Could Sandia Development deduct construction materials sold to LANL when it had letters referring to an NTTC but obtained the actual Type 6 certificate after the audit deadline?

Plain-English summary

Sandia Development could not deduct construction materials sold to Los Alamos National Laboratory because it failed to produce a timely executed NTTC. LANL correspondence referring to a certificate was not a statutory substitute, and the actual Type 6 NTTC arrived seven months after the audit deadline.

Sandia sold high-grade geotextile-impregnated concrete to LANL in 2014. An email sent a blank “Tax Exempt Form,” and a later LANL letter said an NTTC had been furnished. But neither Sandia nor LANL could locate a completed certificate from the transaction.

The audit notice created a firm 60-day second chance

Section 7-9-51 conditioned the construction-material deduction on the buyer delivering an NTTC. Section 7-9-43 generally expected the seller to possess it when the return was due but gave an audited taxpayer 60 days after notice to obtain one.

The Department notified Sandia on August 7, 2014, making October 6 the deadline. Sandia produced none by then. LANL executed a Type 6 NTTC on May 6, 2015, well after the statutory period.

The Department's NTTCnet history showed no other LANL certificate for Sandia before the deadline. Once the 60 days passed, the Department lacked authority to allow the certificate-dependent deduction.

A letter mentioning an NTTC was not enough

The April 2014 LANL letter supported an inference that LANL intended to issue a certificate, but it did not prove timely execution and was not itself the required NTTC.

Section 7-9-43(E) allowed substitute evidence only for the tangible-personal-property-for-resale deduction under Section 7-9-47. Sandia claimed the separate construction-material deduction under Section 7-9-51, so alternative proof could not replace the certificate.

Not charging the customer did not remove seller liability

Sandia also argued that it had not collected gross receipts tax from LANL. New Mexico imposed the tax on the seller's business receipts; passing the cost to a customer was optional. Without a valid deduction, Sandia remained liable from its own receipts.

Failure to obtain the required certificate was civil negligence, and interest was mandatory until principal tax was paid.

Result: protest DENIED. The original assessment was $1,332.61 of tax, $266.53 of penalty, and $81.81 of interest—$1,680.95 total—with interest continuing on unpaid principal.

What this means for you

Construction-material sellers

Obtain and retain the correct NTTC when the sale occurs. Buyer status, buyer intent, and correspondence about tax treatment do not replace the executed certificate.

Taxpayers under audit

Treat the 60-day notice as a final statutory opportunity. Track the exact deadline and verify certificate execution in the Department's system before it expires.

Sellers who did not charge tax

Customer billing does not determine legal liability. If the deduction fails, the seller may owe gross receipts tax even when it cannot recover the cost from the buyer.

Common questions

Q: What did Sandia sell to LANL?
A: High-grade geotextile-impregnated concrete construction material.

Q: Was there evidence LANL intended to issue an NTTC?
A: Yes. An email and letter referred to tax-exempt paperwork, but no timely executed certificate was produced.

Q: When was the actual Type 6 NTTC issued?
A: May 6, 2015, seven months after the October 6, 2014 deadline.

Q: Could the LANL letter substitute for the certificate?
A: No. The alternative-evidence rule did not apply to the Section 7-9-51 construction-material deduction.

Q: Did Sandia owe tax even though it had not charged LANL?
A: Yes. Gross receipts tax was Sandia's liability as the seller.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-9-43 and 7-9-51 — 60-day NTTC rule and construction-material deduction
• NMSA 1978, §§ 7-9-4 and 7-9-5 — tax on business receipts and taxable-receipts presumption
• NMSA 1978, §§ 7-1-67 and 7-1-69 — mandatory interest and negligence penalty
• Regulation 3.2.201.12(C) NMAC — no deduction for an untimely NTTC

Cases cited:

