A seller lost its resale deduction because it didn't have the up-to-date exemption certificate in time. Can a later, more lenient law be applied backward to save the deduction?

Subject

Jobe Concrete Products, Inc. (D&O 98-24)

Plain-English summary

Jobe Concrete Products is an El Paso, Texas company that sells concrete, sand, gravel, rock, and asphalt to businesses in Texas and New Mexico. From January 1993 through August 1996 it sold products to Hydro Conduit, a manufacturer in southern New Mexico, and delivered them in New Mexico. Sales of tangible personal property to a manufacturer can be deducted from gross receipts under Section 7-9-46 — but only if the seller holds the right nontaxable transaction certificate (NTTC) on time, as required by Section 7-9-43.

Throughout those years Jobe held only a pre-1992 NTTC from Hydro Conduit. A 1991 law had voided all NTTCs issued before January 1, 1992 and required buyers to obtain new "1992 Series" certificates. Jobe did not realize it lacked a current certificate until the Department notified it of an audit in August 1996. Hydro Conduit executed a 1992 Series NTTC on October 7, 1996, before the audit began on October 16, but Jobe could not show when it actually received the certificate, and it was not on the auditor's opening list. Because Jobe could not show timely possession, the Department disallowed the deduction and, on April 14, 1997, assessed $47,259.03 gross receipts tax, $15,144.85 interest, and $4,725.96 penalty ($67,129.84 total). Jobe paid part and protested the rest, leaving $41,089.06 in dispute.

Hearing Officer Margaret B. Alcock denied the protest on two issues:

• The 1997 amendment does not apply retroactively. In 1992 the legislature had tightened Section 7-9-43 (a seller "shall" possess the NTTC by the return due date, provable at audit or within a 60-day notice period). In 1997 it loosened the rule again, restoring a 60-day grace period — but effective July 1, 1997. Jobe wanted that grace period applied to its earlier audit. The Hearing Officer refused: the receipts genuinely were not deductible under the 1992–1997 law (Proficient Food — failing the prescribed method waives the deduction); applying the new rule backward would impair the state's vested right to collect and reopen five years of completed audits; and statutes are presumed to operate prospectively absent clear contrary intent (Howell v. Heim; San Luis Power & Water).
• The New Mexico Constitution independently bars it. Article IV, Section 34 says no legislative act "shall affect the right or remedy of either party... in any pending case." Jobe's protest was filed May 1, 1997 — already pending when the amendment took effect on July 1, 1997 — so the Constitution forbade applying it to change the Department's collection rights.
• The negligence penalty was proper. Jobe blamed Hydro Conduit for the late certificate, but the gross receipts tax falls on the seller, and it is the seller's job to have the NTTC (and, failing that, to charge the tax to the buyer). Jobe's inattention to the expiration of its old certificate and to the 1991 law change was negligence under Section 7-1-69.

What this means for you

• A newer, friendlier tax law usually will not save an old transaction. Amendments are presumed to apply going forward from their effective date. Unless the legislature clearly says a change is retroactive, you are judged by the law in force when the transaction happened and the assessment issued.
• Exemption certificates expire and get superseded — track them. New Mexico voided pre-1992 NTTCs and required new "1992 Series" certificates. Holding an outdated certificate is the same as holding none: the deduction is disallowed.
• The seller owns the certificate problem, not the buyer. Because the gross receipts tax is imposed on the seller, you cannot shift the blame (or the penalty) to a buyer who was slow to send an NTTC. If a buyer will not provide one, your remedy is to add the tax to the price.
• Under the 1992-1997 rule, the 60-day window was for proving earlier possession, not obtaining a new certificate. The seller had to possess the NTTC by the return due date and then demonstrate that fact at audit opening or within 60 days of notice. The 1997 amendment later restored a true period to obtain the certificate.
• A pending protest can freeze the applicable law. Under Article IV, Section 34, a mid-dispute statutory change generally cannot be used to alter the parties' rights in a case already filed — a double-edged rule that can cut against a taxpayer as it did here.

