Could a trucking contractor deduct hauling and spreading receipts when it held Type 6 and 7 NTTCs but could not document where the materials originated?

Plain-English summary

Hank Gallegos Trucking could not deduct its hauling and spreading receipts as construction services because its records did not show that the materials came from on or near each construction project. Contractor licenses and timely Type 6 and Type 7 NTTCs did not supply the missing transaction facts.

Hank Gallegos operated the business as a sole proprietorship through December 31, 2003 and then incorporated it. The business provided trucking, demolition, earthwork, roadwork, and other construction-related services.

The Department audited:

• the sole proprietorship for reporting periods ultimately spanning December 1999 through December 2003; and
• the corporation for June 2004 through June 2005.

Gallegos timely produced NTTCs received from construction contractors and customer statements with attached tickets. The Department disallowed the deductions because those records did not substantiate qualifying construction services beyond hauling and transportation.

Only narrowly defined hauling qualified

Section 7-9-52 allowed a deduction for selling a construction service to a construction business that delivered an NTTC. But the transaction first had to be a construction service.

Regulation 3.2.1.11(A) generally excluded hauling to or from a construction site. Regulation 3.2.52.10(C) supplied a narrow exception for hauling and spreading dirt, sand, gravel, or rock when the materials were obtained from a source on or in close proximity to that particular project.

The business established that it had valid New Mexico contractor licenses from May 2004 through 2007. It also produced a customer letter describing “loading, hauling, and spreading.” Neither fact proved the regulation's source-proximity requirement for any individual receipt.

The invoices and tickets did not identify:

• what material was hauled and spread;
• where the material originated;
• where it was delivered; or
• how close the source was to the construction site.

Gallegos testified that detailed contracts were uncommon and that “hauling” in construction usage included spreading and laying down materials. The decision accepted that industry usage for purposes of analysis but still found the evidence too general to show that any transaction met the regulation.

Good-faith NTTC acceptance did not cure the problem

Section 7-9-43 protected a seller that accepted an NTTC in good faith for a service the buyer would use nontaxably. Regulation 3.2.201.14 made the seller continually responsible for ensuring that later services were of the type covered by the certificate.

Because Gallegos did not prove qualifying construction services, the Type 6 and 7 certificates were not applicable to the transactions. The cited cases established that an NTTC cannot transform an otherwise taxable transaction into a nontaxable one.

Interest continued during the long protest

The Department assessed no civil penalty. It did assess tax and statutory interest in October 2006.

The Department's February 2007 protest acknowledgment warned that interest would continue accruing and that payment could stop further accrual while the dispute remained pending. No payment was made.

By the August 2012 hearing, the final amounts stated in the order were:

• sole proprietorship: $303,131.09 tax and $298,878.01 interest; and
• corporation: $69,073.16 tax and $39,020.04 interest.

Result: protest denied. Interest continued to accrue until the tax principal was paid.

What this means for you

Trucking companies working on construction projects

Merely hauling to or from a job site was excluded from construction services under the cited regulation. The exception required both spreading specified materials and proving that their source was on or near the project.

Contractors accepting NTTCs

Match the certificate to the actual work performed. A timely certificate protects only transactions of the type the certificate and deduction cover.

Accountants and project administrators

Invoices should identify material type, source, destination, and the source's relationship to the project site. Generic descriptions such as “hauling” or “loading, hauling, and spreading” were insufficient here.

Common questions

Q: Did Gallegos have contractor licenses?
A: Yes for May 2004 through 2007, but licensing alone did not prove that each audited transaction was a deductible construction service.

Q: Were the NTTCs late?
A: No. The decision said the Type 6 and 7 certificates were timely presented; the problem was that the underlying services were not shown to qualify.

Q: What hauling could qualify under the cited regulation?
A: Hauling and spreading dirt, sand, gravel, or rock obtained from a source on or in close proximity to the construction project.

Q: Why were the customer letter and tickets insufficient?
A: They did not show the particular materials, source, destination, or source-to-project distance for individual receipts.