• Proficient Food Co. v. New Mexico Taxation and Revenue Department, 1988-NMCA-042 — untimely certificate validly defeats a deduction
• Wing Pawn Shop v. Taxation and Revenue Department, 1991-NMCA-024 — strict construction and taxpayer proof of deductions
• Tiffany Construction Co. v. Bureau of Revenue, 1976-NMCA-127 — duty to determine tax consequences
• Marbob Energy Corp. v. New Mexico Oil Conservation Commission, 2009-NMSC-013 — mandatory meaning of “shall”

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Sandia Development & Consulting Services Inc.
• Decision PDF: D&O 16-02

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
SANDIA DEVELOPMENT & CONSULTING SERVICES INC. No. 16-02
TO ASSESSMENT ISSUED UNDER LETTER
ID NO. L1357783088

DECISION AND ORDER

A protest hearing occurred on the above captioned matter on December 15, 2015 before

Brian VanDenzen, Esq., Chief Hearing Officer, in Santa Fe. At the hearing, Oswaldo Galarza,

President of Sandia Development & Consulting Services Inc. (“Taxpayer”) appeared pro se.

Chief Legal Counsel Brad Odell appeared representing the State of New Mexico Taxation and

Revenue Department (“Department”). Protest Auditor Nicholas Pacheco appeared as a witness

for the Department. Taxpayer Exhibits #1-2 were admitted into the record. Department Exhibits

A-E were admitted into the record. All exhibits are more thoroughly described in the

Administrative Exhibit Coversheet. Based on the evidence and arguments presented, IT IS

DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. On July 10, 2015, through letter id. no. L1357783088, the Department assessed

Taxpayer for $1,332.61 in gross receipts tax, $266.53 in penalty, and $81.81 in interest for a total

assessment of $1,680.95 for the CRS reporting periods from June 30, 2011 through June 30,

2014.

2. On September 25, 2015, Taxpayer protested the Department’s assessment.

3. On September 29, 2015, the Department’s protest office acknowledged receipt of

a valid protest.

4. On November 9, 2015, the Department filed a request for hearing in this matter

with the Administrative Hearings Office.

5. On November 12, 2015, the Administrative Hearings Office sent Notice of

Administrative Hearing, scheduling this matter for a merits hearing on December 15, 2015.

6. On December 15, 2015, within 90-days of the Department’s receipt and

acknowledgement of a valid protest, the Administrative Hearings Office conducted a hearing in

the above-captioned matter.

7. Taxpayer is a New Mexico business that provides business consulting services

and sells high-grade construction materials. [Dept. Ex. B].

8. Mr. Oswaldo Galarza is Taxpayer’s President.

9. Taxpayer was selected for a Department audit, which commenced on August 7,

10. [Dept. Ex. B].

11. On August 7, 2014, the Department provided Taxpayer with notice that Taxpayer

had 60-days, until October 6, 2014, to possess an executed nontaxable transaction certificate

(“NTTC or NTTCs”) supporting any claimed deduction. [Dept. Ex. C].

11. During the relevant period, in 2014, Taxpayer claimed a deduction for sale of a

geotextile impregnated concrete to LANL.

12. On or about March 10, 2014, LANL sent Taxpayer an email entitled “Tax Exempt

Form.pdf.” Although the attachments was not provided in the record, Mr. Galarza credibly

testified that the attachments was a blank form that Taxpayer needed to fill out and return to

LANL. [Taxpayer Ex. #1].

13. Taxpayer does not have a copy of the completed form and LANL did not have a

copy of the form.

In the Matter of the Protest of Sandia Development & Consulting Services, Inc., page 2 of 12

14. On April 15, 2014, LANL sent Taxpayer a letter discussing that it had furnished

Taxpayer with a NTTC. However, Taxpayer could not find and did not present a copy of the

NTTC referenced in that April 15, 2014 LANL letter either to the Department as part of the aduit

or at the protest hearing. [Taxpayer Ex. #2].

