s comp fee for reporting periods July 2004 through August 2007.

Taxpayer was also notified of audit of withholding tax and income tax for reporting periods July

2004 through December 2006. [Department A]

3. In its August 30, 2007 letter, the Department further notified Taxpayer that any

nontaxable transaction certificate (“NTTC” or “NTTCs”) necessary to support claimed

deductions needed to be available for inspection during the course of the audit. [Department A.2]

4. On October 19, 2007, the Department sent notice to Taxpayer of the start of the

audit and the need for Taxpayer to present all NTTCs supporting a claimed deduction to the

auditor. [Department B]

5. On October 29, 2007, the Department sent Taxpayer formal 60-day notice of the

requirement to possess and execute any NTTCs necessary to support a claimed deduction by

December 28, 2007 or the claimed deductions would be disallowed under NMSA 1978, Section

7-9-43 (C). [Department C]

6. Taxpayer, through General Manager Steigerwald’s signature, acknowledged

receipt of the 60-day NTTC letter on October 29, 2007. [Department C]

7. Taxpayer and the Department agreed to conduct the audit based on a sample

invoice basis, with sampled invoices broken into three strata: invoices between 0.00-$1,000.00,

invoices between 1000.01-$15,000.00, and all invoices over $15,000.01. The first two strata

were based on a random sample of invoices, while all invoices were audited in the third stratum.

[Department D.5]

8. At the time of the 60-day NTTC deadline on December 28, 2007, Taxpayer

possessed a multijurisdictional sales and use tax certificate (“MTC certificate”) [Taxpayer #1.1]

but not a state NTTC for invoices from Kinetic Systems, Inc., as follows:

a. Invoice #614013, sale to Kinetic Systems, Inc., totaling $225.60, in the

0.00-$1,000.00 audit sample stratum. [Department D.15]
b. Invoice #615701, sale to Kinetic Systems, Inc., totaling $1,643.20, in the

between 1000.01-$15,000.00 audit sample stratum. [Department D.17]

9. The Department disallowed all $1,868.80 in deductions from Kinetic Systems,

Inc. receipts in both the 0.00-$1,000.00 stratum and the 1000.01-$15,000.00 stratum because the

Department determined that Kinetic Systems, Inc. was required to be registered in New Mexico

based on the presence of a state tax registration number on the face of the MTC certificate,

invaliding the MTC certificate and requiring a NTTC.

10. On February 21, 2008, after the 60-day NTTC deadline, Kinetic Systems, Inc.,

provided Taxpayer with a NTTC. [Taxpayer # 1.2]. The Department did not accept this untimely

NTTC.

11. At the time of the 60-day NTTC deadline on December 28, 2007, Taxpayer

possessed a Type 5 NTTC [Taxpayer #1.3] for invoices from KSL, all from the 0.00-$1,000.00

audit sample stratum , as follows:

a. Invoice #348, KSL, totaling $43.07. [Department D.15]

b. Invoice #2698, KSL, totaling $49.77. [Department D.15]

c. Invoice #4372, KSL, totaling $118.40. [Department D.15]

12. The Department disallowed all $211.24 in claimed deductions from Taxpayer’s

KSL receipts in the 0.00-$1,000.00 stratum as invalid because a Type 5 NTTC was not the valid

kind for the transaction at issue. [Department D.15]

13. At the time of the 60-day NTTC deadline on December 28, 2007, Taxpayer

possessed a MTC certificate [Taxpayer #1.4] but not a state NTTC for invoices from Grainger,

all in the above $15,000.01 audit sample stratum, as follows:

a. Invoice #604794, Grainger, totaling $24,660.40; [Department D.19]
b. Invoice #609021, Grainger, totaling $23,472.00; [Department D.19]

c. Invoice #611163, Grainger, totaling $20,342.40. [Department D.19]

14. The Department disallowed all $68,474.40 in deductions from Grainger receipts

in the above $15,000.01 stratum because the Department determined that Grainger was required

to be registered in New Mexico based on the presence of a state tax registration number on the

face of the MTC certificate, invaliding the MTC certificate and requiring a NTTC.

15. On February 8, 2008, after the 60-day NTTC deadline, Grainger provided

Taxpayer with a Type 2 NTTC. [Taxpayer # 1.5]. The Department did not accept this untimely

NTTC.

16. At the time of the 60-day NTTC deadline on December 28, 2007, Taxpayer did

not possess a state NTTC for invoice #610893, Intel Corporation, totaling $30,583.80.

