A man took irregular 'draws' to run his mother-in-law's New Mexico store instead of a wage. Did that money owe New Mexico gross receipts tax, or was it exempt employee pay?

Subject

Aaron & Gaye Garoutte (D&O 00-06)

(The Department's online case listing titles this decision "Aaron & Gaye Baroutte," but the decision itself, its caption, and the official PDF filename all spell the family name "Garoutte." We use the spelling in the ruling.)

Plain-English summary

In 1994, Aaron Garoutte ran his mother-in-law's business in Thoreau, New Mexico — a combined gas filling station, grocery store, and bar — to try to keep it open. He was not paid a wage or salary. Instead he took irregular "draws" from the business, pulling out only what he needed to support his family, and drew a total of $18,365 for the year. His accountant reported that money on a federal Schedule C as income from a business or profession.

Because New Mexico's Taxation and Revenue Department shares data with the IRS, it saw the Schedule C, noticed the Garouttes were not registered for gross receipts tax, and in April 1998 assessed $978 in gross receipts tax, $97.80 in penalty, and $544.02 in interest on the 1994 draws. The Garouttes protested.

The Hearing Officer denied the protest. New Mexico's gross receipts tax (Section 7-9-4) applies to anyone "engaging in business" in the state, and there is a legal presumption (Section 7-9-5) that all of a person's business receipts are taxable. Garoutte's draws were compensation for performing services in New Mexico, so they were gross receipts. The one way out would have been to show he was an employee — because employee wages, salaries, and similar pay are exempt under Section 7-9-17. But Garoutte did not consider himself an employee, no one supervised or directed his work, and he felt he was working for himself. With no employer-employee relationship and no other exemption or deduction available, the draws were taxable. (The Department had separately agreed to abate the penalty, so only the tax and interest remained.)

What this means for you

• Taking "draws" instead of a paycheck does not make the money tax-free. In New Mexico, if you perform services and receive compensation for them, those receipts are presumed subject to gross receipts tax unless a specific exemption or deduction fits. How you label the payment (a "draw," a "distribution") does not control.
• The employee exemption turns on control, not on family ties or good intentions. Section 7-9-17 exempts genuine employee wages, but an employee is someone whose work is supervised and directed by an employer. Someone running a business on his own judgment — even a relative's business, even at a loss to himself — looks like a self-employed person, whose receipts are taxable.
• Reporting income on a federal Schedule C can trigger a New Mexico gross receipts tax bill. The Department receives IRS data. Schedule C income (business or profession income) signals someone "engaging in business," and the Department can assess gross receipts tax on unregistered filers years later — here, a 1994 year assessed in 1998.
• An accountant's silence is not a defense to the tax itself. Garoutte's accountant never told him gross receipts tax was due, but that did not excuse the tax. (It may have supported dropping the penalty, which the Department agreed to abate here.)

Key questions answered

Was the $18,365 Garoutte drew from the family business subject to New Mexico gross receipts tax?
Yes. It was compensation for performing services in New Mexico, which are gross receipts from "engaging in business," and it was presumed taxable under Section 7-9-5 with no applicable exemption or deduction.

Why wasn't it exempt as employee pay?
The employee-wage exemption in Section 7-9-17 applies only to genuine employees. Garoutte did not consider himself an employee, and his work managing the business was not supervised or directed by anyone — so there was no employer-employee relationship.

Did it matter that he was helping family and barely paying himself?
No. The tax applies to receipts from engaging in business; his motive (keeping his mother-in-law's business open) and the modest, irregular size of his draws did not change that the draws were taxable compensation for his services.

Did he have to pay the penalty too?
No. The Department agreed to abate the penalty portion of the assessment. The gross receipts tax and interest, however, remained due.

Verbatim citations

On the tax and the presumption of taxability:

Section 7-9-4 NMSA 1978 imposes a "gross receipts tax" for the privilege of engaging in business upon any person engaging in business in New Mexico. ... Finally, § 7-9-5 NMSA 1978 provides that, "[T]o prevent evasion of the gross receipts tax and to aid in its administration, it is presumed that all receipts of a person engaging in business are subject to the gross receipts tax."

On why the employee exemption did not apply:

The only possible basis on which he would not have been subject to gross receipts tax was if he could be considered an employee of the business. The receipts of employees from wages, salaries, commissions or from any other form of remuneration for personal services are exempt from gross receipts tax under § 7-9-17 NMSA 1978. Mr. Garoutte, however, did not consider himself to be an employee of the business and he was not under the sort of direction or supervision which would indicate an employer-employee relationship.

The holding:

Mr. Garoutte's compensation for managing the family business in 1994 were gross receipts from engaging in business in New Mexico and were subject to gross receipts tax. For the foregoing reasons, the Taxpayers' protest IS HEREBY DENIED.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Aaron & Gaye Baroutte
• Decision PDF: D&O 00-06

Original ruling text

BEFORE THE HEARING OFFICER
OF THE TAXATION AND REVENUE DEPARTMENT
OF THE STATE OF NEW MEXICO

IN THE MATTER OF THE PROTEST OF
AARON AND GAYE GAROUTTE, NO. 00-06
ID. NO. 02-375357-00 9, PROTEST TO
ASSESSMENT NO. 2239705

DECISION AND ORDER

This matter came on for formal hearing on January 19, 2000 before Gerald B.

