Could Highland Construction avoid gross receipts tax on nonprofit construction projects because its customers delivered Type 9 NTTCs that it accepted without reviewing?
Apply this to your situation
This page answers the general question as of 2017. Ezel answers yours, under current New Mexico tax law, with citations.
Plain-English summary
Highland Construction could not use Type 9 NTTCs from two nonprofit customers to avoid gross receipts tax on construction services. The certificates did not cover the transactions, and Highland did not accept them in good faith after reasonable review.
The Department initially assessed $97,564.52 gross receipts tax, $19,512.92 penalty, and $9,033.03 interest for 2013 and 2014.
Two nonprofits refused to pay invoiced gross receipts tax
Highland performed construction for United World College (UWC) and Collins Lake Autism Center (CLAC), both understood to be nonprofit organizations.
Highland normally charged gross receipts tax on all construction work. But UWC told the contractor that it would not pay the tax because it was a nonprofit and required a revised invoice before paying.
UWC delivered a Type 9 NTTC. Based on that experience, Highland later required an NTTC from CLAC and accepted another Type 9 certificate.
Highland then removed gross receipts tax from the invoices and did not report or pay tax on those receipts.
Nonprofit construction services were still taxable
New Mexico imposed gross receipts tax on services, including construction.
Section 7-9-60 and Regulation 3.2.218.9(A) did not exempt construction performed for a 501(c)(3) organization. The construction services and property used in the project were fully taxable receipts from performing a service.
A nonprofit customer's status therefore did not create a deduction for Highland's work.
The Type 9 certificates did not cover the services
The face of each Type 9 NTTC stated that it was for purchasing tangible personal property or construction materials used in construction projects.
It did not cover the contractor's receipts from performing construction services.
Section 7-9-43's good-faith safe harbor did not make every transaction nontaxable whenever a certificate was present. The AHO held that an applicable statutory deduction still had to cover the underlying transaction.
Because no deduction could apply to this nonprofit construction work, there was no valid NTTC for the receipts. A certificate could not transform an otherwise taxable transaction into a nontaxable one.
Highland did not actually review the NTTCs
Owner Michael Quintana admitted that he did not personally see, read, or review either certificate when the transactions occurred. He first reviewed them at the hearing.
He relied on the customers' explanations and an unidentified office person who confirmed that certificates had been received. He did not verify the customers' claims, seek expert advice, or inspect the certificates' stated scope.
Even a superficial review would have shown that the Type 9 form did not apply to construction services and should have triggered further research.
The AHO found Quintana sincere and did not find bad intent. But good faith also required faithfulness to duty and reasonable commercial standards. Highland did not meet that standard.
The contractor remained liable even though it did not collect tax
After the assessment, Highland demanded reimbursement from UWC, which refused.
The AHO explained that businesses often pass gross receipts tax to customers, but the legal obligation belongs to the person engaging in business. Highland was not merely a tax collector for the state.
Its lack of tax knowledge, failure to review the NTTCs, and failure to obtain informed advice also supported the negligence penalty. Interest was mandatory until the tax principal was paid.
Result: protest DENIED. At the hearing, Highland owed $97,161.09 tax, $19,888.95 penalty, and $11,798.19 interest, totaling $128,846.97, with interest continuing.
What this means for you
Contractors working for nonprofits
Do not assume nonprofit status exempts construction services. Identify a specific statutory deduction before removing gross receipts tax.
Sellers accepting NTTCs
Read the certificate and confirm that its type covers the actual goods or services sold. Possession alone does not protect a transaction outside every recognized deduction.
Businesses asked to remove tax from an invoice
The seller remains legally responsible for New Mexico gross receipts tax even if the customer refuses to reimburse it. Resolve taxability before revising the invoice.
Owners without tax expertise
Seek informed professional advice and document it. Sincerity and lack of bad intent did not excuse failure to investigate the tax consequences.
Common questions
Q: Were UWC and CLAC treated as nonprofits?
A: Yes, but their nonprofit status did not exempt Highland's construction-service receipts.
Q: What type of NTTC did they provide?
A: Type 9 certificates.
Q: What did the certificates cover?
A: Purchases of tangible personal property or construction materials for use in construction projects, not Highland's construction services.
Q: Could the safe harbor make the work nontaxable anyway?
A: No. The AHO held that a recognized statutory deduction had to cover the underlying transaction.
Q: Did Highland review the certificates when it accepted them?
A: No. The owner first personally reviewed them at the hearing.
Q: Who legally owed the gross receipts tax?
A: Highland, as the person engaging in business, even though it could contractually pass the cost to a customer.
Q: How much remained due?
A: $128,846.97 at the hearing, plus continuing interest.
