Can I take a resale deduction from New Mexico gross receipts tax if I don't have the NTTCs, and how far back can the state assess if I understated the tax?

Plain-English summary

Margaret's Upholstery was assessed $2,460.04 in gross receipts tax (plus penalty and interest) on 1988 sales of magnets — a side of the business run by the owner's husband, who bought magnets from a supplier and resold them, some to New Mexico distributors who resold them again and some to out-of-state customers. Mr. Stokes died shortly before the assessment. Before the hearing, the Department accepted proof that the out-of-state sales were properly deducted and cut the bill by more than half, to $976.56 in tax. What remained were the resale sales to New Mexico distributors, and the business had no NTTCs to support deducting them — Mr. Stokes and the bookkeeper simply hadn't known the certificates were required.

The Hearing Officer (Ellen Pinnes) denied the protest:

• No NTTC, no deduction. A sale of goods for resale can be deducted from gross receipts, but only if the buyer gives the seller a non-taxable transaction certificate (§ 7-9-47). In 1988 the law required the seller to hold the NTTC at the time of the transaction (§ 7-9-43). Because Margaret's Upholstery couldn't produce the certificates or show it had them when the sales occurred, the deductions failed even though the sales likely would have qualified had the paperwork existed.
• The six-year assessment window applied. Normally the Department must assess within three years (§ 7-1-18(A)), but when tax is understated by more than 25%, that stretches to six years (§ 7-1-18(D)). The 1988 returns were due between February 1988 and January 1989, the understatement exceeded 25% (undisputed), so the Department's December 1994 assessment was timely.
• Interest is mandatory. Section 7-1-67 imposes 15%-per-year interest on unpaid tax, with no exceptions ("shall" is mandatory — State v. Lujan; § 12-2-2(I)).
• The negligence penalty stood. Being unaware of the NTTC requirements is negligence: every taxpayer has a duty to learn the tax rules that apply to its business (Tiffany Construction), and the taxpayer bears the burden to disprove negligence (Regulation TA 69:1). So the § 7-1-69(A) penalty was proper.

What this means for you

A resale deduction lives or dies on the NTTC

If you sell goods to a buyer who will resell them, that sale can be deducted from your gross receipts — but only if you have a valid non-taxable transaction certificate from the buyer. The sale being "obviously" for resale isn't enough; without the certificate, the receipts are taxable to you. Collect the NTTC at the time of the sale and keep it where you can find it on audit.

Understating by more than 25% doubles the state's look-back

The usual three-year assessment limit isn't a safe harbor if you significantly underreported. A 25%-plus understatement extends the Department's window to six years (§ 7-1-18(D)). Here that's exactly why a 1988 tax bill could still be validly assessed at the end of 1994.

"We didn't know the rule" doesn't avoid the penalty

The people running this business genuinely didn't know NTTCs were required, and it still counted as negligence. Taxpayers are charged with knowing the rules that apply to them, and the burden is on you to show you weren't negligent. Not knowing a requirement is one of the classic grounds for the penalty, not an excuse from it.

Interest keeps running regardless of the circumstances

Even in a sympathetic situation — a small business, a deceased spouse who kept the records, a bill that took years to surface — the 15% statutory interest applies in full. It isn't a penalty and can't be waived, so the longer an underpayment sits, the more it costs.

Common questions

Q: The sales really were for resale. Why can't I deduct them without the NTTC?
A: Because the deduction requires the certificate. New Mexico law makes the NTTC the proof of a resale sale, and in 1988 you had to hold it at the time of the transaction. No certificate means no deduction, even for a genuine resale.

Q: These were 1988 taxes assessed in 1994 — isn't that too late?
A: Not here. The normal three-year limit extends to six years when tax is understated by more than 25%, and that threshold was met, so the December 1994 assessment of 1988 tax was timely.

Q: We honestly didn't know NTTCs were required. Why the penalty?
A: Because taxpayers are expected to know the rules that apply to their business, and unawareness counts as negligence. The burden is on the taxpayer to show the failure wasn't negligent, which wasn't met here.

Q: Can the interest be reduced given the circumstances?
A: No. Interest under § 7-1-67 is mandatory at 15% per year with no exceptions. Neither the Department nor the Hearing Officer can lower it.

Citations and references

Statutes and regulations:

• § 7-9-47 NMSA 1978 — deduction for tangible personal property sold for resale, if the buyer delivers an NTTC; Regulation GR 47:1
• § 7-9-43 NMSA 1978 — NTTC-possession requirement; in 1988 the seller had to hold the NTTC at the time of the transaction (N.M. Laws 1983, ch. 220, § 7(A)); Regulation GR 43:1(A)(1)
• § 7-1-18(A) NMSA 1978 — three-year assessment window; § 7-1-18(D) NMSA 1978 — six-year window when tax is understated by more than 25%; § 7-1-11 NMSA 1978 — return due dates
• § 7-1-67 NMSA 1978 — mandatory interest at 15% per year; § 12-2-2(I) NMSA 1978 — "shall" and "must" are mandatory
• § 7-1-69(A) NMSA 1978 — negligence penalty; Regulation TA 69:3 — definition of negligence; Regulation TA 69:1 — the taxpayer bears the burden to negate negligence

Cases cited:

• State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977) — "shall" is mandatory unless a contrary legislative intent is clear
• 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) — taxpayers have a duty to learn the tax requirements applicable to their business; failing to do so is negligence

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Margaret’s Upholstery
• Decision PDF: D&O 97-11

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 97-11
MARGARET'S UPHOLSTERY,
ID NO. 01-0884561-00 4,
PROTEST TO ASSESSMENT NO. 1876402

DECISION AND ORDER
This matter came on for hearing on February 27, 1997, before Ellen Pinnes, Hearing
Officer. Margaret's Upholstery ("the Taxpayer") was represented by Margaret Stokes, its owner,

and by Marilyn Stokes, Margaret's daughter and the bookkeeper for the business. 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) Assessment No. 1876402 was issued on December 4, 1994, for $2,460.04 in gross

receipts tax, plus penalty and interest.

