A surveyor got the required nontaxable transaction certificates from his customers during the audit, but the version of the law in force then required him to have held them when he claimed the deduction years earlier. Does obtaining them late save the deduction?

Subject

Professional Land Surveying (D&O 98-55)

Plain-English summary

Professional Land Surveying, a small business run by registered surveyor Robert Benavidez, did surveying for highway and road construction projects across New Mexico. After an audit, the Department assessed $110,572.67 in gross receipts tax, $11,057.29 penalty, and $56,679.88 interest for 1989–1995. Most of that was resolved before the hearing (the tax principal was whittled down to roughly $59,500). The one remaining dispute was whether the surveyor could deduct, as a construction service under Section 7-9-52, its receipts from its two biggest customers — highway contractors Corn Construction Company and Leedshill Herkenhoff, Inc. — for transactions after July 1, 1992.

That deduction requires the surveyor to hold a nontaxable transaction certificate (NTTC) from the contractor. The catch was timing, and it turned entirely on which version of Section 7-9-43(A) applied. New Mexico rewrote the NTTC-possession rules repeatedly:

• Before July 1, 1992: a taxpayer only had to produce the certificate within 60 days of the Department's notice. (Under this older rule, the surveyor's late-obtained Leedshill certificate was accepted for pre-July-1992 receipts.)
• July 1, 1992 through 1996: the law was tightened. A taxpayer had to actually possess the '1992 series' certificate at the time the return claiming the deduction was due. Producing it later — even within 60 days of an audit notice — was no longer enough.
• 1997 onward: the Legislature scrapped the strict rule and went back to the old "produce within 60 days" standard.

The surveyor didn't obtain 1992-series certificates from Corn (issued June 6, 1995) and Leedshill (issued July 3, 1995) until during the audit — years after the post-July-1992 returns were due. So under the rule then in force, the certificates came too late and the post-July-1992 deductions were disallowed.

Hearing Officer Gerald B. Richardson was openly sympathetic: he agreed the rules were confusing and burdensome, that they "elevate form over substance," and pointedly observed that had the 1997 amendment been in effect, the surveyor would have kept the deductions (because he did get the certificates within 60 days of notice). But he held the hearing office cannot substitute its judgment for the Legislature's when the statute is clear, and that under Tiffany Construction Company v. Bureau of Revenue every taxpayer has a duty to understand the tax consequences of his actions and to keep up with statutory changes. Because the surveyor couldn't show he possessed the 1992-series certificates when the deductions were originally claimed, those deductions were denied. Protest DENIED.

What this means for you

• The NTTC rules have changed over time — the version in force for your tax periods controls. The same set of facts could win or lose depending on which year's statute applies. Don't assume today's more forgiving rule governs an older audit period.
• For transactions from mid-1992 through 1996, timing was unforgiving. You had to actually hold the correct-series certificate when you claimed the deduction. A certificate obtained later — even one produced promptly during an audit — did not save the deduction for those years.
• Get your NTTCs up front, not when the auditor shows up. The safest practice in any era is to have the certificate in hand before you claim the deduction and to keep it with your records. Collecting certificates after the fact leaves you exposed to whatever the stricter rule of that period required.
• "The law was confusing" is not a defense. New Mexico charges every taxpayer with the duty to understand the tax consequences of their business and to keep abreast of statutory changes — even changes that seem to elevate paperwork over substance.
• A later, more taxpayer-friendly amendment won't retroactively rescue you. The hearing office applies the statute that was in effect for the periods at issue; it cannot apply a kinder rule the Legislature adopted afterward.

Key questions answered

The surveyor did get the certificates — why were the deductions still denied?
Because of when he got them. For transactions after July 1, 1992, the law in force required him to possess the 1992-series certificate at the time the return claiming the deduction was due. He obtained the certificates only in mid-1995, during the audit, so for those periods the certificates were too late.

Why were some deductions allowed and others denied?
The timing rule differed by period. Pre-July-1992 transactions were governed by the older, more lenient rule (produce within 60 days of notice), so the surveyor's late Leedshill certificate was accepted for those. Post-July-1992 transactions fell under the stricter possession-when-claimed rule, so those deductions were disallowed.

Wouldn't the surveyor have won under the current law?
Yes — the decision says so explicitly. Under the 1997 amendment (which restored the "produce within 60 days" standard), obtaining the certificates within 60 days of the Department's notice would have preserved the deductions. But that amendment didn't apply to the audit periods at issue.

