As a small contractor, do I owe gross receipts tax on the part of my customer's payment that just covers materials I bought?

Plain-English summary

A carpenter working under fixed-price contracts owed gross receipts tax on the whole price, including the materials portion — because he bought the materials in his own name to fulfill his own contract, not as an "agent" of his customers. Telling the supplier who the customer was did not create an agency relationship. Protest DENIED.

Ronald Frost, who is not a licensed contractor, did part-time framing and carpentry in 1996 — decks, patio covers, storage sheds, and small remodels — alongside his full-time salaried job. He worked under written, fixed-price agreements that covered both materials and labor as a single price, not broken out, with half due at signing. He would discuss the needed materials with the client, but he decided where to buy and the quantity and quality; he bought the materials in his own name, paid for them himself (sometimes on his own supplier accounts, earning a contractor's discount), and deposited the client's payments in his own checking account. His contracts gave him no authority to buy in a client's name and contained no agency language.

Frost reported $17,613 in gross receipts on his 1996 federal Schedule C. He conceded that $9,508 (his labor/services) was taxable but argued the $8,105 covering materials was not. Learning of the income through IRS data, the Department assessed $898.44 in gross receipts tax plus penalty and interest.

The materials money was taxable — no disclosed agency

The starting point is that all business receipts are presumed taxable (Section 7-9-5) and an assessment is presumed correct (Section 7-1-17(C)), so Frost had the burden to show the materials money was excluded. He relied on Section 7-9-3(F)(2)(f), which excludes "amounts received solely on behalf of another in a disclosed agency capacity." Under the implementing regulation (3 NMAC 2.1.19.3.1), an agency relationship exists only if the person can bind the principal to a contract with a third party — so the supplier could enforce payment against the customer.

Frost did tell the suppliers who his customer was, so the relationship was "disclosed." But disclosure alone is not agency. Examining his contracts, the hearing officer found nothing making his customers liable to the suppliers: the contracts set a single price for a finished project, gave Frost no authority to purchase in the customer's name, and left the buying decisions entirely to him. The case was analogous to Brim Healthcare v. State, where a manager's contractual expense reimbursements were held taxable because it received them for its own account to meet its own obligations. Likewise, Frost bought the materials in his own name to satisfy his own contractual duty to deliver the projects, so the payments were not reimbursements — they were payment for his services. The entire fixed price was taxable gross receipts.

Result: protest DENIED.

What this means for you

A fixed price that "includes materials" is fully taxable

If you contract to deliver a finished project for one price, the whole price is gross receipts — even the part that just covers materials. Bundling materials and labor into a single price does not carve the materials out of the tax when you are the one obligated to furnish them.

Disclosing the customer's name to your supplier is not enough to be an "agent"

The disclosed-agency exclusion requires more than telling the supplier who the job is for. You must actually be able to bind your customer to the purchase, so the supplier could collect from the customer directly. If you buy in your own name, on your own account, and decide what and where to buy, you are not an agent — and the money you receive to cover materials is taxable.

If you want a true agency arrangement, structure it that way — in writing

To keep materials genuinely out of your gross receipts, the customer generally needs to be the buyer: written authority for you to purchase in the customer's name, the customer liable to the supplier, and ideally the customer paying (or being billed by) the supplier directly. Absent that, expect the full contract price to be taxable, and price your jobs with the gross receipts tax in mind.

Small and part-time jobs are still taxable — and cross-checked against your federal return

Even occasional, part-time construction work is "engaging in business," and the Department routinely matches Schedule C income from the IRS. Reporting business income federally without paying New Mexico gross receipts tax is a common way an assessment lands years later, with penalty and interest.

Common questions

Q: My contract price covers both labor and materials. Do I owe gross receipts tax on the materials part?
A: Yes, if you are obligated to furnish the materials and you buy them yourself. When you deliver a finished project for one price, the entire price is gross receipts — the materials portion is not carved out.

Q: I told the supplier which customer the materials were for. Doesn't that make me a disclosed agent?
A: No. Disclosure alone is not enough. Agency requires that your customer could be held legally liable to the supplier. If you bought in your own name with no authority to bind the customer, there is no disclosed-agency exclusion.

