If you had a resale certificate but lost it, and you only get a replacement after the state's 60-day deadline, can you still deduct those receipts?

Subject

Antoine Khoury (D&O 98-51)

Plain-English summary

Antoine Khoury provided architectural consulting services to a firm (John K. Klee & Associates) in Albuquerque in 1994, earning about $19,986. He and his then-wife were registered for gross receipts tax but did not report or pay tax on that consulting income, because Khoury believed Klee had given him a Type 5 nontaxable transaction certificate (NTTC) — the certificate a buyer delivers when it buys a service for resale, which lets the seller deduct those receipts under Section 7-9-48.

When the Department audited (after spotting the gap between his federal Schedule C income and his reported gross receipts), its January 1998 notice warned that any deductions unsupported by NTTCs within 60 days would be disallowed. That deadline was March 7, 1998. Khoury searched his files and couldn't find the certificate; Klee was slow to respond and also couldn't find one. Only in April 1998 — after the deadline — did Klee execute and deliver a new Type 5 NTTC. The Department issued the assessment (about $1,929.70 in tax, interest, and penalty) and Hearing Officer Margaret B. Alcock denied the protest.

The rule is strict. Section 7-9-43 says all required NTTCs "should be in the possession of the seller" when the return is due, and if they are not in the seller's possession within 60 days of the Department's notice, the deductions "shall be disallowed." That language is mandatory — the Department has no discretion to extend the deadline. Proving the services really were sold for resale is not enough; the buyer must have actually delivered the NTTC in time (Proficient Food). Because assessments are presumed correct (Section 7-1-17(C)) and all receipts are presumed taxable (Section 7-9-5), with deductions construed strictly against the taxpayer (Wing Pawn Shop), Khoury's late certificate could not rescue the deduction.

(The decision's conclusion cites "Section 7-9-52" in one line, but the deduction actually at issue and analyzed throughout is the service-for-resale deduction of Section 7-9-48.)

What this means for you

• Get your NTTCs in hand — and keep them. A resale/service-for-resale deduction depends on the buyer having actually delivered the certificate, and on you being able to produce it. If you can't locate it during an audit, the deduction is at risk no matter how legitimate the underlying transaction.
• The 60-day deadline after a Department notice is hard. Once the Department sends notice requiring NTTCs, you have 60 days to be in possession of them. The statute says unsupported deductions "shall be disallowed," and the Department cannot extend that window — a certificate obtained even weeks later does not count.
• A replacement certificate issued after the deadline won't work. Here the buyer issued a fresh NTTC in April, after the March deadline. Too late is too late; the timing, not the sincerity, controls.
• You bear the burden. Assessments are presumed correct and all business receipts are presumed taxable. To claim a deduction you must clearly establish your right to it — and follow the exact method the statute prescribes.
• Collect certificates up front, not at audit time. The safest practice is to obtain and file the NTTC when the transaction happens, so you're never scrambling to reconstruct it under a running 60-day clock.

Key questions answered

Why was the deduction disallowed if the services really were for resale?
Because proving the resale nature of the services is not enough. Section 7-9-48 requires the buyer to deliver an NTTC, and Section 7-9-43 requires the seller to have it in possession within 60 days of the Department's notice. Khoury did not, so the deduction "shall be disallowed."

Could the Department have given him more time?
No. The 60-day requirement in Section 7-9-43 is mandatory, and the statute gives the Department no discretion to extend it. A taxpayer who fails to follow the prescribed method waives the deduction (Proficient Food).

He got a new certificate in April — why didn't that fix it?
Because it came after the March 7 deadline. The replacement Type 5 NTTC was delivered too late to satisfy the 60-day possession requirement, so it could not support the 1994 deduction.

Who has to prove what?
The taxpayer. Assessments are presumed correct (Section 7-1-17(C)) and all receipts of a business are presumed subject to gross receipts tax (Section 7-9-5); deductions are construed strictly against the taxpayer, who must clearly establish the right to them (Wing Pawn Shop).

Verbatim citations

The service-for-resale deduction (Section 7-9-48):

Receipts from selling a service for resale may be deducted from gross receipts ... if the sale is made to a person who delivers a nontaxable transaction certificate to the seller....

The mandatory 60-day possession rule (Section 7-9-43):

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.

Why the late certificate could not help:

Mr. Khoury's failure to have the required NTTC in his possession within the 60-day period provided in Section 7-9-43 leaves the Department no choice but to disallow his deductions.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Antoine Khoury
• Decision PDF: D&O 98-51

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 ANTOINE KHOURY 98-51
ID. NO. 02-207285-00 3
ASSESSMENT NO. 2234661

DECISION AND ORDER

A formal hearing on the taxpayer's protest was held on September 21, 1998, before Margaret

B. Alcock, Hearing Officer. Antoine Khoury represented himself. The Taxation and Revenue

Department ("Department") was represented by Jana C. Werner. 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. Khoury provided

architectural consulting services to John K. Klee & Associates ("Klee") in Albuquerque, New Mexico.

2. Mr. Khoury and his wife, Shelley Brock, filed a joint 1994 federal income tax return

(Form 1040). Mr. Khoury and Ms. Brock have since divorced.

3. Mr. Khoury reported the $19,986.21 of income he received from his consulting services

to Klee on a Schedule C, Profit or (Loss) From Business, to his 1994 Form 1040.

4. Ms. Brock filed a separate Schedule C reporting $4,422.50 of income from her

architectural and design services.