Q: Was a penalty imposed?
A: No. The order upheld tax and interest only.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-9-4 and 7-9-5 — gross receipts tax and presumption that business receipts are taxable
• NMSA 1978, § 7-9-52 — construction-service deduction
• NMSA 1978, § 7-9-3(C) — definition of construction
• Regulations 3.2.1.11(A) and 3.2.52.10(C) NMAC — exclusion for ordinary hauling and the source-proximity exception
• NMSA 1978, § 7-9-43 and Regulation 3.2.201.14 NMAC — good-faith NTTC acceptance and seller responsibility
• NMSA 1978, § 7-1-67 — mandatory interest until payment

Cases:

• 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
• Gas Co. v. O'Cheskey, 94 N.M. 630, 632, 614 P.2d 547, 549 (Ct. App. 1980) — an NTTC does not 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 NTTC
• Arco Materials, Inc. v. New Mexico Taxation and Revenue Department, 118 N.M. 12, 16, 878 P.2d 330, 334 (Ct. App. 1994), reversed on other grounds, 118 N.M. 647, 884 P.2d 803 — facial certificate language did not cover an inapplicable transaction
• State v. Lujan, 90 N.M. 103, 105, 560 P.2d 167, 169 (1977) — mandatory meaning of “shall” for interest

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Hank Gallegos Trucking
• Decision PDF: D&O 12-20

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
HANK GALLEGOS TRUCKING No. 12-20
TO ASSESSMENT ISSUED UNDER
LETTER ID NOs. L1922839808 & L2073179392

DECISION AND ORDER

A protest hearing occurred on the above captioned matter on August 28, 2012 before

Brian VanDenzen, Esq., Tax Hearing Officer, in Santa Fe. Mr. Gilbert Sanchez, C.P.A., and

Charlotte Burkhead, C.P.A. appeared in person, representing Hank Gallegos Trucking

(“Taxpayer”). Mr. Hank Gallegos testified on behalf of Taxpayer. Staff Attorney Peter Breen

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 #1-5 were admitted into the record. Department Exhibits A-C were admitted into the

record. All exhibits are more thoroughly described in the Administrative Exhibit Log. Based on

the evidence and arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. Taxpayer provides hauling services and construction services, including

demolition, earth work, and roadwork.

2. Mr. Hank Gallegos owned and operated Taxpayer as a sole proprietorship from

1995 until December 31, 2003.

3. On December 31, 2003, Taxpayer changed from a sole proprietorship to a

corporation as Hank Gallegos Trucking, Inc.

In the Matter of the Protest of Hank Gallegos Trucking, page 1 of 11

4. In Hank Gallegos Trucking, Inc.’s 2004 application for a tax identification

number with the Department, Taxpayer described its nature of business as “trucking,

construction, earthmoving, and demolition.” [Taxpayer Exhibit #4].

5. Taxpayer has a GS05 Contractor’s License with the State of New Mexico.

[Taxpayer Exhibit #2].

6. Taxpayer has a GS08 Contractor’s License with the State of New Mexico.

[Taxpayer Exhibit #3].

7. Taxpayer’s New Mexico Contractor’s Licenses were valid from May 2004

through 2007. [Department Exhibit B, page 4].

8. Taxpayer did not provide proof that it had a valid New Mexico Contractor’s

License from January 2000 through December 2003. [Department Exhibit B, page 7].

9. On July 20, 2005, the Department selected Taxpayer’s sole proprietorship for an

audit of CRS reporting periods January 2002 through December 2003. [Department Exhibit B].

10. On July 20, 2005, the Department selected Taxpayer’s corporation for an audit of

CRS reporting periods January 1, 2004 through June 30, 2005. [Department Exhibit C].

11. Taxpayer timely presented type 6 and type 7 Nontaxable transaction certificates

(“NTTCs”) he had received from construction contractors for claimed construction services

deductions.

12. As part of the audit process, Taxpayer provided the Department auditor with

customer statements that included attached tickets. [Department Exhibit B, page 4 & Department

Exhibit C, page 3].

