Could Pete's Landscaping deduct firewood sold to restaurants that used it for cooking or heat when Department employees approved Type 2 NTTCs?

Plain-English summary

Pete's Top Quality Landscaping accepted restaurant Type 2 NTTCs in good faith after two Department employees told it the certificates covered firewood. The AHO allowed those deductions, reducing gross receipts tax by $7,136.92, from $107,690.52 to $100,533.60.

Pete's sold firewood and other items to landscaping companies and restaurants. The restaurants used the firewood for cooking or heating rather than reselling it, but issued Type 2 NTTCs for tangible personal property.

Pete's was initially wary of accepting the certificates. It contacted the Department more than once, and two employees said the restaurant purchases qualified as long as the certificates were Type 2. Pete's verified the type and relied on both the restaurants and the Department advice.

Timely, proper certificates plus good faith created safe harbor

Section 7-9-43 made a properly executed NTTC conclusive evidence of deductibility when the seller accepted it timely and in good faith. The parties did not dispute that the restaurant certificates were timely, properly executed, and covered tangible personal property.

The only dispute was good faith. The AHO found it because Pete's did not blindly accept the NTTCs: it asked the Department about the exact firewood sales and received the same assurance from two employees before accepting them.

The certificates did not change the restaurants' actual use into resale. Under the cases cited, however, a good-faith certificate could protect the seller and leave the Department to pursue the buyer for compensating tax when a buyer wrongly issued it.

The win affected only part of a much larger assessment

The restaurant deductions were small relative to the audit. Pete's admitted it lacked certificates for at least two landscaping customers and conceded the separately assessed withholding tax, compensating tax, and related additions.

Penalty and interest on gross receipts tax remained legally proper but had to be recomputed using the reduced $100,533.60 principal. Interest continued until payment.

Result: protest GRANTED IN PART AND DENIED IN PART. The backed restaurant sales were deductible; other conceded or unsupported liabilities remained.

What this means for you

Sellers receiving NTTCs

Verify the certificate type and document why you believed it applied at the time of sale. A record of specific Department guidance can be important evidence of good faith.

Restaurants and other buyers

Issuing an NTTC does not necessarily make your use nontaxable. If the seller receives safe-harbor protection, the Department may still pursue the buyer for compensating tax.

Businesses with mixed audit issues

Tie every deduction to a specific certificate and customer. Winning on one group of transactions may produce only a limited reduction if other sales lack certificates or other tax types are conceded.

Common questions

Q: Were the restaurants reselling the firewood?
A: No. They used it for cooking or heating.

Q: Why did Pete's still receive the deduction?
A: It timely accepted properly executed Type 2 NTTCs in good faith after two Department employees approved their use.

Q: How much did the deduction reduce gross receipts tax?
A: By $7,136.92, leaving $100,533.60 of gross receipts tax.

Q: Were penalty and interest fully abated?
A: No. They remained proper but had to be recalculated from the reduced tax principal.

Q: What happened to withholding and compensating tax?
A: Pete's withdrew its protest and conceded those taxes and their related penalty and interest.

Citations and references

Statutes:

• NMSA 1978, §§ 7-9-43 and 7-9-47 — good-faith NTTC protection and tangible-personal-property deduction
• NMSA 1978, §§ 7-9-3.5 and 7-9-4 — gross receipts and tax on business receipts
• NMSA 1978, §§ 7-1-67 and 7-1-69 — interest and negligence penalty calculations

Cases cited:

• Leaco Rural Telephone Cooperative, Inc. v. Bureau of Revenue, 1974-NMCA-076 — timely, properly executed, good-faith NTTC requirements
• Continental Inn v. New Mexico Taxation and Revenue Department, 1992-NMCA-030 — certificate representation and buyer compensating-tax exposure
• Gas Co. v. O'Cheskey, 1980-NMCA-085 — good-faith NTTC can shift tax burden to the buyer
• Marbob Energy Corp. v. New Mexico Oil Conservation Commission, 2009-NMSC-013 — mandatory meaning of “shall”

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Pete’s Top Quality Landscaping, LLC
• Decision PDF: D&O 16-11

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
PETE’S TOP QUALITY LANDSCAPING, LLC, No. 16-11
TO THE ASSESSMENT ISSUED UNDER
LETTER ID NO. L1649029168