Didn't the confusing, frequently-changing rules excuse the mistake?
No. The Hearing Officer shared the taxpayer's frustration but held that the hearing office cannot override clear statutes, and that under Tiffany Construction taxpayers must keep abreast of statutory changes affecting how deductions are claimed.

Verbatim citations

The stricter 1992-series possession rule (Section 7-9-43(A), 1992 Supp.):

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.

The Hearing Officer's acknowledgment that the result was harsh but mandated:

Even though the statutory requirements fluctuated over time, and even though the statutory requirements elevate form over substance, it is well established that every taxpayer is charged with the reasonable duty to understand the tax consequences of his actions.... That duty includes keeping abreast of statutory changes affecting the manner in which taxes must be reported and deductions claimed.

The holding (Conclusion of Law 2):

The Department properly denied the Taxpayer's claim for deduction for its receipts from Corn Construction Company and Leedshill Herkenhoff, Inc. pursuant to Section 7-9-52 NMSA 1978 subsequent to July 1, 1992 because the Taxpayer failed to demonstrate that it possessed 1992 series nontaxable transaction certificates from those customers at the time it filed reports with the Department claiming deductions for its receipts from those customers as required by § 7-9-43(A) NMSA 1978 (1992 Supp.), (1993 Repl. Pamp.) and (1994 Supp.).

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Professional Land Surveying
• Decision PDF: D&O 98-55

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
PROFESSIONAL LAND SURVEYING NO. 98-55
ID. NO. 01-867989-00 7, PROTEST TO
ASSESSMENT NO. 1958341

DECISION AND ORDER

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

September 22, 1998. Professional Land Surveying, hereinafter, “Taxpayer”, was represented by

Ralph Scheuer, Esq. The Taxation and Revenue Department, hereinafter, “Department”, was

represented by Frank D. Katz, Chief Counsel. Based upon the evidence and arguments

presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer is a small business owned and operated by Mr. Robert Benavidez, a

registered surveyor.

2. The Taxpayer primarily does surveying for highway and road construction

projects throughout New Mexico.

3. The Taxpayer has between one and three surveying crews performing surveying

services around the state at any given time and Mr. Benavidez spends the vast majority of his

time out of the office overseeing the work of his various crews.

4. The Taxpayer’s office staff consists of one part-time bookkeeper, who handles

payroll, paying bills, etc.

5. The Taxpayer was audited by the Department. As a result of the audit, on

September 7, 1995 the Department issued Assessment No. 1958341 to the Taxpayer, assessing

$110,572.67 in gross receipts tax, $11,057.29 in penalty and $56,679.88 in interest for reporting

periods from January, 1989 through March of 1995. .

6. On October 6, 1995, the Taxpayer filed a timely, written protest of Assessment

No. 1958341.

7. As a result of discussions between the Taxpayer and the Department, the

Department agreed to adjust substantial portions of the assessment and the Taxpayer conceded

that it owed taxes on some transactions. The parties estimated that the tax principal portion of

the assessment had been reduced to approximately $59,500 at the time of the hearing.

8. The only matter remaining in dispute at the time of the hearing was the

Department’s denial of deductions claimed by the Taxpayer for its receipts from transactions

with Corn Construction Company and Leedshill Herkenhoff, Inc. subsequent to July 1, 1992.

9. Corn Construction Company and Leedshill Herkenhoff, Inc. were the Taxpayer’s

two largest customers. They are highway and road construction contractors. The Taxpayer had a

nontaxable transaction certificate from Corn Construction Company to support the

deductibility of its receipts pursuant to Section 7-9-52 NMSA 1978 for periods prior to July 1,

1992.

10. Effective July 1, 1992, the Legislature amended Section 7-9-43 concerning

nontaxable transaction certificates. Among the changes were that the old nontaxable transaction

certificates would no longer be valid for transactions occurring after December 31, 1991. A new

“1992 series” nontaxable transaction certificate would be required to support a deduction from

gross receipts tax. Additionally, sellers relying upon nontaxable transaction certificates to

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support a claim of deduction from tax were mandated to have the new type of nontaxable

transaction certificate in their possession at the time their tax return claiming the deduction was

due in order to claim a deduction for transactions after July 1, 1992. Finally, upon audit,

taxpayers were required to demonstrate possession of nontaxable transaction certificates at the

commencement of an audit, or they could be given sixty days to demonstrate that they had a

certificate at the time their tax return was due claiming a deduction, but if either of those

conditions was not met, the taxpayer’s claimed deduction would be denied by the Department.

