New Mexico Decisions Highlight Importance of Following Procedures for Claiming Sales Tax Exemptions

Claiming a sales tax exemption may require accepting exemption certificates in a timely manner and with good faith, as two recent New Mexico cases demonstrate.

By Denisse Beldin, SALT associate

In order to claim a sales tax exemption, both the substantive and procedural requirements must be met. [1] Procedurally, many of these exemptions require that the seller obtain an exemption/resale certificate from the purchaser in order to substantiate the applicability of the exemption. In many states, the seller is relieved of their legal obligation to collect sales tax after meeting one or both of the following requirements:

  1. The seller accepts a properly-completed exemption certificate in a timely manner, and
  2. The seller accepts a properly-completed exemption certificate from the purchaser in good faith.

New Mexico’s statute employs both requirements, stating, “when the seller or lessor accepts a nontaxable transaction certificate within the required time and in good faith that the buyer or lessee will employ the property or service transferred in a nontaxable manner, the properly executed nontaxable transaction certificate shall be conclusive evidence, and the only material evidence, that the proceeds from the transaction are deductible from the seller’s or lessor’s gross receipts.” [2] Recently, New Mexico issued two administrative decisions examining the state’s procedural requirements as well as the consequence of failing to satisfy those requirements. [3]

In the Sandia Development case, the taxpayer was under audit and could not produce an exemption certificate (in New Mexico, an exemption certificate is called a Nontaxable Transaction Certificate or “NTTC”) for one of its customers. New Mexico law states that the taxpayer “should” be in possession of all NTTCs at the time the transaction occurs or by the time the return is due for that transaction. [4] However, the law then requires that the taxpayer “must” be in possession of all NTTCs within 60 days following notice by the state requiring such possession. [5] Failure to produce the NTTCs within the 60-day period results in a loss of the exemption, and NTTCs produced after 60 days will not be honored. [6] In this case, the taxpayer produced the NTTC for its customer seven months after the 60-day deadline had expired. Therefore, the administrative hearing officer denied the exemption and assessed tax, interest and penalty to the taxpayer.

In the Landscaping case, the taxpayer sold firewood to its customer, a restaurant, and timely accepted a properly-completed NTTC from the restaurant which claimed that it was reselling the firewood. Upon audit, the Department disallowed the exemption, finding that the restaurant did not resell the firewood but was instead using it for cooking and heating. The Department argued that that the NTTC was not accepted in good faith because the taxpayer knew that the restaurant was not reselling the firewood. Although the taxpayer admitted that it knew the firewood was not being resold, it also submitted as evidence the fact that it had inquired as to the applicability of the NTTCs with two Department representatives, both of whom told the taxpayer that it could accept the NTTCs. Based on this evidence, the administrative hearing officer ruled that the taxpayer had accepted the NTTCs in good faith and was entitled to claim the deduction from gross receipts.

These rulings make clear that a taxpayer must be aware of the process for obtaining exemptions, which may require accepting exemption certificates in a timely manner and/or with good faith. Good faith requires more than just blindly accepting a customer’s exemption certificate. Sometimes taxpayers can be lax in certificate management, as it can seem tedious and mundane, but it is crucial to follow state procedures to receive the exemption. Aprio’s SALT team can assist clients with determining eligibility for exemptions and accepting/maintaining valid certificates.

Contact Denisse Beldin, SALT associate, at denisse.beldin@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the May 2016 SALT Newsletter. To view the newsletter, click here.

[1] This article focuses on the procedural requirements. Substantively, sales tax exemptions generally fall into three broad categories: (i) the type of good sold (e.g., bibles, certain food items, etc.); (ii) the type of seller or purchaser (e.g., state/federal governments, non-profit organizations, etc.) and (iii) the type of transaction (e.g., a sale for resale, a transfer of assets pursuant to a reorganization, a casual sale, etc.). Of course, these exemptions will vary from state to state.

[2] NMSA § 7-9-43(A) (emphasis added).

[3] In the Matter of the Protest of Sandia Development & Consulting Services Inc. to Assessment, 16-02, New Mexico Taxation and Revenue Department Decision and Order, 02/08/2016, and In the Matter of the Protest of Pete’s Top Quality Landscaping, LLC, to Assessment, 16-11, New Mexico Taxation and Revenue Department Decision and Order, 04/25/2016.

[4] NMSA § 7-9-43(A); N.M. Admin. Code § 3.2.201.8(A)(1).

[5] NMSA § 7-9-43(A); N.M. Admin. Code § 3.2.201.8(A)(2).

[6] NMSA § 7-9-43(A); N.M. Admin. Code § 3.2.201.8(A)(3).

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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