If my supplier passes gross receipts tax on to me in the price of materials, can I subtract those material costs from my own gross receipts — and isn't taxing both 'double taxation'?

Plain-English summary

Novick's Painting is a house-painting contractor that had been in business about ten years. Before 1992 the business held type 6 non-taxable transaction certificates (NTTCs), which it gave to its paint supplier so the supplier could deduct those sales and Mr. Novick could buy his paint and supplies free of the gross receipts tax that would otherwise be passed on to him.

Two law changes broke that arrangement. Effective January 1, 1992, the old NTTCs became invalid and a $100 fee was required to obtain the new ones; Mr. Novick thought the fee was wrong and refused to pay it, so the Department denied his application. The fee was repealed effective April 1, 1994, and he reapplied — but on the form he wrote "none" for a contractor's license number without attaching the required explanation of why a license isn't needed for housepainting, so the Department denied the application again. He never followed up or protested that denial.

Once he could no longer buy materials tax-free, Mr. Novick started deducting the cost of his paint and supplies from his own gross receipts on his own initiative. Using Schedule C information shared by the IRS, the Department issued Assessment No. 2084522 on November 14, 1996 — $686.65 in gross receipts tax plus $68.67 penalty and $308.99 interest ($1,064.31 total) for the 1993 calendar year. He filed a timely protest, arguing the assessment amounted to double taxation.

Hearing Officer Gerald B. Richardson denied the protest:

• "Double taxation" is not illegal — and this isn't even double taxation. The U.S. Constitution "no more forbids double taxation than it does doubling the amount of a tax" (Ft. Smith Lumber Co. v. Arkansas). More to the point, there was no double taxation here: the sale of paint by the supplier and the sale of a painting service by Mr. Novick are two separate transactions between two separate taxpayers, each taxed once (House of Carpets).
• You can't create your own deduction. Gross receipts tax falls on the seller's total receipts (§ 7-9-4; § 7-9-3(F)). Mr. Novick billed a single price for each job, materials included, so his whole fee is taxable. Deducting material costs was unauthorized "self-help" that "the law does not allow."
• The legislature already provided the relief — he just didn't use it. Section 7-9-51 lets a supplier deduct sales of materials that go into a construction project when the buyer hands over an NTTC, which would have let Mr. Novick buy paint tax-free. That route was open to him; he lost it by refusing the fee and then not completing the application.

What this means for you

"Double taxation" almost never wins as a legal argument

It feels unfair to pay tax on materials that already carried tax, but courts have long held there is nothing unconstitutional about double taxation — and passing a supplier's tax cost along in a price isn't even the same tax being charged twice. If two different businesses each make a sale, each sale is independently subject to gross receipts tax.

Gross receipts tax is on your total receipts — you can't net out your costs

New Mexico's gross receipts tax applies to what you take in, not your profit. A contractor who charges one bundled price for a job owes tax on the whole price, including the part that covers materials. There is no general "cost of goods" deduction; relief comes only through a specific statutory deduction, and only if you meet its requirements.

The NTTC is the tool that prevents tax from stacking — get it and keep it

The way to avoid tax pyramiding on construction materials is to give your supplier a valid NTTC so the supplier can deduct the sale and you buy the materials tax-free (§ 7-9-51). That certificate is the whole mechanism. If you skip the paperwork — or, like Mr. Novick, refuse a fee or leave the application incomplete — you lose the deduction, and inventing your own substitute won't fix it.

Handle a denied application through the process, not by self-help

When the Department denied his NTTC applications, the answer was to supply the missing information or file a protest of that denial — not to start taking an unauthorized deduction. Self-help created the underpayment that led to the assessment.

Common questions

Q: I already paid tax on my materials when I bought them. Isn't taxing my sales too a double tax?
A: No. The tax your supplier passed along in the paint price and the gross receipts tax on your painting service are two separate transactions involving two separate sellers, each taxed once. And even genuine double taxation isn't illegal — it's a fairness question for the legislature, not a constitutional bar.

Q: Can I deduct the cost of my materials from my gross receipts?
A: Not on your own. Gross receipts tax applies to your total receipts, and there is no general cost-of-materials deduction. The available relief is buying the materials tax-free up front by giving your supplier a valid NTTC under § 7-9-51.

Q: How could this contractor have avoided the tax on his materials?
A: By obtaining and using the type 6 NTTC — paying the fee while it was required, or completing the later application correctly — so his supplier could deduct the sale and he could buy paint free of passed-on gross receipts tax.

Q: The Department denied my NTTC application. What should I do?
A: Give the Department the information it asked for, or file a formal protest of the denial. Don't respond by taking a deduction the statute doesn't authorize; that's what turned into an assessment here.