2) The Taxpayer filed a timely protest of the assessment by a letter from Marilyn Stokes

dated December 20, 1994.

3) The assessment is for gross receipts taxes on sales of magnets by the Taxpayer during

the period from January through December 1988. This portion of the Taxpayer's business was

handled by Margaret Stokes's husband. Mr. Stokes died shortly before the assessment was

issued.

4) Mr. Stokes acted as distributor for the magnets in New Mexico. He purchased the

magnets from a supplier and resold them. Some of these sales were to distributors in New

Mexico who again resold the magnets, while others were to customers outside New Mexico.

1
Decision and Order

Margaret's Upholstery

Page -2-

5) Prior to the hearing, the Taxpayer provided additional information to the Department,

on the basis of which the Department adjusted the assessment to accept that receipts from sales to

customers outside New Mexico were properly deducted from gross receipts. This adjustment

reduced the amount of underpaid tax by more than half.

6) The revised assessment is for $976.56 in gross receipts tax, plus penalty and interest.

(See Ex. 1.)

7) The Taxpayer did not have non-taxable transaction certificates (NTTCs) to support

deductions of receipts from sales for resale to distributors in New Mexico. Apparently

Mr. Stokes was unaware that he was required to have NTTCs in his possession in order to take

the deduction. Marilyn Stokes also was unaware of this requirement. If Mr. Stokes did have

any NTTCs to support the deductions, they could not be located in order to be presented to the

Department in response to the assessment.

8) The Department stated that the revised assessment represented an understatement of

more than twenty-five percent of the tax due for 1988. The Taxpayer did not dispute this.
DISCUSSION

Requirement for non-taxable transaction certificates to support deductions taken
The New Mexico Gross Receipts and Compensating Tax Act ("the Act") provides that

receipts from sales of tangible personal property may be deducted from gross receipts if an

NTTC is delivered by the buyer to the seller. §7-9-47 NMSA 1978. The Department's

regulations reiterate that, in order to qualify for the deduction, a taxpayer must receive an NTTC.

TRD Regulation GR 47:1.

The Act sets out, in §7-9-43 NMSA 1978, the requirements as to when a taxpayer must

2
Decision and Order

Margaret's Upholstery

Page -3-

have NTTCs in its possession in order to substantiate the deduction. That section has been

amended since the period at issue in this case. In 1988, the statute provided that the taxpayer

must have NTTCs at the time the transaction occurred. N.M. Laws 1983, ch. 220, §7(A). This

requirement is set out in the Department's current regulations. GR 43:1(A)(1).

Here, the Taxpayer did not present to the Department NTTCs substantiating the

deductions taken, nor was there any showing that the Taxpayer had such certificates in its

possession at the time the transactions occurred. It appears that the sales at issue were sales for

resale that would have qualified for a deduction if an NTTC had been given to the Taxpayer by

the purchasers. However, the statute is clear that no deduction may be taken unless a properly

executed NTTC is given to the Taxpayer and is in the Taxpayer's possession at the required time.

Because this requirement was not satisfied here, the Taxpayer was properly assessed for gross

receipts taxes on receipts from these sales.

Limitation period
Unless special circumstances are present, the Department may not assess underpaid taxes
after three years from the end of the calendar year in which the tax was due. §7-1-18(A) NMSA

1978. If a taxpayer has understated its tax liability by more than twenty-five percent of the total
      tax due for the period at issue, that limitation period is extended to six years. §7-1-18(D).

The assessment here relates to taxes for January through December of 1988. Tax returns
for these periods would have been due between February, 1988, and January, 1989. §7-1-11

NMSA 1978. The Taxpayer did not dispute that the assessment represented an underpayment of

tax exceeding twenty-five percent of total tax liability. The six-year limitation period in

§7-1-18(D) therefore applies. The Department had until the end of 1994 to issue an assessment

3
Decision and Order

Margaret's Upholstery

Page -4-

as to taxes due in 1988, and did so in December of 1994. The assessment therefore is not barred

by the statute of limitations.

Interest
Section 7-1-67 NMSA 1978 provides for the imposition of interest on tax deficiencies:

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 therefore was

properly imposed on the tax deficiency here.

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

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. The Department's regulations

4
Decision and Order

Margaret's Upholstery

Page -5-

define "negligence" to mean: 1) failure to exercise reasonable business care and prudence,

2) inaction where action is required, or 3) inadvertence, indifference, thoughtlessness,

carelessness, erroneous belief or inattention. Regulation TA 69:3. The Taxpayer has the

burden of presenting evidence negating the existence of negligence. Regulation TA 69:1.

Here, it appears that the Taxpayer was simply unaware of the legal requirements

pertaining to the use of NTTCs and the taking of deductions from gross receipts. All taxpayers

have a reasonable duty to be aware of the requirements imposed on their 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). The failure of the

Taxpayer here 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. 1876402. 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

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

5
Decision and Order

Margaret's Upholstery

Page -6-

Done this 27th day of March 1997.

6