15. Taxpayer did not produce any NTTC executed by the October 6, 2014 60-day

NTTC deadline.

16. In May of 2015, after discussing the potential tax liability with Taxpayer’s

account, Mr. Galarza reached out to LANL about a NTTC for the 2014 transaction at issue.

17. On May 6, 2015, seven-months after the October 6, 2014 NTTC deadline, LANL

executed a Type 6 NTTC to Taxpayer. This NTTC was untimely. [Dept. Ex. D].

18. In reviewing this matter, Department Auditor Nicholas Pacheco reviewed the

Department’s NTTCnet database, which showed a history of electronic NTTCs executed to

Taxpayer.

19. The NTTCnet database shows that of the nine NTTCs noted on Taxpayer’s

account, LANL only executed one NTTC to Taxpayer, the untimely Type 6 NTTC executed on

May 6, 2015. There were no other NTTCs executed by LANL before the October 6, 2014 60-day

deadline. [Dept. Ex. E].

DISCUSSION

The main issue at protest is whether the Department can allow for deduction when

Taxpayer did not possess or produce a requisite NTTC for the deduction either at the time the

taxes were due on the transaction or within 60-days of the Department’s notice of audit.

Taxpayer argues in this protest that should not be required to pay the assessed gross receipts tax,

penalty, and interest because it presented evidence that LANL informed Taxpayer by letter on

In the Matter of the Protest of Sandia Development & Consulting Services, Inc., page 3 of 12
April 15, 2014 that a NTTC had been furnished to Taxpayer. The Department counters that it has

no authority to grant a deduction premised on a NTTC unless Taxpayer presented a timely-

executed NTTC by the 60-day deadline.

Presumption of Correctness.

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

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

Archuleta v. O'Cheskey, 1972-NMCA-165, ¶11, 84 N.M. 428. Unless otherwise specified, for the

purposes of the Tax Administration Act, “tax” is defined to include interest and civil penalty. See

NMSA 1978, §7-1-3 (X) (2013). Under Regulation 3.1.6.13 NMAC, the presumption of

correctness under Section 7-1-17 (C) extends to the Department’s assessment of penalty and

interest. See Chevron U.S.A., Inc. v. State ex rel. Dep't of Taxation & Revenue, 2006-NMCA-50,

¶16, 139 N.M. 498, 503 (agency regulations interpreting a statute are presumed proper and are to be

given substantial weight).

Moreover, “[w]here 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, 1991-NMCA-024, ¶16, 111

N.M. 735 (internal citation omitted); See also TPL, Inc. v. N.M. Taxation & Revenue Dep't, 2003-

NMSC-7, ¶9, 133 N.M. 447. Because Taxpayer is claiming a deduction from gross receipts tax,

Taxpayer must establish its right to claim the deduction.

Gross Receipts Tax, Deductions, and the Requirement of a Timely NTTC

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

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

In the Matter of the Protest of Sandia Development & Consulting Services, Inc., page 4 of 12
1978, Section 7-9-3.5 (A) (1) (2007), the term “gross receipts” is broadly defined to mean

the total amount of money or the value of other consideration received from
selling property in New Mexico, from leasing or licensing property employed in
New Mexico, from granting a right to use a franchise employed in New Mexico,
from selling services performed outside New Mexico, the product of which is
initially used in New Mexico, or from performing services in New Mexico.

“Engaging in business” is defined as “carrying on or causing to be carried on any activity with

the purpose of direct or indirect benefit.” NMSA 1978, § 7-9-3.3 (2003). 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, § 7-9-5 (2002).

Taxpayer was a New Mexico business engaged in selling both consulting services and high-

grade construction materials during the audit period. In particular, for the specific receipts in

question in this protest, Taxpayer was selling high-grade construction materials to LANL. Unless

otherwise established through a valid exemption or deduction, all of Taxpayer’s receipts during the

audit period (including receipts from the sale to LANL) are presumed subject to gross receipts tax.

