A New Mexico subcontractor didn't charge gross receipts tax because the company she worked for resold her services. Does she still owe the tax, and a penalty?

Subject

James M. and Dona H. Curl (D&O 98-22)

Plain-English summary

Dona Curl worked as an independent contractor during 1993 for Integral Systems, Inc. ("ISI"), which in turn resold her services to Intel in Rio Rancho, New Mexico. Each week she billed ISI, and ISI invoiced Intel. Curl assumed New Mexico's tax applied only to ISI's resale of her work to Intel, not to her own receipts, so she never registered or paid gross receipts tax on her ISI income, and she never obtained a nontaxable transaction certificate (NTTC) from ISI.

In 1996, using IRS data, the Department matched the business income on the Curls' 1993 federal Schedule C and, on August 2, 1996, issued Assessment No. 2054402 for 1993: $2,252.20 gross receipts tax, $225.24 penalty, and $999.42 interest — $3,476.86 total. It used the retired CRS number the Curls had obtained years earlier for a separate electronics-repair proprietorship. The Curls protested on four grounds; Hearing Officer Margaret B. Alcock rejected each and denied the protest:

• Liability — the tax is on the seller. New Mexico has no sales tax collected from the final consumer. The gross receipts tax (Section 7-9-4) is imposed directly on the seller of services, with no distinction between selling for resale and selling to a consumer. Curl was the seller of her services to ISI, so she owed the tax.
• No NTTC, no resale deduction. The services-for-resale deduction (Section 7-9-48) is available only if, among other things, the buyer gives the seller an NTTC. Curl never received one from ISI, so she could not deduct the receipts. Deduction statutes are construed strictly against the taxpayer, who must clearly establish the right (Wing Pawn Shop).
• Not illegal "double taxation." Taxing both Curl (on her sale to ISI) and ISI (on its resale to Intel) is not unconstitutional double taxation, because they are separate taxpayers on separate transactions. Whether ISI actually paid was irrelevant, and it is confidential under Section 7-1-8.
• Right taxpayer. A proprietorship has no legal identity apart from its owners. The couple's business was registered under their own names, so reactivating their retired CRS number to assess the tax was proper.
• Negligence penalty upheld. Under Section 7-1-69, penalty applies to a failure to pay due to negligence. Curl had run a prior CRS-registered business, received the Department's CRS-1 Filer's Kits (which defined gross receipts and explained NTTCs), and never actually asked her accountant about gross receipts tax — so the "reliance on an accountant" defense did not apply. Good faith did not excuse the negligence.

What this means for you

• In New Mexico, the person performing the service owes the gross receipts tax — even a subcontractor. It is not a buyer-collected sales tax. If you sell services to another business that resells them, you are still the taxpayer on your sale unless a deduction applies.
• To sell services for resale tax-free, get the NTTC — in hand. The Section 7-9-48 resale deduction hinges on the buyer giving you a nontaxable transaction certificate. Without it, the deduction is lost no matter how the transaction is structured.
• "I'd be taxed twice" is not a defense. Taxing successive sellers on successive transactions is not unlawful double taxation. The legislature prevents pyramiding through deductions like the NTTC-based resale deduction — but only if you meet their conditions.
• A sole proprietorship is legally you. The Department can assess the owners directly, even under a CRS number tied to a different tradename, because the business is not a separate legal person.
• "I relied on my accountant" only helps if you actually asked. The negligence-penalty defense requires reasonable reliance after full disclosure. If you never raised the specific tax with your advisor, there is no reliance to point to — and prior experience with the tax cuts against you.

Key questions answered

Why did Curl owe the tax when ISI resold her services?
Because New Mexico's gross receipts tax is imposed on the seller, not collected from the buyer. Curl sold services to ISI, so she was liable on those receipts. ISI's separate resale to Intel is a different transaction taxed to ISI.

Could she have avoided the tax?
Yes — with an NTTC. The services-for-resale deduction in Section 7-9-48 would have applied if ISI had given her a nontaxable transaction certificate. She never obtained one, so the deduction was unavailable.

Isn't taxing both her and ISI double taxation?
No. The Hearing Officer explained there is no constitutional bar to double taxation, and in any event there was none here: Curl and ISI are separate taxpayers, each taxed once on its own sale.

Why did the negligence penalty stick despite her good faith?
Because negligence under Section 7-1-69 includes inattention and erroneous belief. Curl had previously held a CRS number and received Department kits explaining gross receipts tax and NTTCs, and she never asked her accountant about the tax — so she could not claim reasonable reliance on professional advice.

