A Gallup jewelry partnership's bank account mixed loan money, out-of-state sales, and taxable sales. With records in disarray, how much of it owed New Mexico gross receipts tax?

Subject

Silver House Trading Company (D&O 00-13)

Plain-English summary

Silver House Trading is a Gallup, New Mexico partnership (the Nassar siblings) that sells Native American jewelry, pottery, and paintings. From 1993 it ran an informal joint venture ("Waci-ci") with a Colorado dealer, Mel Silva, financed by a private lender, Robert Baer. Because the partnership was in Gallup, the loan proceeds and the joint venture's out-of-state sales flowed through the partnership's bank account — mingled with the partnership's own sales. The partnership stopped filing monthly CRS-1 returns in August 1993, kept no general ledger, and its records were "in disarray."

When the Department audited, it couldn't tell which deposits were taxable New Mexico sales, which were loans, and which were out-of-state sales — so it treated everything in the federal returns, CRS-1 returns, and bank deposits as taxable and assessed $132,444.58 in tax, penalty, and interest. The partnership protested.

The Hearing Officer partially granted the protest:

• What the partnership won. Before the decision, the Department already conceded several items (periods barred by the six-year statute of limitations under Section 7-1-18(D); documented COD/UPS out-of-state sales; a sale to a county museum; traced refunds and a partner's capital contribution; and two identified Baer loan wires). On top of that, the Hearing Officer abated tax on $151,500 of deposits made in large, even amounts ($3,000, $5,000, $15,000). Reasoning that goods are rarely sold in such round lots, and that these even deposits first appeared when the joint venture began, she found them to be loan proceeds and out-of-state joint-venture sales — not taxable.
• What stayed taxable. Deposits in odd amounts were treated as purchases by the Silvas or Baer individually — New Mexico sales, taxable, with no evidence to the contrary. The partnership's broader claim that many store sales were out-of-state failed: under Section 7-1-10 a taxpayer must keep records that let the Department verify its tax, and here there was no way to tell in-store sales from shipped ones (a partner's "delivered" notations were inconsistent and based on memory years later). And a coral-sale commission — about $27,520 Hafiz Nassar earned finding a buyer for another dealer's Tunisian coral — was gross receipts too: whether viewed as a sale of goods or of services, the money went through the business account as business funds.

What this means for you

• If your records can't prove a deduction or exemption, you lose it — even if it was real. New Mexico presumes every business receipt is taxable and presumes the Department's assessment is correct. When your books can't distinguish taxable from nontaxable money, the Department may tax all of it, and you carry the burden to prove otherwise.
• Keep books that let an auditor trace every dollar. Section 7-1-10 requires records that permit accurate computation of tax. A general ledger, sales invoices tied to shipping proof, and clear labeling of out-of-state versus in-store sales are what win a case like this. Memory and after-the-fact notations are not enough.
• Don't run other people's money through your business account. Mingling loan proceeds and a joint venture's out-of-state sales with your own taxable sales created most of this dispute. If loans or non-taxable receipts must pass through your books, document them contemporaneously so they can be separated later.
• Out-of-state sales are only deductible if you can prove the goods left the state. Shipping documents (UPS, COD records, common-carrier bills) are the proof that works. A customer's out-of-state address on an invoice does not establish that the sale itself was interstate.
• A one-off commission is still gross receipts. Earning a cut for brokering someone else's goods is taxable business income, whether characterized as a product sale or a service — especially when the money lands in your business account.

Key questions answered

Why did the partnership recover the $151,500?
Because the deposits were in large, even amounts ($3,000/$5,000/$15,000), which the Hearing Officer found consistent with loan draws and out-of-state joint-venture sales rather than jewelry sales (which came in odd amounts), and they appeared only after the joint venture started. That evidence was enough to overcome the presumption for those specific deposits.

Why were the odd-amount deposits and other out-of-state sales taxed?
Because the partnership couldn't prove they were nontaxable. With no general ledger and inconsistent, memory-based notations, there was no way to verify which sales were shipped out of state or whether they were even in the audit base, so the presumption of correctness stood.

