I had (or later got) nontaxable transaction certificates for my construction jobs, but didn't show them until after the audit — can I still keep the deductions?

Plain-English summary

Claude Burger Lath & Plaster, a Clovis, New Mexico subcontractor that sells construction services (including services for resale to general contractors), was audited for January 1992 through December 1995. The Department found deductions the business had taken from its gross receipts that weren't backed by proper nontaxable transaction certificates (NTTCs) — about $385,988.67 of receipts on which no gross receipts tax had been paid — and issued Assessment No. 2057422 for $22,920.68 in tax plus penalty and interest.

The Department had warned the business in a January 1996 letter (before the audit) and again at the audit's start that it needed NTTCs in its possession to support its deductions. The business didn't produce them at the audit or within 60 days. Only in October 1996 — after the assessment and its protest — did it submit copies. Those certificates had problems:

• Chaparral Builders and Inca Construction gave the business NTTCs that the Department hadn't issued until after the relevant returns were due (Chaparral's wasn't issued until July 1995 for transactions whose returns were due by May 1995; Inca's wasn't presented until July 1996 for 1993 transactions).
• Two certificates were backdated to January 1, 1992 even though the Department issued them years later. (The hearing officer noted the purchasers appeared to have backdated them; there was no allegation the taxpayer did.)
• J.M. Brook and A&M Building Systems certificates may actually have been in the business's possession at the right time — but the business still didn't demonstrate that possession to the Department within the required window.

Hearing Officer Ellen Pinnes denied the protest:

• The deduction rule has two parts, and timing controls. Under Section 7-9-43(A), for transactions on or after July 1, 1992, the taxpayer must hold a valid NTTC when the return is due and, if it doesn't show that at the audit's start, must demonstrate timely possession within 60 days of the Department's notice — otherwise the deduction is disallowed. (For pre-July-1992 transactions, TRD Regulation GR 43:1(A) requires possession at the time of the transaction, still with the 60-day inspection requirement.) The business proved possession only in October 1996, over eight months after notice, so the deductions were properly disallowed and the tax was owed.
• Interest is mandatory. Section 7-1-67 imposes interest at 15% per year on unpaid tax with no exceptions. Interest isn't a penalty — it compensates the state for the time value of money it didn't have. Even if the rate seems high, the Legislature set it, and neither the Department nor the hearing officer can lower it.
• The penalty stands as negligence. A Section 7-1-69(A) penalty applies when the failure to pay is due to negligence or disregard of rules. The business's only excuse was that it didn't know the NTTC requirements — but a business has a duty to know the tax laws that govern it (Tiffany Construction Co. v. Bureau of Revenue), so that ignorance was itself negligence.

What this means for you

Contractors and subcontractors in New Mexico

When you deduct receipts from sales for resale (or other NTTC-supported deductions), the certificate is only half the job. You must have a valid NTTC in hand at the right time and be able to show it fast — within 60 days of a Department audit notice. Keep your NTTCs organized and ready to produce; getting them (or producing them) after the fact will not rescue a disallowed deduction.

Watch the certificate's issue date

An NTTC can't have been "in your possession" before the Department even issued it. If a customer hands you a certificate dated to cover past jobs, check the Department's issue date on the left of the form — if that date is after your transaction's return was due, the certificate won't support the deduction (and backdating by the customer doesn't fix it). Get valid NTTCs up front, before or as the sale happens.

On interest and penalties

Interest at 15% is automatic and non-negotiable — no one at the Department or the hearing office can waive or reduce it. And "I didn't know the rule" is not a defense to a penalty in New Mexico: a business is charged with knowing the tax requirements that apply to it, so ignorance reads as negligence.

Common questions

Q: I got the NTTCs eventually and sent them in. Why were my deductions still denied?
A: Because Section 7-9-43(A) requires both timely possession and a demonstration of that possession within 60 days of the audit notice. Producing certificates months later — here, over eight months later — doesn't meet the deadline, so the deductions were disallowed.

Q: My customer gave me a certificate dated to cover an earlier job. Isn't that enough?
A: No. The certificate can't have been in your possession before the Department issued it, and backdating by the customer doesn't help. If the Department's issue date falls after your return was due, the NTTC won't support the deduction.

Q: Can the interest or penalty be reduced because I acted in good faith?
A: The 15% interest is mandatory and cannot be reduced by anyone. The penalty applies because failing to learn the NTTC rules is treated as negligence — a business has a duty to know the tax laws that apply to it.