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on March 24, 2016 before

Hearing Officer Dee Dee Hoxie. The Taxation and Revenue Department (Department) was

represented by Ms. Gabrielle Dorian, Staff Attorney. Ms. Milagros Bernardo, Auditor, also

appeared on behalf of the Department. Ms. Sandra Vigil and Mr. Pete Vigil, owners of Pete’s

Top Quality Landscaping, LLC (Taxpayer), appeared for the hearing. The Hearing Officer took

notice of all documents in the administrative file. Based on the evidence and arguments

presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. On August 14, 2015, the Department assessed the Taxpayer for the tax periods from

January 31, 2008 through July 31, 2014. The assessment was for gross receipts tax of

$107,690.52, penalty of $21,147.45, and interest of $9,763.89; withholding tax of

$10,192.71, penalty of $2,429.16, and interest of $2,843.51; and compensating tax of

$1,918.65, penalty of $383.73, and interest of $238.50.

2. On November 12, 2015, the Taxpayer filed a formal protest letter.

3. On December 21, 2015, the Department filed a Request for Hearing asking that the

Taxpayer’s protest be scheduled for a formal administrative hearing.

4. On December 29, 2015, the Hearings Office issued a notice of hearing. The hearing date

was set within ninety days of the protest.

5. On January 29, 2016, a telephonic scheduling hearing was conducted. The hearing date

was announced on the record.

6. On February 1, 2016, the Hearings Office issued the scheduling order and notice of

hearing.

7. On the record at the hearing, the Taxpayer announced that it was no longer protesting the

assessment on the withholding tax and on the compensating tax. The Taxpayer was only

protesting the assessment on the gross receipts tax.

8. The Taxpayer was selling firewood and other items to its customers, including other

landscape companies and restaurants.

9. The Taxpayer accepted nontaxable transaction certificates (NTTCs) from several of its

customers and did not include those sales in its gross receipts.

10. The Department audited the Taxpayer and disallowed deductions for sales that the

Taxpayer made of firewood to various restaurants. The Department determined that the

restaurants were not reselling the firewood to their customers; rather, they were using it

for cooking and/or heating.

11. The Department disallowed the deductions for sales to restaurants even when the

Taxpayer had accepted NTTCs from those restaurants.

12. The Taxpayer acknowledged that it owed some of the gross receipts taxes. The Taxpayer

admitted that it failed to obtain NTTCs from at least two of the other landscapers to

whom it was selling.

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Letter ID No. L1649029168
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13. The Taxpayer’s protest focused solely on the sale of firewood to various restaurants that

had issued NTTCs to the Taxpayer.

14. The Taxpayer argued that it should be allowed to deduct the sales for which it had

NTTCs because it accepted the NTTCs in good faith.

15. The Taxpayer acknowledged that it knew that the restaurants were using the firewood.

16. The Taxpayer contacted the Department prior to accepting the NTTCs from the

restaurants and inquired as to their applicability to sales to the restaurants. Two different

Department employees assured the Taxpayer that the NTTCs were applicable and entitled

it to take deductions as long as they were Type 2 NTTCs, which cover tangible personal

property.

17. The Taxpayer confirmed that the restaurants were issuing Type 2 NTTCs and accepted

them based on the restaurants’ representations and based on the information from the

Department’s employees.

DISCUSSION

The issue to be decided is whether the Taxpayer is liable for the gross receipts tax,

penalty, and interest as assessed. The Taxpayer withdrew the protest on the withholding and

compensating taxes.

Burden of Proof.

Assessments by the Department are presumed to be correct. See NMSA 1978, § 7-1-17.

Tax includes, by definition, the amount of tax principal imposed and, unless the context

otherwise requires, “the amount of any interest or civil penalty relating thereto.” NMSA 1978, §

7-1-3. See also El Centro Villa Nursing Ctr. v. Taxation and Revenue Department, 1989-NMCA-

070, 108 N.M. 795. Therefore, the assessment issued to the Taxpayer is presumed to be correct,

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Letter ID No. L1649029168
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and it is the Taxpayer’s burden to present evidence and legal argument to show that it is entitled

to an abatement.