Why was the coral commission taxable if coral wasn't the partnership's product?
Because "gross receipts" covers money from selling property or performing services in New Mexico. Nassar's activity resembled his normal sales work, the money went into the business account, and nothing showed he treated it as personal rather than business funds.

What's the single biggest lesson here?
Recordkeeping. The partnership almost certainly had real loans and real out-of-state sales, but only the portion it could actually document (or that showed a tell-tale pattern) was abated. The rest was lost to inadequate records.

Verbatim citations

The presumption and the taxpayer's burden:

Section 7-1-17(C) NMSA 1978 provides that any assessment of tax by the Department is presumed to be correct, and it is the taxpayer's burden to overcome this presumption. ... Additionally, "it is presumed that all receipts of a person engaging in business are subject to the gross receipts tax." Section 7-9-5 NMSA 1978.

The recordkeeping duty:

Section 7-1-10 NMSA 1978 requires every taxpayer to "maintain books of account or other records in a manner that will permit the accurate computation of state taxes...." ... "The taxpayer has a duty to provide the commissioner with books and records upon which to establish a standard for taxation as provided by law. If he fails to do so, he cannot complain of the best methods used by the commissioner."

Why unproven out-of-state sales stayed taxable:

Based on the evidence presented, the Taxpayer has failed to establish that receipts included in the audit exception base were receipts from out-of-state sales. Accordingly, the Taxpayer has not overcome the presumption of correctness that attaches to the Department's assessment. ... In the absence of adequate records to establish out-of-state sales, all of the Taxpayer's receipts are presumed taxable.

The holding:

The Taxpayer is entitled to the abatement of gross receipts tax, penalty and interest assessed on the $151,500 of loans and out-of-state sales ... The Taxpayer has not met its burden of proving its right to additional adjustments for out-of-state sales or for the sale of coral ... For the foregoing reasons, the Taxpayer's protest is partially granted ... In all other respects, the Taxpayer's protest is denied.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Silver House Trading Company
• Decision PDF: D&O 00-13

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
SILVER HOUSE TRADING COMPANY No. 00-13
ID. NO. 02-087433-00 2
ASSESSMENT NO. 2294944

DECISION AND ORDER

A formal hearing on the above-referenced protest was held April 25, 2000, before Margaret

B. Alcock, Hearing Officer. Silver House Trading Company (“Taxpayer”) was represented by Lutfi

Nassar and Hafiz Nassar, two of its partners. The Taxation and Revenue Department ("Department")

was represented by Bridget A. Jacober, Special Assistant Attorney General. Based on the evidence

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

FINDINGS OF FACT

1. The Taxpayer is a partnership engaged in the business of selling Native American

jewelry, pottery and paintings. The Taxpayer’s partners are two brothers, Hafiz Nassar and Lutfi

Nassar, and their sister, Samia Nassar.

2. The business started in 1986 and operates out of a wholesale and retail store located

in Gallup, New Mexico.

3. During the period 1992-1995, a number of the Taxpayer’s sales were to out-of-state

customers. In many cases, the items purchased were shipped to the customer’s out-of-state address

or personally delivered to the customer by Hafiz Nassar.

4. In 1993, the Taxpayer entered into an informal joint venture with Mel Silva, who

owned a pawn shop and arts and crafts store in Colorado. The parties referred to their joint venture

by the name of Mel Silva’s Colorado store, Waci-ci.

5. Mr. Silva obtained a substantial loan commitment from Robert Baer, a private lender

in Colorado. Mr. Baer agreed to advance funds for Mr. Silva and Hafiz Nassar to purchase Native

American jewelry in Gallup, New Mexico, and sell the merchandise to merchants and dealers

throughout the west.

6. Because the Taxpayer was located in Gallup, the loan proceeds were deposited into

the Taxpayer’s bank account, from which Hafiz Nassar withdrew the cash needed to purchase

jewelry from Native Americans located in Gallup.

7. Once a sufficient inventory of jewelry was purchased, Hafiz Nassar and Mel Silva

traveled through the western states, making sales along the way. The proceeds of those sales were

turned over to Mrs. Silva, who acted as bookkeeper for the joint venture.

