Could an independent sales consultant for a plumbing subcontractor deduct his fees as construction services by obtaining a late NTTC?

Subject

Jeffery A. Williams (D&O 98-48)

Plain-English summary

Jeffery A. Williams helped Foster Plumbing & Heating Company find residential construction jobs in Farmington. He located general contractors starting houses, obtained project blueprints, and drafted bids for Foster. Foster paid him a flat $1,500 per month, told him he was contract labor responsible for his own taxes and expenses, and issued a Form 1099 for nonemployee compensation.

Williams reported $17,600 from Foster on a Schedule C for his consulting business, claimed $11,080 of business expenses and a $1,521 home-office deduction, and paid self-employment tax. He did not report New Mexico gross receipts tax. After a federal-income match, the Department assessed $996.24 tax, $99.60 penalty, and $491.89 interest for 1994.

Hearing Officer Margaret B. Alcock rejected three defenses. First, Williams was engaging in business: he performed services for monthly compensation, and his contract, Form 1099, Schedule C, deductions, and self-employment tax all confirmed independent-contractor treatment. A taxpayer could not characterize the same work as a business for federal tax and as employment for New Mexico gross receipts tax.

Second, the work was not a deductible construction service under Section 7-9-52. Williams sold lead-generation and bidding services; he did not physically build, alter, repair, or demolish anything, and Foster did not resell his sales service to the general contractor. The Type 7 NTTC Foster later issued could not transform the work into construction.

The NTTC was also too late. The Department's July 23, 1997 audit notice set a September 21 deadline. Williams assumed a later handwritten "Hold" notation suspended that date but never confirmed it. Foster did not issue the certificate until November 24, after the assessment. Section 7-9-43 required disallowance when a required certificate was not obtained within 60 days of notice. Finally, taxing Williams's service sale and Foster's separate plumbing sale was not unlawful double taxation because the taxes applied to different taxpayers and different transactions. The protest was DENIED.

What this means for you

• Services related to a construction project are not necessarily construction services. Sales, lead-generation, and bid-preparation work did not physically change land or a structure.
• Federal reporting can lock in contractor treatment. Williams used Schedule C, claimed business expenses, paid self-employment tax, and received Form 1099; he could not reverse that characterization for state gross receipts tax.
• An NTTC cannot fix an ineligible service. Even a timely certificate would not have made these sales services deductible under the construction-services provision.
• The NTTC deadline was independently fatal. The certificate arrived after the statutory 60-day audit period, and the Department lacked discretion to extend that deadline.
• Do not assume an informal "hold" changes a written deadline. Williams and his accountant did not call to confirm what the notation meant, and the decision found reliance on it unreasonable.

Key questions answered

Was Williams an employee of Foster?
No. The working arrangement and his own federal reporting established that he was an independent contractor engaged in business.

Why weren't his sales and bidding activities construction services?
They did not physically build, alter, repair, or demolish land or a structure. They helped Foster obtain business but were not themselves part of the physical plumbing work.

Could the November 1997 Type 7 NTTC support the deduction?
No. Williams received it after the September 21 deadline, and the underlying service did not qualify as construction in any event.

Did taxing both Williams and Foster create prohibited double taxation?
No. The tax applied once to Williams's sale of consulting services to Foster and separately to Foster's sale of plumbing services to the general contractor.

Verbatim citations

The construction-services rule applied by the decision:

“Construction” does not include services that do not physically change the land or physically create, change or demolish a building, structure or other facility as part of a construction project, even though they may be related to a construction project.

The conclusion that Williams was in business:

The evidence in this case supports the conclusion that Mr. Williams was providing services to Foster as an independent contractor and was engaging in business as defined in the Gross Receipts and Compensating Tax Act.

The two defects in the claimed deduction:

First, his sales services for Foster do not meet the definition of construction services set out in Section 7-9-3(C). Second, the NTTC required to support the deduction was not in Mr. Williams' possession within the time period required by Section 7-9-43.