Citations and references
Statutes and regulations:
- NMSA 1978, §§ 7-9-3, 7-9-3.5, and 7-9-4 — services, gross receipts, and tax
- NMSA 1978, § 7-9-60 — construction services involving nonprofit organizations
- NMSA 1978, § 7-9-43(A) — NTTC good-faith safe harbor
- NMSA 1978, §§ 7-1-3, 7-1-17(C), 7-1-67, and 7-1-69 — assessment presumption, interest, and penalty
- Regulations 3.2.1.18(A), 3.2.218.9(A), and 3.2.4.8 NMAC — services, nonprofit construction, and seller liability
- Regulations 3.2.201.14, 3.1.11.10, and 3.1.11.11 NMAC — NTTC good faith and negligence
Cases cited:
- McKinley Ambulance Service v. Bureau of Revenue, 1979-NMCA-026 — safe harbor does not protect a seller unless the certificate covers the receipts
- Gas Co. v. O'Cheskey, 1980-NMCA-085 — an NTTC does not transform a taxable transaction into a nontaxable one
- Tiffany Construction Co. v. Bureau of Revenue, 1976-NMCA-127 — taxpayer's duty to ascertain tax consequences
- C & D Trailer Sales v. Taxation & Revenue Department, 1979-NMCA-151 — penalty upheld without informed consultation
- Erica, Inc. v. New Mexico Regulation & Licensing Department, 2008-NMCA-065 — good faith includes observance of duties and reasonable commercial standards
Source
- Listing: New Mexico Decisions & Orders
- Decision post: Highland Construction LLC
- Decision PDF: D&O 17-41
Original ruling text
STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT
IN THE MATTER OF THE PROTEST OF No. 17-41
HIGHLAND CONSTRUCTION LLC
TO ASSESSMENT ISSUED UNDER LETTER
ID NO. L1005232432
DECISION AND ORDER
A formal hearing on the merits in the above-captioned protest was held on August 21, 2017
before Hearing Officer Chris Romero, Esq., in Santa Fe, New Mexico. The Taxation and Revenue
Department (Department) was represented by Mr. David Mittle, Staff Attorney. Mr. Nicholas
Pacheco, Auditor, also appeared on behalf of the Department. Staff Attorney Jama Fisk observed
for training purposes. Mr. Joseph Walsh, Esq. (Sommer Udall Law Firm) appeared with Mr.
Michael Quintana, sole member of Highland Construction, L.L.C. (Taxpayer). Taxpayer Exhibits
1 – 11 and Department Exhibits C and F were admitted into the evidentiary record of the hearing.
Taxpayer did not proffer an exhibit 8 nor did the Department proffer exhibits A, B, D, or E. A
more detailed description of exhibits submitted at the hearing is included on the Administrative
Exhibit Coversheet. 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
- On December 9, 2016, the Department assessed Taxpayer for gross receipts tax,
penalty, and interest for the tax period from January 1, 2013 through December 31, 2014. The
assessment was for $97,564.52 in gross receipts tax, $19,512.92 in penalty, and $9,033.03 in
interest.
- On February 8, 2017, Taxpayer filed a formal protest letter by and through its
counsel of record.
- Taxpayer’s formal protest was received in the Department’s Protest Office on
February 10, 2017.
-
On February 21, 2017, the Department acknowledged receipt of Taxpayer’s protest.
-
On April 3, 2017, the Department filed a Hearing Request asking that Taxpayer’s
protest be set for a scheduling conference.
- On April 3, 2017, the Administrative Hearings Office filed and served a Notice of
Telephonic Scheduling Conference setting a telephonic scheduling conference for April 21, 2017.
- On April 21, 2017, a telephonic scheduling conference occurred. The parties did
not object that the hearing occurred within 90 days of Taxpayer’s protest.
- On April 24, 2017, the Administrative Hearings Office filed and served a
Scheduling Order and Notice of Administrative Hearing which in addition to establishing various
deadlines, set a hearing on the merits of Taxpayer’s protest for August 21, 2017.
- On August 4, 2017, Taxpayer filed Taxpayer’s Unopposed Motion for Extension
to File Prehearing Statement. The motion was granted without formal order of the Hearing Officer.
-
On August 8, 2017, the parties filed their Joint Prehearing Statement.
-
During the relevant periods of time, Taxpayer was engaged in business in New
Mexico as Highland Construction, L.L.C. [Testimony of Mr. Quintana].
- Mr. Quintana is the sole member of the limited liability company through which
Taxpayer is organized to conduct business in New Mexico. [Testimony of Mr. Quintana].
- Taxpayer presently has 12 employees. [Testimony of Mr. Quintana].
In the Matter of the Protest of Highland Construction, L.L.C.
Page 2 of 21
- Taxpayer has been in business for approximately 12 years. [Testimony of Mr.
Quintana].