8. Hafiz Nassar and Mel Silva did not keep track of the expenses and profits of the joint

venture. Instead, they used the sales proceeds to purchase additional jewelry and repay Mr. Baer.

They withdrew funds for their personal use on an as-needed basis: if Mr. Silva withdrew $2,000, Mr.

Nassar would withdraw $2,000 at the same time. All disbursements were made by Mrs. Silva.

9. Periodically, Mrs. Silva sent checks to the Taxpayer, which were deposited in the

Taxpayer’s account and used to purchase jewelry. Some of the funds were used to cover the

Taxpayer’s utility bills and other expenses. The checks deposited in the Taxpayer’s account for

these purposes were typically made out in even amounts, such as $1,000, $3,500, $5,000 or $15,000.

Although most deposits were Waci-ci checks, a few of the checks were written by Mel Silva or

Robert Baer.

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10. On occasion, the Silvas purchased items from the Taxpayer for their own account.

These items were paid for with Waci-ci checks, but were sold in the Silvas’ Colorado store, which

was not part of the joint venture.

11. In the summer of 1996, Hafiz Nassar and Mel Silva terminated the joint venture. At

that time, the Taxpayer took over the existing jewelry inventory and accounts receivable, as well as

the liability for repayment of the loan from Robert Baer.

12. In December 1996, Hafiz Nassar discontinued his road sales. From that time on, all

of Taxpayer’s sales were made through the Gallup store.

13. In 1994, Hafiz Nassar agreed to find a buyer for some coral that K. M. Salem, the

owner of Kachina Trading Co. in Gallup, New Mexico, had brought back from Tunisia.

14. K. M. Salem paid Hafiz Nassar one-half of the profits from the sale. This money was

deposited into the Taxpayer’s account: $8,550.00 was deposited on November 16, 1994 and

$18,970.34 was deposited on December 20, 1994.

15. In November 1995, the Department began a field audit of the Taxpayer.

16. On November 29, 1995, the auditors issued a “60-day letter” notifying the Taxpayer

that it had 60 days to demonstrate timely possession of nontaxable transaction certificates

(“NTTCs”) required to support deductions from gross receipts.

17. Although the Taxpayer was required to file monthly CRS-1 returns reporting gross

receipts, compensating, and withholding taxes to the state, the auditors determined that the Taxpayer

had stopped filing CRS-1 returns in August 1993.

18. The audit report notes that the Taxpayer’s records were “in disarray.” There was no

general ledger, and the Taxpayer was unable to provide a summary of cash sales or a listing of sales

invoices or other information reflecting each month’s sales and the deductions taken.

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19. The Taxpayer maintained that most of its sales were wholesale and no gross receipts

tax was due on these transactions. The Taxpayer was not aware that the Gross Receipts and

Compensating Tax Act requires a seller to be in possession of NTTCs before deducting receipts from

wholesale transactions. Accordingly, the Taxpayer was unable to produce NTTCs supporting

deductions taken on sales for resale.

20. The Taxpayer also maintained that most of its sales were made to out-of-state buyers.

After reviewing the invoices provided, the auditors were unable to determine which sales were made

to in-store customers and which sales were shipped or delivered to out-of-state customers.

21. Because the auditors were unable to determine the nature of the Taxpayer’s sales or

confirm which sales had been reported to the state, all income reflected on the Taxpayers’ federal

partnership returns, state CRS-1 returns and bank deposit records were treated as taxable receipts.

22. On September 17, 1998, the Department issued Assessment No. 2294944 to the

Taxpayer in the total amount of $132,444.58, representing gross receipts tax, penalty and interest for

the period January 1990 through October 1995.

23. On December 16, 2000, pursuant to an extension of time granted by the Department,

the Taxpayer filed a written protest to the assessment.

24. After the protest was filed, the Taxpayer’s partners met several times with the

Department’s attorneys and the protest auditor. Following the April 25, 2000 hearing, the record

was kept open for a period of ten days so the Taxpayer could provide additional information

concerning the source of certain wire transfers of funds into the Taxpayer’s bank account.