The holding:

During 1994, Mr. Williams was engaging in business as defined in NMSA 1978, Section 7-9-3(E), and is liable for gross receipts tax on his receipts from performing services for Foster Plumbing & Heating Company.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Jeffery A. Williams
• Decision PDF: D&O 98-48

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 JEFFERY A. WILLIAMS 98-48
ID. NO. 02-349142-00 6
ASSESSMENT NO. 2189404

DECISION AND ORDER

A formal hearing on the taxpayer's protest was held on August 24, 1998 before Margaret B.

Alcock, Hearing Officer. Jeffery A. Williams represented himself. The Taxation and Revenue

Department ("Department") was represented by Javier Lopez, Special Assistant Attorney General.

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

FOLLOWS:

FINDINGS OF FACT

1. During the assessment period January-December 1994, Mr. Williams performed sales

services for Foster Plumbing & Heating Company ("Foster") in Farmington, New Mexico.

2. Foster was in the business of providing plumbing services as a subcontractor on

residential construction projects.

3. In the early 1990s, Foster faced increasing competition from other plumbing firms and

hired Mr. Williams, who was familiar with the Farmington area, to help Foster obtain jobs with general

contractors.

4. Mr. Williams would locate a contractor about to begin construction of a house and

obtain a copy of the blueprints for the project. Mr. Williams would then draft a bid for Foster to submit

to the contractor.

5. Foster told Mr. Williams it was hiring him as contract labor and he would be

responsible for paying his own taxes, social security and insurance. Mr. Williams also paid all of the

costs he incurred in connection with his work for Foster, including transportation and a home office.

6. Foster paid Mr. Williams a flat fee of $1,500 per month. At the end of the year, Foster

issued Mr. Williams a federal Form 1099 listing these payments as "Nonemployee compensation."

7. For tax year 1994, Mr. Williams filed a Schedule C, Profit or (Loss) From Business, to

his federal income tax return listing his principal business or profession as "Consulting Services" and

the name of his business as "New Horizons."

8. Mr. Williams reported the $17,600 of income he received from services performed for

Foster as "Gross receipts or sales" on Line 1 of his 1994 Schedule C. Mr. Williams claimed Schedule

C business expenses of $11,080 and a home office deduction of $1,521. The expenses claimed

included advertising, car and truck expenses, depreciation, office expense, supplies, taxes and licenses,

and long distance telephone calls.

9. Mr. Williams reported self-employment tax on Schedule SE of his 1994 federal return.

10. It did not occur to Mr. Williams that he was subject to New Mexico gross receipts tax

on his receipts from performing services for Foster. Nor did it occur to Mr. Williams that he should

obtain a nontaxable transaction certificate ("NTTC") from Foster.

11. On July 23, 1997, the Department mailed a notice of a limited scope gross receipts

tax audit to Mr. Williams based on the business income reported on his 1994 federal income tax

return.

12. The Department's notice stated that unless NTTCs or other documentation required

to support deductions from gross receipts were in Mr. Williams' possession within 60 days from the

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date of the notice, the deductions would be disallowed. The 60-day period expired September 21,

1997.

13. When Mr. Williams received the Department's notice, he sent a copy to his

accountant, Catherine Martinez.

14. Mr. Williams also called and left a voice message for Carol, the contact person listed

in the Department's notice, that he had asked the IRS to review his situation to determine whether he

was an independent contractor or an employee of Foster.

15. Mr. Williams did not receive a call back from Carol, nor did he try to call her again.

16. Mr. Williams did receive another copy of the original July 23, 1997 audit notice with

the notation "8-4-97 Hold CW" at the top and "Please call" at the bottom.

17. Neither Mr. Williams nor his accountant, Ms. Martinez, called to determine the

meaning of these notations or ask whether the Department had extended the September 21, 1997

deadline for obtaining NTTCs.