The burden is on the Taxpayer to prove that it is entitled to an exemption or deduction.

See Public Services Co. v. N.M. Taxation and Revenue Dep’t., 2007-NMCA-050, ¶ 32, 141 N.M.

520. See also Till v. Jones, 1972-NMCA-046, 83 N.M. 743. “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.” Sec. Escrow Corp. v. State Taxation

and Revenue Dep’t., 1988-NMCA-068, ¶ 8, 107 N.M. 540. See also Wing Pawn Shop v.

Taxation and Revenue Dep’t., 1991-NMCA-024, ¶ 16, 111 N.M. 735. See also Chavez v.

Commissioner of Revenue, 1970-NMCA-116, ¶ 7, 82 N.M. 97.

Gross Receipts Tax.

Anyone engaging in business in New Mexico is subject to the gross receipts tax. See

NMSA 1978, § 7-9-4. Gross receipts tax applies to the total amount of money received from

selling property or services. See NMSA 1978, § 7-9-3.5. It was undisputed that the Taxpayer

was engaging in business and generally subject to the gross receipts tax.

NTTCs.

A taxpayer engaged in business may be able to deduct certain gross receipts when they

are provided with NTTCs from buyers. See NMSA 1978, § 7-9-43 (2011). A taxpayer should

be in possession of NTTCs when the taxes from the transaction are due, but may also produce

NTTCs within a deadline set by the Department. See NMSA 1978, § 7-9-43. The seller must

accept the NTTC in good faith. See id. A properly executed NTTC “shall be conclusive

evidence, and the only material evidence, that the proceeds from the transaction are

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Letter ID No. L1649029168
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deductible[.]” NMSA 1978, § 7-9-43 (A) (emphasis added). The word “shall” indicates that the

provision is mandatory, not discretionary. See Marbob Energy Corp. v. N.M. Oil Conservation

Comm’n., 2009-NMSC-013, ¶ 22, 146 N.M. 24.

A taxpayer can be protected from tax liability when the taxpayer accepts a NTTC in good

faith. See Leaco Rural Telephone Coop., Inc. v. Bureau of Revenue, 1974-NMCA-076, 86 N.M.

629. However, that protection will be conclusive only when three requirements are met; 1) the

acceptance of the NTTC must be timely, 2) must be in good faith, and 3) the NTTC must be

properly executed. See id. at ¶ 15. See also Continental Inn v. N.M. Taxation and Revenue

Dep’t., 1992-NMCA-030, ¶ 12-13, 113 N.M. 588 (holding that a NTTC represents to the seller

that it is entitled to take a deduction and that the NTTC does not transform the taxable

transaction into a nontaxable transaction but allows the Department to pursue the buyer for

compensating tax). See also Gas Co. v. O’Cheskey, 1980-NMCA-085, ¶ 12, 94 N.M. 630

(holding that a NTTC does not transform a taxable transaction into a nontaxable transaction and

recognizing that a NTTC does serve to shift the burden of the tax to the buyer when the seller

accepts a NTTC in good faith even though the buyer wrongly issued it).

The Department argued that the NTTCs from the restaurants were invalid because the

restaurants were not reselling the firewood. The Department argued that good faith did not apply

because the Taxpayer knew that the restaurants were not reselling the firewood. The Department

argued that the Taxpayer was required to take more action to understand the NTTCs rather than

blindly accepting and trusting them.

The Taxpayer indicated that it did not really understand the import and purpose of the

NTTCs. The Taxpayer knew that NTTCs could allow them to deduct sales from its gross

receipts. The Taxpayer was leery of accepting the NTTCs from the restaurants and took

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Letter ID No. L1649029168
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additional steps to try to understand the NTTCs. The Taxpayer contacted the Department on

more than one occasion. The Taxpayer spoke to two different Department employees about

selling firewood and about the NTTCs that the restaurants wanted to issue to it. Both employees

told the Taxpayer that it could accept the NTTCs and deduct its sales to those restaurants from its

gross receipts as long as the restaurants issued Type 2 NTTCs to it. The employees explained

that Type 2 NTTCs cover tangible goods, such as firewood. The Taxpayer then accepted the

Type 2 NTTCs from the restaurants.