Richardson, Hearing Officer. Aaron and Gaye Garoutte, hereinafter, “Taxpayers”, represented

themselves at the hearing. The Taxation and Revenue Department, hereinafter, “Department”,

was represented by Mónica M. Ontiveros, Special Assistant Attorney General. Based upon the

evidence and the arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. During the 1994 tax year, Mr. Garoutte managed the business owned by his mother-in-

law, which was a gasoline filling station, grocery store and bar, located in Thoreau, New Mexico.

2. Mr. Garoutte was not paid an hourly wage or a salary. Instead, he took a draw from the

business, on an irregular basis, taking out only as much as he needed to support himself and his

family, in an effort to try to keep his mother-in-law’s business open.

3. During the 1994 tax year, Mr. Garoutte drew $18,365 from the business.

4. The Taxpayers had their 1994 New Mexico personal income taxes prepared by their

accountant. The accountant treated the $18,365 which Mr. Garoutte had drawn from his mother-

in-law’s business as income from a business or profession and reported that income on a Federal

Schedule C for both state and federal income tax purposes.

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5. When acting as manager of his mother-in-law’s business, Mr. Garoutte’s work was not

supervised or directed by anyone else.

6. Mr. Garoutte did not consider himself an employee of the family business. Rather, he felt

that he was working for himself.

7. Mr. Garoutte was not informed by his accountant that New Mexico gross receipts taxes

should be reported and paid on his income from managing his mother-in-law’s business.

8. The Department has an information sharing agreement with the Internal Revenue Service

whereby the Department is provided information from the federal tax returns of New Mexico

residents.

9. The Department received information from the Internal Revenue Service that Mr.

Garoutte filed a Federal Schedule C for the 1994 tax year reporting $18,365 in gross receipts

from a business or profession.

10. The Department determined that the Taxpayers were not registered with the Department

for gross receipts tax purposes during tax year 1994.

11. On April 4, 1998 the Department issued Assessment No. 2239705 to the Taxpayers

assessing $978.00 in gross receipts tax, $97.80 in penalty and $544.02 in interest for the

reporting period of January, 1994 through December, 1994.

12. On April 14, 1998, the Taxpayers filed a written protest to Assessment No 2239705.

13. The Department has agreed to abate the penalty portion of the assessment.

DISCUSSION

The sole issue to be determined herein is whether the Taxpayers are liable for gross

receipts tax upon the $18,365 drawn during calendar year 1994 for managing the family

business. Section 7-9-4 NMSA 1978 imposes a “gross receipts tax” for the privilege of engaging

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in business upon any person engaging in business in New Mexico. “Engaging in business” is

defined in pertinent part at § 7-9-3(E) NMSA 1978 as “carrying on or causing to be carried on

any activity with the purpose of direct or indirect benefit.” “Gross receipts” are defined to

include the total amount of money or other compensation received from performing services in

New Mexico. Section 7-9-3(F) NMSA 1978. Finally, § 7-9-5 NMSA 1978 provides that, “[T]o

prevent evasion of the gross receipts tax and to aid in its administration, it is presumed that all

receipts of a person engaging in business are subject to the gross receipts tax.”

Applying these definitions to Mr. Garoutte’s activities, he had gross receipts subject to

the gross receipts tax. He had gross receipts from performing services in New Mexico. He was

engaging in business in New Mexico because he received a benefit, in the form of the draws of

money he paid himself from the family business.

The only possible basis on which he would not have been subject to gross receipts tax

was if he could be considered an employee of the business. The receipts of employees from

wages, salaries, commissions or from any other form of remuneration for personal services are

exempt from gross receipts tax under § 7-9-17 NMSA 1978. Mr. Garoutte, however, did not

consider himself to be an employee of the business and he was not under the sort of direction or

supervision which would indicate an employer-employee relationship.

There being no other applicable exemptions or deductions in the Gross Receipts and

Compensating Tax Act , Chapter 7, Article 9 NMSA 1978, Mr. Garoutte was subject to the gross

receipts tax on his receipts from managing the family business in 1994.

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CONCLUSIONS OF LAW

1. The Taxpayers filed a timely, written protest, pursuant to § 7-1-24 NMSA 1978, to

Assessment No. 2239705 and jurisdiction lies over both the parties and the subject matter of this

protest.

2. Mr. Garoutte’s compensation for managing the family business in 1994 were gross

receipts from engaging in business in New Mexico and were subject to gross receipts tax.

For the foregoing reasons, the Taxpayers’ protest IS HEREBY DENIED.

DONE, this 22nd day of February, 2000.

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