- Taxpayer performs approximately 25 to 30 construction contracts per year.
[Testimony of Mr. Quintana].
- Mr. Quintana is a licensed contractor holding a GB98 contractor’s license.
[Testimony of Mr. Quintana].
- Taxpayer provides services in residential construction, institutional construction,
and small commercial construction. [Testimony of Mr. Quintana].
- The overwhelming majority, or approximately 95 percent of Taxpayer’s
construction services, are provided in residential construction on behalf of individual clients.
[Testimony of Mr. Quintana].
- Mr. Quintana is not trained or knowledgeable with Taxpayer’s tax responsibilities
under New Mexico law. He relies on a bookkeeper with whom he consults on an as-needed basis.
The bookkeeper is not employed by Taxpayer. [Testimony of Mr. Quintana].
- Taxpayer’s standard practice is to charge gross receipts tax on all construction
services. [Testimony of Mr. Quintana].
- The only occasions in which the Taxpayer did not charge gross receipts tax arose
from the services now subject of the Taxpayer’s protest. [Testimony of Mr. Quintana].
- Those services involved projects for United World College (UWC) and Collins
Lake Autism Center (CLAC), both of which are situated in northern New Mexico. [Testimony of
Mr. Quintana; Taxpayer Exs. 5 – 11].
- Taxpayer’s understanding is that UWC and CLAC are organized as non-profit
organizations. [Testimony of Mr. Quintana].
In the Matter of the Protest of Highland Construction, L.L.C.
Page 3 of 21
- In reference to UWC, Taxpayer, in 2012, performed construction work and
submitted an invoice for payment containing a line item for gross receipts tax. [Testimony of Mr.
Quintana; Taxpayer Ex. 10.1].
- Through its director of facilities, UWC notified Taxpayer that it would not pay
gross receipts tax because it was organized as a non-profit organization. [Testimony of Mr.
Quintana].
- UWC required that Taxpayer revise and submit a new invoice that removed all
charges for gross receipts tax in order to receive payment. [Testimony of Mr. Quintana; Taxpayer
Ex. 3]
- UWC indicated that it would provide the Taxpayer with a Non-Taxable Transaction
Certificate (NTTC). [Testimony of Mr. Quintana; Taxpayer Ex. 3]
-
UWC executed a Type 9 NTTC to Taxpayer. [Taxpayer Ex. 1].
-
Mr. Quintana admitted that he did not personally review the NTTC [Taxpayer Ex.
1] from UWC at the time of the transactions. Rather, his only review of the NTTC was not until
the hearing in this protest. [Testimony of Mr. Quintana].
- Mr. Quintana authorized that the gross receipts tax be removed from the UWC
invoice when an unidentified individual from his office confirmed that UWC submitted an NTTC.
[Testimony of Mr. Quintana].
- Construction services provided for UWC were thereafter invoiced without
Taxpayer passing along any charge for gross receipts tax. [Testimony of Mr. Quintana; Taxpayer
Exs. 10.2 – 11.7].
- UWC was the first client Mr. Quintana recalled that raised an issue of gross receipts
tax being passed along to non-profit organizations. [Testimony of Mr. Quintana].
In the Matter of the Protest of Highland Construction, L.L.C.
Page 4 of 21
- Taxpayer performed construction services for CLAC during the same relevant
periods of time. [Testimony of Mr. Quintana].
- Mr. Quintana understood that CLAC was also a non-profit entity based on a
conversation he had with its director. [Testimony of Mr. Quintana].
- Mr. Quintana informed CLAC that gross receipts tax would be charged for
construction services unless CLAC provided an NTTC. [Testimony of Mr. Quintana; Taxpayer
Ex. 4].
- The position Mr. Quintana took in reference to CLAC was based on an
understanding he developed during his business dealings with UWC. [Testimony of Mr. Quintana].
-
CLAC executed a Type 9 NTTC to Taxpayer. [Taxpayer Ex. 2].
-
Mr. Quintana admitted that he did not review the NTTC [Taxpayer Ex. 2] at the
time of the transactions. Rather, his only review of the NTTC was not until the hearing in this
protest. [Testimony of Mr. Quintana].
- Mr. Quintana authorized that the gross receipts tax be removed from the CLAC
invoices when an unidentified individual from his office confirmed that CLAC submitted an
NTTC. [Testimony of Mr. Quintana].
- Construction services provided for CLAC were thereafter invoiced without
Taxpayer passing along any charge for gross receipts tax. [Testimony of Mr. Quintana; Taxpayer
Ex. 6.1 – 6.13; Taxpayer Ex. 7.1 – 7.6].
- Taxpayer also performed services for the director of CLAC in his personal capacity.