18. On October 21, 1997, the IRS sent Mr. Williams a letter acknowledging receipt of his

request for a determination of his work relationship with Foster and notifying him that the

determination could take eight to ten months.

19. Sometime after Mr. Williams' receipt of the October 21, 1997 letter from the IRS,

Ms. Martinez called the Department and was told that Mr. Williams could not deduct his receipts

from performing services for Foster because he did not have an NTTC from Foster.

20. On November 9, 1997, the Department issued Assessment No. 2189404 to Mr.

Williams for the period January-December 1994 for gross receipts tax of $996.24, penalty of $99.60

and interest of $491.89.

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21. On November 18, 1997, Ms. Martinez called Foster and asked them to issue an

NTTC to Mr. Williams.

22. On November 24, 1997, Foster issued Mr. Williams a Type 7 NTTC, Construction

Contractor Purchase of Services.

23. On December 5, 1997, Ms. Martinez, on behalf of Mr. Williams, filed a written

protest to the Department's assessment and enclosed a copy of the NTTC from Foster.

DISCUSSION

Mr. Williams raises the following arguments in support of his protest to the Department’s

assessment: (1) Mr. Williams' work as contract labor for Foster did not constitute "engaging in

business" for purposes of the gross receipts tax; (2) The Type 7 NTTC Foster issued to Mr. Williams on

November 24, 1997 entitles Mr. Williams to deduct his receipts from performing sales services for

Foster; and (3) denying Mr. Williams a deduction from gross receipts will result in double taxation.

I. ENGAGING IN BUSINESS.

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

engaging in business in New Mexico. The definition of “engaging in business” includes “carrying on

or causing to be carried on any activity with the purpose of direct or indirect benefit.” NMSA 1978,

Section 7-9-3(E). The statute makes no distinction between activities engaged in by large

corporations and activities engaged in by small “mom and pop” operations or by individuals acting

as independent contractors. The term “gross receipts” is defined in Subsection F of Section 7-9-3 to

include the total amount of money or the value of other consideration received from performing

services in New Mexico. Here, Mr. Williams was providing services to Foster in return for the benefit

of monthly payments. This activity comes within the definition of engaging in business for purposes of

the gross receipts tax.

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Although Mr. Williams asked the IRS to determine whether he was an independent

contractor or an employee of Foster,1 the evidence presented at the August 24, 1998 hearing

confirms Mr. Williams' status as an independent contractor. See, Regulation 3 NMAC 2.17.7, setting

out factors to consider in determining a worker's status. First, Mr. Williams acknowledged that he

was hired as "contract labor." Foster paid him a flat monthly fee for his services and issued him a

federal Form 1099 at the end of the year. Mr. Williams reported his income as business income on

Schedule C to his 1994 federal income tax return. He listed his principal business or profession as

"Consulting Services" and the name of his business as "New Horizons." Mr. Williams also took

substantial business deductions, including costs of advertising, car and truck expenses, depreciation,

supplies, taxes and licenses and long distance telephone calls. Finally, Mr. Williams reported self-

employment tax on Schedule SE of his 1994 federal return.

New Mexico case law holds that a taxpayer must treat transactions uniformly for all purposes

within the tax laws. The taxpayer may not treat a transaction one way for purposes of federal tax and

another way for purposes of state gross receipts tax. Stohr v. New Mexico Bureau of Revenue, 90 N.M.

43, 46, 559 P.2d 420, 423 (Ct. App. 1976), cert. denied, 90 N.M. 254, 561 P.2d 1347 (1977); Co-Con,

Inc. v. Bureau of Revenue, 87 N.M. 118, 121-122, 529 P.2d 1239, 1241-1242 (Ct. App.), cert. denied,

87 N.M. 111, 529 P.2d 1232 (1974). The evidence in this case supports the conclusion that Mr.

Williams was providing services to Foster as an independent contractor and was engaging in business

as defined in the Gross Receipts and Compensating Tax Act.