25. Based on the additional information and records provided, the Department agreed to

the following partial abatements:

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(1) gross receipts tax, penalty and interest assessed for the periods January 1990

through December 1991 (see page 6 of Exhibit 2). By the time the assessment was issued, these

periods were beyond the six-year statute of limitations set out in Section 7-1-18(D) NMSA 1978;

(2) gross receipts tax, penalty and interest assessed on receipts from out-of-state

sales evidenced by C.O.D. sales invoices and UPS shipping documents; receipts from a deductible

sale of tangible personal property to San Juan County Museum (a governmental entity); bank

deposits traced to utility, tax and airline refunds; and a bank deposit identified as a capital

contribution to the partnership by Samia Nassar. These adjustments are described on page 6.1 of

Exhibit 2 and pages PC 11 and PC 11.1 of Exhibit 3; and

(3) gross receipts tax, penalty and interest assessed on a $45,000 wire transfer

deposited in the Taxpayer’s account on or about July 29, 1993 and a $5,000 wire transfer deposited

into the Taxpayer’s account on or about September 21, 1993, both of which were identified as loans

from Robert Baer (see documentation attached to Bridget Jacober’s May 8, 2000 letter to the hearing

officer).

26. The Department did not adjust tax on sales invoiced to out-of-state buyers when there

was no evidence to show whether the transactions were in-store sales or sales where the goods were

shipped or delivered to the buyer’s out-of-state address.

27. Lutfi Nassar, the partner managing the daily operation of the store, attempted to

identify additional out-of-state sales based on his recollection, but there were no shipping documents

or other evidence to indicate whether his memory of these transactions was reliable. The notations

Lutfi Nassar made on the Taxpayer’s invoices to assist the auditors in identifying out-of-state sales

were not consistent. In some cases, for example, the notation “delivered” or “del.” indicated the

item was delivered to the customer in the Taxpayer’s store in Gallup, New Mexico; in other cases,

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the notation indicated the item was delivered to the customer at the customer’s out-of-state location.

28. Even when there was evidence to show that goods sold to a particular customer were

shipped or delivered out-of-state, there was often no way to determine whether receipts from the sale

of those goods were included in the audit. Unless the protest auditor could verify that gross receipts

tax was actually assessed on receipts from the transaction, no adjustment was made.

DISCUSSION

The Taxpayer maintains the Department erroneously assessed gross receipts tax on loan

proceeds and out-of-state sales. The issue presented for decision is whether the Taxpayer has met its

burden of proof concerning these transactions. Section 7-1-17(C) NMSA 1978 provides that any

assessment of tax by the Department is presumed to be correct, and it is the taxpayer's burden to

overcome this presumption. Archuleta v. O'Cheskey, 84 N.M. 428, 431, 504 P.2d 638, 641 (Ct. App.

1972); Wing Pawn Shop, 111 N.M. 735, 741, 809 P.2d 649, 655 (Ct. App. 1991). Additionally, "it is

presumed that all receipts of a person engaging in business are subject to the gross receipts tax."

Section 7-9-5 NMSA 1978.

The Department concedes that loans and out-of-state sales of tangible personal property are

not subject to New Mexico gross receipts tax. The Department contends, however, that the

Taxpayer’s records were inadequate to clearly establish the nature of the sales and deposits at issue.

Waci-ci Deposits. During the audit period, the Taxpayer deposited into its bank account

large sums of money received from Robert Baer, Mel Silva and Waci-ci, the informal joint venture

entered into between the Hafiz Nassar and Mr. Silva. In 1993, Mel Silva obtained a substantial loan

commitment from Robert Baer, a private lender who agreed to advance funds for Mr. Silva and Hafiz

Nassar to purchase Native American jewelry in Gallup, New Mexico, and sell the jewelry to

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merchants and dealers throughout the west. Because the Taxpayer was located in Gallup, the loan

proceeds were deposited into the Taxpayer’s bank account, from which Hafiz Nassar withdrew the

cash needed to purchase jewelry from Native Americans in Gallup. Once a sufficient inventory of

jewelry was acquired, Hafiz Nassar and Mel Silva traveled through the western states, making sales

along the way.

