A stucco subcontractor had a nontaxable transaction certificate but lost it and couldn't produce it during the audit. Can the state still deny the construction deduction — and does an early cashier's-check payment stop interest from running?

Subject

Actionside Lath & Plaster (D&O 98-54)

Plain-English summary

Actionside Lath and Plaster was a construction contractor doing stucco work, mostly as a subcontractor. In 1994 it did $16,790 of work for a general contractor, Omega Sunspaces, and deducted that amount from gross receipts as a construction service under Section 7-9-52. That deduction is available when a subcontractor's work is sold to another construction business that hands over a nontaxable transaction certificate (NTTC) — the mechanism New Mexico uses so the same construction dollar isn't taxed at every tier of a project.

Actionside's owner said Omega had in fact given him the NTTC, but when the Department audited (notice given January 21, 1997), neither Actionside nor Omega could locate the certificate — not at the audit and not within the 60 days the Department's letter allowed for producing NTTCs. The Department disallowed the deduction and assessed $21,659.27 in gross receipts tax, $1,448.80 penalty, and $1,676 interest for 1994–1996. Hearing Officer Gerald B. Richardson denied the protest on both issues it raised.

Issue 1 — the missing certificate. Under Section 7-9-43(A), a seller must be able to demonstrate possession of the required NTTC either at the start of the audit or within 60 days of the Department's written request; if it cannot, the deduction "shall be disallowed." That is true even if the seller genuinely held the certificate when the return was originally due. Actionside argued the result was unfair because Omega had already paid gross receipts tax on receipts that included Actionside's work — so the same activity was effectively taxed twice. The Hearing Officer agreed the outcome was "harsh" but explained that these are two separate businesses and two separate taxable transactions, Section 7-9-52 is the only mechanism to avoid the stacking, and without the certificate the Legislature has mandated disallowance — the hearing office "does not have the discretion to create exceptions."

Issue 2 — the early payment and interest. Before the audit, Actionside had tendered a $15,000 cashier's check toward taxes it knew it owed, but it submitted no returns showing which tax programs, periods, and amounts the money should be applied to. The Department refused the tender because it couldn't tell how to apply it. Actionside argued the tender should count as payment and stop interest from running under Section 7-1-67. Relying on Amoco Production v. New Mexico Taxation and Revenue Department, the Hearing Officer held that money deposited with the State is not a "payment" unless it's accompanied by the information (taxpayer identity, tax period, tax program) needed to apply it. So the tender did not toll interest. Protest DENIED.

What this means for you

• Keep your nontaxable transaction certificates — and be able to produce them fast. A construction-service deduction under Section 7-9-52 stands or falls on the NTTC. Even if the certificate once existed and the underlying work clearly qualifies, losing it can cost you the entire deduction.
• The 60-day audit rule is strict and unforgiving. Under Section 7-9-43(A), you must show possession of the certificate at the start of the audit or within 60 days of the Department's notice. Miss that window and the deduction "shall be disallowed" — the hearing office has no power to grant an exception, no matter how sympathetic the facts.
• "The tax already got paid by the other guy" is not a defense. A subcontractor and a general contractor are two separate taxpayers with two separate taxable transactions. The NTTC is the only way to prevent tax from stacking; without it, you owe tax on your receipts even though the contractor above you paid tax on the same dollars.
• Prepaying doesn't stop interest unless you file the returns to go with it. Dropping a check with the Department is not "payment" if the Department can't tell which taxes and periods it covers. To stop interest from accruing, pair any payment with returns identifying the tax program, period, and amount.
• Interest is not a penalty and is not discretionary. Section 7-1-67 runs interest on unpaid tax from the day it was due until it is actually paid. Good-faith attempts to pay early don't help unless they meet the statute's definition of payment.

Key questions answered

The work clearly qualified for the deduction — why deny it just for a missing form?
Because Section 7-9-43(A) makes possession of the certificate a hard requirement. If the seller can't demonstrate possession at the start of the audit or within 60 days of the Department's notice, the deduction "shall be disallowed" — regardless of whether the transaction itself qualifies. The Hearing Officer called this harsh but said the Legislature mandated it.

Isn't it double taxation if the general contractor already paid tax on the same work?
In effect, yes — and the decision acknowledges that. But a subcontractor and a general contractor are separate businesses generating separate gross receipts. Section 7-9-52 exists precisely to avoid stacking those taxes, and it works only if the subcontractor holds the NTTC. Without the certificate, both transactions are taxed.

Why didn't the $15,000 cashier's check stop interest from accruing?
Because it wasn't accompanied by returns telling the Department which taxes, periods, and amounts to apply it to. Under Amoco Production, money deposited with the State isn't a "payment" until the taxpayer supplies the information needed to apply it. So under Section 7-1-67, interest kept running.

Could the taxpayer have avoided this?
Yes — by retaining the NTTC (or getting a replacement) so it could be produced within the 60-day window, and by filing returns along with any early payment so the Department could apply it and stop interest.

Verbatim citations

The construction-service deduction (Section 7-9-52):

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.