13. After reviewing Taxpayer’s customer statements with attached tickets, the

Department disallowed Taxpayer’s claimed construction services deductions because it

In the Matter of the Protest of Hank Gallegos Trucking, page 2 of 11
determined that Taxpayer could not substantiate that it provided qualifying construction services

other than the non-qualifying hauling and transporting services. [Department Exhibit B, page 4

and 7, & Department Exhibit C, page 5].

14. The Department determined that Taxpayer’s sole proprietorship had

underreported by 25%, and therefore expanded the audit to include the reporting period January

1, 2000 through January 1, 2002. [Department Exhibit B, page 5].

15. On May 5, 2006, Taxpayer presented a letter from Construction Contracting

Management, Inc. (“CCM”) to the Department where CCM indicated that it had paid Taxpayer’s

sole proprietorship and Taxpayer’s corporation to perform “various construction services… such

as loading, hauling, and spreading.” [Taxpayer Exhibits #1 & #1.1].

16. On May 16, 2006, the Department informed Taxpayer via letter that CCM’s

letters provided to the Department “would not justify deductions for construction services for

CCM.” The letter also informed Taxpayer that the Type 6 & 7 NTTCs Taxpayer received were

“inappropriate and not in good faith” without additional records to “justify that a construction

service was performed…” [Taxpayer Exhibit #5].

17. On October 17, 2006, the Department assessed Taxpayer’s sole proprietorship for

$303,131.09 in gross receipts tax for reporting periods December 31, 1999 through December

31, 2003 and $184,424.03 in interest, for a then total assessment of $487,555.12.

18. On October 17, 2006, the Department assessed Taxpayer’s corporation for

$69,073.16 in gross receipts tax for reporting periods June 30, 2004 through June 30, 2005 and

$12,939.91 in interest, for a then total assessment of $82,013.07.

19. The Department did not assess Taxpayer with civil penalty under either of the

assessments.

In the Matter of the Protest of Hank Gallegos Trucking, page 3 of 11

20. On November 21, 2006, Taxpayer filed a request for a retroactive extension of

time to file its protests of the assessments.

21. Taxpayer’s November 21, 2006 letter also contained Taxpayer’s formal protest to

the Department’s assessments.

22. On February 6, 2007, the Department informed Taxpayer that it granted

Taxpayer’s request for a retroactive extension of time in which to file protests to the

Department’s assessments and acknowledged receipt of Taxpayer’s protest.

23. On May 23, 2011, the Department’s then counsel, Chief Legal Counsel Nelson

Goodin, asked Taxpayer to provide any information to substantiate its claim that it provided

construction services beyond hauling of materials by June 15, 2011. Mr. Goodin never received

any additional documentation to support Taxpayer’s claimed deduction. [Department Exhibit A].

24. On August 8, 2011, the Department requested a hearing with the Department’s

Hearings Bureau in this matter.

25. On August 26, 2011, the Hearings Bureau sent Notice of Administrative Hearing,

scheduling a protest hearing on March 13, 2012.

26. On February 2, 2012, the Hearings Bureau sent Amended Notice of

Administrative Hearing, rescheduling the protest hearing to May 24, 2012.

27. On May 22, 2012, Taxpayer’s representative moved to continue the May 24, 2012

hearing because of a family medical emergency. The Department did not oppose Taxpayer’s

request for continuance.

28. On May 22, 2012, the Hearings Bureau issued an order continuing the May 24,

2012 hearing and rescheduling the formal protest hearing in this matter for August 28, 2012.

In the Matter of the Protest of Hank Gallegos Trucking, page 4 of 11

29. As of the date of hearing, $298,878.01 in interest had accumulated against

Taxpayers’ sole proprietorship and $39,020.04 in interest had accumulated against Taxpayer’s

corporation.