Because that work was not performed for CLAC, but instead for its director, Taxpayer charged
gross receipts tax. [Testimony of Mr. Quintana; Taxpayer Ex. 9].
In the Matter of the Protest of Highland Construction, L.L.C.
Page 5 of 21
- However, on at least one occasion, Taxpayer did not charge gross receipts tax for
services provided for the director of CLAC in his personal capacity. [Testimony of Mr. Quintana;
Dept. Ex. C.1].
- Taxpayer did not, at any relevant time, consult any tax professional regarding his
tax liabilities or obligations in reference to the taxability of receipts generated from construction
activities he performed for UWC and CLAC. [Testimony of Mr. Quintana].
- At all relevant times, Taxpayer’s standard procedure was to file NTTCs until they
were required by the bookkeeper for tax reporting or filing purposes. [Testimony of Mr. Quintana]
- Mr. Quintana admitted he is unfamiliar with the various types of NTTCs.
[Testimony of Mr. Quintana].
- The face of the NTTCs indicate in relevant part that they are “[f]or the purchase of
tangible personal property only and may not be used for the purchase of services, for the lease of
property or to purchase construction materials for the use in construction projects.” [Taxpayer Ex.
1; Taxpayer Ex. 2].
- Mr. Quintana could not estimate the number of previous transactions in which a
client presented Taxpayer with an NTTC. [Testimony of Mr. Quintana].
- Mr. Quintana’s present-day understanding of Taxpayer’s gross receipts tax
obligations differs from his understanding prior to the assessment. [Testimony of Mr. Quintana].
- As a result of the assessment, Taxpayer now passes along gross receipts taxes on
all construction services, including non-profit organizations. This has resulted in a loss of business
from UWC and CLAC. [Testimony of Mr. Quintana].
In the Matter of the Protest of Highland Construction, L.L.C.
Page 6 of 21
- As a result of the assessment that issued in this protest, Taxpayer made a written
demand to UWC for payment of gross receipts tax. UWC refused Taxpayer’s request. [Testimony
of Mr. Quintana].
- As of the date of the hearing on the merits of Taxpayer’s protest, Taxpayer’s
outstanding liability was $97,161.09 in gross receipts tax, $19,888.95 in penalty, and $11,798.19
in interest for a total amount due and owing of $128,846.97. [Testimony of Mr. Pacheco; Dept.
Ex. F].
DISCUSSION
The issue to be decided is whether the Taxpayer is liable for gross receipts tax, penalty,
and interest that were assessed on receipts generated from construction services performed for two
non-profit organizations. Those entities, UWC and CLAC, both provided Taxpayer with Type 9
NTTCs for construction projects. Taxpayer, in reliance on the NTTCs, did not pass along any
charges for gross receipts tax or otherwise report or pay tax to the Department on the receipts
generated from those construction services.
The Taxpayer argued that it should be entitled to the benefit of the good-faith, safe harbor
provision provided in NMSA 1978, Sec. 7-9-43 because it accepted the NTTCs in good-faith
reliance on the representations of UWC and CLAC. In contrast, the Department argued that the
Taxpayer failed to establish good faith, in part due to ignorance of the law, and a failure to seek
assistance or make other efforts to become knowledgeable in the matters of Taxpayer’s reporting
and payment obligations arising from construction activities performed for non-profit
organizations.
Burden of Proof
In the Matter of the Protest of Highland Construction, L.L.C.
Page 7 of 21
Assessments by the Department are presumed to be correct. See NMSA 1978, Sec. 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.” See NMSA 1978, Sec. 7-1-
- See also El Centro Villa Nursing Ctr. v. Taxation and Revenue Department, 1989-NMCA-070,
108 N.M. 795. Therefore, the assessment issued to Taxpayer is presumed to be correct, and it is
Taxpayer’s burden to present evidence and legal argument to show that it is entitled to an
abatement.
The burden is also on Taxpayer to prove that it is entitled to an exemption or deduction, if
one should possibly apply. 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.” See 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 who engages in business in New Mexico is subject to the gross receipts tax. See
NMSA 1978, Sec. 7-9-3.5; Sec. 7-9-4. Services are subject to the gross receipts tax. See Regulation
3.2.1.18 (A) NMAC. According to NMSA 1978, Sec. 7-9-3, “‘[s]ervice’ includes construction
activities and all tangible personal property that will become an ingredient or component part of a
construction project.”
In the Matter of the Protest of Highland Construction, L.L.C.
Page 8 of 21
Neither the Gross Receipts and Compensating Tax Act nor the regulations that implement
it provide any exceptions for construction activities provided for non-profit organizations. See
NMSA 1978, Sec. 7-9-60. In contrast, Regulation 3.2.218.9 (B) NMAC provide that “Receipts
from performing a construction project for a 501 (c) (3) organization, including construction
services and the value of property used in the construction project, are receipts derived from
performing a service and are fully taxable.” Therefore, receipts from construction activities, even
for non-profit organizations, are taxable.
