NM D&O 16-42 Gross Receipts Tax 2016-08-17

Could a contractor recover gross receipts tax on depreciable equipment and systems incorporated into a county-owned fire station?

Short answer: No. Weil Construction's remaining claimed equipment, piping, cabling, electrical systems, signage, and other items were incorporated into a county fire-station project, making them taxable construction materials rather than deductible government sales of tangible property. After a $3,629.44 partial refund for six mostly removable categories, the AHO denied the remaining $27,221.56 claim.

Apply this to your situation

This page answers the general question as of 2016. Ezel answers yours, under current New Mexico tax law, with citations.

Disclaimer: This is a published Decision and Order of the New Mexico Administrative Hearings Office, an independent agency that adjudicates tax protests separately from the Taxation and Revenue Department. It resolves one taxpayer's protest on the specific facts and the law in effect when issued; different facts or later changes in the law can change the result, and another taxpayer should not assume it applies to their situation. A Decision and Order binds the parties to that protest and is not a general ruling or advisory opinion of the Department. This summary is informational only and is not legal or tax advice. Consult a licensed New Mexico tax professional about your specific situation.

About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked on this page as a PDF) is the authoritative source for any reliance.

View original ruling (PDF)

Plain-English summary

A contractor could not recover gross receipts tax on equipment and systems incorporated into a county-owned fire station because they were construction materials, even if a cost-segregation study classified them as depreciable property. The AHO denied the remaining $27,221.56 refund claim.

Weil Construction built a new fire station in Edgewood for Santa Fe County during October 2012 through December 2013. It issued Type 6 construction NTTCs to vendors and paid gross receipts tax on the full receipts from the county, including items incorporated into the station.

A cost-segregation study identified property that could be depreciated over 3, 5, 7, 10, or 15 years under federal tax rules. Weil sought a $30,851 refund of gross receipts tax attributable to those items.

After the protest began, the Department granted $3,629.44 for six categories: lockers, visual display boards, audio/visual equipment, appliances, fire extinguishers, and window treatments. The parties described the allowed property as mostly easy to remove. The remaining 28 categories included cabinets, counters, flooring, flagpoles, signage, partitions, piping, cabling, ventilation, electrical work, a generator, security systems, and related equipment.

Government sales did not include incorporated construction materials

Section 7-9-54 generally allowed a deduction for tangible personal property sold to a government agency, but expressly excluded construction materials. Section 7-9-3.4 defined construction material as tangible property that became or was intended to become an ingredient or component of a construction project.

The remaining items were firmly attached to or incorporated into the fire station. Because Weil was performing construction services for the county, the items fell within the statutory construction-material exclusion. A regulatory definition could not narrow the Legislature's broader construction definition.

Federal depreciation classification was not controlling

Weil argued that depreciable property installed to perform or support activities inside a building was outside the definition of the building itself. It proposed a broad reading under which items serving firefighters' comfort or convenience, including counters and decorative lighting, supported the station's emergency-services mission.

The AHO read the regulation more narrowly. Excluded equipment had to serve a specific process rather than the building's general operation or maintenance. Weil presented almost no item-specific evidence showing that the disputed property directly supported emergency services instead of ordinary building functions.

The lack of evidence independently defeated the claim, although the decision regarded that issue as secondary because the statutory construction-material exclusion already controlled.

Other possible liabilities were outside this protest

The Department raised possible underreported gross receipts tax and compensating tax as offsets. The AHO did not decide them because the Department had not shown an assessment or proper offset notice, and Weil lacked notice to prepare for those issues.

Result: protest DENIED. The earlier $3,629.44 partial refund stood, but no additional refund was allowed.

What this means for you

Government construction contractors

The government-customer deduction does not automatically cover materials built into a public facility. Separate removable tangible property from fixtures, systems, and components incorporated into the construction project.

Businesses using cost-segregation studies

Federal depreciation categories do not control New Mexico gross receipts tax. A short-life asset can still be a construction material if it becomes part of the project.

Accountants and tax professionals

Support each disputed asset with evidence of attachment, removability, function, and whether it serves a specialized process or general building operation. A category list and depreciation class were insufficient here.