The possession-and-60-day requirement (Section 7-9-43(A)):

If the seller or lessor does not demonstrate possession of 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.

The Hearing Officer on the harsh but mandatory result:

While this result is, indeed, harsh, the Legislature has mandated this result and this forum does not have the discretion to create exceptions to the mandate of the statute.

What counts as "payment" for interest purposes (quoting Amoco Production):

The entire statutory scheme indicates that a tax is not paid simply when monies are deposited with the State. Rather, the applicable statutes and Department instructions enacted pursuant to them indicate that, in most instances when taxes are paid, a taxpayer is required to provide the following information to the State: the taxpayer's identity, the tax period to which the monies are to be applied and the tax program to which the monies are to be applied.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Actionside Lath & Plaster
• Decision PDF: D&O 98-54

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
ACTIONSIDE LATH AND PLASTER, NO. 98-54
ID NO. 02-229516-00 0, PROTEST TO
ASSESSMENT NO. 2129624

DECISION AND ORDER

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

September 29,. 1998. Actionside Lath and Plaster, hereinafter, “Taxpayer”, was represented by

Mr. Tim Trujillo, the owner. The Taxation and Revenue Department, hereinafter, “Department”,

was represented by Monica M. Ontiveros, Esq. Based upon the evidence and the arguments

presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer engages in business as a construction contractor who performs

stuccoing services, acting primarily as a subcontractor on most of its jobs.

2. In the fall of 1996, the Department informed the Taxpayer that it would be audited

by the Department.

3. The Department’s audit of the Taxpayer commenced on January 21, 1997.

4. The Taxpayer had not filed returns under the Department’s Combined Reporting

System (CRS) for reporting of gross receipts tax, withholding tax and compensating tax for

reporting periods from July of 1995 through December of 1996.

5. On December 3, 1996, the Taxpayer tendered a cashier’s check in the amount of

$15,000 to the Department in payment of taxes it might owe under the Combined Reporting
System. Although the Taxpayer attempted to tender the cashier’s check, the Taxpayer did not

prepare or present to the Department any tax returns along with the check to inform the

Department as to which tax programs and reporting periods, and the amounts of such taxes which

were being paid by the tender of the cashier’s check.

6. Because the Department could not determine how to apply the payment tendered,

it did not accept the cashier’s check in payment of any taxes which the Taxpayer might owe at

the time of tender.

7. As a result of the Department’s audit, on April 23, 1997, the Department issued

Assessment No. 2129624 to the Taxpayer, assessing $21,659.27 in gross receipts taxes, $1448.80

in penalty and $1,676 in interest for the period of January, 1994 through December, 1996.

8. On April 28, 1997, the Taxpayer filed a timely, written protest to Assessment No.

2129624.

9. During 1994, the Taxpayer performed work for Omega Sunspaces and received

compensation for this work in the amount of $16,790 for which it claimed a deduction from

gross receipts tax pursuant to Section 7-9-52. Although the Taxpayer received a non-taxable

transaction certificate from Omega Sunspaces in support of its claim of deduction, neither the

Taxpayer or Omega Sunspaces could locate a copy of the certificate, either at the time of the

audit or at any time thereafter.

10. The Taxpayer was given a letter by the Department’s auditor on January 21, 1997,

at the commencement of the Department’s audit requesting that all nontaxable transaction

certificates relied upon by the Taxpayer in claiming deductions from tax be presented to the

Department within sixty days of the service of the letter.

11. Omega Sunspaces included the cost of the work performed by the Taxpayer in its

charges to its customers pursuant to its contracts with its customers and paid gross receipts tax to

the Department upon its receipts from those contracts.

12. Because the Taxpayer was not able to produce a nontaxable transaction certificate

to support its claim of deduction for its receipts from Omega Sunspaces within sixty days of

January 21, 1997, the Department’s audit denied the deduction and gross receipts taxes were

assessed to the Taxpayer upon its receipts from Omega Sunspaces.

DISCUSSION

The Taxpayer’s protest raises two issues, whether the Department properly assessed gross

receipts tax on the Taxpayer’s receipts from Omega Sunspaces, and whether the assessment of

interest should be reduced to account for the Taxpayer’s attempt to pay taxes by its tender of a

cashier’s check in December, 1996, prior to the commencement of the audit and the issuance of

the assessment.

The Department’s denial of the deduction claimed for the Taxpayer’s receipts from

Omega Sunspaces will be discussed first. The Taxpayer had claimed the deduction based upon

the provisions of § 7-9-52 NMSA 1978 (1993 Repl. Pamp.) which provides as follows:

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.
B. The buyer delivering the nontaxable transaction certificate must
have the construction services performed upon:
(1) a construction project which is subject to the gross
receipts tax upon its completion or upon the completion of the
overall construction project of which it is a part; or
(2) a construction project which is subject to the gross
receipts tax upon the sale in the ordinary course of business of the
real property upon which it was constructed.
In this case, there is no dispute that the nature of the Taxpayer’s work for Omega Sunspaces as a

subcontractor would qualify for the deduction provided at § 7-9-52, provided that the Taxpayer

was given a non-taxable transaction certificate by Omega Sunspaces. Mr. Trujillo stated that he

had a non-taxable transaction certificate from Omega Sunspaces but he was not able to locate it

at the time of the audit or within the sixty day deadline for presenting nontaxable transaction

certificates after notice that he must do so. Thus, the issue is whether the Department properly

denied the deduction upon audit for failure to possess the certificate.