Verbatim citations

The gross receipts tax is on the seller, not the consumer:

New Mexico does not have a sales tax that is charged to and collected from the final consumer. New Mexico has a gross receipts tax that is imposed directly on the seller of goods and services. Section 7-9-4 NMSA 1978 imposes an excise tax on the gross receipts of any person engaging in business in New Mexico.

No NTTC means no resale deduction:

In this case, Ms. Curl does not qualify for the deduction because she did not receive an NTTC from ISI.

Successive sellers are not "double taxation":

Ms. Curl and ISI are separate taxpayers, each of which is engaged in business in New Mexico. The gross receipts tax is imposed--once--on Ms. Curl's receipts from selling services to ISI.... The gross receipts tax is also imposed--once--on ISI's sale of services, including the resale of Ms. Curl's services, to Intel.... Under the facts of this case, there is no "double taxation."

Why the negligence penalty applied:

Although the Curls acted in good faith, with no intention to avoid the payment of taxes, they were negligent in failing to take such action as was required to determine their gross receipts tax liability to the state. For this reason, penalty was properly imposed under Section 7-1-69.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: James M. and Dona H. Curl
• Decision PDF: D&O 98-22

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 JAMES M. AND DONA H. CURL 98-22
ID. NO. 02-153661-00 9
ASSESSMENT NO. 2054402

DECISION AND ORDER

This matter came on for formal hearing on April 15, 1998, before Margaret B. Alcock,

Hearing Officer. James M. Curl and Dona H. Curl were represented by Dona H. Curl. The

Taxation and Revenue Department ("Department") was represented by Monica M. Ontiveros,

Special Assistant Attorney General. Based upon the evidence and the arguments presented, IT IS

DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. During 1993, Dona Curl performed services as an independent contractor for

Integral Systems, Inc. (“ISI”), which resold her services to Intel Corporation in Rio Rancho, New

Mexico.

2. Each week, Ms. Curl submitted a time sheet to ISI and received payment for her

services from ISI. Exhibits I and J. ISI then submitted an invoice for professional services to Intel.

The invoice identified Ms. Curl as the person who performed the services and stated the number of

hours worked and the charge per hour. Exhibit K.

3. Ms. Curl was not aware that the New Mexico gross receipts tax applied to her

receipts from working as a subcontractor. Ms. Curl believed that tax was due only on ISI’s resale

of her services to Intel.

4. Ms. Curl never had any discussion with ISI or her accountant concerning the

payment of gross receipts tax on her services.

5. Ms. Curl never requested a New Mexico nontaxable transaction certificate

(“NTTC”) from ISI, nor did ISI provide her with one.

6. The Curls filed a joint 1993 federal income tax return, Form 1040, which was

prepared by their certified public accountant. Exhibit 1.

7. The 1993 Form 1040 indicates that both Mr. Curl and Ms. Curl were self-employed.

8. The income Ms. Curl earned from services performed for ISI was reported on

Schedule C (Profit or Loss From Business) to the Curls’ 1993 Form 1040. Ms. Curl also filed a

Schedule SE, Self-Employment Tax.

9. Ms. Curl never asked the accountant who prepared the Curls’ 1993 federal income

tax return whether she should be paying gross receipts tax on her business income or whether any

other tax was due on this income.

10. From January to May 1994, Ms. Curl provided services directly to Intel. At that

time, Ms. Curl registered with the Department for payment of gross receipts tax.

11. From August 1990 through July 1993, Ms. Curl and her husband operated an

electronic repair business under the tradename “D&M Electronics Repair.” Exhibits A, B & C.

12. At the time the business began in August 1990, the Curls registered the business as a

proprietorship under the business name “James M. and Dona H. Curl.” Exhibit A. The

Department assigned the Curls CRS ID No. 02-153661-009.

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13. On July 22, 1993, Ms. Curl notified the Department that D&M Electronic Repair,

operating under CRS ID No. 02-153661-009, was going out of business on July 31, 1993 and

would not be filing monthly CRS reports after that date.

14. During the three years that the Curls’ CRS number was active, they received CRS-1

Filer’s Kits from the Department. See, e.g., Exhibit 2.

15. On July 17, 1996, as a result of information obtained from the IRS, the Department

sent the Curls a notice of the discrepancy between business income reported to the IRS on

Schedule C to the Curls’ 1993 federal income tax return and business income reported to the

Department for gross receipts tax purposes. The Department asked the Curls to indicate whether

they were registered for payment of gross receipts tax and to provide information to substantiate

any gross receipts tax exemptions or deductions taken during 1993. Exhibit H.