Key questions answered

Why was Jobe's deduction disallowed if the sales really were to a manufacturer?
Because qualifying for the Section 7-9-46 deduction requires timely possession of a valid NTTC under Section 7-9-43. Jobe held only a voided pre-1992 certificate and could not show it had a current 1992 Series NTTC at the time of the sales or when the audit began.

Didn't the 1997 law give a 60-day grace period Jobe met?
The 1997 amendment did restore a 60-day grace period, but it took effect July 1, 1997. The Hearing Officer held it applies only prospectively, so it could not rescue deductions that failed under the stricter 1992–1997 version in force during Jobe's audit.

How did the New Mexico Constitution factor in?
Article IV, Section 34 bars a legislative act from affecting either party's rights in a pending case. Jobe's protest was already pending when the 1997 amendment became effective, so the Constitution independently prevented applying the new rule to reduce the state's collection rights.

Why couldn't Jobe blame its buyer for the penalty?
Because the gross receipts tax is legally imposed on the seller. It was Jobe's responsibility to obtain the NTTC needed for the deduction; failing to notice its certificate had been voided was negligence, so the Section 7-1-69 penalty applied.

Verbatim citations

The manufacturer-sale deduction requires the buyer's NTTC (Section 7-9-46):

Receipts from selling tangible personal property may be deducted from gross receipts...if the sale is made to a person engaged in the business of manufacturing who delivers a nontaxable transaction certificate to the seller.

Why retroactive application was rejected:

If the 1997 amendment to Section 7-9-43 were applied to allow the Taxpayer to claim deductions for which it did not qualify at the time the assessment was issued, there is no question that this would impair the Department's vested right to collect taxes due and owing under prior law and result in a revenue loss to the state.

The constitutional bar (Article IV, Section 34):

At the time the 1997 amendment to Section 7-9-43 became effective on July 1, 1997, the Taxpayer had a pending case before the Department.... The New Mexico Constitution therefore bars application of the 1997 amendment in a manner that would adversely affect the Department's right to collect tax due under the law in effect at the time the Taxpayer's protest was filed.

The seller, not the buyer, is responsible for the NTTC:

The Taxpayer's attempt to shift responsibility to its buyer is inconsistent with New Mexico's gross receipts tax scheme, which places the legal incidence of tax on the seller. It is the seller's responsibility to determine whether it has the NTTC needed to qualify for a deduction.... In cases where the buyer fails or refuses to provide the seller with an NTTC, the seller has a clear remedy available, i.e., the seller can include the tax in the price charged to the buyer.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Jobe Concrete Products, Inc.
• Decision PDF: D&O 98-24

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
JOBE CONCRETE PRODUCTS, INC. 98-24
ID. NO. 01-199825-00 3
ASSESSMENT NO. 2128424

DECISION AND ORDER

This matter came on for formal hearing on April 8, 1998, before Margaret B. Alcock,

Hearing Officer. Jobe Concrete Products, Inc. (“the Taxpayer”) was represented by William L. Lutz,

its attorney. The Taxation and Revenue Department ("the Department") was represented by Frank D.

Katz, Chief Counsel. Based upon the parties’ stipulation of facts and the arguments presented, IT IS

DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer is a Texas corporation with its principal place of business in El Paso,

Texas.

2. The Taxpayer sells concrete, sand, gravel, rock and asphalt to contractors and other

businesses located in Texas and New Mexico.

3. During the period January 1993 through August 1996, the Taxpayer sold concrete, sand

and gravel to Hydro Conduit, a company with its principal place of business in southern New Mexico,

outside El Paso, Texas. The Taxpayer delivered the products to Hydro Conduit in New Mexico.

4. When the Taxpayer sold products to Hydro Conduit during the period January 1993

through August 1996, the Taxpayer had in its possession a pre-1992 nontaxable transaction certificate

(“NTTC”) from Hydro Conduit.

5. In August 1996, the Taxpayer was notified that the Department would be conducting an

audit of the Taxpayer. The Department’s audit began on October 16, 1996.