Common questions

Q: How much did Weil originally request?
A: $30,851. The Department granted $3,629.44 after the protest, leaving $27,221.56 at issue.

Q: Why were some items refunded?
A: The six allowed categories were described as mostly easily removable, including lockers, appliances, fire extinguishers, and window treatments.

Q: Did depreciation status make the remaining items deductible?
A: No. Their incorporation into the fire-station construction project controlled the gross receipts tax treatment.

Q: Would a specialized system ever fall outside the building?
A: The regulation contemplated equipment serving a specific activity or process, but Weil did not provide enough item-specific evidence to show that its disputed systems met that standard.

Q: Did the AHO impose the Department's proposed offsets?
A: No. Potential underreported tax and compensating tax were not properly noticed or assessed within this protest.

Citations and references

Statutes and regulations:

NMSA 1978, §§ 7-9-3.4 and 7-9-54 — construction definitions and government tangible-property deduction
NMSA 1978, §§ 7-9-43, 7-9-49, and 7-9-51 — NTTC authority and Types 2 and 6
NMSA 1978, §§ 7-1-17 and 7-1-29 — assessment notice and refund offsets
Regulations 3.2.1.11(H)-(J), 3.2.209.22, 3.2.212.10, and 3.2.212.22 NMAC — fixtures, building components, and government construction

Cases cited:

Arco Materials, Inc. v. Taxation and Revenue Department, 1994-NMCA-062 — construction materials sold to state agencies remain taxable
Blaze Construction Co. v. Taxation and Revenue Department, 1995-NMSC-110 — treatment of government construction materials
Whiteco Industries, Inc. v. Commissioner, 65 T.C. 664 (1975) — removability and structural-component factors
Hospital Corp. of America v. Commissioner, 109 T.C. 21 (1997) — specialized equipment versus building operation and maintenance
Security Escrow Corp. v. State Taxation and Revenue Department, 1988-NMCA-068 — strict proof of deductions

Source

Listing: New Mexico Decisions & Orders
Decision post: Weil Construction Inc.
Decision PDF: D&O 16-42

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
WEIL CONSTRUCTION INC., No. 16-42
TO THE FAILURE TO GRANT OR TO DENY A CLAIM FOR REFUND
PROTEST ACKNOWLEDGED BY LETTER ID NO. L0917463088

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on May 20, 2016 before

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

represented by Ms. Cordelia Friedman, Staff Attorney. Mr. Danny Pogan, Auditor, and Ms.

Melinda Wolinsky, Staff Attorney, also appeared on behalf of the Department. Mr. Steve Keen,

CPA, Mr. Jeffrey Shilling, and Mr. Duwayne Sibley appeared for the hearing as the authorized

representatives of Weil Construction, Inc. (Taxpayer). The Hearing Officer took notice of all

documents in the administrative file. Both parties provided numerous exhibits. Exhibits will be

referenced in the decision as Ex. followed by the number or exhibit letter and then the page of

the exhibit, for example: Ex. 1-1 and Ex. A-1. The Department’s supplemental briefing included

a copy of the refund granted as Exhibit “A”. However, since the Department had previously

admitted an Exhibit “A” at the hearing, the refund with letter ID number L0425267248 that was

attached to the supplemental brief will be relettered for purposes of the record as Exhibit “Z” and

will be referred to as such. Based on the evidence and arguments presented, IT IS DECIDED

AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

On November 25, 2014, the Taxpayer filed an application for refund of $30,851 in gross

receipts tax for the periods from October 1, 2012 through December 31, 2013. Ex. 1-1.

The Department took no action on the request for refund within 120 days of its filing.
On June 15, 2015, the Taxpayer filed a timely formal protest letter.
On August 6, 2015, the Department filed a Request for Hearing asking that the

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

On August 7, 2015, the Hearings Office issued a notice of hearing. The hearing date was

set within ninety days of the protest.

On September 9, 2015, a telephonic scheduling hearing was conducted. A date for a

hearing on the merits was selected on the record, and formal notice was sent to the parties

on September 17, 2015.

The Taxpayer is engaged in the construction business in New Mexico.
From October 1, 2012 through December 31, 2013, the Taxpayer was involved in a

construction project for the county of Santa Fe, New Mexico. The Taxpayer performed

construction services by building a new fire station for the city of Edgewood.