Nevertheless, Taxpayer relied on the representations of UWC and CLAC that construction
services to non-profit organizations were not taxable and Taxpayer accepted Type 9 NTTCs.
Taxpayer asserts that it accepted the NTTCs in good faith and should be entitled to the safe harbor
provision contained in NMSA 1978, Sec. 7-9-43 (A).
Non-Taxable Transaction Certificates
While the transactions at issue were not deductible as discussed in the preceding section,
Sec. 7-9-43 provides a safe harbor from taxation in some circumstances when a seller accepts an
NTTC in good faith. Sec. 7-9-43 states in relevant part:
[w]hen the seller or lessor accepts a nontaxable transaction certificate within
the required time and in good faith that the buyer or lessee will employ the
property or service transferred in a nontaxable manner, the properly executed
nontaxable transaction certificate shall be conclusive evidence, and the only
material evidence, that the proceeds from the transaction are deductible from
the seller's or lessor's gross receipts.
Consequently, the statute grants the seller of the service safe harbor from taxation when the
seller timely accepts a properly executed NTTC in good faith from the buyer. Regulation 3.2.201.14
NMAC (05/31/01) discusses good faith acceptance of an NTTC:
Acceptance of nontaxable transaction certificates (nttcs) in good faith
that the property or service sold thereunder will be employed by the
In the Matter of the Protest of Highland Construction, L.L.C.
Page 9 of 21
purchaser in a nontaxable manner is determined at the time of each
transaction. The taxpayer claiming the protection of a certificate
continues to be responsible that the goods delivered or services
performed thereafter are of the type covered by the certificate.
(Emphasis added)
The Administrative Hearings Office, and its predecessor the Hearings Bureau, have employed
a broader view of the good-faith, safe harbor protection since the 2013 issuance of the decision and
order In the Matter of the Protest of Case Manager, No. 13-12 (non-precedential) and In the Matter
of the Protest of Rio Grande Electric Co., Inc, No. 13-16 (non-precedential). In an unpublished
decision, the New Mexico Court of Appeals affirmed the ruling in the Case Manager under a right
for any reason standard. See New Mexico Taxation and Revenue Dep’t. v. Case Manager, No.
32,940 (N.M. Ct. App. April 29, 2015) (non-precedential).
However, even under the broader reading of the safe harbor protection employed since Case
Manager and Rio Grande Electric, the good-faith, safe-harbor provision is limited to cases where the
underlying transaction itself is otherwise covered by a recognized statutory deduction. See In the
Matter of the Protest of Adecco USA, Inc., Decision and Order No. 14-16 (non-precedential); See also
In the Matter of the Protest of The GEO Group, Inc., Decision and Order No. 14-36 (non-
precedential). Those decisions and orders have consistently determined that the safe harbor provision
cannot serve to make a taxable transaction, not covered by any recognized statutory deduction, into a
nontaxable transaction merely by possession of a NTTC.
In McKinley Ambulance Serv. v. Bureau of Revenue, 1979-NMCA-026, ¶10, 92 N.M. 599,
the Court of Appeals held that the good faith safe harbor provision did not protect a seller from
taxation “unless the certificate covered the receipts in question.” The court went on to say that since
In the Matter of the Protest of Highland Construction, L.L.C.
Page 10 of 21
there was “no certificate applicable” for the type of services that taxpayer provided, the Department’s
denial of the deduction was proper. See McKinley, ¶13.
Consistent with McKinley, the Court of Appeals stated in Gas Co. v. O'Cheskey, 1980-
NMCA-085, ¶12, 94 N.M. 630 that “[t]he issuance of a ‘Nontaxable Transaction Certificate’ does not
operate to transform an otherwise taxable transaction into a nontaxable transaction.” Further, in Arco
Materials, Inc. v. Taxation & Revenue Dep't, 1994-NMCA-062, 18 N.M. 12 (overturned on other
grounds), the New Mexico Court of Appeals relied on a taxpayer’s continuing obligation to ensure
that the NTTC covers the type of goods sold in finding that a taxpayer was not entitled to a deduction
when the transaction was no longer subject to a deduction. While Leaco Rural Tel. Coop. v. Bureau
of Revenue, 1974-NMCA-076, ¶15, 86 N.M. 629 and Continental Inn v. N.M. Taxation and
Revenue Dep’t., 1992-NMCA-030, 113 N.M. 588 suggest that timely, good faith acceptance of a
properly executed NTTC is sufficient for a taxpayer to claim a deduction even if the transaction itself
did not fall under any recognized deduction, those cases must be interpreted in the context of the cases
that followed, McKinley , Gas Co., and Arco Materials.