See § 7-9-3.3 and § 7-9-5.

The New Mexico Gross Receipts and Compensating Tax Act provides numerous deductions

of gross receipts tax. One particular deduction is at issue in this protest: the sale of construction

material to persons engaged in the construction business under NMSA 1978, Section 7-9-51 (2001).

In pertinent part, Section 7-9-51 (A) (emphasis added) states that:

Receipts from selling construction material 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 seller...

Simply selling the construction material to a buyer engaged in the construction business, as the

Taxpayer did in this instance, is not enough to satisfy the requirements of the deduction under

In the Matter of the Protest of Sandia Development & Consulting Services, Inc., page 5 of 12
Section 7-9-51. The statute clearly and unambiguously conditions the deduction on a sale made to a

person/entity who delivers a NTTC.

In pertinent part, NMSA 1978, Section 7-9-43 (A) (2011) articulates the requirements for

obtaining NTTCs:

All nontaxable transaction certificates of the appropriate series
executed by buyers or lessees 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 except as provided in Subsection E of this section....

While taxpayers “should” have possession of required NTTCs at the time the return is due from the

receipts at issue, Section 7-9-43 gives taxpayers audited by the Department a second chance to

obtain these NTTCs: within 60-days of when the Department gives notice, taxpayers must possess a

NTTC in order to claim a deduction.

Taxpayers who rely on this 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 reason why a

taxpayer cannot obtain a NTTC is irrelevant. The language of Section 7-9-43 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). See Marbob Energy Corp. v. N.M. Oil

Conservation Comm'n, 2009-NMSC-013, ¶22, 146 N.M. 24 (use of the word “shall” in a statute

indicates provision is mandatory absent clear indication to the contrary). Consistent with the

statutory language, under Regulation 3.2.201.12 (C), a taxpayer “is not entitled to the deduction”

when the NTTC is untimely. The New Mexico Court of Appeals has held that despite its general

In the Matter of the Protest of Sandia Development & Consulting Services, Inc., page 6 of 12
reluctance to place “form over substance,” the failure to timely and properly present a requisite

NTTC is a “valid basis” for the Department to deny a claimed deduction. Proficient Food Co. v.

New Mexico Taxation & Revenue Dep't, 1988-NMCA-042, ¶22, 107 N.M. 392.

Under Section 7-9-43, Taxpayer had a statutory obligation to possess a NTTC at the time

when the gross receipts tax was initially due for the 2014 selling of the construction materials to

LANL. Although Taxpayer did present some evidence that alluded to LANL issuing a NTTC in

March and April of 2014, Taxpayer was not able to present a NTTC executed at the time the CRS

taxes were due on the 2014 sale of construction materials to LANL. Nor was Taxpayer able to

produce a NTTC executed by the Section 7-9-43, 60-day second chance deadline of October 6,

2014. After passage of the October 6, 2014 60-day deadline, under Section 7-9-43 and Regulation

3.2.201.12 (C), the Department had no authority to allow Taxpayer’s claimed deduction. By not

presenting the NTTCs in a timely manner, as required by Section 7-9-43 and Regulation 3.2.201.12

(C), Taxpayer waived its right to the claimed deduction. See Proficient Food Co., ¶22 (internal

citations omitted) (“Where a party claiming a right to an exemption or deduction fails to follow the

method prescribed by statute or regulation, he waives his right thereto.”). The Department simply

had no authority to grant Taxpayer’s claimed refund based on the NTTC executed on May 6, 2015,

because that NTTC was executed well after the 60-day deadline.