[Department D.19]. Taxpayer did possess a purchase order from Intel indicating that the

purchase was tax exempt. [Taxpayer #1.9]

17. On March 4, 2008, after the 60-day NTTC deadline, Taxpayer received a Type 9

NTTC from Intel for the $30,583.80 in receipts.

18. Without timely possession of a valid NTTC, the Department disallowed the

$30,583.80 claimed deduction from the Intel receipt in the above $15,000.01 sample stratum.

19. During the audit, the Department determined a percentage rate of error in the

0.00-$1,000.00 stratum and the 1000.01-$15,000.00 stratum by “dividing the total disallowed

deduction exceptions amount by the total nontaxable sales invoice amount.” Using each

respective percentage rate of error in these sample strata, the Department extrapolated a total

gross receipts liability for these strata. [Department D.6]

20. The Department calculated the percentage rate of error for the 0.00-$1,000.00

stratum as 2.40919%. [Department D.16]

21. The Department calculated the percentage rate of error for the 1000.01-

$15,000.00 stratum as 5.49536%. [Department D.18]

22. Since the Department audited every invoice in the invoices over $15,000.01

stratum, it did not need to calculate a percentage rate of error for that stratum and instead

calculated a total gross receipts liability from all actual invoices. [Department D.5-6]

23. On June 12, 2008, in letter id. #L0246638976, the Department assessed Taxpayer

$32,564.95 in gross receipts tax, $9,403.46 in gross receipts interest, $695.12 in compensating

tax, and $171.58 in compensating tax interest, for a total assessed liability of $43,835.11.

[Department G]

24. On July 9, 2008, Taxpayer filed a protest to the Department’s assessment.

Taxpayer did not protest the compensating tax assessment or interest. While the Department

disallowed other claimed deductions as part of the gross receipts audit, Taxpayer’s letter of

protest (and presentation during hearing) makes clear that Taxpayer only protests the disallowed

deductions articulated in Findings of Fact 8-18, and the resulting rates of error articulated in

Findings of Fact 20-21 from those disallowed deductions used to calculate the overall gross

receipts assessed liability. [Taxpayer #1, Department H]

25. On July 21, 2008, the Department acknowledged timely receipt of Taxpayer’s

protest. [Department I]

26. On April 25, 2012, the Department filed a request for hearing in this matter.

27. On May 4, 2012, the Department’s Hearing Bureau sent notice of administrative

hearing, scheduling this matter for July 5, 2012 at 9:00 AM.

28. On May 14, 2012, Taxpayer moved to continue the scheduled July 5, 2012

hearing so that Mr. Steigerwald would not have to travel on the 4th of July holiday.

29. On May 23, 2012, the Department’s Hearings Bureau sent amended notice of

administrative hearing, scheduling this matter for July 5, 2012 at 1:00 PM, giving Taxpayer more

time to travel to the hearing on the July 5th.

30. As of the date of hearing, Taxpayer owed $32,564.95 in gross receipts tax and

$14,736.87 in interest, for a total outstanding liability of $47,301.82. [Department M]

DISCUSSION

Based on Taxpayer’s well-articulated protest letter, the presentation of evidence at

hearing, and the arguments of the parties at hearing, there are four main issues at protest. The

first issue is whether Taxpayer was entitled to claimed deductions when it timely possessed MTC

certificates from Kinetic Systems, Inc., and Grainger rather than state-issued NTTCs. The second

issue is whether the Department may accept Taxpayer’s NTTCs acquired after the expiration of

the 60-day NTTC deadline. The third issue is whether Taxpayer is entitled to rely in good faith

on KSL’s Type 5 NTTC. And the final issue is whether general fairness concerns regarding the

audit process and with the delay in conducting the protest hearing entitle Taxpayer to additional

relief like the Department’s acceptance of Taxpayer’s untimely possessed NTTCs.

Presumption of Correctness and Burden of Proof.

Under NMSA 1978, Section 7-1-17(C) (2007), the assessment issued in this case is

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

and establish that it was entitled to the claimed deductions during the sample audit period. 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 disallowed claims for deductions.

“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).

However, once a taxpayer rebuts the presumption of correctness, the burden shifts to the

Department to show the correctness of the assessed tax. See MPC Ltd. v. N.M. Taxation & Revenue

Dep't, 133 N.M. 217, 220, 2003 NMCA 21, ¶13, 62 P.3d 308, 311 (N.M. Ct. App. 2002).