The Taxpayer issued Type 6 nontaxable transaction certificates (NTTCs) to its vendors

for items that were included in the construction of the fire station.

The Taxpayer paid gross receipts tax on its receipts from the county for the construction

of the fire station, including on items of tangible personal property that were incorporated

into the fire station.

Mr. Sibley and his firm performed a cost segregation study on the construction of the fire

station at the behest of the county.

They concluded that many items of tangible personal property that were incorporated into

the fire station were items that could be classified as 3-year, 5-year, 7-year, 10-year, and

15-year property under Section 168 of the Internal Revenue Code (depreciable property).

Weil Construction, Inc.
Letter ID No. L0917463088
page 2 of 17

Mr. Sibley and his firm agreed to represent the Taxpayer in order to try to recuperate

some of the county’s expenses through tax refunds.

Mr. Sibley communicated with the Department about the Taxpayer’s cost segregation

study and submitted the Taxpayer’s application for refund using the method

recommended by the auditor.

Mr. Sibley has done numerous cost segregation studies for other taxpayers in the past,

and the requests for refund on those taxpayers were generally granted from 2008 through

2013, although there were some delays and additional justifications required in 2010 and

Mr. Sibley explained that the process changes every time a new auditor is assigned

to these types of claims.

The Taxpayer now seeks a refund on the gross receipts tax paid on those items of tangible

personal property incorporated into the fire station that could be classified as depreciable

property.

Since the protest was filed, the Department has granted a partial refund to the Taxpayer.
The parties did not specify what amount of refund was granted, but agreed that the

majority of the refund requested remains outstanding.

On June 22, 2016, the Hearing Officer ordered the parties to provide additional

information, with specific details, on the partial refund that was granted. The Department

was ordered to file a brief by July 1, 2016, and the Taxpayer’s response was due by July

8, 2016.

On June 29, 2016, the parties requested additional time to file their supplemental briefs.

Weil Construction, Inc.
Letter ID No. L0917463088
page 3 of 17

On July 6, 2016, the order granting additional time was filed. The Department was

ordered to provide its brief by July 8, 2016, and the Taxpayer was ordered to provide its

response by July 15, 2016. Both parties filed timely briefs.

On July 29, 2016, the Department filed another brief in reply. On August 5, 2016, the

Taxpayer filed a response.

The Department’s first brief included an exhibit with specific details on the refund and

the items to which the refund related. Ex. “Z”. The Taxpayer stipulated to the exhibit in

its response.

The Department granted a refund of gross receipts tax paid in the amount of $3,629.44.

Therefore, the refund claim still outstanding is $27,221.56.

The detail sheet identifies 34 items or categories of items that made up the total refund

claim for $30,851.00.

The partial refund granted reflects that six of these claimed items were approved as

allowable deductions, which resulted in the refund amount of $3,629.44.

The six allowed items were lockers, visual display boards, audio/visual equipment,

appliances, fire extinguishers, and window treatments.

The parties agreed on the record at the hearing that the items allowed were primarily

items that were easily removable from the fire station.

The remaining items were cabinets and countertops, athletic flooring, flagpoles, exterior

signage, interior signage, operable partitions, postal specialties, computer equipment

cooling, vehicle service exhaust, vehicle service equipment piping, compressed air

piping, emergency eyewash/shower, kitchen equipment piping, laundry equipment piping

and ventilation, data cabling and equipment, computer equipment electrical, kitchen

Weil Construction, Inc.
Letter ID No. L0917463088
page 4 of 17
appliance electrical, generator, fitness equipment electrical, audio visual equipment and

electrical, office equipment electrical, paging system equipment and electrical, security

and surveillance electrical, signage electrical, telephone cabling and equipment,

television cabling and equipment, vehicle service equipment electrical, and laundry

equipment electrical.

Exhibit “Z” reflects that these items were denied as they were permanent structural

components of the building, affixed to the building, part of the construction service, or

not even part of the building.

DISCUSSION

The issue to be decided is whether the Taxpayer is entitled to a refund for gross receipts

tax paid on items of tangible personal property that were incorporated into a fire station that was

constructed for a government agency.