It was undisputed that the Taxpayer was in possession of several properly executed

NTTCs from various restaurants in a timely manner. It was also undisputed that the NTTCs

were for tangible personal property, which is subject to deduction when the seller is given a

NTTC by a buyer. See NMSA 1978, § 7-9-47. It was also undisputed that the Taxpayer was

selling tangible personal property to the restaurants. The only issue at dispute was whether the

Taxpayer accepted the NTTCs in good faith. The Taxpayer only accepted the NTTCs after being

assured by Department employees that it could do so and would be entitled to take the

deductions based on those NTTCs. Based upon the totality of the evidence, the Taxpayer

accepted the NTTCs from the restaurants in good faith and was entitled to take the deductions.

Adjustment to tax.

The Department anticipated the possibility that the NTTCs would be sufficient to allow

the Taxpayer to take the deductions for its sales of firewood to the restaurants that issued the

NTTCs. Ms. Bernardo applied the NTTCs’ deductions to the formula used in the audit to

calculate the tax. Ms. Bernardo determined that the deductions from the restaurants that issued

NTTCs would be fairly minimal to the Taxpayer’s overall gross receipts tax liability. Ms.

Bernardo concluded that the Taxpayer’s gross receipts tax liability would be reduced by only

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Letter ID No. L1649029168
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$7,136.92 when the deductions were applied. Therefore, even allowing for the deductions for

the NTTCs from the restaurants, the Taxpayer’s gross receipts tax liability is still $100,533.60.

Assessment of Penalty.

A taxpayer’s lack of knowledge or erroneous belief that the taxpayer did not owe tax is

considered to be negligence for purposes of assessment of penalty. See Tiffany Const. Co., Inc.

v. Bureau of Revenue, 1976-NMCA-127, 90 N.M. 16. Therefore, penalty was properly assessed

to the Taxpayer, but the amount of penalty will be adjusted accordingly to reflect the reduction in

the gross receipts tax liability. See NMSA 1978, § 7-1-69 (using the amount of the unpaid tax

liability as the basis to calculate the amount of penalty).

Assessment of Interest.

Interest “shall be paid” on taxes that are not paid on or before the date on which the tax is

due. NMSA 1978, § 7-1-67 (A). Again, the word “shall” indicates that the assessment of interest

is mandatory, not discretionary. See Marbob Energy Corp. v. N.M. Oil Conservation Comm’n.,

2009-NMSC-013, ¶ 22, 146 N.M. 24. The assessment of interest is not designed to punish

taxpayers, but to compensate the state for the time value of unpaid revenues. Because the tax

was not paid when it was due, interest was properly assessed. The amount of interest will also be

adjusted accordingly to reflect the reduction in gross receipts tax liability. See NMSA 1978, § 7-

1-67 (using the amount of unpaid tax liability as the basis to calculate interest). Interest

continues to accrue until the underlying tax principal is paid. See id.

CONCLUSIONS OF LAW

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Letter ID No. L1649029168
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A. The Taxpayer filed a timely written protest to the Notice of Assessment issued

under Letter ID number L1649029168, and jurisdiction lies over the parties and the subject matter

of this protest.

B. The Taxpayer withdrew its protest and conceded that it owed the withholding tax,

the compensating tax, and their respective penalty and interest as assessed.

C. The Taxpayer accepted the NTTCs from the restaurants in good faith, and they are

conclusive evidence that the Taxpayer was entitled to take the deductions. See NMSA 1978, § 7-9-

43. See also Leaco, 1974-NMCA-076; Continental Inn, 1992-NMCA-030; Gas Co., 1980-

NMCA-085.

D. When the deductions pursuant to the NTTCs are applied to the Taxpayer’s gross

receipts, the gross receipts tax owed is reduced to $100,533.60. Penalty and interest were properly

assessed, but will be adjusted to reflect the reduced amount of tax owed. See NMSA 1978, § 7-1-69

and § 7-1-67.

For the foregoing reasons, the Taxpayer's protest is GRANTED IN PART AND DENIED

IN PART.

DATED: April 25, 2016.

Dee Dee Hoxie
DEE DEE HOXIE
Hearing Officer
Administrative Hearings Office
Post Office Box 6400
Santa Fe, NM 87502

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Letter ID No. L1649029168
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