Overview of Deduction and NTTCs

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

receipts for taxpayers who meet the statutory requirements set by the legislature. In order to qualify

for the claimed deductions, many of the deductions require a taxpayer to obtain a supporting NTTC.

All of Taxpayer’s claimed deductions in this protest require a supporting NTTC.

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.

Regulation 3.2.201.8(A)(1) NMAC (05/31/01) further indicates that a taxpayer “should be in

possession of all (NTTCs) at the time the deductible transaction occurs.” While taxpayers “should”

have possession of required NTTCs at the time the return is due from the receipts at issue under the
statute, NMSA 1978, §7-9-43 (2005) gives taxpayers audited by the Department a second chance to

obtain the required NTTCs. See also Regulation 3.2.201.8(A)(2) NMAC (05/31/01).

Regardless of the reason for failing to obtain a requisite NTTC, taxpayers who rely on the

statute’s second chance provision run the risk of having their deductions disallowed if they are

unable to meet the 60-day deadline set by the legislature. 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). NMSA 1978, §7-9-43 (2005).

Issue 1: Whether Taxpayer could rely on MTC Certificates in lieu of NTTCs?

In this protest, Taxpayer argues that the Department should accept the MTC certificates

timely in its possession in support of its claimed deductions for it receipts from Kinetic Systems,

Inc. and Grainger. The Department expressed in questioning over the course of the hearing some

uncertainty about what Taxpayer was hoping to achieve related to the claimed deductions,

percentage rate of error, and ultimate assessed liability. To the extent that Department was

suggesting that Taxpayer had not made explicit the grounds of its protests, and the specific relief

requested, Taxpayer’s protest letter, and the protest hearing make clear that Taxpayer is attempting

to receive credit for the claimed deductions for Kinetic Systems, Inc. and Grainger receipts, which

in turn would lead to a reduction in the percentage rate of error in each of the first two strata used to

extrapolate Taxpayer’s liability in those strata, and a reduction in the actual liability in the third

stratum. In other words, if the Department should have accepted Taxpayer’s MTC certificates,

Taxpayer would be entitled to the claimed deductions, which would lower both Taxpayer’s actual

liability in the third stratum and the percentage rate of errors in the first and second strata used to

extrapolate liability in those respective strata.
Under NMSA 1978, §7-9-43 (2005), the Department is authorized, through promulgation of

regulation, to accept as a valid NTTC “documents issued by other states or the multistate tax

commission to taxpayers not required to be registered in New Mexico.”

As directed by NMSA 1978, §7-9-43 (2005), the Department has in fact promulgated a

regulation regarding the acceptance of MTC certificates. Under Regulation 3.2.201.13 (A) NMAC

(05/31/01, before 3/15/10 changes), the Department will accept a MTC certificate issued by another

state or the multistate tax commission “to a taxpayer not required to be registered in New Mexico”

as equivalent to a New Mexico Type 1 or Type 2 NTTC.

The Department disallowed the MTC certificates in Taxpayer’s possession from Kinetic

Systems, Inc. and Grainger because on the face of each respective MTC certificate, both Kinetic

Systems, Inc. and Grainger listed New Mexico CRS identification numbers. However, the

Department’s presumption that because Kinetic Systems, Inc. and Grainger listed a New Mexico

CRS identification number on each respective MTC certificate means they were required to

register in New Mexico is contrary to clear, applicable case law.

A New Mexico Court of Appeals, Siemens Energy & Automation, Inc. v. New Mexico

Taxation and Revenue Department, 119 N.M. 316, 889 P.2d 1238 (Ct. App. 1994), is nearly

directly on point to the facts of this case, and reaches a conclusion directly contrary to the

Department’s position on disallowing Taxpayer’s timely possessed MTC certificates. In Siemens,

the taxpayer timely possessed two MTC certificates to support claimed deductions. However, the

Department disallowed the MTC certificates because each respective issuing company had listed

a New Mexico tax registration number on the face of the MTC certificates. See id. at 317, 1239.

The Court of Appeals noted that the Department misunderstood the presumption of correctness

in this fact pattern: once the taxpayer presented a MTC certificate, the taxpayer successfully met
the presumption of correctness and the burden shifted to the Department to challenge the validity

of the presented MTC certificates. See id. at 318, 1240.