16. Ms. Curl returned the form stating that she did not register for a New Mexico

CRS identification number. On July 30, 1996, Ms. Curl wrote a letter to the Department

explaining that she worked as a subcontractor to ISI. Ms. Curl stated that she was unaware that

she was supposed to obtain a CRS number and report gross receipts tax on her income from ISI

and was unaware that she needed to obtain an NTTC from ISI. Exhibit M.

17. Ms. Curl requested information as to whether ISI paid tax on its resale of her

services to Intel. The Department told Ms. Curl it was unable to provide her with this

information, which is confidential under Section 7-1-8 NMSA 1978.

18. On August 2, 1996, The Department issued Assessment No. 2054402 for the

period January-December 1993 in the amount of $2,252.20 gross receipts tax, $225.24 penalty

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and $999.42 interest, for a total assessment of $3,476.86. The assessment was issued under the

Curls’ retired CRS ID No. 02-153661-00 9. Exhibit E.

19. On August 19, 1996, Ms. Curl filed a protest to the Department’s assessment.

DISCUSSION

The Curls raise the following arguments in support of their protest to the Department’s

assessment: (1) ISI, not Ms. Curl, was the party responsible for paying gross receipts tax on Ms.

Curl’s services; (2) because collecting gross receipts tax from both ISI and Ms. Curl results in

illegal double taxation, the Department’s refusal to disclose whether ISI paid gross receipts tax on

its resale of Ms. Curl’s services should excuse the Curls from paying the Department’s assessment;

(3) the Department assessed the wrong taxpayer when it issued the assessment under the CRS ID

number the Curls obtained for their electronics repair business; (4) Ms. Curl relied on her family

accountant to advise her of her tax liabilities.

I LIABILITY FOR PAYMENT OF GROSS RECEIPTS TAX.

Ms. Curl argues that as a subcontractor, she was not liable for tax on her sale of services

to ISI. Ms. Curl believes that only ISI, the prime contractor with Intel, was required to collect

what she refers to as the “sales tax” on her services.

Ms. Curl’s argument is based on a misunderstanding of New Mexico’s tax system. New

Mexico does not have a sales tax that is charged to and collected from the final consumer. New

Mexico has a gross receipts tax that is imposed directly on the seller of goods and services.

Section 7-9-4 NMSA 1978 imposes an excise tax on the gross receipts of any person engaging in

business in New Mexico. The term “gross receipts” is defined in Subsection F of Section 7-9-3

NMSA 1978 to include the total amount of money or the value of other consideration received

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from performing services in New Mexico. The statute makes no distinction between persons

selling services for resale and persons selling services to the final consumer. Accordingly, unless

a specific statutory exemption or deduction applies, Ms. Curl is liable for gross receipts tax on her

receipts from performing services as a subcontractor of ISI.

Section 7-9-48 NMSA 1978 provides a deduction for receipts from selling services for

resale when certain conditions are met. In order for a seller of services to qualify for the resale

deduction, the buyer must: (1) provide the seller with an NTTC; (2) resell the service in the

ordinary course of business; (3) separately state the value of the service at the time it is resold;

and (4) be subject to gross receipts tax on the subsequent sale. In this case, Ms. Curl does not

qualify for the deduction because she did not receive an NTTC from ISI.

It is possible that ISI failed to give Ms. Curl an NTTC because ISI was also unaware of the

requirements of New Mexico law. Alternatively, ISI may have determined that it did not meet the

conditions of Section 7-9-48. For example, if ISI were entitled to claim a deduction for the sale of

services to Intel, ISI would not be subject to gross receipts tax on its resale of Ms. Curl’s services

and would not be entitled to issue her an NTTC. The reason that ISI did not provide Ms. Curl with

an NTTC is irrelevant. Whether ISI paid gross receipts tax on its resale of Ms. Curl’s services to

Intel is also irrelevant. The only matter at issue here is whether Ms. Curl is liable for gross receipts

tax on her sale of services to ISI.

There is a statutory presumption that the Department’s assessment of gross receipts taxes is

correct. Section 7-1-17(C) NMSA 1978. 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

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established by the taxpayer. Wing Pawn Shop v. Taxation and Revenue Department, 111 N.M. 735,

740, 809 P.2d 649, 654 (Ct. App. 1991). Where a party claiming a right to a tax exemption or

deduction fails to follow the method prescribed by statute or regulation, he waives his right thereto.