II DEDUCTION FOR SALE OF CONSTRUCTION SERVICES PROVIDED
IN NMSA 1978, SECTION 7-9-52.

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The distinction between an employee and an independent contractor is significant because NMSA 1978, Section 7-
9-17, exempts from gross receipts tax the receipts of employees from wages, salaries and commissions.

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Mr. Williams maintains that if he was engaging in business, he was entitled to deduct his

receipts from Foster under the provisions of NMSA 1978, Section 7-9-52(A), which states:

A. Receipts from selling a construction service may be deducted from gross
receipts if the sale is made to a person engaged in the construction business
who delivers a nontaxable transaction certificate to the person performing the
construction service.

There are two prerequisites to taking the deduction: (1) the taxpayer must be selling a construction

service, and (2) the taxpayer must obtain an NTTC from the buyer of his construction services.

(a) Sale of a Construction Service. NMSA 1978, Section 7-9-3(C), defines "construction" as

"building, altering, repairing or demolishing" a road or structure, as well as leveling, excavating and

drilling wells. Regulation 3 NMAC 2.1.11.1.2 states:

"Construction" does not include services that do not physically change the
land or physically create, change or demolish a building, structure or other
facility as part of a construction project, even though they may be related to a
construction project. The fact that a service may be a necessary prerequisite or
ancillary to construction or a construction project does not in itself make the
service a construction service.

Mr. Williams testified that he provided sales services to Foster, which was facing increasing

competition from other plumbing firms. Mr. Williams was hired because he was familiar with the

Farmington area and could help Foster obtain jobs with residential contractors. Mr. Williams would

locate a contractor about to begin construction of a house and obtain a copy of the blueprints for the

project. He would then draft a bid for Foster to submit to the contractor. Mr. Williams did not perform

any of the plumbing work on the construction project itself.

Foster's payments to Mr. Williams were part of Foster's cost of doing business. Foster did not

resell Mr. Williams' sales services to the general contractor, nor do these services come within the

definition of construction services set out in Section 7-9-3(C). For this reason, Mr. Williams was not

eligible to claim the deduction provided in Section 7-9-52.

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(b) Possession of NTTC. Even if Mr. Williams had been selling a construction service, he

could not have taken the deduction provided in Section 7-9-52 because he did not obtain an NTTC

from Foster within the time required by statute. The requirements for obtaining NTTCs to support

deductions from gross receipts are set out in NMSA 1978, Section 7-9-43. During 1994, the period at

issue, the statute provided, in pertinent part:

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....
(emphasis added).

The word "shall" indicates that the provisions of a statute are mandatory and not discretionary. State v.

Lujan, 90 N.M. 103, 105, 560 P.2d 167, 169 (1977). Mr. Williams did not have an NTTC from Foster

in his possession at the time his 1994 gross receipts tax returns were due. He did not meet the statutory

requirements of Section 7-9-43 then in effect and was not entitled to claim a deduction.

In 1997, the legislature amended Section 7-9-43 to allow taxpayers additional time within

which to obtain required NTTCs. Laws 1997, Chapter 72, Section 1. This version of the statute,

effective July 1, 1997, provides:

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.

The amendment gave taxpayers audited after its effective date a second chance to obtain NTTCs that

should have been in their possession at the time their deductions from gross receipts tax were taken.

Taxpayers who rely on this provision must recognize, however, that they run the risk of having their

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deductions disallowed if they fail to obtain required NTTCs within the 60-day period provided by the

legislature.

In this case, the Department's July 23, 1997 letter gave Mr. Williams notice that unless

NTTCs or other documentation required to support deductions from gross receipts were in his

possession within 60 days from the date of the letter, the deductions would be disallowed. When he

received the notice, Mr. Williams called Carol, the Department's contact person. He did not talk

with Carol personally but left a message that the IRS was reviewing his situation to determine

whether he was an independent contractor or an employee of Foster. Mr. Williams did not receive a

call back from Carol, nor did he try to call her again. Sometime in August, Mr. Williams received

another copy of the July 23, 1997 audit notice with the notation "8-4-97 Hold CW" at the top and

"Please call" at the bottom.