Citations and references

Statutes and regulation:

• § 7-9-43(A) NMSA 1978 — NTTCs must be in possession when the return is due, and possession must be demonstrated within 60 days of an audit notice, or the deduction is disallowed
• TRD Regulation GR 43:1(A) — for pre-July-1-1992 transactions, NTTCs must have been in possession at the time of the transaction (still subject to the 60-day inspection requirement)
• § 7-1-67 NMSA 1978 — interest at 15% per year on unpaid tax; compensates the state for the time value of money and is not a penalty
• § 7-1-69(A) NMSA 1978 — civil penalty when non-payment is due to negligence or disregard of rules and regulations
• § 12-2-2(I) NMSA 1978 — "shall" and "must" are mandatory unless a contrary legislative intent is manifest

Cases cited:

• State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977) — "shall" is mandatory rather than discretionary
• Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976), cert. denied, 90 N.M. 255, 561 P.2d 1348 (1977) — a taxpayer has a reasonable duty to be aware of the tax requirements imposed on its operations

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Claude Burger Lath & Plaster
• Decision PDF: D&O 97-08

Original ruling text

BEFORE THE HEARING OFFICER
OF THE TAXATION AND REVENUE DEPARTMENT
OF THE STATE OF NEW MEXICO

IN THE MATTER OF THE PROTEST OF
CLAUDE BURGER LATH & PLASTER No. 97-08
ID NO. 01-133148-00 8, PROTEST
TO ASSESSMENT NO. 2057422

DECISION AND ORDER

This matter came on for hearing on February 7, 1997, before Ellen Pinnes, Hearing

Officer. Claude Burger Lath & Plaster ("the Taxpayer") was represented by its owner, Claude

Burger. The Taxation and Revenue Department ("the Department") was represented by

Margaret B. Alcock, Special Assistant, Attorney General.

Based upon the evidence and arguments presented, IT IS HEREBY DECIDED AND

ORDERED AS FOLLOWS:

FINDINGS OF FACT

1) The Taxpayer, which is based in Clovis, New Mexico, is in the business of selling

construction services, including services provided as a subcontractor on construction projects.

2) The assessment at issue, No. 2057422, is for gross receipts taxes due on sales of

construction services for resale.

3) The assessment was issued pursuant to an audit of the Taxpayer's tax records. The

audit began on February 21, 1996, and covered the period from January, 1992, through

December, 1995.

4) The Taxpayer was given advance notice of the audit by a letter dated January 22, 1996,

from the Department's Audit and Compliance Division (Ex. 1, p. 1). That letter notified the

Taxpayer that an audit would be performed and specifically advised the Taxpayer of the need to

have nontaxable transaction certificates (NTTCs) in its possession to support deductions taken

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from gross receipts.

5) At the commencement of the audit on February 21, 1996, the Department's auditor

gave the Taxpayer a letter of introduction, identifying the auditor who would be performing the

audit, stating the date on which the audit was deemed to have started for purposes of §7-9-43

NMSA 1978, and reiterating requirements relating to possession of NTTCs (Ex. 1, p. 2). Also,

on February 21, 1996, the auditor gave the Taxpayer a second letter which set out the

requirements regarding NTTCs in greater detail (Ex. 1, p. 3).

6) The auditor identified a number of deductions taken by the Taxpayer during the audit

period for which the Taxpayer did not have proper NTTCs to support the deduction. The total

amount of gross receipts determined to be subject to tax and on which gross receipts tax had not

been paid was $385,988.67. (See Ex. 2, p. 3.)

7) The Taxpayer did not produce NTTCs to support these deductions, either at the time of

the audit or within sixty days of the audit.

8) Assessment No. 2057422 was issued by the Department on August 11, 1996, for
$22,920.68 in gross receipts taxes plus penalty and interest.1

9) The Taxpayer filed a timely protest of the assessment.

10) After the assessment was issued and the protest filed, the Taxpayer, by letter dated

October 28, 1996, submitted to the Department copies of NTTCs relating to the disallowed

deductions (Ex. 3).

11) Each NTTC issued by the Department shows, in the "date issued" block on the left

1
The Department also issued a second assessment on August 11, 1996 for corporate income tax due for 1993,
plus penalty and interest. That assessment is not at issue here.

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side of the certificate, the date on which it was issued to the person authorized to give it to a

seller of goods or services. On the right side of the certificate is a separate "date" block which

should show the date on which the certificate is delivered to the seller by the purchaser.

