BEFORE THE HEARING OFFICER
OF THE TAXATION AND REVENUE DEPARTMENT
OF THE STATE OF NEW MEXICO
IN THE MATTER OF THE PROTEST OF
NOVICK'S PAINTING, ID. NO. NO. 97-13
02-016295-00 2, PROTEST TO
ASSESSMENT NO. 2084522
DECISION AND ORDER
This matter came on for formal hearing before Gerald B. Richardson, Hearing Officer,
on April 9, 1997. Novick's Painting, hereinafter, "Taxpayer", was represented by its owner,
Mr. John D. Novick. The Taxation and Revenue Department, hereinafter, "Department", was
represented by Gail MacQuesten, Special Assistant Attorney General. Based upon the evidence
and the arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:
FINDINGS OF FACT
1. The Taxpayer is a painting contractor which engages in the business of house
painting.
2. The Taxpayer has been in the housepainting business for approximately ten
years.
3. Prior to 1992 the Department had issued type 6 nontaxable transaction
certificates ("NTTCs") to the Taxpayer. By issuing a NTTC to a vendor of paint and painting
supplies, the vendor was able to claim a deduction from gross receipts tax pursuant to NMSA
1978, 7-9-51, for the sale of tangible personal property to be incorporated as an ingredient or
component part of a construction project. Because the vendor could claim a deduction from
gross receipts tax on such transactions, the Taxpayer was able to purchase the materials used in
its business free of the cost of gross receipts taxes which would normally be passed on to the
purchaser.
4.
4. Effective January 1, 1992, the law changed with respect to NTTCs. The old,
pre-1992 NTTCs became invalid and taxpayers wishing to obtain the new 1992 NTTCs were
required to pay a $100 fee to obtain NTTCs.
5. Mr. Novick applied to the Department for the new 1992 form NTTCs, but he
felt it was wrong for the Department to charge a fee for NTTCs, so he refused to include the
$100 fee with his application for NTTCs.
6. The Department denied the Taxpayer's application for the new 1992 NTTC's
based upon the Taxpayer's failure to pay the required fee.
7. The law concerning NTTC's was changed again, effective April 1, 1994, to
repeal the requirement that an applicant for NTTC's pay a $100 fee.
8. After the $100 fee was repealed, the Taxpayer applied again with the
Department for type 6 NTTCs. The application form for type 6 NTTCs requires that an
applicant provide a contractor's license number or provide proof that a contractor's license is
not required. Mr. Novick filled out the box requesting a contractor's license number with the
notation, "none", and he failed to attach a letter or other information to demonstrate that a
contractor's license is not required.
9. The Department denied the Taxpayer's application for NTTCs for failure to
explain why a contractor's license is not needed to do housepainting.
10. The Taxpayer did not follow up on the denial of its application for NTTCs by
providing information to the Department as to why it did not need a contractor's license, nor
did the Taxpayer otherwise protest the Department's denial of its application for NTTCs.
11. When the Taxpayer was no longer able to purchase its materials free of the cost
of gross receipts tax, the Taxpayer began deducting the cost of goods and materials from gross
receipts upon which gross receipts tax was reported and paid.
12. Pursuant to an information sharing agreement with the Internal Revenue Service,
the Department receives information about taxpayers who file a Schedule C reporting income or
loss from a business in New Mexico.
13. As a result of information the Department received from the Internal Revenue
Service about the Taxpayer, on November 14, 1996, the Department issued Assessment No.
2084522 to the Taxpayer, assessing $686.65 in gross receipts tax, $68.67 in penalty and
$308.99 in interest, totalling $1064.31 for the 1993 calendar year.
14. On November 19, 1997, the Taxpayer filed a timely, written protest to
Assessment No. 2084522.
DISCUSSION
The Taxpayer disputes the assessment at issue on the basis that it amounts to double
taxation, which the Taxpayer believes is prohibited. It is a popular misconception that there is
something inherently illegal or unconstitutional with double taxation. As noted by Justice
Oliver Wendell Holmes in Ft. Smith Lumber Co. v. Arkansas, 251 U.S. 532 (1920), the U.S.
Constitution "no more forbids double taxation than it does doubling the amount of a tax."
Although there is nothing inherently illegal with double taxation, most tax policy makers, such
as state legislatures and Congress, recognize that from a tax policy standpoint, double taxation
is objectionable because it is perceived to be unfair. Since ultimately, the success of a tax
system in raising the revenues needed to maintain government operations depends upon the
willingness of the subjects of taxation to properly pay and report taxes, if the system is
perceived to be unfair, the foundation of the tax system is eroded.