The determination of this issue is governed by the provisions of § 7-9-43(A) NMSA 1978

(1993 Repl. Pamp.), which provides in pertinent part:

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 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.

This provision makes clear that even if a seller had the nontaxable transaction certificate in his

possession at the time the return was due for receipts from the transaction with the purchaser and

the deduction was claimed, if the seller cannot produce the certificate upon audit or within the

sixty day period allowed after notice is given requiring the possession of the certificates, the

deduction “shall be disallowed.”
The Taxpayer objects to the application of this provision, since Omega Sunspaces also

remitted tax to the Department on its receipts from its customers which included the cost of the

Taxpayer’s services to Omega Sunspaces. While it is true that, in effect, tax is imposed twice

upon the same activity, we have two separate businesses and two separate transactions generating

gross receipts. While § 7-9-52 provides a mechanism to avoid the stacking of taxes on the two

transactions, because the Taxpayer could not produce the nontaxable transaction certificate, the

deduction must be disallowed upon audit. While this result is, indeed, harsh, the Legislature has

mandated this result and this forum does not have the discretion to create exceptions to the

mandate of the statute.

The next issue is whether the Department correctly computed the interest on the

Taxpayer’s assessed liability. Prior to the commencement of the audit, the Taxpayer attempted to

tender a cashier’s check in the amount of $15,000 in payment of taxes owed. The Taxpayer had

failed to report or pay gross receipts taxes to the Department from June of 1995 until the

commencement of the audit in January of 1996. Presumably, because the Taxpayer knew taxes

would be due, it attempted to make a payment towards those taxes. The problem, however, was

that the Taxpayer did not submit returns indicating the Taxpayer’s gross receipts, deductions,

amount of taxes due and the tax periods for which taxes were being paid at the time payment was

tendered. Because the Department did not have this information to determine how the tax

payment should be applied, the Department would not accept the tender of payment. The

Taxpayer argues that the amount of interest should be reduced because its tender of the cashier’s

check should be considered a payment, which would stop the accrual of interest on those taxes

paid.
Section 7-1-67 NMSA 1978 (1995 Repl. Pamp.) provides for the imposition of interest

on tax deficiencies, and states in pertinent part:

A. If any tax imposed is not paid on or before the day on which it
becomes due, interest shall be paid to the state on such amount
from the first day following the day on which the tax becomes due,
without regard to any extension of time or installment agreement,
until it is paid....

The statute imposes interest on unpaid taxes until they are “paid”. Thus, the question is whether

the Taxpayer’s tender of a check in payment of taxes, without filing returns to inform the

Department which taxes and for which periods the payment was to be applied constitutes a

payment. This question was answered by the decision in Amoco Production v. New Mexico

Taxation and Revenue Department, 118 N.M. 72, 878 P.2d 1021 (Ct. App. 1994). In that case,

the taxpayer sought offsets, for purposes of calculating interest on tax underpayments, for other

periods in which there were tax overpayments, but the Taxpayer had not filed amended returns

indicating the tax overpayments and underpayments during the periods of time for which the

taxpayer sought the offsets. The taxpayer argued that its overpayments should be considered

payments of the taxes which were underpaid, even though the taxpayer had provided no

information or amended returns to the Department to inform it of the underpayments of

overpayments. The court rejected the Taxpayers argument, stating:

The entire statutory scheme indicates that a tax is not paid simply
when monies are deposited with the State. Rather, the applicable
statutes and Department instructions enacted pursuant to them
indicate that, in most instances when taxes are paid, a taxpayer is
required to provide the following information to the State: the
taxpayer’s identity, the tax period to which the monies are to be
applied and the tax program to which the monies are to be applied.
(statutory citations omitted).
Thus, the mere tender of a payment without the information necessary to properly apply the tax

payment did not amount to a payment of taxes in this instance so as to toll the imposition of

interest.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment No. 2129624 pursuant

to Section 7-1-24 NMSA 1978 and jurisdiction lies over both the parties and the subject matter

of this protest.

2. The Department properly denied the Taxpayer’s deduction of gross receipts paid

by Omega Sunspaces based upon the Taxpayer’s failure to provide a nontaxable transaction

certificate to the Department within sixty days of the Department’s notice to the Taxpayer

pursuant to Section 7-9-43(A) NMSA 1978 (1993 Repl. Pamp.)

3. The Taxpayer’s tender of a check which was not accompanied by returns showing

the tax programs tax amounts and tax periods to which the payment should be applied did not

constitute a payment of taxes for purposes of tolling the imposition of interest pursuant to

Section 7-1-67 NMSA 1978 (1995 Repl. Pamp.)

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

DONE, this 15th day of October, 1998.