The problem with applying the good-faith, safe harbor provision in this case, and what
makes this case distinguishable from Continental Tire, is that under no circumstance could these
transactions qualify for a deduction because receipts from construction services provided to non-
profit organizations are taxable. Because the transactions at issue in this protest are not deductible,
there was no NTTC certificate applicable to Taxpayer’s services and Taxpayer’s acceptance of a
NTTC in this instance does not convert what was clearly a taxable transaction into a nontaxable one.
See McKinley, ¶13; See also Gas Co. ¶12.
As mentioned, the Continental Inn case is distinguishable from the facts of the present protest
because in that case, the transactions were potentially deductible under a recognized deduction if the
In the Matter of the Protest of Highland Construction, L.L.C.
Page 11 of 21
buyer in that case had adhered with the usual requirements of the Gross Receipts and Compensating
Tax Act. In Continental Inn, a general contractor constructing an inn issued NTTCs to
subcontractors. See id. at ¶1 – 3. The Court of Appeals noted that the transactions themselves were
potentially deductible under two recognized deductions if the general contractor ultimately paid
gross receipts tax on the sale of the constructed inn. See id. at ¶7. However, for uncertain reasons,
the general contractor chose not to pay gross receipts tax on the constructed inn. See id. The
Department pursued the general contractor with a compensating tax assessment, which the Court
of Appeals ultimately upheld. In addressing one of the taxpayer’s arguments, the Court of Appeals
in Continental Inn reviewed the good-faith, safe harbor provision under Section 7-9-43 and found
that the general contractor’s issuance of the NTTCs to the subcontractors “represented to the
subcontractors that the use of the NTTCs was such that the subcontractors were entitled to the
deduction from gross receipts.” Id. ¶13. This statement is arguably dicta, since the case involved
Taxpayer’s liability for compensating tax rather than the subcontractors’ ability to claim a
deduction. But even if applicable, Continental Inn is still distinguishable from the present protest
in that the transactions with the subcontractors in Continental Inn would have qualified for a
recognized deduction but for the buyer’s failure to otherwise proceed as expected in the
transaction. In this protest, there is no circumstance where the transaction could have qualified for
any recognized deduction.
Even if the safe harbor provision was applicable in circumstances where there was no
pertinent deduction, it cannot be said, in this case, that Taxpayer’s acceptance of the NTTCs was
made in good-faith. “Questions of good faith belief . . . are questions of fact.” See Erica, Inc. v. N.M.
Regulation & Licensing Dep't, 2008-NMCA-65, ¶23, 144 N.M. 132, 184 P.3d 444 (Ct.App.2008)
(quoting State v. Vandenberg, 2003-NMSC-30, ¶18, 134 N.M. 566, 81 P.3d 19).
In the Matter of the Protest of Highland Construction, L.L.C.
Page 12 of 21
In Erica, the New Mexico Court of Appeals referenced Black’s Law Dictionary to define
good faith. The Court of Appeals stated
[g]ood faith is a broad term: “The phrase ‘good faith’ is used in a
variety of contexts, and its meaning varies somewhat with the
context.” Black’s Law Dictionary 701 (7th ed. 1999) (internal
quotation marks and citation omitted) (defining good faith as ‘A state
of mind consisting in (1) honesty in belief or purpose, (2) faithfulness
to one’s duty or obligation, (3) observance of reasonable commercial
standards of fair dealing in a given trade or business, or (4) absence of
intent to defraud or to seek unconscionable advantage”). Id. at ¶18.
(Emphasis Added)
The Hearing Officer did not doubt Mr. Quintana’s sincerity. He was candid and
forthcoming and the Hearing Officer was persuaded that he did not act with ill intention. Despite
those observations, “every person is charged with the reasonable duty to ascertain the possible tax
consequences” of his or her actions. See Tiffany Construction Co. v. Bureau of Revenue, 1976-
NMCA-127, ¶5, 90 N.M. 16. Under the facts of this protest, Mr. Quintana breached his duty to
ascertain the consequences of his actions, contrary to Erica and the dictionary definition of “good
faith.”
Taxpayer operates under Mr. Quintana’s contractor’s license through a limited liability
company in which he is the sole member. It was evident that Mr. Quintana was exclusively in
charge of his business operations. It was also clear that the decision to accept the NTTCs was
entirely his, and he did not delegate that authority to any employee or other party. To the extent
Mr. Quintana could have relied on anyone else, such as a bookkeeper, accountant, or employee,
he neither identified them, called upon them to present evidence, nor attributed any statements to
them which could have established some reasonable reliance for his acceptance of the NTTCs in
these transactions.
In the Matter of the Protest of Highland Construction, L.L.C.
Page 13 of 21
Rather, Mr. Quintana admitted that he never saw, reviewed, or read the NTTCs from UWC
or CLAC prior to protesting the assessment. At the time of the transactions, Mr. Quintana admitted
that his understanding of the NTTCs was based on information from UWC or CLAC.
Unfortunately, Taxpayer made no effort verify the information which UWC and CLAC provided,
did not seek expert opinion, or even review the face of the NTTCs at any time prior to the protest
of the assessment. Instead, Taxpayer accepted the information of UWC and CLAC without further
inquiry, investigation, or due diligence to ascertain the correctness of their explanations or
Taxpayer’s obligations under the law.
Had Taxpayer conducted even a superficial examination of the NTTCs at the time the
transactions arose, or made other inquiries, he may have been alerted to the fact that the Type 9
NTTC, although commonly utilized by non-profit organizations, is not applicable to construction
services. This was evident from the face of the NTTCs in this protest, and should have alerted the
Taxpayer of the need to conduct additional research or seek professional assistance at the time the
transactions were occurring.
Once again referring to McKinley, 1979-NMCA-026, ¶10, the good faith safe harbor
provision will not protect a seller from taxation “unless the certificate covered the receipts in
question.” In this case, the NTTC provided actual notice that it was not to be utilized for construction
services, but Taxpayer failed to heed the notice. Therefore, Taxpayer did not establish that his reliance
on the NTTCs was in good faith under the circumstances in this protest. The Taxpayer is therefore
not entitled to the safe harbor provision under which he seeks relief in this protest.
Taxpayer expressed disappointment with the possibility that it may be liable for the
amounts due under the assessment. Mr. Quintana testified that he made a written demand to UWC
seeking reimbursement for the gross receipts taxes it should have paid but for its representations
In the Matter of the Protest of Highland Construction, L.L.C.
Page 14 of 21
that it was not obligated to pay because it was a non-profit organization. UWC denied the request.
Although Taxpayer’s sentiments in this regard are respected, New Mexico imposes a gross receipts
tax on all the receipts of a person or entity engaged in business. Although it is common for a
business to pass the tax on to the consumer, it is not the consumer who bears the obligation of
paying the tax. Rather, the obligation rests solely with the person or entity engaged in business.
Regulation 3.2.4.8 NMAC states “[t]he gross receipts tax is imposed on persons engaging in
business in New Mexico. Such persons are solely liable for payment of the tax; they are not
‘collectors’ on behalf of the state.”
Penalty and Interest
When a taxpayer fails to make timely payment of taxes due to the state, “interest shall be
paid to the state on that amount from the first day following the day on which the tax becomes
due...until it is paid.” See NMSA 1978, Sec. 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. v. N.M. Oil Conservation Comm'n, 2009-NMSC-013, ¶22,
146 N.M. 24. 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. In this case, the Department has no
discretion under Section 7-1-67 and must assess interest against Taxpayer from when the tax was
originally due until Taxpayer pays the gross receipts tax principal in this matter.
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, NMSA 1978 Section 7-1-69
(2007) requires that
In the Matter of the Protest of Highland Construction, L.L.C.
Page 15 of 21
there shall be added to the amount assessed a penalty in an amount equal to
the greater of: (1) two percent per month or any fraction of a month from
the date the tax was due multiplied by the amount of tax due but not paid,
not to exceed twenty percent of the tax due but not paid.
(italics added for emphasis).
Again, the statute’s use of the word “shall” makes the imposition of penalty mandatory in
all instances where a taxpayer’s actions or inactions meet the legal definition of “negligence.” See
Marbob.
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.” In this
case, Taxpayer was negligent under Regulation 3.1.11.10 (A) (B) & (C) NMAC, because Taxpayer
failed to exercise that degree of ordinary business care and prudence which reasonable taxpayers
would exercise under like circumstances to report and pay gross receipts tax when due.
In instances where a taxpayer might fall under the definition of civil negligence generally
subject to penalty, Section 7-1-69 (B) provides a limited exception in that “[n]o penalty shall be
assessed against a taxpayer if the failure to pay an amount of tax when due results from a mistake
of law made in good faith and on reasonable grounds.” Here, there is no evidence that Taxpayer
made an informed judgment or determination based on reasonable grounds that gross receipts tax
did not apply to the services subject of this protest. See C & D Trailer Sales v. Taxation and Revenue
Dep’t, 1979-NMCA-151, ¶8-9, 93 N.M. 697 (penalty upheld where there was no evidence that the
taxpayer “relied on any informed consultation” in deciding not to pay tax). Consequently, this
mistake of law provision of Section 7-1-69 (B) does not mandate abatement of penalty in this case.
In the Matter of the Protest of Highland Construction, L.L.C.