The proceeds of the Baer loan and the out-of-state sales were turned over to Mrs. Silva, who

acted as bookkeeper for the joint venture. Periodically, Mrs. Silva sent checks to the Taxpayer,

which were deposited in the Taxpayer’s account and used to purchase jewelry, although some of the

funds were used to cover the Taxpayer’s utility bills and other expenses. A few checks were written

by Mel Silva or Robert Baer. Most of the checks deposited were issued by Waci-ci. On occasion,

the Silvas purchased items from the Taxpayer for their own account. Many of these items were paid

for with Waci-ci checks, but were sold in the Silvas’ Colorado store, which was not part of the joint

venture.

The Taxpayer argues that deposits made in large, even amounts represent proceeds from the

Baer loan and the out-of-state sales of jewelry by Hafiz Nassar and Mel Silva, neither of which are

subject to New Mexico gross receipts tax. While conceding that at least some of the deposits were

attributable to loans and out-of-state sales, the Department maintains there is insufficient evidence to

distinguish between these deposits and the deposits attributable to the Taxpayer’s sale of goods to

the Silvas and Robert Baer in their individual capacities.

While a great deal of confusion was created by the overlapping use of Waci-ci checks and

invoices, I believe the evidence is sufficient to conclude that deposits made between 1993 and 1995

for large, even sums of money represent proceeds of the Baer loan and the out-of-state sales made by

Hafiz Nassar and Mel Silva on behalf of the joint venture. As Lutfi and Hafiz Nassar both testified,

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goods are rarely sold in even lots of $3,000, $5,000 or $15,000. A review of the many invoices

admitted into evidence supports this testimony since the vast majority of the invoices are for odd

amounts (see, e.g., Exhibit 10 invoices for $1262.80, $629.00, $1382.00, and $1,029.00). In addition,

while there are a few deposits from Waci-ci, Mel Silva, and Mel’s Pawn Shop in 1992 and early

1993, the large even-dollar Waci-ci deposits first appear in the Taxpayer’s records in mid-1993, the

same time the parties’ joint venture got underway. Based on the documentary evidence in the record

and the Nassars’ testimony, I find that the following $151,500 of deposits listed in Exhibit 2 were

proceeds from the Baer loan or from out-of-state sales by the joint venture and are not subject to

New Mexico gross receipts tax:1

Page/Exhibit 2 Month/Year Deposit Name

12.11 May-93 $ 500 Waci-ci
12.11 Jun-93 $ 3,000 Mel Silva
12.11 Jun-93 $ 4,500 Robert Baer
12.11 Jun-93 $15,500 Waci-ci
12.11 Jun-93 $ 4,500 Waci-ci
12.12 Jun-93 $15,000 Waci-ci
12.12 Jul-93 $ 3,000 Waci-ci
12.13 Jul-93 $ 3,000 Waci-ci
12.14 Aug-93 $ 5,000 Robert Baer
12.14 Sep-93 $ 5,000 Robert Baer
12.14 Sep-93 $ 5,000 Waci-ci
12.14 Sep-93 $ 5,000 Waci-ci
12.14 Sep-93 $ 5,000 Waci-ci
12.14 Sep-93 $ 5,000 Waci-ci
12.15 Oct-93 $ 6,000 Waci-ci
12.15 Oct-93 $ 1,000 Waci-ci
12.15 Nov-93 $ 5,000 Waci-ci
12.15 Dec-93 $ 2,000 Waci-ci
12.15 Jan-94 $ 5,000 Waci-ci
12.16 Jan-94 $ 5,000 Waci-ci
12.16 Jan-94 $ 8,500 Waci-ci
12.16 Jan-94 $ 7,000 Waci-ci

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A September 22, 1993 deposit in the amount of $5,000 has been excluded from the list. As set out in Finding of
Fact No. 25(3) on page 5, the Department has already agreed to abate tax on this deposit, which was identified as a
wire transfer from Robert Baer.