The Taxpayer argues that the depreciable property is tangible personal property that was

sold to a government agency and should be deductible. The Taxpayer argues that construction

does not include the depreciable property under Regulation 3.2.1.11 (J) (2). The crux of the

Taxpayer’s argument is that the word “building” is modified by the regulation and a building

“does not include equipment, systems, or components installed to perform, support or serve the

activities and processes conducted in the building and which are classified” as depreciable

property. 3.2.1.11 (J) (2) NMAC (2012). The Taxpayer argues that all of the claimed

depreciable property is equipment installed to support the activities conducted in the building.

The Taxpayer encourages a broad interpretation of supporting the activities or processes. The

Taxpayer would include any depreciable property that is installed for the convenience and

comfort of anyone within the building, such as countertops and decorative lighting. See Ex. 1-7,

Weil Construction, Inc.
Letter ID No. L0917463088
page 5 of 17
1-8, and 1-111. The Taxpayer argues that the fire station’s express purpose is to provide

emergency services to the public. The Taxpayer essentially argues that the fire station houses

firefighters and that almost everything within the building, like countertops and decorative

lighting, goes to support their activities.

The Department argues that the term “building” in the regulation “includes the structural

components integral to the building and necessary to the operation or maintenance of the

building”. 3.2.1.11 (J) (2) NMAC. The Department also argues that all of the depreciable

property claimed is comprised of fixtures, which are items “so firmly attached to the realty as to

constitute a part of the construction project.” 3.2.1.11 (H) (1) NMAC (2012). The Department

encourages a narrow interpretation of supporting the activities or processes. The Department

would exclude any depreciable property that is not directly required in a manufacturing process,

such as a microchip producer’s clean room. The Taxpayer argues that the exception in (J) (2)

does not require manufacturing. See 3.2.1.11 (J) (2) NMAC.

The Department argues that the depreciable property at issue is necessary to the operation

or maintenance of the building and was not installed for the express or exclusive purpose of

supporting fire-fighting activities. The Department argues that the easily removable items that

clearly went to fire-fighting activities, such as the fire extinguishers, were allowed in the partial

refund granted after the protest was filed. The Department argues that depreciable property that

has been fixed to the property and cannot be removed without damage are items that are

necessary to the operation and maintenance of the building and do not specifically support the

provision of emergency services.

1
Exhibit 1-11 reveals that the category asset #16505 Computer Equipment Electrical on Exhibit “Z” consists mainly
of various forms of decorative lighting.
Weil Construction, Inc.
Letter ID No. L0917463088
page 6 of 17
The Department also argues that receipts “from performing a construction project for a

governmental agency are receipts derived from performing a service and are not deductible”.

3.2.212.10 NMAC (A) (2001). The Department argues that the deduction is not available even if

“the materials are billed separately on the same contract as the construction services or are billed

under a separate contract.” Id. The Department acknowledges that depreciable property might

be deducted in a sale to a government agency, but only when there is a bond project with a third

party acting as an agent for the government. See 3.2.212.22 NMAC (2001). The Department

argues that there was no agent or bond project in the Taxpayer’s case. The Taxpayer concedes

that the construction of the fire station was not a bond project with a third party agent. The

Taxpayer also admits that its receipts were from performing construction for the county of Santa

Fe in the city of Edgewood. The Taxpayer argues that the general provisions of Regulation

3.2.1.11 (J) (2) should still apply.

Burden of Proof.

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

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

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 (emphasis added). 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.

Weil Construction, Inc.
Letter ID No. L0917463088
page 7 of 17
“[I]t is presumed that all receipts of a person engaging in business are subject to the gross

receipts tax.” NMSA 1978, § 7-9-5. The Taxpayer acknowledges that it was engaged in the

construction business in New Mexico and that its sales are generally subject to the gross receipts

tax. See NMSA 1978, § 7-9-3.5 (2007). The Taxpayer acknowledges that “[g]enerally, New

Mexico imposes its gross receipts tax on all construction activity.” Ex. 1-4. However, receipts

from the sales of tangible personal property to a government agency may be deducted from gross

receipts. See NMSA 1978, § 7-9-54. The Taxpayer acknowledges that the construction of the

fire station would generally fall under the definition of “construction” in the statute because it

involved the construction of a “building, stadium, or other structure”. NMSA 1978, § 7-9-3.4

(A) (1) (b) (2003). Again, it is the Taxpayer’s burden to prove that it is entitled to take the

deduction. See Public Services Co., 2007-NMCA-050, ¶ 32.