Citations and references

Statutes:

• § 7-9-4 NMSA 1978 — gross receipts tax imposed on persons engaging in business in New Mexico
• § 7-9-3(F) NMSA 1978 — definition of "gross receipts"; the legal incidence of the tax is on the seller
• § 7-9-51 NMSA 1978 — deduction for tangible personal property sold to a buyer who delivers an NTTC and will incorporate it into a construction project
• § 7-9-48 NMSA 1978 — deduction for tangible personal property sold for resale, if the buyer delivers an NTTC
• § 7-1-24 NMSA 1978 — protest procedure and jurisdiction

Cases cited:

• Ft. Smith Lumber Co. v. Arkansas, 251 U.S. 532 (1920) — the Constitution "no more forbids double taxation than it does doubling the amount of a tax"
• House of Carpets, Inc. v. Bureau of Revenue, 84 N.M. 747, 507 P.2d 1078 (Ct. App. 1973) — separate transactions each taxed once are not double taxation
• United States v. New Mexico, 581 F.2d 803 (10th Cir. 1978) — the legal incidence of the gross receipts tax is on the seller, not the purchaser

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Novick’s Painting
• Decision PDF: D&O 97-13

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
NOVICK'S PAINTING, ID. NO. NO. 97-13
02-016295-00 2, PROTEST TO
ASSESSMENT NO. 2084522

DECISION AND ORDER

This matter came on for formal hearing before Gerald B. Richardson, Hearing Officer, on

April 9, 1997. Novick's Painting, hereinafter, "Taxpayer", was represented by its owner, Mr.

John D. Novick. The Taxation and Revenue Department, hereinafter, "Department", was

represented by Gail MacQuesten, Special Assistant Attorney General. Based upon the evidence

and the arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer is a painting contractor which engages in the business of house

painting.

2. The Taxpayer has been in the housepainting business for approximately ten years.
3. Prior to 1992 the Department had issued type 6 nontaxable transaction certificates

("NTTCs") to the Taxpayer. By issuing a NTTC to a vendor of paint and painting supplies, the
vendor was able to claim a deduction from gross receipts tax pursuant to NMSA 1978, § 7-9-51,

for the sale of tangible personal property to be incorporated as an ingredient or component part of
a construction project. Because the vendor could claim a deduction from gross receipts tax on

such transactions, the Taxpayer was able to purchase the materials used in its business free of the
cost of gross receipts taxes which would normally be passed on to the purchaser.

4. Effective January 1, 1992, the law changed with respect to NTTCs. The old,
   pre-1992 NTTCs became invalid and taxpayers wishing to obtain the new 1992 NTTCs were
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required to pay a $100 fee to obtain NTTCs.

5. Mr. Novick applied to the Department for the new 1992 form NTTCs, but he felt it

was wrong for the Department to charge a fee for NTTCs, so he refused to include the $100 fee

with his application for NTTCs.

6. The Department denied the Taxpayer's application for the new 1992 NTTC's based

upon the Taxpayer's failure to pay the required fee.

7. The law concerning NTTC's was changed again, effective April 1, 1994, to repeal

the requirement that an applicant for NTTC's pay a $100 fee.

8. After the $100 fee was repealed, the Taxpayer applied again with the Department

for type 6 NTTCs. The application form for type 6 NTTCs requires that an applicant provide a

contractor's license number or provide proof that a contractor's license is not required. Mr.

Novick filled out the box requesting a contractor's license number with the notation, "none", and

he failed to attach a letter or other information to demonstrate that a contractor's license is not

required.

9. The Department denied the Taxpayer's application for NTTCs for failure to

explain why a contractor's license is not needed to do housepainting.

10. The Taxpayer did not follow up on the denial of its application for NTTCs by

providing information to the Department as to why it did not need a contractor's license, nor did
the Taxpayer otherwise protest the Department's denial of its application for NTTCs.

11. When the Taxpayer was no longer able to purchase its materials free of the cost of

gross receipts tax, the Taxpayer began deducting the cost of goods and materials from gross

receipts upon which gross receipts tax was reported and paid.

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12. Pursuant to an information sharing agreement with the Internal Revenue Service,

the Department receives information about taxpayers who file a Schedule C reporting income or

loss from a business in New Mexico.

13. As a result of information the Department received from the Internal Revenue

Service about the Taxpayer, on November 14, 1996, the Department issued Assessment No.

2084522 to the Taxpayer, assessing $686.65 in gross receipts tax, $68.67 in penalty and $308.99

in interest, totalling $1064.31 for the 1993 calendar year.

14. On November 19, 1997, the Taxpayer filed a timely, written protest to Assessment

No. 2084522.

DISCUSSION
The Taxpayer disputes the assessment at issue on the basis that it amounts to double

taxation, which the Taxpayer believes is prohibited. It is a popular misconception that there is

something inherently illegal or unconstitutional with double taxation. As noted by Justice Oliver

Wendell Holmes in Ft. Smith Lumber Co. v. Arkansas, 251 U.S. 532 (1920), the U.S.

Constitution "no more forbids double taxation than it does doubling the amount of a tax."