6. Between notification of the audit and commencement of the audit, the Taxpayer

discovered that Hydro Conduit had not provided the Taxpayer with a current 1992 Series NTTC.

7. Hydro Conduit issued the Taxpayer a 1992 Series Type 1 Manufacturers NTTC on

October 7, 1996. Exhibit 1.

8. This NTTC was not noted on the auditor’s list of the NTTCs that the Taxpayer had on

hand at the time the audit began on October 16, 1996. The Taxpayer does not know when it actually

received the 1992 Series NTTC from Hydro Conduit.

9. The Taxpayer’s receipts from sales to Hydro Conduit would have been eligible for a

deduction from gross receipts if the Taxpayer’s possession of the 1992 Series NTTC had met the

statutory requirements of Section 7-9-43 NMSA 1978, as that section existed at the time of the

Department’s audit.

10. Based on the provisions of Section 7-9-43 NMSA 1978 then in effect, the Department

disallowed the deductions taken by the Taxpayer because the Taxpayer did not demonstrate that it had

the 1992 Series NTTC in its possession at the time of its sales to Hydro Conduit or at the time the

Department’s audit began on October 16, 1996.

11. On April 14, 1997, the Department issued Assessment No. 2128424 for the reporting

periods January 1993 through August 1996, assessing the Taxpayer $47,259.03 gross receipts tax,

$15,144.85 interest, and $4,725.96 penalty, for a total assessment of $67,129.84.

12. On May 1, 1997, The Taxpayer paid $21,934 of tax principal and $7,191 of interest.

The Taxpayer protested the remaining principal and interest and all of the penalty, leaving a balance of

$41,089.06 in dispute.

2
DISCUSSION

The Taxpayer’s protest raises two issues: (1) whether the New Mexico legislature intended its

1997 amendment to Section 7-9-43 NMSA 1978 to have retroactive effect; and (2) whether the

Taxpayer was negligent for purposes of the penalty assessed under Section 7-1-69 NMSA 1978.

I. APPLICATION OF THE 1997 AMENDMENT TO SECTION 7-9-43 NMSA 1978.

The Department assessed the Taxpayer for gross receipts tax, interest and penalty on its receipts

from sales made to Hydro Conduit during the period January 1993 through August 1996. The

Department disallowed the Taxpayer’s deduction of these receipts because the Taxpayer did not have

timely possession of a 1992 Series NTTC as required by the version of Section 7-9-43 NMSA 1978 that

was in effect between July 1, 1992 and July 1, 1997. The Taxpayer argues that it obtained a 1992

Series NTTC within the 60-day period allowed by a 1997 amendment to Section 7-9-43 and that the

amendment should be applied retroactively to permit the Taxpayer to claim the deductions disallowed

by the Department.1

A History of Section 7-9-43 NMSA 1978.

The Gross Receipts and Compensating Tax Act provides several deductions from gross receipts

for taxpayers having possession of NTTCs. In this case, the Taxpayer claims the deduction provided in

Section 7-9-46:

Receipts from selling tangible personal property may be deducted from gross
receipts...if the sale is made to a person engaged in the business of
manufacturing who delivers a nontaxable transaction certificate to the seller.
(Emphasis added).

The requirements for obtaining NTTCs to support deductions from gross receipts is governed by

Section 7-9-43 NMSA 1978. Prior to 1991, the statute stated that a taxpayer "should" have the NTTC

3
required to support a particular deduction in the taxpayer’s possession at the time of the transaction for

which the deduction was claimed. The statute nonetheless allowed the taxpayer a 60-day period,

beginning on the date the Department gave the taxpayer written notice requiring possession of NTTCs

(commonly known as a “60-day letter”), to obtain and demonstrate possession of the NTTC. If the

taxpayer could not demonstrate possession of the NTTC within the 60-day period, the deduction was

disallowed.