Q: How could I actually keep materials out of my gross receipts?
A: The customer generally has to be the real buyer — with written authority for you to purchase in their name, the customer liable to the supplier, and the supplier able to collect from the customer. That is a genuine agency arrangement, not just a note on the invoice.

Q: It was only part-time side work. Is that still taxable?
A: Yes. Part-time or occasional construction work is still engaging in business for gross receipts tax, and the Department matches the business income you report to the IRS on Schedule C.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-9-3(F)(2)(f) — "gross receipts" excludes amounts received solely on behalf of another in a disclosed agency capacity
• NMSA 1978, § 7-9-5 — all receipts of a person engaging in business are presumed subject to gross receipts tax
• NMSA 1978, § 7-1-17(C) — a Department assessment is presumed correct, placing the burden on the taxpayer
• Regulation 3 NMAC 2.1.19.3.1 — reimbursed expenditures are gross receipts unless incurred as agent for a disclosed principal; an agency relationship exists only where the person can bind the principal so a third party can enforce the obligation against the principal

Cases cited:

• Brim Healthcare v. State, Taxation and Revenue Dep't, 119 N.M. 818 (Ct. App. 1995) — contractual expense reimbursements received for the taxpayer's own account, to meet its own contract obligations, are taxable gross receipts rather than agency payments

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Ronald and Gloria Frost
• Decision PDF: D&O 00-27

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
RONALD AND GLORIA FROST NO. 00-27
ID. NO. 02-404389-00 3, PROTEST TO
ASSESSMENT NO. 2499887

DECISION AND ORDER

This matter came on for formal hearing on August 21, 2000 before Gerald B. Richardson,

Hearing Officer. Ronald and Gloria Frost, hereinafter, “Taxpayers”, were represented by Ronald

Frost. The Taxation and Revenue Department, hereinafter, “Department”, was represented by

Bruce J. Fort, Special Assistant Attorney General. Based upon the evidence and arguments

presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. In 1996, Taxpayers filed a Federal Schedule C with the Internal Revenue Service (“IRS”)

reporting $17,613 in gross receipts from a framing and carpentry business.

2. Mr. Frost is not a licensed contractor.

3. During 1996, Mr. Frost engaged in part-time work as a framer and carpenter, in addition

to his full time salaried job. The jobs he performed were fairly small jobs such as building

decks, patio covers, storage sheds and performing small remodeling jobs.

4. Prior to taking on a construction job, Mr. Frost would meet with his potential client to

discuss their project to determine what the client envisioned and the materials to be used. He

would then meet with a construction materials supplier, would disclose who his customer was

and the materials needed and would obtain a price for the necessary materials and determine

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their availability. Mr. Frost would then use this information to develop a price to be presented to

his potential client for the proposed project.

5. If a client determined to proceed with engaging Mr. Frost for the project, Mr. Frost

entered into written agreements with his customers which specified the work to be performed,

the materials to be used, established a fixed price for the project and set forth the terms of

payment for the project. The agreements specified that the price included all materials and labor

but did not break out the specific amounts for either category. The terms of payment in each

agreement required that the customer pay one half of the project cost upon the signing of the

agreement. None of the agreements had any language authorizing Mr. Frost to act as an agent

for the customer in purchasing materials nor did he discuss with his clients making materials

purchases in their name for the project.

6. Although Mr. Frost discussed with his clients the materials needed to do the project

contemplated, it was left to Mr. Frost to decide where to purchase the materials and the quantity

and quality of the materials necessary to complete the project described in the agreements.

7. The money paid to Mr. Frost by his clients under the agreements was deposited by Mr.

Frost into his checking account. Mr. Frost wrote checks on his checking account when

purchasing materials to be used in the projects for his clients.

8. Although Mr. Frost disclosed the name of his client to the businesses from whom

materials were purchased, he never used the word “agent” when discussing his relationship with

his clients with the materials suppliers. Mr. Frost had accounts in his own name with some of the

materials suppliers and received a contractor’s discount when he made purchases from those

suppliers. All purchases were made in his name and paid for by him at the time of purchase.