12) Two of the certificates in Exhibit 3, those from Chaparral Builders, Inc., and Midcon,

Inc., stated that the certificates were presented to the Taxpayer on January 1, 1992. However,

these certificates were not issued by the Department until July, 1995, and November, 1994,

respectively. They therefore could not have been given to the Taxpayer in January, 1992. It

appears that the parties presenting these certificates to the Taxpayer backdated them in an attempt

to assist the Taxpayer in establishing the propriety of deductions taken in connection with sales

to these parties. There is no allegation by the Department that the Taxpayer was responsible for

the backdating of the certificates.

13) No transactions involving Midcon, Inc., are involved in the assessment at issue here.

(See Ex. 2, p. 3.)

14) The transactions involving Chaparral Builders that are involved in Assessment No.
2057422, took place between April, 1994, and April, 1995. The NTTC given to the Taxpayer by

Chaparral Builders was not issued by the Department until July, 1995.
15) Chaparral Builders paid applicable gross receipts tax on its own receipts from

projects incorporating work by the Taxpayer. (See Ex. A.)
16) Two of the certificates in Exhibit 3, those from Inca Construction Co., Inc., and

Cheyenne Building Contractors, state on their faces that they were presented to the Taxpayer in

July, 1996, several months after the Department's audit.

17) No transactions involving Cheyenne Building Contractors are involved in the

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assessment at issue.

18) The transactions involving Inca Construction Co. that underlie part of the assessment

here took place in January, February and April of 1993. The certificate given to the Taxpayer by

Inca Construction was issued by the Department in May, 1993.

19) One of the certificates in Exhibit 3, from J.M. Brook Corp., was issued by the

Department on June 6, 1994, and given to the Taxpayer on November 1, 1995. A single

transaction with J.M. Brook is involved in the assessment here; that transaction took place in

December, 1995.

20) The final certificate in Exhibit 3, from A&M Building Systems, Inc., was issued by

the Department on November 26, 1991, and delivered to the Taxpayer on January 30, 1992.

A&M Building Systems apparently was the purchaser in transactions listed in Exhibit 2 under the

name "Landmark Title" as well as a transaction under the A&M name. These three transactions

took place in March, April and May of 1992.

21) For transactions in the first half of 1992, it appears that the Taxpayer had a proper
NTTC in its possession at the time of the transactions. However, it did not make the NTTC

available for inspection by the Department within sixty days of notice by the department
requiring that the NTTCs be in the Taxpayer's possession.

22) For transactions occurring after July 1, 1992, the Taxpayer did not demonstrate to the
Department within sixty days of the commencement of the audit that it had NTTCs in its

possession at the time the return for receipts from the transactions were due. In some cases, the

Taxpayer did not have NTTCs for those transactions at the time the returns were due; in others,

the Taxpayer may have had the NTTC at the time the returns were due, but did not demonstrate

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that possession to the Department within the applicable time period.

23) The only excuse offered by the Taxpayer for failing to have NTTCs in its possession

at the required times, or to so demonstrate to the Department, was that it was unaware of the

legal requirements regarding NTTCs.

DISCUSSION

Gross receipts taxes; requirement of nontaxable transaction certificates
The New Mexico Gross Receipts and Compensating Tax Act requires that, in order for a

taxpayer to claim a deduction for receipts from transactions occurring on or after July 1, 1992,

appropriate NTTCs must be in the taxpayer's possession at the time the return is due for receipts

from the transactions. §7-9-43(A) NMSA, 1978. If the taxpayer does not demonstrate timely

possession of the certificates at the commencement of an audit, it has sixty days from the date of

notice from the Department to show that it was in fact in possession of the certificates at the time

the return was due. If these requirements are not met, deductions claimed by the taxpayer and

requiring a certificate to support the deduction will be disallowed. Id.
The requirements for transactions occurring prior to July 1, 1992, are slightly different.

For these earlier transactions, taxpayers must have had applicable NTTCs in their possession at
the time of the transaction, rather than when the return was due. There is still a requirement that

certificates be available for inspection by the Department within sixty days of notice requiring
possession. TRD Regulation GR 43:1(A).

For most of the transactions underlying the assessment here, Claude Burger Lath &

Plaster did not have proper NTTCs in its possession at the applicable time. Included in the

assessment are eight transactions with Chaparral Builders, occurring from April, 1994, through

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April, 1995. Returns for taxes on these receipts were due in May, 1995, and earlier. §7-90-11

NMSA 1978. The NTTC given to the Taxpayer by Chaparral was not issued by the Department

until July, 1995, and thus could not have been in the Taxpayer's possession at the time the returns

were due. Similarly, transactions with Inca Construction Company took place in the first half of

1993. The NTTC was not presented to the Taxpayer by Inca until July, 1996, well after returns

were due for receipts from the 1993 transactions. NTTCs for transactions with J.M. Brook

Corp. and A&M Building Systems were given to the Taxpayer by these purchasers prior to the

dates of the transactions and thus may have been in the Taxpayer's possession at the required

times.

However, the Taxpayer was required not only to have the certificates in its possession at

the appropriate times, but to demonstrate such possession within sixty days of notice from the

Department. The Taxpayer did not demonstrate possession of NTTCs pertaining to these

transactions until October, 1996, more than eight months after notice was given by the

Department.
Because the Taxpayer did not demonstrate possession of required NTTCs within the time

frame set out in the Gross Receipts and Compensating Tax Act and accompanying regulations,
deductions for receipts from these transactions were properly disallowed as provided in

§7-9-43(A) NMSA 1978. The Department's assessment for gross receipts taxes on these
receipts was therefore proper.

Interest
The New Mexico Tax Administration Act, §7-1-67 NMSA, 1978, provides for the

imposition of interest on tax deficiencies:

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A. If any tax imposed is not paid on or before the day on which it becomes due, interest

shall be paid to the state on such amount from the first day following the day on

which the tax becomes due ... until it is paid... .

B. Interest due to the state under Subsection A ... shall be at the rate of fifteen percent a

year... . (Emphasis added.)

It is a well settled rule of statutory construction that the word "shall" is mandatory rather

than discretionary, unless a contrary legislative intent is clearly demonstrated. State v. Lujan, 90

N.M. 103, 560 P.2d 167 (1977). The New Mexico Legislature has expressly reiterated this

general rule in §12-2-2(I) NMSA 1978 (in construing statutory provisions, the words "shall" and

"must" are to be construed as mandatory unless this would be inconsistent with manifest

legislative intent or repugnant to the context of the statute).

Section 7-1-67 requires that interest, at the rate of 15% per year, be imposed on the

amount of any unpaid taxes. No exceptions to this rule are provided for. Interest is intended to

compensate the state for the time-value of money which was not paid when it was due. While it
may be unpleasant to pay interest on monies owed, interest is not a penalty for late payment. It

is, rather, a means of making a creditor whole through reimbursement for not having had the use
of the money during the time it remained unpaid. While the interest rate imposed here may

seem high, that rate has been set by the Legislature in the statute, and both the Department and
the hearing officer lack the authority to reduce it.

Penalty
The Tax Administration Act provides that a penalty will be imposed in certain

circumstances when a taxpayer does not pay tax at the time it is due. The penalty is not based

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simply on failure to make payment on time. Rather, such failure must be due to negligence or

disregard of rules and regulations. §7-1-69(A) NMSA 1978.

Here, the only reason given by the Taxpayer to excuse its failure to pay gross receipts tax

on the transactions at issue was ignorance of the legal requirements pertaining to the use of

NTTCs and the taking of deductions from gross receipts. This is insufficient grounds on which

to base a finding that the Taxpayer is not liable for penalty. The Taxpayer had a reasonable duty

to be aware of the requirements imposed on its operations by the tax laws of this state. See

Tiffany Construction Company, Inc. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct.App.

1976), cert. den. 90 N.M. 255, 561 P.2d 1348 (1977). Its failure to familiarize itself with the

requirements pertaining to the use of NTTCs and the taking of deductions from gross receipts

constituted negligence and/or disregard of rules and regulations, and the penalty authorized by

§7-1-69(A) was properly imposed by the Department.

CONCLUSIONS OF LAW
1) The Taxpayer filed a timely protest of Assessment No. 2057422. Jurisdiction thus lies

over the parties and the subject matter of this protest.
2) The Taxpayer improperly deducted certain receipts from gross receipts and failed to

pay applicable gross receipts tax thereon, and the Department's assessment for such unpaid tax is
proper.

3) Because the Taxpayer did not pay the tax owed at the time it was due, interest was

properly imposed on the deficiency at the statutory rate.

4) The Taxpayer's failure to pay the tax was due to negligence and/or disregard of

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applicable rules and regulations, and penalties were properly imposed on the unpaid amounts.

For the foregoing reasons, the Taxpayer's protest IS HEREBY DENIED.

DONE, this 7th day of March, 1997.

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