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12.16 Feb-94 $ 1,000 Waci-ci
12.16 Mar-94 $ 2,000 Waci-ci
12.16 Mar-94 $ 2,000 Waci-ci
12.16 Mar-94 $ 3,000 Waci-ci
12.16 Mar-94 $ 1,000 Waci-ci
12.17 Apr-94 $ 3,000 Waci-ci
12.17 Jun-94 $ 3,000 Waci-ci
12.17 Jun-94 $ 4,000 Waci-ci
12.18 Jul-94 $ 1,000 Waci-ci
12.18 Aug-94 $ 3,500 Waci-ci
12.18 Aug-94 $ 3,500 Waci-ci
12.19 Nov-94 $ 2,500 Waci-ci
12.20 Jul-95 $ 3,500 Waci-ci

The following deposits in odd amounts are assumed to represent purchases by the Silvas or Robert

Baer in their individual capacities. Because there is no satisfactory evidence to the contrary, these

sales must be treated as New Mexico sales subject to gross receipts tax:

Page/Exhibit 2 Month/Year Deposit Name

12.5 Aug-92 $1,088 Waci-ci
12.8 Dec-92 $ 120 Mel’s Pawn Shop
12.10 May-93 $1,688 Mel Silva
12.11 Jun-93 $4,322 Mel Silva
12.14 Aug-93 $ 975 Robert Baer
12.14 Aug-93 $6,966 Waci-ci
12.16 Mar-94 $2,805 Waci-ci
12.16 Mar-94 $2,775 Waci-ci
12.17 May-94 $5,443 Waci-ci
12.18 Jul-94 $5,050 Waci-ci
12.18 Jul-94 $4,950 Waci-ci
12.19 Oct-94 $4,750 Waci-ci

Out-Of-State Sales. The Taxpayer contends the Department erroneously included receipts

from out-of-state sales when calculating the Taxpayer’s gross receipts tax liability. The Department

responds that the Taxpayer’s records were inadequate to clearly establish the nature of the sales at

issue. Section 7-1-10 NMSA 1978 requires every taxpayer to “maintain books of account or other

records in a manner that will permit the accurate computation of state taxes....” As stated in the

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concurring opinion to Archuleta v. O'Cheskey, 84 N.M. 428, 504 P.2d 638 (Ct. App. 1972), which

approved the Department’s method of estimating tax in the absence of adequate taxpayer records:

“The taxpayer has a duty to provide the commissioner with books and records upon which to

establish a standard for taxation as provided by law. If he fails to do so, he cannot complain of the

best methods used by the commissioner.”

In this case, the Taxpayer did not maintain a general ledger and was unable to provide a

summary of cash sales or a listing of sales invoices or other information reflecting each month’s

sales and the deductions taken. Although the Taxpayer’s invoices list the customer by name and

address, there is no way to determine which sales were made to in-store customers and which sales

were shipped or delivered to customers located out-of-state. After extensive review of the

Taxpayer’s records, the auditors were able to trace only two or three sales to UPS shipping

documents. The Department also allowed one or two sales where the invoices showed delivered was

“COD”.

Lutfi Nassar, the partner managing the daily operation of the store, attempted to identify out-

of-state sales based on his recollection. But the notations Mr. Nassar made on the Taxpayer’s

invoices to indicate that an item was shipped or delivered to the customer were inconsistent. An

example of this inconsistency was evidenced in Mr. Nassar’s testimony concerning Invoice 7237

(found on the last page of Exhibit 7), which documents a transaction with De Jeunes Perfume

Parlour in San Antonio, Texas. The invoice reads as follows:

Refund Returned Merchandise (-200)
took Merchandise 850.00
balance 650.00.

The invoice is signed by the customer. In the upper left-hand corner of the invoice, Lutfi Nassar

made the notation “Del.” When questioned, Mr. Nassar testified that since he did not remember

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making any deliveries to San Antonio, Texas, this was most likely a transaction that took place in the

Taxpayer’s store in Gallup, New Mexico. When the Department’s attorney asked whether this

meant that all invoices with the notation “Del.” or “Delivered” were transactions where the

merchandise was delivered to the customer in Gallup, Mr. Nassar said no, not necessarily.

Even when the Department could verify that goods sold to a particular customer were

shipped or delivered out-of-state, there was often no way to determine whether receipts from the sale

of those goods were included in the audit exception base. Unless the auditor could verify that gross

receipts tax was actually assessed on receipts from the transaction, no adjustment was made.

Based on the evidence presented, the Taxpayer has failed to establish that receipts included

in the audit exception base were receipts from out-of-state sales. Accordingly, the Taxpayer has not

overcome the presumption of correctness that attaches to the Department’s assessment. The

Taxpayer has an obligation to maintain books of account and records that allow the Department to

verify whether a sale was made in New Mexico or outside the state; whether the receipts from that

sale were deposited into the Taxpayer’s bank account; and whether the receipts were reported (or

reported and deducted) to the Department on the Taxpayer’s monthly CRS-1 returns. The

Department cannot be expected to rely on a taxpayer’s memory of specific sales transactions,

particularly when several years have passed since those transactions took place. Section 7-1-5

NMSA 1978 creates a presumption that all receipts of a person engaging in business in New Mexico

are subject to the gross receipts tax. In the absence of adequate records to establish out-of-state sales,

all of the Taxpayer’s receipts are presumed taxable.

Receipts from Kachina Trading Co. The final issue raised by the Taxpayer concerns two

1994 bank deposits: a November 16, 1994 deposit of $8,550.00 and a December 20, 1994 deposit of

$18,970.34 (Exhibit 12). Hafiz Nassar testified that these receipts represented his profit or

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commission from selling coral on behalf of K. M. Salem, the owner of Kachina Trading Co., another

business located in Gallup, New Mexico. Mr. Nassar said that Mr. Salem brought the coral back

from Tunisia, but did not know who how to market it. Mr. Nassar offered to find a buyer for the

coral in exchange for half the profits. Mr. Nassar does not believe these deposits should be treated as

taxable receipts because the coral was not part of the Taxpayer’s regular inventory.

Section 7-9-4 NMSA 1978 imposes an excise tax on the gross receipts of any person

engaging in business in New Mexico. “Engaging in business” is defined in Section 7-9-3(E) NMSA

1978 to mean “carrying on or causing to be carried on any activity with the purpose of direct or

indirect benefit.” The term “gross receipts” is defined in Section 7-9-3(F) NMSA 1978, as:

the total amount of money or the value of other consideration received from
selling property in New Mexico, from leasing property employed in New
Mexico, from selling services performed outside New Mexico the product of
which is initially used in New Mexico or from performing services in New
Mexico.

Whether the sale of the coral is characterized as a sale of tangible personal property or as a sale of

Hafiz Nassar’s services, the proceeds of the transaction are gross receipts. Although the coral may

not have been part of the Taxpayer’s regular inventory, Mr. Nassar’s services in finding a buyer for

the coral were very similar to his sales activities as a partner of the Taxpayer. The money Mr.

Nassar earned from the sale was deposited in the Taxpayer’s bank account, and there is no evidence

that Mr. Nassar treated this money as his personal funds, rather than as funds belonging to the

business. Given these circumstances, the proceeds from the sale of the coral were properly included

in the Taxpayer’s taxable receipts.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment No. 2294944, and

jurisdiction lies over the parties and the subject matter of this protest.

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2. The Taxpayer is entitled to the partial abatements of gross receipts tax, penalty and

interest set out in Finding of Fact 25 on page 5 of this decision.

3. The Taxpayer is entitled to the abatement of gross receipts tax, penalty and interest

assessed on the $151,500 of loans and out-of-state sales listed at pages 8 and 9 of this decision.

4. The Taxpayer has not met its burden of proving its right to additional adjustments for

out-of-state sales or for the sale of coral on behalf of Kachina Trading Co. and has failed to overcome

the presumption of correctness that attaches to the Department’s assessment of tax on these sales.

For the foregoing reasons, the Taxpayer's protest is partially granted and the Department is

ordered to make the adjustments set out in Conclusions of Law 2 and 3, above. In all other respects, the

Taxpayer’s protest is denied.

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DATED May 10, 2000.

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