Could a construction subcontractor use an NTTC obtained almost two months after the audit deadline when the buyer caused the delay?

Plain-English summary

A construction subcontractor lost its deduction because it obtained the required NTTC almost two months after the statutory audit deadline, even though the customer caused the delay. The AHO upheld $8,656.84 tax, $1,731.36 penalty, and $864.26 interest.

Gutierrez Aggregate Systems provided construction services and materials as a subcontractor in New Mexico during 2012. The Department's November 21, 2015 audit notice told the company that it had 60 days—until January 20, 2016—to obtain any required NTTCs.

Gutierrez immediately contacted the customer and repeatedly explained the deadline. The customer's owner promised a certificate but said she would obtain it at her convenience. The customer did not receive and execute the NTTC until March 15, nearly two months late.

The 60-day deadline was mandatory

Sections 7-9-51 and 7-9-52 allowed construction-related deductions when the buyer delivered an NTTC. Section 7-9-43 said that a seller should possess the certificate when the receipts were reported, with one additional 60-day opportunity after Department notice.

If the seller still lacked the certificate at the end of that period, the statute said the deduction “shall be disallowed.” The AHO treated that wording as mandatory and found that the Department had no discretion to extend the deadline because of the customer's delay.

The decision emphasized that the 60-day period was legislative grace, not the normal time to collect certificates. A seller that claims a deduction before obtaining an NTTC assumes the risk that the buyer may later refuse, delay, lose records, or go out of business.

Buyer delay did not remove negligence

Gutierrez argued that it had done everything it could after the audit letter and that the customer's conduct should not create a penalty. But buyers had a privilege, not a duty, to execute NTTCs. If a buyer did not provide one during the transaction, the seller should not claim the deduction and should charge and pay tax.

The AHO found negligence because Gutierrez claimed the deduction without timely possessing the certificate. Its mistaken belief that it would eventually obtain one fell within the regulatory negligence standard.

Interest was also mandatory because the tax was not paid when due. The fact that Gutierrez later went out of business did not alter the statutory result.

Result: protest DENIED. The full assessment remained.

What this means for you

Construction subcontractors

Obtain the NTTC before or during the project, not after an audit begins. A customer's promise to provide one later does not protect the deduction.

Businesses facing a 60-day notice

Treat the deadline as absolute. Continue requesting the certificate, but also evaluate payment and protest options because the Department cannot extend the statutory deadline based on fairness.

Accountants and tax professionals

Review certificate possession at the time each return is filed. Post-audit diligence may help explain the facts but does not cure the original risk of claiming a deduction without documentation.

Common questions

Q: Did Gutierrez ignore the audit letter?
A: No. It immediately and repeatedly contacted the customer, but the certificate still arrived after the deadline.

Q: When was the NTTC due and received?
A: It was due January 20, 2016 and was executed and received March 15, 2016.

Q: Could the Department grant extra time?
A: No. The AHO treated the 60-day statutory language as mandatory rather than discretionary.

Q: Was the customer required to issue an NTTC?
A: No. Executing certificates was a buyer privilege, which is why the seller bore the risk of claiming a deduction without one.

Q: What amounts were upheld?
A: $8,656.84 gross receipts tax, $1,731.36 penalty, and $864.26 interest.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-9-3.5, 7-9-51, and 7-9-52 — gross receipts and construction deductions
• NMSA 1978, § 7-9-43 — NTTC possession and 60-day deadline
• NMSA 1978, §§ 7-1-3 and 7-1-17 — tax definition and assessment presumption
• NMSA 1978, §§ 7-1-67 and 7-1-69 — interest and negligence penalty
• Regulations 3.1.11.8 and 3.1.11.10 NMAC — penalty presumption and negligence

Cases cited:

• Proficient Food Co. v. New Mexico Taxation and Revenue Department, 1988-NMCA-042 — late certificate as a valid reason to deny a deduction
• Public Services Co. v. New Mexico Taxation and Revenue Department, 2007-NMCA-050 — taxpayer's burden to prove a deduction
• Security Escrow Corp. v. State Taxation and Revenue Department, 1988-NMCA-068 — strict proof of deductions
• Marbob Energy Corp. v. New Mexico Oil Conservation Commission, 2009-NMSC-013 — mandatory meaning of “shall”