Neither Mr. Williams nor his accountant, Catherine Martinez, called to determine the

meaning of these notations or ask whether the Department had extended the September 21, 1997

deadline for obtaining NTTCs. It was not until October or November, well after the deadline had

passed, that Ms. Martinez called to talk with someone in the Department. At that time, she was told

that Mr. Williams could not claim a deduction from gross receipts because he had not provided the

Department with an NTTC. On November 18, 1997, nine days after the Department's assessment

was issued, Ms. Martinez asked Foster to issue an NTTC to Mr. Williams, which it did on November

24, 1997. On December 5, 1997, Ms. Martinez sent a copy of the NTTC to the Department.

The November 24, 1997 NTTC was not in Mr. Williams' possession within the time period

required by Section 7-9-43. Although Mr. Williams assumed the "Hold" notation on the copy of the

Department's July 23, 1997 letter meant he did not have to comply with the 60-day deadline, he did not

take any steps to confirm this assumption. Mr. Williams' reliance on the hand-written notation was not

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reasonable given the clear language in the notice that failure to obtain NTTCs by September 21, 1997

would result in the disallowance of deductions. That language is taken directly from the statute itself.

Section 7-9-43 does not give the Department discretion to extend the 60-day deadline: if a seller is not

in possession of required NTTCs within 60 days from the date of the notice requiring possession,

"deductions claimed by the seller...that require delivery of these nontaxable transaction certificates shall

be disallowed." (emphasis added).

(c) Burden of Proof. There is a statutory presumption that the Department’s assessment of

gross receipts tax is correct. NMSA 1978, Section 7-1-17 (C). 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 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, Mr. Williams did not meet either of the requirements for taking the

deduction provided in Section 7-9-52. First, his sales services for Foster do not meet the definition of

construction services set out in Section 7-9-3(C). Second, the NTTC required to support the deduction

was not in Mr. Williams' possession within the time period required by Section 7-9-43. Mr. Williams'

claim to the deduction was properly disallowed.

III. DOUBLE TAXATION.

Mr. Williams argues that denying him a deduction from gross receipts results in double

taxation. It is a popular misconception that double taxation is inherently illegal or unconstitutional.

Almost 80 years ago, in Ft. Smith Lumber Co. v. Arkansas, 251 U.S. 532 (1920), the United States

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Supreme Court summarily disposed of the plaintiff's argument that Arkansas had imposed a double tax

on corporate stock in violation of the federal constitution. 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 held, on numerous occasions, that there is no constitutional

prohibition against double taxation. New Mexico State Board of Public Accountancy 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). In construing

the Gross Receipts and Compensating Tax Act, the New Mexico Court of Appeals has also 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. The gross receipts tax was imposed—once—on Mr.

Williams' sales services to Foster. The gross receipts tax was also imposed—once—on Foster's

plumbing services to the general contractor.2 Under the facts presented, there is no double taxation.

CONCLUSIONS OF LAW

1. Mr. Williams filed a timely written protest to Assessment No 2189404, and jurisdiction

lies over the parties and the subject matter of this protest.

2
If Foster obtained an NTTC from the general contractor, Foster's receipts from performing subcontract plumbing
services on a construction project would have been deductible under NMSA 1978 Section 7-9-52.

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2. During 1994, Mr. Williams was engaging in business as defined in NMSA 1978,

Section 7-9-3(E), and is liable for gross receipts tax on his receipts from performing services for Foster

Plumbing & Heating Company.

4. Mr. Williams is not entitled to claim the deduction from gross receipts provided in

NMSA 1978, Section 7-9-52.

For the foregoing reasons, Mr. Williams’ protest IS DENIED.

DONE, this 4th day of September 1998.

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