Does a roofing consultant who drills into a roof, removes a cross-section to inspect it, and then repairs the hole perform a deductible 'construction service'?

Subject

Donald L. Oschwald (D&O 99-03)

Plain-English summary

Donald Oschwald, a licensed architect and building inspector, semi-retired and worked part-time as a roofing consultant for licensed contractors. His method: travel to a proposed roofing job, climb onto the roof, use a special tool he invented to drill in and remove a cross-section of the roof, evaluate how many layers were already there and their condition (building codes bar a third layer of roofing on homes), then replace the cross-section and patch and seal the hole. The contractor then used his findings to decide the scope of the reroofing work.

Around 1990–91 he called the Department to ask whether these receipts were subject to gross receipts tax. The employee who took the call — who happened to know his work — checked with two more senior employees, and all agreed he was performing construction services and could deduct receipts from contractors who gave him a Type 7 nontaxable transaction certificate (NTTC). He followed that advice and collected Type 7 NTTCs. (He did make a bookkeeping error: he simply left the covered receipts off his returns instead of reporting everything and then deducting.)

In 1995 the Department noticed his federal business income exceeded his reported New Mexico receipts, reversed course, and disallowed the deductions — saying his work was not construction — issuing Assessment No. 1963930 for $1,504.90 tax, $150.50 penalty, and $921.75 interest. (It abated the penalty once he showed he had relied on Department advice.)

Hearing Officer Margaret B. Alcock granted the protest and ordered the assessment abated in full. The only real question was whether his work was a construction service. Section 7-9-3(C) defines "construction" to include altering and repairing a structure. The Construction Industries Division's General Construction Bureau Chief testified that Oschwald's hands-on cutting and repair of a roof is "contracting" under the nearly identical Section 60-13-3(A)(2) of the Construction Industries Licensing Act — work that can only be done by a licensed contractor (or someone working with one). The Department offered no contrary evidence. So its original advice had been right: he was selling construction services and, holding valid Type 7 NTTCs, could deduct the receipts under Section 7-9-52. Because he won on the merits, the Hearing Officer did not need to decide his backup argument that the Department was equitably estopped from reversing its advice.

What this means for you

• "Construction" turns on physically altering or repairing a structure — not on building something new. Cutting into and repairing a roof qualified. If your work involves hands-on alteration or repair of a building, it may be a construction service even if it looks like inspection or consulting.
• A related licensing standard can help prove the tax question. The Hearing Officer leaned on the Construction Industries Licensing Act's near-identical definition of "contracting," and on testimony that only a licensed contractor could legally do the work, to conclude the activity was "construction" for tax purposes.
• Type 7 NTTCs let a construction-service seller deduct receipts — but only for genuine construction services. The deduction under Section 7-9-52 requires both that you are selling a construction service and that the buyer (a person in the construction business) gives you the certificate.
• Report all receipts, then deduct — don't just omit them. Oschwald's habit of leaving covered receipts off his returns (instead of reporting the gross and taking the deduction) is exactly what triggered the federal-to-state income mismatch that drew the Department's inquiry.
• Relying on the Department's advice can at least save you the penalty. The Department abated the negligence penalty once he showed his position came from its own employees' guidance — a reminder to document who you spoke with and what you were told.

Key questions answered

What made his work "construction" rather than a non-deductible service?
Section 7-9-3(C) defines construction to include altering and repairing a structure. He physically drilled into, cut out, and then patched and sealed a section of roof — hands-on alteration and repair — which the Construction Industries Division confirmed is "contracting" under the parallel Section 60-13-3(A)(2). That satisfied the "construction service" requirement of the Section 7-9-52 deduction.

Why did the Department lose after winning the audit?
Its auditors had disallowed the deduction on the theory his work was not construction, but at the hearing it presented no evidence to contradict the Construction Industries Division's testimony that the work was contracting. The Hearing Officer found the Department's original advice — that he qualified — was the correct reading.

Did the Hearing Officer decide the estoppel argument?
No. Because he won on the merits of the Section 7-9-52 deduction, it was unnecessary to reach whether the Department was equitably estopped from reversing the advice its employees had given him.