Like in the present protest, the Department in Siemens simply presumed based on the

listed New Mexico tax identification numbers that the issuers of the MTC certificates were

required to be registered taxpayers in New Mexico. However, the Court of Appeals explicitly

rejected the Department’s presumption by finding in Siemens that “the mere possession of a New

Mexico registration number does not mean that the taxpayer is registered with New Mexico for

gross receipts tax purposes.” id. at 320, 1242. Like the record in the present protest, the Court of

Appeals noted in Siemens that “[t]he record also does not indicate why they [issuers of the MTC

certificates] possessed New Mexico tax identification numbers,” or what New Mexico taxes

were being paid by MTC certificate issuers. In sum, the Siemens’ Court of Appeals specifically

held “that the fact [MTC Certificate issuers] included their New Mexico taxpayer identification

numbers, without more, does not invalidate Siemens’ reliance upon the MTC certificates.” id. at

322, 1244.

Although it does not alter the clear applicability of the Siemens’ holding to the present

protest, it is worth briefly mentioning that because of the regulation then in place, and because of

the requirements then listed on the MTC certificate consistent with that regulation, nexus played

a part in the Siemens’ analysis. Both the regulation in place at that time and the information on

the back of the MTC certificate required as a condition of New Mexico’s acceptance of the MTC

certificate in lieu of a NTTC that the purchaser issuing the MTC certificate not have sufficient

nexus with New Mexico to be subject to state gross receipts tax. In Siemens, the Department

determined that the presence of the New Mexico taxpayer identification numbers on the face of

the MTC certificates meant that the issuers were required to register as taxpayers in New Mexico
because they had sufficient nexus with New Mexico. The Court of Appeals rejected the

Department’s interpretation in Siemens’ because it found that requiring a taxpayer to make a

complicated nexus determination based on the face of the document would invalidate the very

purpose of Multistate Tax Compact. id.

While nexus may continue to underpin the purpose of MTC certificates, nexus is no

longer an explicit regulatory requirement, or a requirement written on the MTC certificate itself.

Both Regulation 3.2.201.13 (A) NMAC (05/31/01, before 3/15/10 changes) and the version of the

MTC certificate at issue in this protest have dropped reference to nexus and indicate that the

Department will only accept a MTC certificate in lieu of an NTTC when the buyer is “not

required to be registered in New Mexico.” [Department F.3]. Similar to its rejected presumption

in Siemens, it is clear that the Department in this protest determined based on the presence alone

of New Mexico tax registration numbers on the MTC certificates that the buyers are required to

be registered in New Mexico. Even without the added Siemens’ nexus considerations, Siemens

still stands for the proposition that the Department is not free to presume like it did in this protest

that in the absence of additional information, the mere presence of New Mexico tax registration

numbers on the face of the MTC certificates established that the buyer was required to be

registered in New Mexico and invalidated the MTC certificate.

Because Taxpayer established that it timely possessed MTC certificates from Kinetic

Systems, Inc. and Grainger, pursuant to Siemens, the burden shifted to the Department to

establish that those MTC certificates were invalid. The Department did not present any

additional evidence other than what was contained on the face of the MTC certificates. Under the

holding of Siemens, without additional evidence that Kinetic Systems, Inc. and Grainger were

required to be registered in New Mexico or the certificates were otherwise invalid, the
Department was not free to reach that conclusion merely based on the presence of New Mexico

tax registration numbers on the MTC certificates. Like in Siemens, therefore, the Department

must accept Taxpayer’s timely possession of MTC certificates and allow Taxpayer’s claimed

deductions for the Kinetic Systems, Inc. and Grainger receipts. Based on these allowable

deductions, the Department must recalculate the percentage rate of error in the first and second

strata, extrapolate a new total liability in the first and second strata based on the recalculated

percentage rate of error, and reduce Taxpayer’s actual liability in the third strata accounting for

the $68,474.80 total Grainger allowable deductions.

Issue 2: Whether the Department has authority to accept untimely NTTCs?

Taxpayer argues that the Department should accept the untimely Intel NTTC it received

after the expiration of the 60-day NTTC deadline. There is no dispute in this case that Taxpayer

did not possess a valid NTTC from Intel at the time of the transaction, as indicated under

Regulation 3.2.201.8(A)(1) NMAC (05/31/01), or at time the tax return was due from those

receipts, as required under NMSA 1978, §7-9-43 (2005). Taxpayer therefore must rely on the 60-

day second chance provision under NMSA 1978, §7-9-43 (2005) to obtain the valid NTTC.

