Insights from a Former Nail Tech!
Nail technicians in New Mexico frequently face audits for unpaid gross receipts taxes (GRT), largely due to the unique nature of their work and a lack of clarity about their tax obligations.
The Common Scenario
Picture this: you receive a letter titled “Notice of Limited Scope Audit Commencement” from the New Mexico Department of Taxation. In the letter, the Department claims you owe gross receipts taxes, along with penalties and interest, for the past three or more tax years. You’re given 60 days to provide any Nontaxable Transaction Certificates (NTTCs) to support any deductions you’ve claimed.
The problem? You’re now tasked with proving your innocence. Unlike criminal law, where you’re presumed innocent until proven guilty, tax matters can feel like the opposite—you’re “guilty until proven otherwise.”
As a former nail tech, I’ve experienced this situation firsthand. My goal in writing this article is to help you avoid the anxiety and stress that comes from receiving such a letter from the Department.
Gross Receipts Tax: The Basics
New Mexico’s Gross Receipts Tax (“GRT”) is a tax on the total revenue a business earns from selling goods or services. The tax is levied on the business, rather than the consumer. While businesses are responsible for paying this tax, they often pass it on to customers through the prices they charge. For example, if you pay for a manicure or pedicure at a local nail salon in Bernalillo, the price likely includes GRT (typically 7.18%).
As a nail tech, each mani/pedi service you provide is subject to GRT, and it’s typically the salon’s responsibility to collect and remit the tax—though many nail tech and salons may be unaware of this obligation.
Audit Triggers
The Department often flags “irregularities” in tax filings as potential triggers for an audit. Nail technicians who do not own a salon but report income on Schedule C (used for reporting business income or losses as a sole proprietor) are frequently targeted for GRT assessments.
The Department has access to your federal tax filings, and if they see income reported on your Schedule C or 1099-Misc, they might identify a discrepancy and initiate an audit.
Since GRT is levied on the business (not the consumer), if you work for a salon, the salon should have collected and paid GRT on the services you provided. Your task is to provide evidence that the tax was indeed paid.
How to Respond
First and foremost, treat the audit letter as an opportunity to explain why you don’t owe the taxes the Department claims. Ignoring it could result in significant penalties.
Second, the Department will expect you to provide acceptable evidence to dispute their findings. The “gold standard” for this is a Nontaxable Transaction Certificate (NTTC), which serves as conclusive proof that certain receipts are deductible from GRT. As outlined in FYI-105, a properly executed NTTC can absolve you of the tax liability.
But what if you or the salon don’t have an NTTC or don’t even know what it is?
Other Acceptable Evidence
While the Department insists on NTTCs, other forms of evidence are legally acceptable, even if the audit letter doesn’t mention them. This is important because it means you have options beyond NTTCs.
Under NMSA 1978, § 7-9-43 (B), alternative evidence can be provided to prove you don’t owe GRT. For example:
- Section B(3) allows the salon to send a letter to the Department confirming that they have been collecting and paying GRT.
- Section B(4) allows for “any other evidence” that demonstrates entitlement to a deduction, giving you additional flexibility in your response.
Conclusion
Navigating a GRT audit can be intimidating, but understanding your rights and the available evidence is crucial. Don’t panic if you don’t have an NTTC—other forms of proof, like letters from the salon, can help establish that the tax has already been paid. The key is to respond promptly and provide the necessary documentation. By being proactive and informed, you can effectively manage an audit and protect your business from unnecessary tax burdens.
Business Law Southwest. Business law that makes business sense.
