Contractors and Gross Receipts Tax – The Basics and The Changes

As reported in last month’s Housing Journal the Legislature passed, and Governor Martinez signed, a new law aimed at curtailing construction project gross receipts tax pyramiding. The new law goes into effect January 1, 2013. As you can imagine we have been part of many discussions about New Mexico’s Gross Receipts Tax (GRT) during and since the Legislative Session, with everybody from Governor Martinez and her officials to local contractors and their accountants. I believe a discussion of a few basics of this tax and the expected impact of the law is in order.

First of all, there is still some misunderstanding of what our GRT really is all about. In short, the name says it all! This tax is levied upon each construction business (and many other types of businesses as well) for the privilege of existing and doing business in New Mexico, and the basis of the tax is a percentage of the business’s gross receipts. I have had several contractors tell me they avoid paying the GRT because they “pay the tax” when they buy their materials. The GRT is NOT a sales tax! New Mexico does not have a sales tax requirement. Many businesses succeed in getting their customers to pay their GRT by disguising their GRT as a sales tax added to the bottom of the customer bill. This leads to lots of confusion. If your business paid some other business’s tax (as in “I paid the tax when I bought the lumber”) that has no bearing on the fact that your business owes a percentage of your gross receipts to the government.

The next subject we need to discuss is the Non-Taxable Transaction Certificate (NTTC). This is a document the buyer in a business-to-business transaction gives to the seller. It allows the selling business to duck paying GRT on the income generated by the sale. Income generated by the selling business under these tax-sheltering NTTCs is listed on the selling business’s tax report as “non-taxable” receipts and the state loses out on the tax they would normally get based on those receipts. This is a concession to the phenomenon of “pyramiding” of taxes. In a construction context pyramiding occurs when subsequent business-to-business transactions rack up tax on tax, which some would consider immoral, but which isn’t illegal in New Mexico. Again, in a construction context, pyramiding occurs because the subcontractor’s subs have to pay tax on their receipts, then the subs in turn also have to pay tax on their receipts, and so on, until the entire project is finally sold in a retail transaction, which once again generates a tax on the business which makes this final sale. This is easy to understand if you remember that without NTTCs, each and every business simply owes a portion of their GROSS RECEIPTS to the state of New Mexico as a tax.

Now let’s talk about what is changing. Prior to passage of the GRT bill this last Session, purchasing contractors were restricted on the type of purchases where they could give the seller an NTTC. For many years the basic rule of the Tax and Revenue Department (TRD) held the position that only purchases related to materials that would eventually become a component part of a building could use NTTC tax sheltering. The law on that has changed effective January 1, 2013. Contractors will soon be able to give those who provide the services required to complete a construction project an NTTC. Easy to spot services would include professional design fees, job-site fencing, and portable toilets. You should carefully examine your operations for other potentially tax-sheltered and project-specific services like bank fees, energy ratings, and temporary power costs so you will be ready when the new TRD rules take effect next year.

Our Taxation and Revenue Department still needs to give us their rules for implementation of the new law, and that process is always a challenge. It is not unusual to find that our bureaucrats’ interpretation of a law change is different than we have envisioned during the legislative process! Getting new rules completed by next January is very important, nevertheless. Any of you who have had the pleasure of undergoing a tax audit by TRD officials will understand the urgency in getting clear and definitive rules for how we are expected to implement this law change.

NMHBA has drafted a rules revision we believe appropriately implements this new law, and we are busy meeting with the leaders of other industry organizations to promote our version of the rules. We plan to meet with TRD officials soon as well.

In the meantime I am recommending that you scrutinize your business practices to see how you and your service providers can take advantage of this law change. In order to help you I have compiled four rules I believe serve as a “test” for services for which you may be able to use new NTTCs, starting next year. Each and every point must be met for a particular service to qualify.

Construction Service and Construction Related Service Deductions from Gross Receipts taxation are transactions that:

add value to an particular real property; and
are a business-to-business sale to a contractor; and
the project culminates in a “retail” sale by the contractor to a consumer; and
GRT is paid on the resulting “retail” sale.

We estimate the savings for the contractor to be $1,200-$2,500 on a $200,000 home sale depending on the project and the local GRT rate, so this is worth dedicating some time to understand how it will work. We also suggest you have a chat very soon with your accountant about how you might need to re-arrange your accounting practices to accommodate the new tax shelter for you and your service providers. You may be handing an NTTC to a whole new set of service providers who have never seen such a document before, and you may need to educate them on what this is all about. If your business is part of the construction team that provides a service to contractors, you need to be thinking about this and talking to your accountant too.

Copies of the new law are available on the Internet. If you need help finding this, please contact Melanie at the NMHBA office. Also, if you or your accountants are willing to slog through our draft of new rules to see if you agree with our ideas, we have these available too.