Although there is nothing inherently illegal with double taxation, most tax policy makers, such as

state legislatures and Congress, recognize that from a tax policy standpoint, double taxation is

objectionable because it is perceived to be unfair. Since ultimately, the success of a tax system in

raising the revenues needed to maintain government operations depends upon the willingness of

the subjects of taxation to properly pay and report taxes, if the system is perceived to be unfair, the

foundation of the tax system is eroded.

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Before discussing the particular facts of this case, it is instructive to understand the

operation and imposition of New Mexico's gross receipts tax. The gross receipts tax is imposed

upon the gross receipts of persons engaging in business in New Mexico. NMSA 1978, § 7-9-4.

"Gross receipts" is defined at NMSA 1978 § 7-9-3(F) as follows:
"gross receipts" means the total amount of money or the value of other consideration
received from selling property in New Mexico, from leasing property employed in
New Mexico, from selling services performed outside New Mexico the product of
which is initially used in New Mexico or from performing services in New Mexico.

Thus, the legal incidence of the gross receipts tax is upon the seller of goods or services and the

lessor of property, not upon the purchaser or lessee. United States v. New Mexico, 581 F. 2d 803

(10th Cir. 1978).

In this case, the Taxpayer objects to what it perceives to be double taxation of the paint

and other materials it uses in performing housepainting services. Because the Taxpayer did not

have a NTTC to present to the paint supply company, the paint supply company could not claim a

deduction from its gross receipts pursuant to NMSA 1978, § 7-9-51, which allows the seller of

materials which will be incorporated into a construction project to claim a deduction when selling
those materials to a purchaser who delivers a NTTC. The paint company thus sought to recoup

that tax by passing on the cost of that tax to the Taxpayer when it made its purchases.

The Taxpayer is also liable for gross receipts tax upon its own gross receipts from

performing painting services for its customers. When the Taxpayer bills its customers, it does

not itemize the cost of the paint and supplies from its labor costs, but rather, it charges a fee for

the painting job, inclusive of materials. The entire amount the Taxpayer receives for performing

the painting job represents the Taxpayer's gross receipts which are subject to gross receipts tax.

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Because the Taxpayer has already paid the cost of passed-on gross receipts tax from its paint

supplier, the Taxpayer believes that it is being subjected to double taxation.

Double taxation does not exist under the facts as outlined. There are two separate

transactions, involving two separate taxpayers, each of which is subjected to gross receipts tax

only once. There is the sale of the paint by the paint supply company, and there is the sale of a

painting service, which service includes the paint used in performing the service, which is being

sold by the Taxpayer to its customer. There is no double taxation. See, House of Carpets v.

Bureau of Revenue, 84 N.M. 747, 507 P.2d 1078 (Ct. App. 1973).

Even though there is no double taxation, the New Mexico legislature has been careful to

provide a number of statutory deductions to prevent the pyramiding or stacking of the gross

receipts tax. Thus, it has provided a deduction for the sale of tangible personal property which

will be resold, where the purchaser of the property provides the seller with a NTTC and represents

that the property will be resold. See, NMSA 1978, § 7-9-48. Similarly, it has provided for a

deduction, pursuant to § 7-9-51 for the sale of tangible personal property which will be
incorporated into a construction project which will be subject to gross receipts tax upon its

completion. This deduction would have been available to the Taxpayer's paint supplier if the
Taxpayer had provided the supplier with a NTTC. Then the Taxpayer could have bought its

paint free of the cost of passed-on gross receipts tax. This deduction was not available, however,
because the Taxpayer did not have a NTTC to present to its supplier to support the deduction

because the Taxpayer refused to pay the $100 fee the legislature imposed to obtain NTTCs or

because, after the fee was repealed, the Taxpayer failed to follow the instructions on the

application for NTTCs which required that it provide an explanation as to why a contractor's

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license was not needed to perform the kind of construction services it performed. Instead of

paying the $100 fee, or instead of taking up the denial of its application of NTTCs with the

Department by providing the necessary documentation or by filing a protest to the Department's

denial of its application for NTTCs, the Taxpayer chose to create its own remedy by deducting

from its receipts the total amount it paid for the materials it used in its painting jobs. The law

does not allow this type of self-help. By creating a deduction not authorized by statute and in

contravention of the definition of gross receipts, the Taxpayer has disregarded the statutes

imposing gross receipts taxes and provided the basis for the Department's assessment of tax.

Because there are no exemptions or deductions from gross receipts tax which would apply to any

portion of the Taxpayer's gross receipts from performing painting services, the Department's

assessment must be upheld.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment No. 2084522 pursuant

to NMSA 1978, §7-1-24 and jurisdiction lies over both the parties and the subject matter of this

protest.

2. There has been no illegal double taxation of the Taxpayer's receipts from

performing housepainting services.

3. There is no applicable deduction or exemption which would apply to allow the

Taxpayer to deduct the cost of materials used in performing housepainting services from its gross

receipts subject to tax.

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

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DONE, this 18th day of April, 1997.

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