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Gutierrez Aggregate Systems LLC
• Decision PDF: D&O 16-40

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
GUTIERREZ AGGREGATE SYSTEMS LLC, No. 16-40
TO ASSESSMENT ISSUED UNDER
LETTER ID NO. L1752805936

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on July 7, 2016 before

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

represented by Ms. Melinda Wolinsky, Staff Attorney. Mr. Tom Dillon, Auditor, also appeared on

behalf of the Department. Mr. Lawrence Gutierrez, owner of Gutierrez Aggregate Systems 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 February 23, 2016, the Department assessed the Taxpayer for gross receipts tax,

penalty, and interest for the tax period from January 1, 2012 through December 31, 2012.

The assessment was for $8,656.84 tax, $1,731.36 penalty, and $864.26 interest.

2. On May 2, 2016, the Taxpayer filed a formal protest letter.

3. On May 16, 2016, the Department filed a Request for Hearing asking that the Taxpayer’s

protest be scheduled for a formal administrative hearing.

4. On May 17, 2016, the Hearings Office issued a notice of hearing. The hearing was held

within 90 days of the protest.

5. In 2012, the Taxpayer was engaged in business in New Mexico. The Taxpayer’s

business consisted of providing construction services and materials.

6. The Taxpayer served as a subcontractor for another business during that time.

7. The Department issued a notice of audit to the Taxpayer on November 21, 2015. The

notice also advised the Taxpayer of its responsibility to obtain nontaxable transaction

certificates (NTTCs) within 60 days of the letter (the 60-day letter).

8. The deadline for NTTCs was January 20, 2016.

9. The Taxpayer immediately contacted the owner of the business for whom it was serving

as a subcontractor in 2012. The Taxpayer requested a NTTC from that business.

10. The owner of the business assured the Taxpayer that it would give the Taxpayer a NTTC.

11. The Taxpayer repeatedly contacted the business owner and requested the NTTC be

delivered. The Taxpayer explained that he was on a deadline to obtain it.

12. The business owner said that she would get the NTTC at her convenience and then would

issue it to the Taxpayer.

13. The business was issued the NTTC on March 15, 2016. The business then executed the

NTTC to the Taxpayer on March 15, 2016.

14. The Taxpayer was in possession of the NTTC almost two months past the 60-day

deadline of January 20, 2016.

DISCUSSION

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

penalty, and interest that were assessed.

The Taxpayer argued that it was not at fault for the late NTTC. The Taxpayer argued that

the other business owner refused to provide it in a timely fashion. The Taxpayer argued that the

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Department should have granted it additional time to obtain the NTTC. The Taxpayer also

argued that it was fundamentally unfair to require it to pay taxes years later when it has gone out

of business.

The Department argued that the Taxpayer has the responsibility of obtaining NTTCs at

the time of the transaction. The Department argued that the 60-day deadline is a function of the

statute. The Department argued that the Taxpayer did not obtain the NTTC within the statutory

time frame and that deductions are prohibited by the statute.

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,

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.

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Gross Receipts Tax.

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

NMSA 1978, § 7-9-3.5 (2007). Services are subject to the gross receipts tax. See 3.2.1.18 (A)

NMAC (2012). The Taxpayer admitted that it was engaged in business. The Taxpayer admitted

that it was working as a subcontractor for the other business during 2012.

NTTCs.

A taxpayer may deduct certain gross receipts only 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 receipts from the transaction are due, but may also produce NTTCs within 60 days of

notice from the Department. See id. The seller must accept the NTTC in good faith. See id.

Businesses providing construction services and materials may deduct their gross receipts when

they are provided with NTTCs from buyers. See NMSA 1978, § 7-9-51 and § 7-9-52.

The Taxpayer was served with the 60-day letter by mailing on November 21, 2015, and

the 60-day deadline was January 20, 2016. The Taxpayer received the proper NTTC from the

other business on March 15, 2016. Therefore, the NTTC was not received timely. See NMSA

1978, § 7-9-43. When a taxpayer “is not in possession of the required [NTTCs] within sixty

days from the date that the notice…is given…, deductions claimed by the seller or lessor that

require delivery of these nontaxable transaction certificates shall be disallowed”. NMSA 1978, §

7-9-43 (A) (emphasis added). The word “shall” indicates that the denial of the deduction is

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

2009-NMSC-013, ¶ 22, 146 N.M. 24. A right to a deduction must be established by the taxpayer

claiming the deduction, and the failure of the taxpayer to possess a NTTC in the right form and

within the time prescribed by the Department is a valid reason to deny the deduction even though

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form is not favored over substance. See Proficient Food Co. v. N.M. Taxation and Revenue

Dep’t., 1988-NMCA-042, ¶ 22, 107 N.M. 392 (holding that the Department had properly denied

the deduction when the taxpayer had not received the proper form from the buyer within the time

limit). Therefore, the Department properly denied the deductions, and the Taxpayer is liable for

the gross receipts tax.