What happened to the penalty?
The Department had already abated the $150.50 penalty before the hearing, once Oschwald showed his deductions were based on advice he received from Department employees.

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 definition of construction (Section 7-9-3(C)):

building, altering, repairing or demolishing in the ordinary course of business any: ... (2) building, stadium or other structure;...

The holding:

The work Mr. Oschwald performs when he drills into a roof, removes a cross section of the roof, and then repairs the damage resulting from that procedure qualifies as construction under Section 7-9-3(C).

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Donald L. Oschwald
• Decision PDF: D&O 99-03

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
DONALD L. OSCHWALD No. 99-03
ID NO. 01-747241-00 5
ASSESSMENT NO. 1963930

DECISION AND ORDER

A formal hearing on the taxpayer's protest was held January 20, 1999 before Margaret B.

Alcock, Hearing Officer. Donald L. Oschwald ("Taxpayer") represented himself. The Taxation and

Revenue Department ("Department") was represented by Monica M. Ontiveros, Special Assistant

Attorney General. Based upon the evidence and the arguments presented, IT IS DECIDED AND

ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. Mr. Oschwald is a licensed architect and building inspector.

2. In 1989, Mr. Oschwald's wife became ill, leading him to close his office and retire from

work as a full-time architect.

3. After closing his office, Mr. Oschwald continued to work part-time as a roofing

consultant to licensed contractors.

4. In the ordinary course of his work, Mr. Oschwald travels to the site of a proposed

roofing project, climbs onto the roof and then, using a special tool he invented, drills into the roof

and removes a cross section for analysis.

5. It is necessary for Mr. Oschwald to physically remove a section of the roof because

building codes prohibit placing a third layer of roofing material on residential structures. If a roof

already has two layers of roofing material, these must be removed before a new roof can be put
down. Only by removing a cross section of the roof can Mr. Oschwald determine the condition and

number of layers already on the roof.

6. After completing his analysis, Mr. Oschwald replaces the cross section of the roof

and repairs and seals the area where the hole was made. Based on Mr. Oschwald's findings, the

contractor determines the extent of the work that must be done to repair or replace the roof.

7. In late 1990 or early 1991, Mr. Oschwald called the Department to ask whether his

receipts from performing these services were subject to gross receipts tax.

8. Mr. Oschwald's call was taken by Cindy Loretto, who worked in the Santa Fe District

Office helping taxpayers who called or came into the office for advice.

9. Ms. Loretto recognized Mr. Oschwald because she formerly worked as a secretary

and office manager for one of the roofing companies for which Mr. Oschwald performed services.

10. Ms. Loretto was familiar with the type of work Mr. Oschwald did for contractors and

believed he would be able to deduct his receipts from this work if the contractor provided him with a

Type 7 nontaxable transaction certificate (NTTC).

11. Because she had not been working with the Department very long, Ms. Loretto

consulted with two more senior Department employees who concurred that Mr. Oschwald was

performing construction services and could deduct his receipts from contractors who provided him

with Type 7 NTTCs.

12. Mr. Oschwald followed Ms. Loretto's advice and obtained a Type 7 NTTC from each

contractor for whom Mr. Oschwald performed services.

13. Mr. Oschwald made an error in completing his gross receipts tax returns and simply

excluded receipts for which he had Type 7 NTTCs, rather than reporting all of his receipts and then

taking a deduction for receipts covered by the NTTCs.

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14. In 1995, the Department discovered the discrepancy between the business income

reported on Mr. Oschwald's 1991 federal income tax return and the receipts reported on his New

Mexico gross receipts tax returns for the same period.

15. Upon receiving the Department's notice of inquiry, Mr. Oschwald explained that the

discrepancy was attributable to the receipts he earned from contractors who provided him with Type

7 NTTCs.

16. The Department informed Mr. Oschwald that it was disallowing his deductions

because his services did not qualify as construction services and he was not entitled to accept Type 7

NTTCs from the contractors for whom he performed services.