Proficient Food v. New Mexico Taxation & Revenue Department, 107 N.M. 392, 397, 758 P.2d

806, 811 (Ct. App. 1988).

In this case, Ms. Curl has not met her burden of showing that she is entitled to an exemption

or deduction from gross receipts tax. As discussed above, Ms. Curl does not qualify for the resale

deduction provided in Section 7-9-43 because she did not obtain an NTTC from the buyer of her

services. She has not provided information to support a claim to any other exemption or deduction.

Ms. Curl is therefore liable for gross receipts tax on her receipts from performing services for ISI.

II. DOUBLE TAXATION.

The Curls argue that they are entitled to know whether ISI paid tax on its resale of Ms.

Curl’s services to Intel because payment of the gross receipts tax by both ISI and the Curls would

result in double taxation. It is a popular misconception that there is something inherently illegal or

unconstitutional with double taxation. Almost 80 years ago, in Ft. Smith Lumber Co. v. Arkansas,

251 U.S. 532 (1920), the United States Supreme Court summarily disposed of the plaintiff's

argument that the federal constitution prohibits a state from taxing the same transaction twice. As

stated by Justice Oliver Wendell Holmes, writing for the majority:

The objection to the taxation as double may be laid on one side.
That is a matter of State law alone. The Fourteenth Amendment no
more forbids double taxation than it does doubling the amount of a
tax..."

251 U.S. at 533. New Mexico courts have also held, on numerous occasions, that there is no

constitutional prohibition against double taxation. New Mexico State Board of Public Accountancy

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v. Grant, 61 N.M. 287, 299 P.2d 464 (1956); Amarillo-Pecos Valley Truck Line, Inc. v. Gallegos,

44 N.M. 120, 99 P.2d 447 (1940); State ex rel. Attorney General v. Tittmann, 42 N.M. 76, 75 P.2d

701 (1938).

It should also be noted that in construing the New Mexico Gross Receipts and

Compensating Tax Act, the New Mexico courts have held that there is no double taxation where

the two taxes complained of are imposed on the receipts of different taxpayers. See, e.g., House of

Carpets, Inc. v. Bureau of Revenue, 87 N.M. 747, 507 P.2d 1078 (Ct. App. 1973); New Mexico

Sheriffs & Police Association v. Bureau of Revenue, 85 N.M. 565, 514 P.2d 616 (Ct. App. 1973).

That is the case here. Ms. Curl and ISI are separate taxpayers, each of which is engaged in business

in New Mexico. The gross receipts tax is imposed--once--on Ms. Curl’s receipts from selling

services to ISI. As the seller, only Ms. Curl is liable for this tax. The gross receipts tax is also

imposed--once--on ISI’s sale of services, including the resale of Ms. Curl’s services, to Intel. Only

ISI is liable for this tax. Under the facts of this case, there is no "double taxation."

Even though taxing successive transactions is not 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 for resale when the purchaser of the property provides the seller with an NTTC

and represents that the property will be resold. See, Section 7-9-47 NMSA 1978. Similarly, it has

provided a deduction for the sale of services for resale when certain statutory conditions are met.

See, Section 7-9-48 NMSA 1978 and discussion in Part I, above. The deduction in Section 7-9-48

would have been available to Ms. Curl if she had obtained an NTTC from ISI. Unfortunately, she

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did not, and there is no basis for relieving her of the liability for gross receipts tax due on her

receipts from performing services for ISI.

III CRS IDENTIFICATION NUMBER.

The Curls argue that by issuing the assessment of gross receipts tax due on Ms. Curl’s

services to ISI under the retired CRS ID number the Curls obtained for their electronics repair

business, the Department assessed the wrong taxpayer.

Unlike a corporation, a proprietorship has no legal identity separate and apart from that of

its owners. Although the Curls operated their business under the tradename “D&M Electronics

Repair”, the business was not a separate legal entity; D&M Electronics Repair was, in fact, James

and Dona Curl. It is also important to note that the business was not registered under the tradename

D&M Electronics, but was registered under the name “James M. and Dona H. Curl.” See Exhibit

A. The Department’s assessment was issued to “Curl James M. & Dona H.” The Curls have failed

to show that there was anything improper or prejudicial in the Department’s decision to reactivate

the Curls’ retired CRS number to assess gross receipts tax on the business income reported on

Schedule C to the Curls’ 1993 federal income tax return.

IV PENALTY.

The Curls’ 1993 federal income tax return was prepared by their family accountant. Ms.