11. It was not clear what date the audit of the Taxpayer commenced in this case. In

any event, on May 22, 1995, the Department gave notice to the Taxpayer that it must demonstrate

possession of all nontaxable transaction certificates supporting its claimed deductions within

sixty days, and with respect to transactions occurring on or after July 1, 1992, the Taxpayer must

demonstrate that it had the nontaxable transaction certificates in its possession at the time each

transaction generating gross receipts was required to be reported.

12. After receiving the Department’s sixty day letter on May 22, 1995, the Taxpayer

obtained nontaxable transaction certificates of the “1992 Series” from both Corn Construction

Company and Leedshill Herkenhoff, Inc. and presented them to the Department. The certificate

from Corn Construction Company indicates it was issued to the Taxpayer on June 6, 1995. The

certificate from Leedshill Herkenhoff, Inc. was issued on July 3, 1995. Because neither

certificate was in the Taxpayer’s possession at the time it claimed deductions for its receipts from

either customer for periods after July 1, 1992, the Department denied the Taxpayer’s claims for

deduction for its receipts from Corn Construction Company and Leedshill Herkenhoff, Inc. for

periods after July 1, 1992. Because the law applicable to transactions prior to July 1, 1992

merely required that a taxpayer demonstrate possession of a nontaxable transaction certificate

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within sixty days of notice requiring possession of a certificate, the Department accepted the

Leedshill Herkenhoff certificate to support the Taxpayer’s claimed deductions from that

customer for periods prior to July 1, 1992.

DISCUSSION

The sole issue to be determined is whether the Department properly denied the deductions

claimed by the Taxpayer for its receipts from Corn Construction Company and Leedshill

Herkenhoff, Inc. for transactions occurring after July 1, 1992. The Department based its denial

of the deductions upon the Taxpayer’s failure to demonstrate that it had a 1992 series nontaxable

transaction certificate from those customers in its possession either at the commencement of the

Department’s audit, or at the time it claimed the deductions on its reports to the Department.

The Taxpayer argues that because the statutory requirements concerning the possession of

nontaxable transaction certificates changed so often and these changes were so confusing, that it

was essentially impossible for small taxpayers to keep up and comply with the changes in the law

without the assistance of “a phalanx of accountants and lawyers.” Section 7-9-43(A) is the

provision governing the necessity of nontaxable transaction certificates to support claims of

deduction and the consequences of failure to demonstrate possession of such certificates.

Excerpted below are the pertinent provisions of the version in effect at the commencement of the

audit period:

All nontaxable transaction certificates executed by buyers or
lessees should be in the possession of the seller or lessor for
nontaxable transactions at the time the nontaxable transactions
occur. If the seller or lessor is not in possession of these
nontaxable transaction certificates within sixty days from the date
notice requiring the possession of these nontaxable transaction
certificates is given the seller or lessor by the director or his
delegate, deductions claimed by the seller or lessor which require

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delivery of these nontaxable transaction certificates shall be
disallowed.

Section 7-9-43(A) NMSA 1978 (1988 Repl. Pamp.) As written, taxpayers claiming

deductions from tax which require a nontaxable transaction certificate “should” have the

certificate in their possession at the time the transaction generating taxable gross receipts

occurred, but, as long as a taxpayer could obtain a certificate within sixty days of notice from the

director of the Department, or his delegate, to acquire possession of such a certificate, the

deduction would be allowed, assuming the transaction otherwise qualified for whatever statutory

deduction was claimed. Only if a taxpayer failed to obtain the necessary certificates within sixty

days of notice that they needed to demonstrate possession of such certificates did the statute

mandate that the deduction “shall be disallowed.”

In 1991, the legislature amended § 7-9-43 to add a new subsection D. It provided that

after January 1, 1992, any nontaxable transaction certificates issued prior to that date would be

void. It also provided for the Department to issue new nontaxable transaction certificates,

hereinafter referred to as “1992 series” certificates, to buyers or lessees who apply to the

Department for the new certificates and pay a $100 fee. These certificates were to be good for

four years from the date of the application for these certificates and could be renewed for an

additional four years if the issuer applies for renewal. See, Laws 1991, ch. 9, § 29.

In 1992, the Legislature again amended § 7-9-43, substantially changing the requirements

as to when nontaxable transaction certificates must be in the possession of taxpayers who claim

deductions from tax which require such certificates. In pertinent part, subsection A was amended

to read:

The provisions of this subsection apply to transactions occurring
on or after July 1, 1992. All nontaxable transaction certificates of

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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.