5. Mr. Khoury and Ms. Brock were registered with the Department for payment of gross

receipts tax and filed quarterly gross receipts tax returns on their joint receipts under one tax

identification number.

6. During 1994, Mr. Khoury and Ms. Brock reported gross receipts of $4,298.00. They

did not report or pay gross receipts tax on the $19,986.21 of income Mr. Khoury earned from providing

consulting services to Klee or on an additional $123.79 of Ms. Brock's receipts.

7. On January 6, 1998, the Department mailed notice of a limited scope gross receipts

tax audit to Mr. Khoury and Ms. Brock based on the $20,110.00 discrepancy between the business

income reported on their 1994 federal income tax return and the gross receipts reported to the

Department.

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

to support deductions from gross receipts were in the taxpayers' possession within 60 days from the

date of the notice, the deductions would be disallowed. The 60-day period expired March 7, 1998.

9. Mr. Khoury believed he had a Type 5 NTTC from Klee showing that Klee was

purchasing Mr. Khoury's services for resale.

10. When Mr. Khoury received the Department's notice, he looked through his files but

could not locate an NTTC from Klee. Mr. Khoury then called and left a message asking John Klee

whether he could provide Mr. Khoury with a copy of the NTTC.

11. Mr. Klee was slow in getting back to Mr. Khoury and no NTTC had been found by

March 7, 1998, the expiration of the 60-day period for obtaining possession of NTTCs to support

deductions Mr. Khoury had taken during the 1994 audit period.

12. On March 7, 1998, Mr. Khoury wrote a letter to the Department asking for an

extension of the 60-day period and stating that he would have a copy of the required NTTC the

following week.

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13. On March 19, 1998, the Department issued Assessment No. 2234661 to Mr. Khoury

and Ms. Brock for $1,929.70, representing gross receipts tax, interest and penalty due for the period

January-December 1994.

14. John Klee was ultimately unable to find a copy of an NTTC executed to Mr. Khoury

in his company's files. In April 1998, Klee executed and delivered a new Type 5 NTTC to Mr.

Khoury.

15. On Monday, April 20, 1998, Mr. Khoury filed a letter protesting the assessment and

enclosing a copy of the new NTTC.

DISCUSSION

The issue in this case is whether the Type 5 NTTC Klee delivered to Mr. Khoury in April 1998

entitles Mr. Khoury to deduct his receipts from providing consulting services to Klee during calendar

year 1994.

Burden of Proof. Section 7-1-17(C) NMSA 1978 states that any assessment of taxes made

by the Department is presumed to be correct, and it is the taxpayer's burden to overcome this

presumption. Archuleta v. O'Cheskey, 84 N.M. 428, 431, 504 P.2d 638, 641 (Ct. App. 1972). Further,

Section 7-9-5 NMSA 1978 creates a statutory presumption "that all receipts of a person engaging in

business are subject to the gross receipts tax." 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). Accordingly, it is Mr. Khoury's burden to come forward with

evidence to show that he was entitled to the deductions taken and that the Department's assessment is

incorrect.

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Evidence Required to Support Deductions under Section 7-9-48. The Gross Receipts and

Compensating Tax Act provides several deductions from gross receipts for taxpayers who meet the

statutory requirements set by the legislature. Mr. Khoury claims the deduction provided in NMSA

1978, Section 7-9-48:

Receipts from selling a service for resale may be deducted from gross receipts
... if the sale is made to a person who delivers a nontaxable transaction
certificate to the seller.... (emphasis added).

The fact that a taxpayer can prove his services were sold for resale is not sufficient to support a

deduction under Section 7-9-48. The buyer of the services must deliver an NTTC to the seller before

the seller is entitled to claim a deduction from gross receipts.

Taxpayer Responsibility for Documenting Deductions. The requirements for obtaining

NTTCs to support deductions from gross receipts are set out in NMSA 1978, Section 7-9-43:

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.

NTTCs required to support deductions must be "in the possession" of the seller within 60 days from the

date of the Department's notice. The language of the statute is mandatory and does not give the

Department discretion to extend the 60-day deadline: if a seller is not in possession of required NTTCs

within the period allowed, "deductions claimed by the seller...that require delivery of these nontaxable

transaction certificates shall be disallowed." (emphasis added). See also, Proficient Food v. New

Mexico Taxation & Revenue Department, 107 N.M. 392, 397, 758 P.2d 806, 811 (Ct. App.), cert.

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denied, 107 N.M. 308, 756 P.2d 1203 (1988) (where a party claiming a right to a tax deduction fails to

follow the method prescribed by statute or regulation, he waives his right thereto).

Although Mr. Khoury believed he had obtained an NTTC from Klee, he was unable to locate

the NTTC in his files. John Klee was unable to locate an NTTC in the company's files. It was not until

April 1998, well after expiration of the 60-day period, that Klee executed and delivered a Type 5 NTTC

to Mr. Khoury, who forwarded it to the Department. Mr. Khoury's failure to have the required NTTC

in his possession within the 60-day period provided in Section 7-9-43 leaves the Department no choice

but to disallow his deductions.

CONCLUSIONS OF LAW

1. Mr. Khoury filed a timely written protest to Assessment No. 2234661, and jurisdiction

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

2. Mr. Khoury is liable for gross receipts tax on his receipts from providing consulting

services to Klee.

3. Mr. Khoury is not entitled to claim the deduction from gross receipts provided in

Section 7-9-52 because he did not have the required NTTC in his possession within the 60-day period

provided in Section 7-9-43.

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

Dated September 25, 1998.

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