Curl testified that she relied on the accountant to advise her concerning her tax liabilities. Although

reliance on an accountant does not affect a taxpayer’s liability for tax principal and interest, it may

affect the taxpayer’s liability for the 10 percent negligence penalty.

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Section 7-1-69 NMSA 1978 (1993 Repl.Pamp.) governs the imposition of penalty during

the period at issue in this protest. Subsection A imposes a penalty of two percent per month, up to a

maximum of 10 percent:

[i]n the case of failure, due to negligence or disregard of rules and
regulations, but without intent to defraud, to pay when due any amount
of tax required to be paid...

Taxpayer "negligence" for purposes of assessing penalty is defined in Regulation GR 69:3 (now 3

NMAC 1.11.10) as:

1) failure to exercise that degree of ordinary business care and
prudence which reasonable taxpayers would exercise under
like circumstances;

2) inaction by taxpayers where action is required;

3) inadvertence, indifference, thoughtlessness, carelessness,
erroneous belief or inattention.

Regulation GR 69:4 (now 3 NMAC 1.11.11) sets out several situations that may indicate a taxpayer

has not been negligent, including “reasonable reliance on the advice of competent tax counsel or

accountant as to the taxpayer’s liability after full disclosure of all relevant facts....”

The Curls’ failure to report and pay gross receipts tax was not based on advice received

from their accountant, but on their inattention to the requirements of New Mexico law and Ms.

Curl’s erroneous belief that a subcontractor is not liable for payment of gross receipts tax on the

sale of services for resale. The evidence shows that the Curls were well aware of the existence of

New Mexico’s gross receipts tax, having reported and paid the tax on receipts from their previous

business. The January-June 1992 CRS-1 Filer’s Kit issued by the Department was mailed to

everyone who held an active CRS ID number, which included the Curls. The kit contains a

definition of gross receipts that should have alerted Ms. Curl to the fact that her receipts from

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performing services for ISI were subject to tax. See Exhibit 2, pp. 1-2. The kit also explains the

use of NTTCs, including the following statement (Exhibit 2, p. 4):

There are different Types of NTTCs. The type of transaction determines the
type of NTTC needed, that is, a Type 2 NTTC is for the sale of tangible
personal property for resale, a Type 5 NTTC is for the sale of a service for
resale....

When claiming a deduction you should have the necessary NTTC in your
possession. Otherwise the Department may disallow the deduction and
assess tax, penalty and interest.

The Curls’ inattention to the tax information provided to them by the Department and Ms. Curl’s

erroneous belief that a subcontractor is not subject to gross receipts tax comes within the definition

of negligence for purposes of Section 7-1-69.

Ms Curl believes that her accountant should have advised her of her liability for gross

receipts tax on her 1993 income. Ms. Curl acknowledges, however, that she never asked the

accountant whether there might be other taxes due in connection with the business income reported

on her federal income tax return. Nor did Ms. Curl discuss the applicability of the gross receipts tax

or the use of NTTCs with her accountant at the time she began performing services for ISI.

Although reasonable reliance on the advice of a competent tax advisor may be a defense to the

imposition of penalty under Regulation GR 69:4, there is no evidence that Ms. Curl either sought or

received advice concerning her gross receipts tax liability on her 1993 income.

Although the Curls acted in good faith, with no intention to avoid the payment of taxes, they

were negligent in failing to take such action as was required to determine their gross receipts tax

liability to the state. For this reason, penalty was properly imposed under Section 7-1-69.

CONCLUSIONS OF LAW

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1. The Curls filed a timely written protest to Assessment No 2054402 pursuant to

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

protest.

2. The Department’s use of the Curls’ CRS number 02-153661-00 9 to assess gross

receipts tax, penalty and interest due on business income reported on the Curls’ 1993 federal

income tax return was proper.

3. When Ms. Curl performed services for ISI during 1993, she was engaging in

business as defined in Section 7-9-3(E) NMSA 1978 and was subject to gross receipts tax on her

receipts.

4. The Curls did not meet their burden of establishing that Ms. Curl was entitled to an

exemption or deduction in connection with her receipts from performing services for ISI and they

are liable for the gross receipts tax and interest assessed.

5. The Curls were negligent in failing to report gross receipts tax on business income

earned during 1993 and are liable for the negligence penalty assessed pursuant to Section 7-1-69

NMSA 1978.

For the foregoing reasons, the Taxpayers’ protest IS DENIED.

DONE, this 21st day of April 1998.

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