17. On September 23, 1995, the Department issued Assessment No. 1963930 in the total

amount of $2,577.15, representing gross receipts tax of $1,504.90, penalty of $150.50 and interest of

$921.75.

18. On September 28, 1995, Mr. Oschwald filed a protest to the assessment.

19. After Mr. Oschwald established that his deductions were based on advice received

from Department employees, the Department abated the penalty of $150.50.

DISCUSSION

Mr. Oschwald raises two arguments in support of his protest: (1) he is not liable for the gross

receipts tax assessed by the Department because he is entitled to claim the deduction for receipts

from the sale of construction services provided in Section 7-9-52 NMSA 1978; (2) the doctrine of

equitable estoppel bars the Department from assessing gross receipts tax on receipts Mr. Oschwald

deducted on the advice of Department employees.

Mr. Oschwald argues that he is entitled to deduct his receipts from his roofing services under

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

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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. In this

case, there is no dispute that Mr. Oschwald had timely possession of the Type 7 NTTCs required under

Section 7-9-52. The only matter at issue is whether the services performed by Mr. Oschwald qualify as

construction services. Subsection (C) of Section 7-9-3 NMSA 1978 defines "construction" to include:

building, altering, repairing or demolishing in the ordinary course of
business any:
...

(2) building, stadium or other structure;...

Subsection (K) defines "service" to include "construction activities and all tangible personal property

that will become an ingredient or component part of a construction project."

In the ordinary course of his work as a roofing consultant, Mr. Oschwald uses a special tool he

invented to drill into a customer's roof and remove a cross section of the roof itself. After evaluating

the number of layers and condition of the roof, Mr. Oschwald replaces the cross section and repairs the

area where the hole has been drilled. The repair work includes patching the hole with membrane and

sealing it with plastic roof sealer.

Fermin Aragon, General Construction Bureau Chief for the Construction Industries Division

("CID") testified at the hearing. Mr. Aragon gave his opinion that Mr. Oschwald's work constitutes

construction. Mr. Aragon stated that Mr. Oschwald's roofing services can be performed only by a

contractor licensed by CID or by someone who is performing the work in association with a properly

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licensed contractor. Mr. Aragon's conclusion was based on CID's interpretation of Section 60-13-

3(A)(2) NMSA 1978 of the Construction Industries Licensing Act, which states, in pertinent part:

Contracting includes but is not limited to constructing, altering, repairing,
installing or demolishing any:
...

(2) building, stadium or other structure;...

The definition of contracting in Section 60-13-3 is virtually identical to the definition of construction in

Section 7-9-3(C). Mr. Aragon testified that Mr. Oschwald's physical hands-on alteration and repair of a

roof qualifies his work as contracting under Section 60-13-3. The Department did not present any

evidence to contradict Mr. Aragon's testimony or explain why Mr. Oschwald's work did not constitute

altering and repairing a structure for purposes of meeting the definition of construction under Section 7-

9-3(C).

Based on the evidence presented, the Department's original advice to Mr. Oschwald was

correct. The work Mr. Oschwald performs when he drills into a roof, removes a cross section of the

roof and then repairs the damage resulting from that procedure qualifies as construction under Section

7-9-3(C). Mr. Oschwald was entitled to deduct his receipts from performing such services for licensed

contractors who provided him with Type 7 NTTCs.

My determination that Mr. Oschwald is entitled to the deduction provided in Section 7-9-52

makes it unnecessary to reach the issue of equitable estoppel.

CONCLUSIONS OF LAW

1. Mr. Oschwald filed a timely, written protest to Assessment No. 1963930, and

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

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2. The work Mr. Oschwald performs when he drills into a roof, removes a cross section of

the roof, and then repairs the damage resulting from that procedure qualifies as construction under

Section 7-9-3(C).

3. During the assessment period at issue, Mr. Oschwald was entitled to deduct his receipts

from performing services for licensed contractors who provided him with Type 7 NTTCs.

For the foregoing reasons, the Taxpayer's protest is GRANTED. The Department is ordered to

abate Assessment No. 1963930 in full.

Dated January 25, 1999.

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