Exclusion of construction materials from deduction.

The right to a deduction must be clearly and unambiguously expressed in the statute.

Sec. Escrow Corp., 1988-NMCA-068, ¶ 8. In this instance, the statute itself indicates that the

deduction does not apply to “receipts from selling construction material”. NMSA 1978, § 7-9-54

(A) (3) (2003). “Construction material” is defined by statute as “tangible personal property that

becomes or is intended to become an ingredient or component part of a construction project”.

NMSA 1978, § 7-9-3.4 (B) (2003). Construction project is intended to include the broad

statutory definition of construction. See id. The regulations that interpret Section 7-9-54, which

provides for the deduction, should be given greater weight in determining whether the deduction

applies than the regulation that interprets Section 7-9-3.4, which provides general definitions.

See Ping Lu v. Educ. Trust Bd., 2013-NMCA-010, ¶ 13 (holding that when two statutes deal with

the same subject, the more specific one will be given effect over the more general one). See also

Weil Construction, Inc.
Letter ID No. L0917463088
page 8 of 17
Johnson v. NM Oil Conservation Com’n, 1999-NMSC-021, 127 NM 120 (holding that canons of

construction that apply to statutes also apply to rules and regulations). The fact that there is a

special regulation addressing depreciable property in the context of sales to government agencies

indicates that the sale of construction services to government agencies is not treated the same as

sales of construction services in general. See 3.2.212.22 NMAC (2001). The statute also

excludes from the deduction “that portion of the receipts from performing a ‘service’ that reflects

the value of tangible personal property utilized or produced in performance of such service.”

NMSA 1978, § 7-9-54. See also Arco Materials, Inc. v. Taxation and Revenue Dep’t, 1994-

NMCA-062, ¶ 7, 188 N.M. 12, overruled in part on other grounds by Blaze Constr. Co. Inc. v.

Taxation and Revenue Dep’t, 1995-NMSC-110, 118 N.M. 647.

In Arco Materials, the court affirmed the Department’s disallowance of deductions for

receipts from sales of construction materials to state government agencies and reversed the

Department’s disallowance of deductions for sales to certain federal agencies. See Arco

Materials, 1994-NMCA-062, ¶ 16. The decision was reversed on the issue of the federal

agencies and upheld on the state agencies. See Blaze Construction Co., 1995-NMSC-110. The

taxpayer in Arco Materials was also claiming a deduction under Section 7-9-54 for sales of

tangible personal property to government agencies. See Arco Materials, 1994-NMCA-062, ¶ 4.

The taxpayer in Arco Materials argued that it was also relying on the Department’s longstanding

treatment of some items as non-construction materials and its then-existing regulatory definition

of “construction project”. See id. at ¶ 5. The court found that even if the taxpayer’s sales of

materials did not fall within the Department’s regulatory definition of “construction project” the

regulation could not change the legislatively defined meaning of construction in the statute. See

id. at ¶ 6. The court held that the legislature broadly defined construction in the statute and that

Weil Construction, Inc.
Letter ID No. L0917463088
page 9 of 17
there was no indication that the legislature intended to distinguish between construction and

“construction project”. See id. The court also found that even if the Department had been

treating some materials as non-construction materials in the past, that treatment could not

override the legislative definition that clearly included the materials in its definition of

construction. See id. at ¶ 7. The court found that the statute intended to make sales of

construction materials to government agencies taxable when those materials are incorporated

into a construction project, and that construction project includes all of the construction activities

defined in the statute. See id. Therefore, the statutory provisions of Section 7-9-54 control and

limit the deduction.

Again, the deduction does not apply to “receipts from selling construction material”.