In 1991, the legislature amended Section 7-9-43 to provide that “[a]fter January 1, 1992, any

nontaxable transaction certificate issued prior to that date shall be void.” Laws 1991, Chapter 9,

Section 29. The amendment required buyers and lessees to apply to the Department to obtain new

NTTCs, which became known as “1992 Series” NTTCs. The 1991 amendment did not change the

provisions relating to the 60-day grace period for possession of NTTCs.

In 1992, the legislature amended Section 7-9-43 to change the time within which a taxpayer

must be in possession of NTTCs required to support deductions from gross receipts. Laws 1992,

Chapter 39, Section 3. The 1992 amendment substantially tightened the requirements with respect to

NTTCs. The language providing that a taxpayer "should" have possession of the NTTC at the time of

the nontaxable transaction was changed to state that the taxpayer "shall" have possession of the NTTC

by the due date of the return reporting the taxpayer’s receipts from the transaction. The taxpayer was

required to demonstrate possession of all necessary NTTCs at the commencement of an audit or, in

response to a 60-day letter from the Department, demonstrate that the NTTCs were in the taxpayer’s

possession at the time the receipts from each transaction were required to be reported. The effective

date of the amendment was July 1, 1992.

1
Although the parties stipulated that the Taxpayer did not know when it received the 1992 Series NTTC from
Hydro Conduit, the Department has not contested the Taxpayer’s argument that the NTTC was or could have been
provided to the Department within 60 days after the commencement of the audit.

4
Five years later, the 1997 legislature amended Section 7-9-43 to again allow taxpayers a 60-day

grace period within which to obtain NTTCs required to support deductions taken. Laws 1997, Chapter

72, Section 1. The effective date of this amendment was July 1, 1997. A comparison of the pertinent

language in effect before and after the 1997 amendment appears below:

Prior Version, Laws 1992, Chapter 39, Section 3 (effective July 1, 1992):

A. The provisions of this subsection apply to transactions occurring on or
after July 1, 1992. All nontaxable transaction certificates of the appropriate
series executed by buyers or lessees shall be in the possession of the seller or
lessor for nontaxable transactions at the time the return is due for receipts from
the transactions. If the seller or lessor does not demonstrate possession of any
required nontaxable transaction certificates to the department at the
commencement of an audit or demonstrate within sixty days from the date that
the notice requiring possession of these nontaxable transaction certificates is
given the seller or lessor by the department that the seller or lessor was in
possession of such certificates at the time receipts from the transactions were
required to be reported, deductions claimed by the seller or lessor that require
delivery of these nontaxable transaction certificates shall be disallowed.
(Emphasis added).

Current Version, Laws 1997, Chapter 72, Section 1 (effective July 1, 1997):

A. All nontaxable transaction certificates of the appropriate series executed
by buyers or lessees should be in the possession of the seller or lessor for
nontaxable transactions at the time the return is due for receipts from the
transactions. If the seller or lessor is not in possession of the required
nontaxable transaction certificates within sixty days from the date that the
notice requiring possession of these nontaxable transaction certificates is given
the seller or lessor by the department , deductions claimed by the seller or
lessor that require delivery of these nontaxable transaction certificates shall be
disallowed. (Emphasis added).

The Taxpayer does not dispute that under the version of Section 7-9-43 in effect when the

Department’s audit commenced, the Taxpayer did not meet the statutory requirements for timely

possession of the 1992 Series NTTC needed to support the Taxpayer’s deductions. The Taxpayer

argues, however, that the 1997 amendment to Section 7-9-43 should be applied retroactively to allow

5
the NTTC Hydro Conduit executed to the Taxpayer in October 1996 to be accepted as timely because it

was produced within the 60-day notice period.

B. Retroactive Application: Rules of Statutory Construction.

A statute or regulation is considered retroactive if it impairs vested rights acquired under

prior law or requires new obligations, imposes new duties, or affixes new disabilities to past

transactions. Howell v. Heim, 118 N.M. 500, 506, 882 P.2d 541, 547 (1994); City of Albuquerque v.

State ex rel. Village of Los Ranchos de Albuquerque, 111 N.M. 608, 616, 808 P.2d 58, 66 (Ct. App.