Section 7-9-43(A) NMSA 1978 (1992 Supp.) This amendment changed the language of the

former provision which had stated that taxpayers “should” have the certificates in their

possession at the time the nontaxable transaction occurs to a mandate that taxpayers “shall” have

the certificates in their possession at the time the tax return reporting the tax on the nontaxable

transaction occurs. It also changed the standards a taxpayer must meet for proving possession of

the certificates upon audit. Instead of merely being required to demonstrate possession of the

certificate within sixty days of notice from the Department, taxpayers must demonstrate

possession of the certificates at the commencement of an audit, or, within 60 days of notice from

the Department, they must demonstrate that they had possession of the certificate at the time the

tax return claiming the deduction was due. Thus, even if a taxpayer obtains a certificate from a

customer, the certificate must indicate it was issued to a taxpayer at the time it filed a return

claiming a deduction from tax.

In addition to these changes, Subsection D was amended to change the period of time that

the new 1992 series certificates would be effective from four years, renewable for an additional

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four years to a flat ten year period. The language about the $100 fee for the new certificates was

moved to a new subsection E. See, Laws 1992, ch. 39, § 3.

In 1993, only minor changes, not pertinent to the issue in this case were made to § 7-9-43.

See, Laws 1993, ch. 31, § 9. In 1994, the Legislature repealed the $100 fee for certificates. See,

Laws 1994, ch. 94, § 1.

Ultimately, and after the audit period at issue, the Legislature scrapped its revisions to

Section 7-9-43 which had made possession of the new type of certificates a requirement at the

time the tax return claiming a deduction was due. Instead, the requirements for possession of

nontaxable transaction certificates were made essentially the same as they were prior to the 1992

revisions of § 7-9-43. Taxpayers “should” have the certificates in their possession at the time

they claim the deduction, but they are given sixty days to produce them after notice from the

Department, and taxpayers need not demonstrate possession of the certificates at the time the

deduction was claimed, so long as they produce them within the sixty days. See, Laws 1997, ch.

72, § 1.

The changes outlined above demonstrate that the legal requirements for substantiating

deductions which require the possession of nontaxable transaction certificates changed

substantially during the past ten years. It also demonstrates that had the 1997 changes been in

effect at the time the Taxpayer was audited, that it would have been entitled to claim the

deductions for its transactions with both Corn Construction Company and Leedshill Herkenhoff,

Inc., since it obtained nontaxable transaction certificates from them within sixty days of receiving

notice from the Department to produce the certificates. The Taxpayer argues that the statutory

requirements in effect at the time they were audited amount to taxation by “I gotcha”, rather than

any reasonable policy which looks at the facts of the transactions themselves to determine

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whether they would qualify for deduction except for the absence of the nontaxable transaction

certificate at the required point of time.

I share the Taxpayer’s concerns about the confusion and burdens placed upon Taxpayers

by the statutory changes which occurred with respect to the requirements for claiming deductions

which require nontaxable transaction certificates. Nonetheless, this forum is not empowered to

establish tax policy contrary to that established by the Legislature. It is that body which writes

the statutes. This forum is not entitled to substitute its judgment for that of the Legislature where

the language of the statutes is clear and free from ambiguity. Unfortunately for the Taxpayer,

that is the situation here. Even though the statutory requirements fluctuated over time, and even

though the statutory requirements elevate form over substance, it is well established that every

taxpayer is charged with the reasonable duty to understand the tax consequences of his actions.

Tiffany Construction Company v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App.

1976), cert. denied, 90 N.M. 255, 561 P.2d 1348 (1977). That duty includes keeping abreast of

statutory changes affecting the manner in which taxes must be reported and deductions claimed.

Because the Taxpayer was not able to demonstrate compliance with the statutory requirements

applicable during portions of the audit period with respect to its claim of deduction for its

receipts from Corn Construction Company and Leedshill Herkenhoff, Inc., those deductions must

be denied.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment No. 1958341 pursuant

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

protest.

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2. The Department properly denied the Taxpayer’s claim for deduction for its

receipts from Corn Construction Company and Leedshill Herkenhoff, Inc. pursuant to Section 7-

9-52 NMSA 1978 subsequent to July 1, 1992 because the Taxpayer failed to demonstrate that it

possessed 1992 series nontaxable transaction certificates from those customers at the time it filed

reports with the Department claiming deductions for its receipts from those customers as

required by § 7-9-43(A) NMSA 1978 (1992 Supp.), (1993 Repl. Pamp.) and (1994 Supp.).

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

DONE, this 22nd day of October, 1998.

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