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9. Sometimes Mr. Frost arranged to have his materials purchases delivered by the supplier

to his customer’s address. Sometimes, Mr. Frost picked up the materials himself.

10. Of the $17,613 reported as gross receipts on the Taxpayers’ Federal Schedule C, $8,105

represented the cost of materials. The Taxpayers admit that the remaining $9,508 are gross

receipts subject to gross receipts tax.

11. The Department has an information sharing agreement with the IRS through which it

learned of the gross receipts reported by the Taxpayers on their 1996 Federal Schedule C.

12. The Department contacted Mr. Frost because he was not registered with the Department

as a business for gross receipts tax purposes. Mr. Frost spoke with an employee of the

Department, Pat Robertson, and explained his situation. After their discussion, Mr. Frost agreed

that he was liable for gross receipts tax on the amount he received for his services but he did not

believe that he was liable for gross receipts tax on the materials he purchased for his customers.

Ms. Robertson advised Mr. Frost to file an amended Federal income tax return with an amended

Schedule C, which treated the amounts of materials and supplies as a deduction from income as

cost of goods sold rather than as an expense deduction for supplies.

13. On February 7, 2000, Taxpayers filed an amended Federal income tax return with an

amended Schedule C in accordance with the advice of Ms. Robertson of the Department. The

Amended Schedule C still reflected the Taxpayers total gross receipts to be $17,613, and the

amendments did not alter the amount of net profit reported from Mr. Frost’s business.

14. Mr. Frost now believes that he was advised erroneously by the Department and that his

gross receipts should not include the costs of materials used in the projects he built for his

clients.

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15. On March 1, 2000, the Department issued Assessment No. 2499887 to the Taxpayers,

assessing $898.44 in gross receipts tax, $89.88 in penalty and $ 488.53 in interest for the periods

of January through December, 1996.

16. On March 27, 2000, the Taxpayers filed a written protest to Assessment No. 2499887.

17. The Taxpayers have paid $427.56 towards the gross receipts tax assessed.

DISCUSSION

The sole issue to be determined herein is whether the amounts Mr. Frost received from

his customers and used to purchase construction materials to be used in the projects he was

building for them constituted gross receipts subject to gross receipts tax.

As a starting point, Section 7-9-5 NMSA 1978 provides a presumption that all receipts of

a person engaging in business are subject to the gross receipts tax. Section 7-1-17(C) provides

that any assessment of taxes by the Department is presumed to be correct. Thus, the Taxpayers

carry the burden of establishing that the amounts Mr. Frost received to purchase construction

materials are not gross receipts subject to gross receipts tax.

Taxpayers argue that the amounts received for the purchase of materials fall under the

express exclusion from the definition of “gross receipts” found at § 7-9-3(F)(2)(f), which

excludes “amounts received solely on behalf of another in a disclosed agency capacity.” The

Department has implemented a regulation, 3 NMAC 19.3.1 which further clarifies the exclusion

from gross receipts under § 7-9-3(F)(2)(f) by explaining the legal requirements of an agency

relationship. It provides that:

The receipts of any person received as a reimbursement of
expenditures incurred in connection with the performance of a
service or the sale or lease of property are gross receipts as defined
by Subsection F of Section 7-9-3, unless that person incurs such
expense as agent on behalf of a principal while acting in a
disclosed agency capacity. An agency relationship exists if a

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person has the power to bind a principal in a contract with a third
party so that the third party can enforce the contractual obligation
against the principal.

In this case Mr. Frost informed the materials vendors of the name of his customer, so there is no

issue that the vendors were aware of the relationship between Mr. Frost and his customer. It

remains to be determined whether the relationship between Mr. Frost’s customer and himself

constituted an agency relationship such that the materials vendors would have the right to

enforce payment for the materials against Mr. Frost’s customers. This requires an examination

of the contractual relationship between the customers and Mr. Frost to determine whether the

contract establishes an agency relationship such that Mr. Frost was empowered to bind his

customers in his transactions with the third-party materials vendors.

The contracts each specify that the contracted price includes the cost of materials as well

as labor. Those costs are not broken down separately. The contracts provide no authorization

for Mr. