What is a Non-Taxable Transaction Certificate and why would I need one?
Non-Taxable Transaction Certificates (NTTCs) are a mechanism to avoid the double taxation that can occur when sales are business-to-business. That's what's known as pyramiding. They are issued by buyers or lessors to sellers or lessees and are the best proof of a seller's deductible (exempt) gross receipts.
There are 11 different types of NTTCs that are used in different circumstances. The most common are:
Type 2 - Sales of tangible personal property or licenses for resale or will become an ingredient in or component of a manufactured product.
Type 5 - Sales of services for resale if the sale is subject to gross receipts tax.
Type 6 - Sales of construction materials and services that will become an ingredient in a construction project upon completion.
Type 9 - Sales to non-profits only for purchases of tangibles. Note: Sales of services to non-profits are taxable.
There is not an NTTC for sales to a buyer located outside of NM. In these cases, the seller must have proof that they are entitled to the deductions. The proof is different for the sale of services for resale and for sales of products.
Services sold to an out-of-state buyer: Proof that the initial use of the product of the service was outside of NM.
Products sold to an out-of-state buyer. Proof that the buyer has taken delivery of the product outside of NM.
Examples of acceptable proof might include documents such as billing and shipping records or, for the sale of tangible personal property for resale or as an ingredient or component of a manufactured product, the Multi-Jurisdictional Uniform Sales and Use Tax Certificate issued by a seller who is registered with the N.M. Taxation & Revenue Dept. A more detailed list can be found in the department's Publication FYI-215.
Avoiding double-taxation of the same sale.
Tangibles. Sales of tangible personal property for resale are not subject to GRT. For example, when a wholesaler sells to a retailer, to avoid double-taxation, the retailer gives the wholesaler an NTTC Type 2 that states the wholesaler’s product is being resold by the retailer. When the wholesaler files gross receipts tax reports, they report sales to the retailer and then takes a deduction for the amount they sold to the retailer from their total to determining taxable gross receipts. In this scenario only the retailer pays the tax.
Services. Gross receipts from sales of services for resale are deductible if the subsequent sale is subject to GRT. It often applies to independent contractors who are, in effect, subcontractors whose services are resold in a transaction that is subject to GRT. The buyer of the services issues an NTTC Type 5 to their customer as proof that the customer's services are not subject to GRT. Important: A the second-level provider must pay GRT. If it seems like double-taxation, it is!
Example: Consultant 1 has a contract to provide services to an end user. Consultant 1 purchases services from consultant 2 who in turn purchases services from consultant 3. The result is that consultant 1 pays GRT, consultant 2 has deductible (i.e. reportable but non-taxable) gross receipts and consultant 3 pays GRT. Here's how it goes:
Consultant 1 sells service to end user → Pays GRT → Issues NTTC Type 5 to consultant 2.
Consultant 2 sells service to consultant 1 → Deducts gross receipts.
Consultant 3 sells service to consultant 2 → Is not entitled to deduct - Pays GRT.
Important: The taxation of services is a key feature of gross receipts tax that sets New Mexico’s version of sales tax apart from other states’ sales tax. It can be a trap for an uninformed service provider.
Construction. The general contractor pays the GRT on the completed contract and issues an NTTC Type 6 to the subcontractors as proof that the subcontractors' sales are not subject to GRT. As long as the subcontractors are in the construction business, they can issue NTTCs to their subs and materials suppliers. The result is that all subcontractors have deductible gross receipts.