1991), cert. denied, 113 N.M. 524, 828 P.2d 957 (1992). The Taxpayer maintains that the 1997

amendment to Section 7-9-43 did not change the taxable rights of the parties, but merely changed the

paperwork requirements for establishing possession of NTTCs. The Taxpayer argues that applying the

amendment to transactions and audits occurring prior to the amendment’s effective date of July 1, 1997

would not result in a loss to either party since the Taxpayer’s receipts from sales to Hydro Conduit were

always deductible.

In fact, the Taxpayer’s receipts were not deductible under the version of Section 7-9-43 in

effect between July 1992 and July 1997 because the Taxpayer did not meet the statutory requirements

for possession of a 1992 Series NTTC from Hydro Conduit. 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.), cert. denied, 107 N.M. 308, 756 P.2d 1203 (1988). Here, the Department

assessed the Taxpayer for unpaid gross receipts tax because the Taxpayer could not establish its right to

the deductions taken. If the 1997 amendment to Section 7-9-43 were applied to allow the Taxpayer to

claim deductions for which it did not qualify at the time the assessment was issued, there is no question

6
that this would impair the Department’s vested right to collect taxes due and owing under prior law

and result in a revenue loss to the state.

There is a presumption that statutes and rules apply prospectively absent a clear intention to

the contrary. Howell, supra; Gadsden Federation of Teachers v. Board of Education of Gadsden

Independent School District, 122 N.M. 98, 920 P.2d 1052 (Ct. App. 1996). There is no indication

that the 1997 legislature intended to allow taxpayers correctly assessed under the prior version of

Section 7-9-43 to have their tax liability abated or, in cases where the tax assessments have been

paid, to receive a refund of those taxes. And yet, this would be the effect of granting the Taxpayer’s

protest in this case. If this Taxpayer were given the benefit of the relaxed “paperwork” requirements

adopted by the 1997 legislature, the same benefit would have to be accorded to every other taxpayer

audited by the Department during the five-year period July 1, 1992 and July 1, 1997.

This case raises many of the same issues discussed in San Luis Power & Water Co. v. State, 57

N.M. 734, 739, 263 P.2d 398, 401-402 (1953), where the New Mexico Supreme Court rejected the

power and water company’s attempt to have a change in the property tax law applied retroactively:

The question posed is whether the act is applicable to assessments made prior
to its passage.... There is no prohibition against retroactive legislation
impairing the rights of the states where there is a clear and manifest intent to
do so, Fulghum v. Madrid, 33 N.M. 303, 265 P. 454, but from our study of
the act, we find no such intent. The taxes became a lien on the property
January 1, 1946, and the taxes became due and payable November 1, 1946.
The first half became delinquent December 1, 1946 and the second half May
1, 1947. On those dates penalties and interest accrued. At the time of the
passage of the act, state and county budgets had been made, values
determined, certified tax rolls had been delivered to the county treasurers and
notices given to taxpayers. Possibly, some of the landowners had paid their
taxes in full. Did the lawmakers contemplate the undoing of all this? Were
the tax rolls to be returned to the assessor to ascertain what lands were served
by the appellant? Were values to be redetermined and new notices given to
taxpayers? Was there to be an additional payment of taxes? The act contains
no such directive and certainly none is implied. Its language is clear and
unambiguous and there is no room to read in it an intent not expressed.

7
In this case, the 1997 legislature specified that the change in the requirements for possession of NTTCs

would be effective July 1, 1997. There is no basis for reading into the amendment an intent to apply the

new requirements retroactively, thereby reopening several years of completed audits and exposing the

state to the cost of refunding tax revenues legitimately due to the state at the time of payment.