DISCUSSION

Taxpayer protests the Department’s denial of a deduction for selling construction services

to person engaged in construction business under NMSA 1978, Section 7-9-52 (2000). Taxpayer

argues that it was entitled to the claimed deduction because Taxpayer is a licensed general

contractor and because Taxpayer provided hauling services that, in the nomenclature of the

construction industry, includes spreading and laying materials down. Moreover, Taxpayer argued

that it was entitled to accept and rely on the NTTCs it received in good faith.

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 it was entitled to the claimed deductions. 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).

Gross Receipts Tax and the Construction Services Deduction.

For the privilege in engaging in business, New Mexico imposes a gross receipts tax on the

receipts of any person engaged in business. See NMSA 1978, Section 7-9-4 (2002).

In the Matter of the Protest of Hank Gallegos Trucking, page 5 of 11
Under the Gross Receipts and Compensating Tax Act, there is a statutory presumption that all

receipts of a person engaged in business are taxable. See NMSA 1978, Section 7-9-5 (2002).

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, § 7-9-52 (2002), which states in

pertinent part that:

Receipts from selling a construction service may be deducted from
gross receipts if the sale is made to a person engaged in the
construction business who delivers a nontaxable transaction
certificate to the person performing the construction service.

NMSA 1978, Section 7-9-3(C) (2001) defines construction for gross receipt tax purposes as

the “building, altering, repairing or demolishing” any of the 18-listed items under the statute.

Regulation 3.2.1.11(A) NMAC (10/31/2000) limits construction services to the 18 items/activities

listed under NMSA 1978, § 7-9-3(C) (2001). Moreover, Regulation 3.2.1.11(A) NMAC

(10/31/2000) specifically excludes “hauling to or from the construction site except as otherwise

provided” under Regulation 3.2.52.10 (C) NMAC (05/31/01).

Regulation 3.2.52.10 (C) NMAC (05/31/01) allows a deduction pursuant to NMSA 1978, §

7-9-52 (2002) only when the person had receipts “from hauling and spreading dirt, sand, gravel, and

rock, treated or untreated, for the purposes of furnishing materials to a construction project when

such materials have been obtained from source which is on or in the proximity of that construction

project…” (italics added for emphasis). In other words, only when the hauling is of material

obtained from a source that is on or in close proximity of that specific construction project can

hauling qualify for a deduction under NMSA 1978, § 7-9-52 (2002). Department regulations

interpreting a statute are presumed proper and are to be given substantial weight. See Chevron

In the Matter of the Protest of Hank Gallegos Trucking, page 6 of 11
U.S.A., Inc. v. State ex rel. Dep't of Taxation & Revenue, 139 N.M. 498, 503, 2006 NMCA 50, 16,

134 P.3d 785, 790 (N.M. Ct. App. 2006).

Simply proving that Taxpayer was a licensed contractor in New Mexico during a portion of

the audit period, which Taxpayer certainly did prove during the hearing, does not satisfy Taxpayer’s

burden to establish it was entitled to a deduction under NMSA 1978, § 7-9-52 (2002) given the clear

requirements of Regulation 3.2.52.10 (C) NMAC (05/31/01). Taxpayer did not present any

evidence in any fashion during the audit or during the protest hearing that Taxpayer was hauling and

spreading materials that Taxpayer obtained from a source on or near the specific construction

project. Taxpayer Exhibits #1 & #1.1 only establish that Taxpayer generically provided construction

services such as loading, hauling, and spreading for CCM. Those exhibits do not specify what

materials were hauled, from which source, or from what distance in relation to the specific

construction site. Reviewing the audit summaries of Taxpayer’s audits contained in Department

Exhibit B & C, the invoices do not show that Taxpayer was hauling or spreading any materials

Taxpayer obtained from either at the construction project site or in close proximity to the

construction site.