The evidence established that Taxpayer had clear notice of the 60-day second chance NTTC

statutory provision. Even before sending the official 60-day notice, the Department informed

Taxpayer twice—on August 27, 2007 and October 19, 2007—of the necessity of obtaining the

NTTCs as part of the audit process. On October 29, 2007, the Department formally sent Taxpayer

notice of audit that included explicit notice that under NMSA 1978, §7-9-43 (2005),Taxpayer had

60-days until December 28, 2007 to obtain any NTTCs necessary to support its claimed deductions.

Although Taxpayer may have made genuine efforts to obtain the NTTC from Intel, the

evidence is clear that Taxpayer did not receive the NTTC until March 4, 2008, nearly six-weeks
after the December 28, 2007 60-day NTTCs deadline. Regardless of the reason for non-possession

of a required NTTC, NMSA 1978, §7-9-43 (2005), with its mandatory “shall be disallowed”

language, provides no further extension of time beyond this 60-day second chance period. Taxpayer

had a regulatory obligation at the time of the transactions to obtain the relevant NTTC supporting its

claim for deductions and a statutory obligation to have all the NTTCs at the time the tax returns for

the receipts at issue were due.

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

precisely because the legislature recognized the potential challenges of obtaining NTTCs after the

transactions between the buyer 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 businesses can close or restructure. By

waiting to obtain the NTTCs until the 60-day period after notice of audit, Taxpayer subjected itself

to myriad risks that Intel would be unable or unwilling to timely provide a NTTC to Taxpayer.

Ultimately, Taxpayer and not Intel had the obligation under the statute to document its

gross receipts tax deductions. Under New Mexico's self-reporting tax system, every entity is

charged with the reasonable duty to ascertain the possible tax consequences of its 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 Intel invoice listing the transaction as non-taxable

does not satisfy the NTTC possession requirement imposed on Taxpayer by statute. The incidence

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

determine whether it had the appropriate documentation needed to support Taxpayer’s claimed

deductions. The Taxpayer's failure to obtain the requisite, valid NTTCs within the 60-day period
provided in NMSA 1978, §7-9-43 (2005) leaves the Department with no choice but to disallow the

claimed deductions.

Issue 3: Whether the Taxpayer acted in good faith in accepting KSL’s Type 5 NTTC?

As raised specifically in Taxpayer’s protest letter, Taxpayer argues that it accepted and

relied upon KSL’s timely issued Type 5 NTTC in good faith, and therefore should be granted the

claimed deductions for the KSL receipts.

Under NMSA 1978, §7-9-43 (2005), a seller who accepts a timely NTTC “in good faith that

the buyer… will employ the property… transferred in a nontaxable manner,” may rely on that

NTTC as “conclusive evidence” that the receipts from that transaction “are deductible.” Regulation

3.2.201.14 NMAC (05/31/01) indicates that the statutes “good faith” provision will be determined at

the time of each transaction, and that a taxpayer claiming protection of an NTTC “continues to be

responsible that the goods delivered… are of the type covered by the certificate.”

By Regulation 3.2.201.14 NMAC (05/31/01) and by case law, a taxpayer may only rely on

an NTTC if the goods delivered during the transaction are the correct type given the NTTC issued

and the deduction at issue. See Gas Co. v. O'Cheskey, 94 N.M. 630, 632, 614 P.2d 547, 549 (Ct.

App. 1980) (issuance of NTTC does not transform an otherwise taxable transaction into a

nontaxable one); see also McKinley Ambulance Service v. Bureau of Revenue, 92 N.M. 599, 601-

602, 592 P.2d 515, 517-518 (Ct. App. 1979) (the "conclusive evidence" provision of § 7-9-43(A)

does not apply when there is no NTTC applicable to the transaction at issue); see also Arco

Materials, Inc. v. New Mexico Taxation and Revenue Department, 118 N.M. 12, 16, 878 P.2d

330, 334 (Ct. App.) (because Type 9 NTTCs no longer applied to the sale of construction

materials to government agencies, they could not be used to support the deductions claimed,
“regardless of what the NTTCs represented on their face”), rev’d on other grounds, 118 N.M.

647, 884 P.2d 803 (1994).

Here, the evidence is clear that KSL provided Taxpayer an incorrect type of NTTC to cover

the transaction between KSL and Taxpayer. A Type 5 NTTC, which is the type KSL provided to

Taxpayer, covers the sale of a service. Rather than providing a service to KSL, Taxpayer sold KSL

tangible personal property in the form of valves, fittings, and fluid system components. When

specifically asked if Taxpayer provided any installation or maintenance services, Mr. Steigerwald

replied no, that Taxpayer only sold valves, fittings, and fluid system component products to

customers. Therefore, since Taxpayer accepted the wrong type of NTTC given the nature of the

transaction involving products rather than services, Taxpayer is not entitled to the statute’s safe

harbor, good-faith NTTC protection. The Department properly disallowed the claimed KSL

deductions.

