Larry Hess CPA
What is a Non-Taxable Transaction Certificate and why would I need one?
Non-Taxable Transaction Certificates (NTTCs) are a mechanism to help ensure that gross receipts tax (GRT) is not paid twice on the same sale. They are issued by buyers or lessors to sellers or lessees and are the best proof of a seller deductible (exempt) gross receipts.
There are 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.
Example: Seller located outside of New Mexico. A seller located outside of NM is liable for GRT if they have taxable sales of more than $100,000 to customers located in NM. during the previous calendar year. There is not an NTTC for a seller a seller located outside of NM unless the seller is registered with the NM Taxation & Revenue Dept. The GRT rate in those cases is the state rate, 5.00%.
Example: Buyer located outside of New Mexico. There is not an NTTC when the buyer is located outside of NM. Sellers must be able to prove that the initial use of the product or service is outside of NM or the buyer takes delivery of the product or service outside of NM. Proof might include documents such as billing and shipping records or the Multi-Jurisdictional Uniform Sales and Use Tax Certificate issued by the seller.
Avoiding double-taxation of the same sale.
Tangibles. 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 and the retailer has . When the wholesaler files gross receipts tax reports, they report sales to the retailer and then deducts 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. This is similar to the sale of tangibles. 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: 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. Subcontractors can issue NTTCs to their subs and materials suppliers. Note that unlike sales of tangibles and services, all subcontractors can avoid GRT.
When double-taxation cannot be avoided.
In the case of sales of tangibles and services, the exemption applies only to the if the next sale is subject to GRT. Take the case of a series of transactions where Business #1)sells to a consumer tangibles or services that they have acquired from Business #2. And Business #2 has has purchased the tangibles or services from Business #3. Business #1 can issue Business #2 an NTTC Type 2 or 5. However, since the sales of Business #2 are not taxable, Business #2 cannot issue an NTTC to Business #3. The result is Business #3 must also pay GRT on the same sales as Business #1. This unfortunate result is called pyramiding and has been the subject to much political debate in New Mexico.