Before discussing the particular facts of this case, it is instructive to understand the
operation and imposition of New Mexico's gross receipts tax. The gross receipts tax is
imposed upon the gross receipts of persons engaging in business in New Mexico. NMSA 1978,
7-9-4. "Gross receipts" is defined at NMSA 1978 7-9-3(F) as follows:
"gross receipts" means the total amount of money or the value of
other consideration received from selling property in New
Mexico, from leasing property employed in New Mexico, from
selling services performed outside New Mexico the product of
which is initially used in New Mexico or from performing
services in New Mexico.
Thus, the legal incidence of the gross receipts tax is upon the seller of goods or services and the
lessor of property, not upon the purchaser or lessee. United States v. New Mexico, 581 F. 2d
803 (10th Cir. 1978).
In this case, the Taxpayer objects to what it perceives to be double taxation of the paint
and other materials it uses in performing housepainting services. Because the Taxpayer did not
have a NTTC to present to the paint supply company, the paint supply company could not claim
a deduction from its gross receipts pursuant to NMSA 1978, 7-9-51, which allows the seller
of materials which will be incorporated into a construction project to claim a deduction when
selling those materials to a purchaser who delivers a NTTC. The paint company thus sought to
recoup that tax by passing on the cost of that tax to the Taxpayer when it made its purchases.
The Taxpayer is also liable for gross receipts tax upon its own gross receipts from
performing painting services for its customers. When the Taxpayer bills its customers, it does
not itemize the cost of the paint and supplies from its labor costs, but rather, it charges a fee for
the painting job, inclusive of materials. The entire amount the Taxpayer receives for
performing the painting job represents the Taxpayer's gross receipts which are subject to gross
receipts tax. Because the Taxpayer has already paid the cost of passed-on gross receipts tax
from its paint supplier, the Taxpayer believes that it is being subjected to double taxation.
Double taxation does not exist under the facts as outlined. There are two separate
transactions, involving two separate taxpayers, each of which is subjected to gross receipts tax
only once. There is the sale of the paint by the paint supply company, and there is the sale of a
painting service, which service includes the paint used in performing the service, which is being
sold by the Taxpayer to its customer. There is no double taxation. See, House of Carpets v.
Bureau of Revenue, 84 N.M. 747, 507 P.2d 1078 (Ct. App. 1973).
Even though there is no double taxation, the New Mexico legislature has been careful to
provide a number of statutory deductions to prevent the pyramiding or stacking of the gross
receipts tax. Thus, it has provided a deduction for the sale of tangible personal property which
will be resold, where the purchaser of the property provides the seller with a NTTC and
represents that the property will be resold. See, NMSA 1978, 7-9-48. Similarly, it has
provided for a deduction, pursuant to 7-9-51 for the sale of tangible personal property which
will be incorporated into a construction project which will be subject to gross receipts tax upon
its completion. This deduction would have been available to the Taxpayer's paint supplier if the
Taxpayer had provided the supplier with a NTTC. Then the Taxpayer could have bought its
paint free of the cost of passed-on gross receipts tax. This deduction was not available,
however, because the Taxpayer did not have a NTTC to present to its supplier to support the
deduction because the Taxpayer refused to pay the $100 fee the legislature imposed to obtain
NTTCs or because, after the fee was repealed, the Taxpayer failed to follow the instructions on
the application for NTTCs which required that it provide an explanation as to why a
contractor's license was not needed to perform the kind of construction services it performed.
Instead of paying the $100 fee, or instead of taking up the denial of its application of
NTTCs with the Department by providing the necessary documentation or by filing a protest to
the Department's denial of its application for NTTCs, the Taxpayer chose to create its own
remedy by deducting from its receipts the total amount it paid for the materials it used in its
painting jobs. The law does not allow this type of self-help. By creating a deduction not
authorized by statute and in contravention of the definition of gross receipts, the Taxpayer has
disregarded the statutes imposing gross receipts taxes and provided the basis for the
Department's assessment of tax. Because there are no exemptions or deductions from gross
receipts tax which would apply to any portion of the Taxpayer's gross receipts from performing
painting services, the Department's assessment must be upheld.
CONCLUSIONS OF LAW
1. The Taxpayer filed a timely, written protest to Assessment No. 2084522
pursuant to NMSA 1978, 7-1-24 and jurisdiction lies over both the parties and the subject
matter of this protest.
2. There has been no illegal double taxation of the Taxpayer's receipts from
performing housepainting services.
3. There is no applicable deduction or exemption which would apply to allow the
Taxpayer to deduct the cost of materials used in performing housepainting services from its
gross receipts subject to tax.
For the foregoing reasons, the Taxpayer's protest IS HEREBY DENIED.
DONE, this 18th day of April, 1997.
Decision and Order
Novick's Painting
Page -8-
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