Taxpayer argued that his presentation of the April 15, 2014 letter from LANL, where LANL

indicates it had executed a NTTC to Taxpayer, ought to be sufficient to substantiate its claimed

deduction under Section 7-9-51. However, under Section 7-9-43 (E), the Department may only

accept alternative evidence other than a NTTC to substantiate a claim for a deduction for the sale of

tangible personal property for resale pursuant to NMSA 1978, Section 7-9-47. Since this case does

not involve a claim for deduction under Section 7-9-47, subsection E of Section 7-9-43 does not

In the Matter of the Protest of Sandia Development & Consulting Services, Inc., page 7 of 12
apply to Taxpayer. Thus, Taxpayer was required to produce a timely executed NTTC rather than

any alternative evidence in order to support the claimed deduction under Section 7-9-51.

Consequently, even though the April 15, 2014 letter from LANL refers to a NTTC, under the

requirements of Section 7-9-43 and Section 7-9-5, the letter itself is an insufficient substitute for the

requisite, timely-executed NTTC.

While the March 10, 2014 email of LANL and the April 15, 2014 letter of LANL

circumstantially suggest that LANL intended to execute a NTTC to Taxpayer for Taxpayer’s sale of

construction materials to LANL, the evidence did not establish that LANL in fact timely executed

the NTTC referred to in either document. Taxpayer itself could never produce either the referenced

blank attachment from the March 10, 2014 email or a timely executed NTTC. And the

Department’s NTTCnet database does not show that Taxpayer received an executed NTTC from

LANL until May 6, 2015, well after the transaction and 60-day deadline had passed.

In Taxpayer’s protest letter, Taxpayer also argued that it did not owe gross receipts taxes

because it never collected the tax from LANL. However, while taxpayers often choose to pass on

the cost of the gross receipts tax to the buyers of the products and services, in New Mexico the gross

receipts tax is the liability of the business selling the goods or services, not the buyer of those goods

and services. See Regulation 3.2.4.8 NMAC & Regulation 3.2.6.9 NMAC. Without a timely NTTC,

Taxpayer is not entitled to the claimed deduction under Section 7-9-51 and liable for the assessed

gross receipts tax regardless of whether Taxpayer “charged” LANL for the gross receipts tax.

Penalty and Interest.

Taxpayer did not specifically address interest and penalty, but because Taxpayer asked for

“affirmative relief of the charges” under assessment in the protest letter, interest and penalty will

briefly be addressed in this decision. When a taxpayer fails to make timely payment of taxes due

In the Matter of the Protest of Sandia Development & Consulting Services, Inc., page 8 of 12
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, § 7-1-67 (2007) (italics for

emphasis). Under the statute, regardless of the reason for non-payment of the tax, 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 Marbob Energy Corp., ¶22. The language

of Section 7-1-67 also makes it clear that interest begins to run from the original due date of the tax

until the tax principal is paid in full. The Department has no discretion under Section 7-1-67 and

must assess interest against Taxpayer until Taxpayer satisfies the gross receipts tax principal.

Further, the Department has no basis to abate civil negligence penalty under NMSA 1978,

Section 7-1-69 (2007) in this case. When a taxpayer fails to pay taxes due to the State because of

negligence or disregard of rules and regulations, but without intent to evade or defeat a tax, by its

use of the word “shall”, Section 7-1-69 requires that civil penalty be added to the assessment. As

discussed above, the statute’s use of the word “shall” makes the imposition of penalty mandatory

in all instances where a taxpayer’s actions or inactions meets the legal definition of “negligence.”

Regulation 3.1.11.10 NMAC defines negligence in three separate ways: (A) “failure to

exercise that degree of ordinary business care and prudence which reasonable taxpayers would

exercise under like circumstances;” (B) “inaction by taxpayer where action is required”; or (C)

“inadvertence, indifference, thoughtlessness, carelessness, erroneous belief or inattention.” 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, 1976-NMCA-127, ¶5, 90 N.M. 16. In this case, although certainly not intentional,

Taxpayer was civilly negligent under Regulation 3.1.11.10 (B) NMAC by not obtaining a timely

executed NTTC necessary to support its claimed deduction under Section 7-9-51. There is no

In the Matter of the Protest of Sandia Development & Consulting Services, Inc., page 9 of 12
evidence supporting abatement of penalty under either Section 7-1-69 (B) or the multiple

scenarios listed under Regulation 3.1.11.11 (D) NMAC. Therefore, the Department properly

assessed penalty and interest. Taxpayer’s protest is denied.

