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 in certain circumstances. They are issued by buyers or lessors to sellers or lessees and the best proof a seller can have of its deductible gross receipts.
Types. There are different types NTTCs that are used in different circumstances. The most common are:
Type 2 - Sales of tangible personal property or licenses for resale that 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 For construction materials and services that will become an ingredient in or construction project upon completion.
Type 9 for sales to non-profits only for purchases of tangibles. Sales of services to non-profits are taxable.
Seller located outside of New Mexico. A seller located outside of NM is liable for GRT of sales to customers located in NM. There is not an NTTC for a seller like that unless the seller is registered with the N.M. Taxation & Revenue Dept. The GRT rate in those cases is the state rate, 5.25%.
Customer located outside of New Mexico. There is also not an NTTC when the customer is located outside of New Mexico. Sellers must be able to prove that the initial use of the product of the service is outside of New Mexico or takes delivery of the product of the service outside of New Mexico. Proof might include documents such as billing and shipping records or the Multi-jurisdictional Uniform Sales and Use Tax Certificate.
Wholesaler. Take the case of a wholesaler who sells to a retailer whose sale is subject to gross receipts tax. It would be unfair for both the wholesaler and retailer to pay gross receipts tax on both sales. The retailer gives the wholesaler an NTTC Type 2 that states that the wholesaler’s product is being resold by the retailer. When the wholesaler files their gross receipts tax reports, they deduct the amount they sold to the retailer from their total before determining taxable gross receipts.
Construction Contractor. The example of a wholesaler is straight-forward. Not so for construction businesses. Take the case of a general contractor who purchases services from a subcontractor who in turn hires a sub-subcontractor. Here are the steps to use to determine who pays GRT:
If the general contractor’s contract is with someone who is going to use the product of the project, the general contractor’s gross receipts are subject to gross receipts tax.
The general contractor can give the sub-contractor a NTTC Type 6 so that the sub-contractor does not have to pay GRT on its gross receipts from its contract with the general. Note that the subcontractor can also give its suppliers Type 6 ‘ NTTCs so that the suppliers’ gross receipts are not taxable and do not charge the subcontractor GRT.
However, since the subcontractor’s gross receipts are not taxable, the subcontractor cannot give the sub-0subcontactor an NTTC and the sub-subcontractor must pay GRT on its gross receipts from the subcontractor.
Important: The taxation of services is a key feature of gross receipts tax that sets New Mexico’s version of sales tax apart from most states’ sales tax. It can be a trap for an uninformed seller.