Assessment of Penalty.

The Taxpayer argued that it should not have to pay penalty. The Taxpayer argued that

the other business had a NTTC on file. The Taxpayer argued that it repeatedly contacted the

other business after it received the 60-day letter. The Taxpayer argued that the failure of the

other business to provide the NTTC within the deadline should not subject the Taxpayer to

penalty.

Penalty “shall be added to the amount assessed” when a tax is not paid on time due to

negligence. See NMSA 1978, § 7-1-69 (2007) (emphasis added). Again, the word “shall”

indicates that the assessment of penalty is mandatory, not discretionary. See Marbob Energy

Corp., 2009-NMSC-013, ¶ 22. Assessments of penalty are presumed to be correct and it is a

taxpayer’s burden to show that the assessment was not correct. See 3.1.11.8 NMAC (2001). See

NMSA 1978, § 7-1-17. See also El Centro, 1989-NMCA-070. It is a taxpayer’s responsibility to

obtain NTTCs at the time that the return is due. See NMSA 1978, § 7-9-43. If a taxpayer is not in

possession of NTTCs at that time, it should not take deductions on its gross receipts. See id. The

fact that the statute allows an additional 60 days after notice is a legislative grace and does not

mean that a taxpayer is entitled to take the deductions without a timely NTTC. See id. Moreover,

a business that could execute NTTCs to its buyers is not required to do so. See id. (indicating that

NTTCs are a privilege that buyers can exercise). If a buyer refuses to provide a NTTC to a seller,

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then the seller knows not to take the deduction and to charge and pay the gross receipts taxes at the

time. See id. A taxpayer who takes the deduction without first obtaining the NTTC is running the

risk that the NTTC will be unavailable in the future. See id. Negligence includes failure to

exercise ordinary business care, a mistaken belief, and inaction where action is required. See

3.1.11.10 NMAC (2001). As the Taxpayer was not in possession of the NTTC within the

statutory deadline, the Taxpayer was negligent. Therefore, penalty was appropriately assessed.

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., 2009-NMSC-013, ¶ 22. 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.

CONCLUSIONS OF LAW

A. The Taxpayer filed a timely written protest to the Notice of Assessment of gross

receipts taxes issued under Letter ID number L1752805936, and jurisdiction lies over the parties

and the subject matter of this protest.

B. The Taxpayer failed to obtain a timely NTTC. See NMSA 1978, § 7-9-43. See also

3.2.201.8 NMAC. See also Proficient Food Co., 1988-NMCA-042 (holding that failure to timely

possess a NTTC was a valid reason to deny the deduction).

C. Therefore, the deductions were properly denied, and the Taxpayer was

appropriately assessed for gross receipts taxes. See NMSA 1978, § 7-9-43.

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D. The Taxpayer mistakenly believed that it would be able to obtain a timely NTTC

and did not pay its gross receipts taxes when they were due. Therefore, the Taxpayer was

negligent and penalty was appropriately assessed. See NMSA 1978, § 7-1-69. See 3.1.11.10

NMAC (2001).

E. The Taxpayer failed to pay the tax when it was due, so interest was appropriately

assessed. See NMSA 1978, § 7-1-67.

F. The Taxpayer failed to overcome the presumption that the assessment was

correct. See NMSA 1978, § 7-1-17.

For the foregoing reasons, the Taxpayer's protest is DENIED.

DATED: July 27, 2016.

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

NOTICE OF RIGHT TO APPEAL

Pursuant to NMSA 1978, § 7-1-25, 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. A copy of the Notice of Appeal should be mailed to John Griego,

P. O. Box 6400, Santa Fe, New Mexico 87502. Mr. Griego may be contacted at 505-827-0466.

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