CONCLUSIONS OF LAW

A. Taxpayer filed a timely, written protest to the Department’s assessment, and

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

B. The hearing was timely set and held within 90-days of protest under NMSA 1978,

Section 7-1B-8 (2015).

C. Taxpayer did not overcome the presumption of correctness that attached to the

assessments under NMSA 1978, Section 7-1-17 (C) (2007) and Archuleta v. O'Cheskey, 1972-

NMCA-165, ¶11, 84 N.M. 428.

D. Taxpayer was engaged in business in New Mexico selling consulting services and

high-end construction materials for the purposes of NMSA 1978, Section 7-9-4 (2002), and

therefore all of Taxpayer’s receipts during the audit period are presumed subject to gross receipts

tax under NMSA 1978, Section 7-9-5 (2002).

E. Taxpayer did not present timely executed NTTCs to support the claimed deduction

for the sale of construction materials under NMSA 1978, Section 7-9-51 (2001). Under NMSA

1978, Section 7-9-43 (2011) and Regulation 3.2.201.12 (C), without a timely executed NTTC at

either the time of the filing of returns or within 60-days of notice of audit, the Department is not

allowed to grant and Taxpayer is not entitled to the claimed deduction under Section 7-9-51. See

Marbob Energy Corp. v. N.M. Oil Conservation Comm'n, 2009-NMSC-013, ¶22, 146 N.M. 24 (use

of the word “shall” in a statute indicates provision is mandatory absent clear indication to the

contrary). See also Proficient Food Co. v. New Mexico Taxation & Revenue Dep't, 1988-NMCA-

In the Matter of the Protest of Sandia Development & Consulting Services, Inc., page 10 of 12
042, ¶22, 107 N.M. 392 (Court found it valid for the Department to deny a claimed deduction when

taxpayer did not timely present a requisite NTTC).

F. Under Section 7-9-43 (E), the Department is not allowed to accept substitute

evidence other than a timely executed NTTC for the claimed deduction under Section 7-9-51.

G. Under NMSA 1978, Section 7-1-67 (2007), Taxpayer is liable for accrued interest

under the assessment. Interest continues to accrue until the tax principal is satisfied.

H. Under NMSA 1978, Section 7-1-69 (2007), Taxpayer is liable for civil negligence

penalty because Taxpayer’s inaction met the definition of civil negligence under Regulation

3.1.11.10 (B) NMAC.

For the foregoing reasons, the Taxpayers’ protest IS DENIED. Taxpayer is liable for the

assessed gross receipts tax, penalty, and interest. Under Section 7-1-67, interest continues to

accrue until tax principal is satisfied.

DATED: February 8, 2016.

Brian VanDenzen
Interim Chief Hearing Officer
Administrative Hearings Office
P.O. Box 6400
Santa Fe, NM 87502

In the Matter of the Protest of Sandia Development & Consulting Services, Inc., page 11 of 12
NOTICE OF RIGHT TO APPEAL

Pursuant to NMSA 1978, Section 7-1-25 (1989), the parties have the right to appeal this

decision by filing a notice of appeal with the New Mexico Court of Appeals within 30 days of the

date shown above. See Rule 12-601 NMRA. If an appeal is not filed within 30 days, this

Decision and Order will become final. Either party filing an appeal shall file a courtesy copy of

the appeal with the Administrative Hearings Office contemporaneous with the Court of Appeals

filing so that the Administrative Hearings Office may being preparing the record proper.

In the Matter of the Protest of Sandia Development & Consulting Services, Inc., page 12 of 12