Issue 4: Whether fairness issues warrant further Taxpayer relief?

Without citing any legal authority, Taxpayer argued that fairness required that it be granted

some additional relief and allowed credit for the untimely NTTC in this matter for two reasons.

First, Taxpayer repeatedly suggested that the audit process itself was skewed heavily towards

finding additional tax liabilities rather than locating any possible tax credits for items that Taxpayer

might have inadvertently categorized as taxable. Second, Taxpayer found a contradiction with the

fact that the Department argued that Taxpayer was liable under a strict 60-day NTTC possession

deadline, yet it took the Department nearly four-years to hold the requested protest hearing.

Regarding the audit, there is no evidence on the record that the Department did anything

improper or unprofessional in conducting this audit. To the contrary, the evidence suggests that the

Department complied with all statutory audit requirements. The nature of New Mexico’s self-
reporting tax system, and the fact that a taxpayer carries the burden to substantiate any claimed

deduction, does put the onus squarely on a taxpayer during the audit to demonstrate that claimed

deductions from the imposition of tax are legally warranted. Whether a taxpayer feels that this onus

is fair or not, the Department was in compliance with the Legislature’s tax statutes, the Tax

Administration Act.

Regarding the delay from the time Taxpayer protested the audit until the time of hearing, it

must be noted for the record that the Department’s Hearing Bureau first learned of this case when it

received the Department’s request for hearing on April 25, 2012. Upon receipt of that request, the

Hearing Bureau promptly scheduled this matter for protest hearing at the next available opportunity

on the docket, some two-months later on July 5, 2012.

Although the reason for the Department’s delay in requesting a hearing in this matter are

unclear, New Mexico courts have applied the general rule of tardiness in administrative hearings

under the Tax Administration Act: 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).

Collection of taxes is the enforcement of public right/interest, and 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. Further, while certainly an inconvenience, there is

no evidence that Taxpayer suffered any prejudice to the presentation of its protest as a result of the

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

remedy sought for the delay by Taxpayer—granting of deductions for a NTTC possessed after the
mandatory 60-day statutory deadline and a NTTC of the wrong type for the transaction at issue—is

not permissible under the applicable statutory, regulatory, and case-law authority. The Legislature

has mandated that the Department disallow any deduction in which a taxpayer does not possess a

valid NTTC within 60-days of notice of audit. While the delay is unfortunate and regrettable,

Taxpayer is not entitled to any additional relief resulting from the delay.

CONCLUSIONS OF LAW

A. Taxpayer filed a timely, written protest to the gross receipts portion of assessment

L0246638976. Jurisdiction lies over the parties and the subject matter of this protest.

B. Taxpayer did timely possess MTC certificates for all claimed deductions of receipts

from sales to Kinetics Systems, Inc. and Grainger under the rationale of Siemens Energy &

Automation, Inc. v. New Mexico Taxation and Revenue Department, 119 N.M. 316, 889 P.2d

1238 (Ct. App. 1994).

C. Pursuant to the holding of Siemens, since it presented no other evidence

challenging the validity of the MTC certificates other than the registration numbers on the face

of the certificates, the Department must honor the MTC certificates and allow Taxpayer’s

claimed deductions from sales to Kinetics Systems, Inc. and Grainger.

D. Taxpayer did not timely possess the requisite NTTC from Intel within 60-days of the

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

Department was required to disallow the claimed deduction.

E. Taxpayer could not rely on good faith acceptance of the KSL Type 5 NTTC because

that NTTC type only applies to services and not products.

F. Taxpayer cites no authority that either a delay in the hearing process or alleged bias

in the audit warrants further relief from the assessment.
For the foregoing reasons, the Taxpayer's protest IS GRANTED IN PART AND

DENIED IN PART. The Department is ordered to allow Taxpayer’s claimed Kinetics Systems,

Inc. and Grainger deductions, recalculate the applicable percentage of error or the actual

exceptions in each audit sample strata in light of those allowable deductions, and use those new

figures to extrapolate Taxpayer’s outstanding gross receipts tax liability. Taxpayer is then

ordered to pay the newly calculated gross receipts tax liability and any accrued interest.

DATED: July 19, 2012.

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