NMSA 1978, § 7-9-54 (A) (3) (2003). “Construction material” is defined by statute as “tangible

personal property that becomes or is intended to become an ingredient or component part of a

construction project”. NMSA 1978, § 7-9-3.4 (B) (2003). Construction projects include all of

the statutory activities and items listed by the legislature, including a building, and regulations

cannot override the legislative definition. See Arco Materials, 1994-NMCA-062, ¶ 6-7. See also

NMSA 1978, § 7-9-3.4 (A) (2003). All of the depreciable property claimed by the Taxpayer

appears to be firmly attached to the fire station, which means that the depreciable property was

incorporated into the construction project. See 3.2.1.11 (H) (1) NMAC (2012). See also

3.2.209.22 NMAC (2001). Consequently, all of the depreciable property became an ingredient

or component part of the fire station. Moreover, the performance of a construction service for

the government is the sale of a service and is not subject to the deduction. See 3.2.212.10

NMAC (A) (2001). Therefore, all of the outstanding depreciable property was construction

Weil Construction, Inc.
Letter ID No. L0917463088
page 10 of 17
material as defined by the statute, and the deduction was properly denied. See NMSA 1978, §§

7-9-54 and 7-9-3.4.

Operation and maintenance vs. supporting the activities.

Even if the outstanding depreciable property were not excluded by the statute, the

Taxpayer’s argument would fail in this case. The regulation gives several examples of

“equipment, systems, or components” that may or may not support or serve the activities and

processes conducted in the building. See 3.2.1.11 (J) (3) NMAC. These would include

elevators, escalators, heating and cooling units, electrical systems, and plumbing systems. See

id. These items would all be considered as components of the building except for items that

were categorized as depreciable property

installed to meet temperature, humidity or cleanliness requirements for the operation of
machinery or equipment or the manufacture, processing or storage of products;
…installed to power machinery or equipment operated as part of the activities and
processes conducted in the building and not necessary to the operation or maintenance of
the building; and…installed to perform, serve or support the activities and processes
conducted in the building, such as for the handling, transportation or treatment of
ingredients, chemicals, waste or water for a manufacturing or other process. Id.
(emphasis added)

Therefore, the Taxpayer’s interpretation of the regulation is too broad. The examples

given in the regulation demonstrate an intent to limit the exclusion to items that provide a

specific function that is necessary for the activities and processes occurring in the building, but

not for the items that are part of the building’s overall operation and maintenance. See id.

The Department pointed out that its approach, granting the part of the refund for easily

removable items like fire extinguishers, is akin to the federal standard for determining if an item

is tangible personal property or a structural component of a building. The federal standard is

based on several factors that have to do with ease of removal. See Whiteco Indus., Inc. v.

Comm’r, 65 T.C. 664, 672 (1975). The federal case cited by the Taxpayer also adopts this
Weil Construction, Inc.
Letter ID No. L0917463088
page 11 of 17
standard, but notes that removability is not an absolute necessity. See Hosp. Corp. of Am. v.

Comm’r, 109 T.C. 21, 57 (1997). The court notes that items are structural components of the

building if they relate to the operation and maintenance of the building. See id. at 58. The court

reviewed the extensive evidence presented on each claimed item, including information from

expert witnesses on the items’ functionality and their relation to the hospital care, to make a

determination on each item’s status as tangible personal property or as a structural component of

the building. See id. at 61-92. The court indicated that items which served a dual function, as

part of the operation of the building and as an essential component to conducting hospital

activities, failed to meet the “sole justification” test and were structural components. See id. at

91-92. However, some items, such as the electrical system, could be partially claimed based on

the amount of use directly related to the operation of hospital equipment. See id. at 63.

There was almost no evidence presented on the depreciable property claimed by the

Taxpayer and its relation to the fire station’s provision of emergency services. A few

outstanding items of the claimed depreciable property were mentioned as part of the argument

that they supported the activities and processes; the exhaust fans, and part of the drainage in the

garage. There was no evidence on how exactly those items related to the provision of emergency

services. Again, the burden is on the Taxpayer to prove that it is entitled to the deduction. See

Sec. Escrow Corp., 1988-NMCA-068, ¶ 8. See also Wing Pawn Shop, 1991-NMCA-024, ¶ 16.