Page 16 of 21
The other grounds for abatement of civil negligence penalty are found under Regulation
3.1.11.11 NMAC. That regulation establishes eight indicators of non-negligence where penalty
may be abated. Based on the evidence presented, only one factor under Regulation 3.1.11.11
NMAC is potentially applicable in this protest:
D. the taxpayer proves that the failure to pay tax or to file a return was
caused by reasonable reliance on the advice of competent tax counsel or
accountant as to the taxpayer's liability after full disclosure of all relevant
facts; failure to make a timely filing of a tax return, however, is not excused
by the taxpayer's reliance on an agent;
Although Taxpayer testified that he occasionally utilized a bookkeeper or an accountant,
Taxpayer did not purport to rely on this person for any purpose relevant to the issues in this protest,
nor did Taxpayer present evidence to establish that this person was competent, such that any
reliance on his or her advice would be reasonable.
Taxpayer readily admitted that he was inexperienced in tax matters and the Department does
not contend that he acted with bad intentions. Undeniably, Taxpayer’s actions resulted from
inadvertence, erroneous belief, and inattention. Yet, El Centro Villa Nursing established that the civil
negligence penalty is appropriate for inadvertent error and Regulation 3.1.11.11 (D) NMAC does
not provide grounds for abatement of the penalty.
Unfortunately, Taxpayer’s lack of experience, knowledge, or understanding is no defense to
the assessment. “[E]very person is charged with the reasonable duty to ascertain the possible tax
consequences” of his or her actions. Tiffany Construction Co., supra. The Department’s assessment
of penalty and interest in this matter was correct and there was no authority for an abatement.
For the reasons stated herein, Taxpayer’s protest should be denied.
CONCLUSIONS OF LAW
In the Matter of the Protest of Highland Construction, L.L.C.
Page 17 of 21
A. Taxpayer filed a timely written protest to the Notice of Assessment of gross receipts
taxes issued under Letter ID number L1005232432, 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 Taxpayer’s 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 and did not establishment entitlement to any specific statutory
deduction.
D. Receipts from performing a construction project for a 501(c)(3) organization,
including the construction services and the value of all property used in the construction project, are
receipts derived from performing a service and are fully taxable pursuant to Regulation 3.2.218.9 (A)
NMAC, NMSA 1978, Sec. 7-9-60, and NMSA 1978, Sec. 7-9-3.
E. Because no deduction or certificate covered the transaction at issue, Taxpayer did not
establish good-faith acceptance of the NTTCs and thus was not entitled to safe harbor protection under
NMSA 1978, Section 7-9-43 (A). See McKinley Ambulance Serv. v. Bureau of Revenue, 1979-
NMCA-026, ¶10, 92 N.M. 599.
F. Under NMSA 1978, Sec. 7-1-67 (2007), Taxpayer is liable for accrued interest
under the assessment. Interest continues to accrue until the tax principal is satisfied.
G. Under NMSA 1978, Sec. 7-1-69 (2007), Taxpayer are liable for civil negligence
penalty under the negligence definition found under Regulation 3.1.11.10 (C) NMAC.
For the foregoing reasons, Taxpayer’s protest IS DENIED. As of the date of the hearing on
the merits of Taxpayer’s protest, Taxpayer’s outstanding liability was $97,161.09 in gross receipts
In the Matter of the Protest of Highland Construction, L.L.C.
Page 18 of 21
tax, $19,888.95 in penalty, and $11,798.19 in interest for a total amount due and owing of
$128,846.97. Interest shall continue to accrue until the underlying tax principal is satisfied.
DATED: September 28, 2017
Chris Romero
Hearing Officer
Administrative Hearings Office
P.O. Box 6400
Santa Fe, NM 87502
In the Matter of the Protest of Highland Construction, L.L.C.
Page 19 of 21
NOTICE OF RIGHT TO APPEAL
Pursuant to NMSA 1978, Section 7-1-25 (2015), 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. If an appeal is not timely filed with the Court of Appeals within 30 days, this
Decision and Order will become final. Rule of Appellate Procedure 12-601 NMRA articulates the
requirements of perfecting an appeal of an administrative decision with the Court of Appeals.
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 begin preparing the record proper. The parties will each be provided with a
copy of the record proper at the time of the filing of the record proper with the Court of Appeals,
which occurs within 14-days of the Administrative Hearings Office receipt of the docketing
statement from the appealing party. See Rule 12-209 NMRA.
In the Matter of the Protest of Highland Construction, L.L.C.
Page 20 of 21
CERTIFICATE OF SERVICE
I hereby certify that I mailed the foregoing Decision and Order to the parties listed below
this _____ day of September, 2017 in the following manner:
First Class Mail and Fax Interoffice Mail
In the Matter of the Protest of Highland Construction, L.L.C.
Page 21 of 21
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