Taxpayer testified and argued that detailed contracts are not a construction industry standard

because general contractors want the flexibility to shop a bid until the last possible moment in the

event they can find a cheaper subcontractor. Further, Taxpayer testified and argued that in the

construction industry, the word “hauling” means hauling, spreading, and laying down all

transported materials at the construction site. Even accepting and considering these industry

practices, the testimony of Taxpayer still does not provide enough specific information to determine

whether any of Taxpayer’s individual receipts were entitled to the deduction under Regulation

3.2.52.10 (C) NMAC (05/31/01) because there is no way to determine if the source of the hauled

In the Matter of the Protest of Hank Gallegos Trucking, page 7 of 11
and spread materials came from on or in close proximity to the construction site. Moreover, under

Regulation 3.2.1.11(A) NMAC (10/31/2000), “hauling to or from the construction site…” alone is

excluded from the definition of a construction service even if the industry uses the word hauling to

describe hauling, spreading, and laying down all transported materials.

Without more detailed invoices showing the source and destination of the hauling and

spreading of materials, and the type of materials hauled and spread, there is no way to determine

whether Taxpayer qualified for the deduction under the requirements of Regulation 3.2.52.10 (C)

NMAC (05/31/01). As such, Taxpayer failed to meet the standard under Wing Pawn Shop to

establish it was entitled a deduction and Taxpayer failed to overcome the presumption of

correctness attached to the assessments.

Good Faith Acceptance of NTTCs

Taxpayer also argued it was entitled to claim the deduction under NMSA 1978, § 7-9-52

(2002) because Taxpayer accepted the NTTCs from CCM and other construction companies in

good faith.

Under NMSA 1978, §7-9-43 (2001), a seller who accepts a timely NTTC “in good faith that

the buyer… will employ…the service 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 statute’s “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… services performed thereafter 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 services performed 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

In the Matter of the Protest of Hank Gallegos Trucking, page 8 of 11
(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, Taxpayer presented no evidence that he performed qualifying construction services by

hauling materials originating from or within close proximity of the construction site, as required

under Regulation 3.2.52.10 (C) NMAC (05/31/01). Consequently, the services performed were not

of the type that would qualify for the issued NTTCs. Taxpayer is not entitled to the statute’s safe

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

Assessment of Interest

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. 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

In the Matter of the Protest of Hank Gallegos Trucking, page 9 of 11
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 6, 2007 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 this

matter in accord with the statutory mandate.

CONCLUSIONS OF LAW

A. Taxpayer filed a timely, written protest to the assessments L2073179392 and

L1922839808. Jurisdiction lies over the parties and the subject matter of this protest.

B. Because Taxpayer could not establish the source of the hauled and spread materials

Taxpayer provided to construction sites came from on or in close proximity to that construction site,

Taxpayer did not satisfy the requirements of Regulation 3.2.52.10 (C) NMAC (05/31/01) for a

claim for deduction under NMSA 1978, Section 7-9-52 (2002).

C. Taxpayer did not demonstrate that it was entitled to a deduction under NMSA 1978,

Section 7-9-52 (2002) for the transportation, hauling, and spreading services it provided to

construction contractors.

D. Under Gas Co. v. O'Cheskey, 94 N.M. 630, 632, 614 P.2d 547, 549 (Ct. App. 1980),

given the non-construction hauling services actually rendered, Taxpayer could not rely on good

faith acceptance of the NTTCs to transform an otherwise taxable transaction into a nontaxable

transaction.

E. Under NMSA 1978, Section 7-1-67 (2001) and State v. Lujan, 90 N.M. 103, 105,

560 P.2d 167, 169 (1977), Taxpayer shall pay interest on the outstanding tax liabilities.

In the Matter of the Protest of Hank Gallegos Trucking, page 10 of 11
For the foregoing reasons, the Taxpayer's protest IS DENIED. Taxpayer’s sole

proprietorship owes $303,131.09 in gross receipts tax and $298,878.01 in interest as of the date

of hearing. Taxpayer’s corporation owes $69,073.16 in gross receipts tax and $39,020.04 in

interest as of the date of hearing. Pursuant to NMSA 1978, Section 7-1-67 (2007), interest

continues to accrue until tax principal is paid.

DATED: September 27, 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 Hank Gallegos Trucking, page 11 of 11