See also Chavez, 1970-NMCA-116, ¶ 7. Given the lack of evidence presented on the items

claimed and their relation to provision of emergency services rather than the overall operation

and maintenance of the building, the Taxpayer has failed to meet its burden. Ultimately, though,

this issue is moot given the statutory limitations on taking a deduction for sales of tangible

Weil Construction, Inc.
Letter ID No. L0917463088
page 12 of 17
personal property to government agencies when those items are incorporated into a construction

project.

NTTCs.

The Taxpayer admitted that it regularly issued Type 6 NTTCs to its vendors. Buyers

must apply to the Department for the privilege of executing NTTCs, and will only be issued

appropriate NTTCs. See NMSA 1978, § 7-9-43 (D) (2011). A Type 2 NTTC is used by buyers

who are “engaged in a business that derives a substantial portion of its receipts from leasing or

selling tangible personal property”. NMSA 1978, § 7-9-49 (1992). A Type 6 NTTC is used by

buyers who are “engaged in the construction business” for the purchase of construction

materials. NMSA 1978, § 7-9-51 (2001). The Taxpayer is engaged in the construction business

and its purchases of materials are generally for purposes of performing construction. Therefore,

Type 6 NTTCs are the appropriate NTTCs for the Taxpayer to issue, and there is no evidence

that the Taxpayer would be entitled to issue Type 2 NTTCs.

If there were sufficient evidence to show that the Taxpayer issued Type 6 NTTCs on the

items it now claims as depreciable property, it would be conclusive evidence that the items

became ingredients or component parts of the construction project because the goods purchased

using a Type 6 NTTC are required to be incorporated into a construction project. See NMSA

1978, § 7-9-51. By issuing Type 6 NTTCs for the purchases of the materials, the Taxpayer

represents that it is incorporating the items into the construction project and that the project is

subject to the gross receipts tax. See id. However, there was no substantive evidence that the

Taxpayer purchased any of the claimed items using Type 6 NTTCs. The Department’s argument

that NTTCs were issued by the Taxpayer during the construction project to vendors who sold the

same types of items claimed is speculative at best.

Weil Construction, Inc.
Letter ID No. L0917463088
page 13 of 17
Matters not at issue.

The Department raised several issues that are not a part of this protest. The Department

argues that the Taxpayer is not entitled to claim the deduction because the Taxpayer is not the

party who can depreciate the property and that the property cannot even be categorized as

depreciable property because the city is not entitled to claim the property for depreciation

purposes under another provision of the Internal Revenue Code. These arguments fail as the

regulation does not require these criteria. See 3.2.1.11 (J) (2) NMAC. There was no evidence to

refute the Taxpayer’s claims that the property claimed would be categorized as depreciable

property as required by the regulation and the applicable section of the Internal Revenue Code.

See id. The Department also argues that the Taxpayer underreported its gross receipts tax on the

overall construction project and whether the Taxpayer would owe compensating tax. The

Department argues that they should, nevertheless, be considered in offsetting any refund that

might be granted to the Taxpayer pursuant to the protest.

The Department may use refunds to offset amounts of tax due. See NMSA 1978, § 7-1-

However, the Department must first give appropriate notice to a taxpayer that the offset will

occur. See NMSA 1978, § 7-1-29. Moreover, the Department must give notice to a taxpayer

that a tax is due by issuing an assessment. See NMSA 1978, § 7-1-17. There was no evidence

that the Department has done either.

Presumption of correctness only applies to assessments made. See id. There was little to

no evidence presented at the hearing to support the Department’s claims on these issues. The

Taxpayer was surprised by the arguments made by the Department on the issues of the

underreported gross receipts tax and compensating tax, and the Taxpayer was not afforded

sufficient notice to be able to prepare and address these issues at the hearing. Although these

Weil Construction, Inc.
Letter ID No. L0917463088
page 14 of 17
issues are tangentially related to the Taxpayer’s claim for refund, they are not ripe and are not a

part of this protest. Moreover, they are moot given the findings made in this decision.

CONCLUSIONS OF LAW

A. The Taxpayer filed a timely written protest to the Department’s failure to act on its

claim for refund, the protest was acknowledged by Letter ID number L0917463088, and jurisdiction

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

B. Receipts for sales of construction materials to government agencies are not subject

to deduction. See NMSA 1978, § 7-9-54 (A) (3). See also Arco Materials, 1994-NMCA-062.

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