Sales Tax on proceeds of sale?

3 Replies

Hi folks,

I'm working on a Flip (my 1st property) with a JV Partner in Albuquerque, NM. I'm having a discussion with my accountant at the moment about sales tax. He's my personal accountant who I'm trying to convert to my business accountant. He feels I need a CRS# and that I owe sales tax on the proceeds of the property sale. He checked with a Special Auditor from NM State who says, "...even though you don't have a contractor's license you are 'engaged in the construction business' so you are required to follow the same statute."  The statue she's referring to is...

----------

3.2.211.10 REMODELING OR OTHER IMPROVEMENTS:

A. A person possessing a valid contractor's license who purchases and improves real property by either remodeling or constructing additional improvements on the property and who subsequently sells the real property with the improvements is considered to be regularly engaged in the construction business. The receipts attributable to the remodeling or other improvements constructed on the real property are subject to the gross receipts tax. The receipts subject to tax are the sales price less the value of the real property purchased. The value of real property (VRP) purchased is computed through the use of a formula. The formula is the ratio of the cost of the real property (CRP) purchased divided by the cost of the real property (CRP) plus the cost of the remodeling or other improvements (CRI) times the sales price (SP), or:

VRP = ( CRP ) x SP

(CRP + CRI )

B. The value of real property (VRP) is then subtracted from the sales price (SP) and the difference is the amount attributable to the value of remodeling or other improvements (VRI), which amount is subject to the gross receipts tax, or:

SP - VRP = VRI (Taxable receipts)

----------

I disagree with this position since I'm not a contractor and don't have a contractor's license - the statute clearly says that condition one is "A person possessing a valid contractor's license...".  I don't meet that condition and therefore the statute is not applicable to me.  However, my accountant says, "It’s up to you on how you’d like to handle this, but I know for a fact that the state is auditing people for gross receipts taxes like crazy right now and the statute of limitations on them is 10 years."  

My understanding is that if the statute is vague, the law is interpreted in favor of the plaintiff.  So, while I don't shy away from a good argument, I'm also not sure I want to be a test case for tax statute in NM either.

What is the experience of other investors - in NM and elsewhere - on sales tax?

Thanks!

Charles

Wow, that's a new one for me.  But, your accountant is doing his job properly as he is giving you a heads up.

Charles,

Did you ever get any clarification on your gross receipts tax question? I'm in a similar situation now and just wondering what gross receipts tax actually applies to.

Thanks,

Greg

You've got yourselves a "tax controversy" case that could, if brought up by the Commissioner of Revenue, be interpreted not in your favor. Here is some words of wisdom about Tax Courts, they generally interpret words however they want, without any predictable rhyme or reason behind it. It drives Tax Controversy practitioners mad. You should absolutely consult a local Tax Controversy Attorney in New Mexico to review the statute and advise you further. I would agree with your reading, but I am not licensed in New Mexico.

Join the Largest Real Estate Investing Community

Basic membership is free, forever.

By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.