C. Retroactive Application: New Mexico Constitution.

The New Mexico Constitution, article IV, section 34, provides: "No act of the legislature

shall affect the right or remedy of either party, or change the rules of evidence or procedure, in any

pending case." A case is “pending” for purposes of this provision if the case is filed prior to the

effective date of the new law. Pineda v. Grande Drilling Corp., 111 N.M. 536, 539, 807 P.2d 234,

237 (Ct. App. 1991) (notice of enactment of a law is irrelevant under article IV, section 34; the

effective date is the determining factor). See also, State v. Baca, 120 N.M. 383, 392, 902 P.2d 65, 74

(1995) (because case was filed and pending prior to the effective date of an amendment to the Rules

of Evidence, the amendment did not apply).

The Department’s assessment against the Taxpayer was issued April 14, 1997. The

Taxpayer’s protest to the assessment was filed May 1, 1997. At the time the 1997 amendment to

Section 7-9-43 became effective on July 1, 1997, the Taxpayer had a pending case before the

Department. See, Phelps Dodge Corp. v. Revenue Division of the Taxation and Revenue

Department, 103 N.M. 20, 23, 702 P.2d 10, 13 (Ct. App.), cert. denied, 103 N.M. 62, 702 P.2d 1007

(1985) (article IV, section 34 applies to administrative tax refund proceeding); Pineda, supra

(article IV, section 34 applies to adjudicative proceeding before the Workers’ Compensation

Division). The New Mexico Constitution therefore bars application of the 1997 amendment in a

manner that would adversely affect the Department’s right to collect tax due under the law in effect

at the time the Taxpayer’s protest was filed.

8
II PENALTY.

Section 7-1-69 NMSA 1978 (1995 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.

The Taxpayer argues that it was dependent on the actions of Hydro Conduit and should not be

penalized for Hydro Conduit’s negligence in failing to provide the Taxpayer with the required NTTC in

a timely manner.2 The Taxpayer’s attempt to shift responsibility to its buyer is inconsistent with New

Mexico’s gross receipts tax scheme, which places the legal incidence of tax on the seller. It is

the seller’s responsibility to determine whether it has the NTTC needed to qualify for a deduction under

the Gross Receipts and Compensating Tax Act. In the absence of an NTTC, the seller has no right to

claim the deduction. In cases where the buyer fails or refuses to provide the seller with an NTTC, the

seller has a clear remedy available, i.e., the seller can include the tax in the price charged to the buyer.

2
The Taxpayer is contesting the entire amount of penalty assessed. The Taxpayer did not, however, provide any
explanation for its failure to pay the gross receipts tax that was assessed but not protested or make any argument as to
why penalty should not be imposed on this amount.

9
Here, the Taxpayer was assessed gross receipts tax because it claimed deductions to which it

was not entitled. The assessment resulted from the Taxpayer’s inattention to the date on its pre-1992

NTTC from Hydro Conduit and the Taxpayer’s failure to take action to obtain a new NTTC as required

by the 1991 amendment to Section 7-9-43. It was not until the Taxpayer received the Department’s

notice of audit that the Taxpayer reviewed its records and realized it did not have a current NTTC from

Hydro Conduit. The Taxpayer’s inattention to changes in New Mexico’s tax law and its failure to take

action to obtain a 1992 Series NTTC within the time allowed by Section 7-9-43 constitute negligence

for purposes of Section 7-1-69.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely written protest to Assessment No 2128424 pursuant to

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

2. The New Mexico Legislature did not intend its 1997 amendment to Section 7-9-43

NMSA 1978 to be applied retroactively.

3. The New Mexico Constitution, article IV, section 34, bars application of the 1997

amendment to Section 7-9-43 NMSA 1978 to the Taxpayer’s protest.

4. The Taxpayer is not entitled to claim the deduction from gross receipts provided in

Section 7-9-46 NMSA 1978 because the Taxpayer did not have timely possession of a 1992 Series

NTTC as required by the version of Section 7-9-43 NMSA 1978 in effect between July 1, 1992 and

July 1, 1997.

5. The Taxpayer was negligent in failing to obtain the NTTC required to support the

deductions taken on its gross receipts tax returns.

For the foregoing reasons, the Taxpayer’s protest IS DENIED.

DONE, this 23rd day of April 1998.

10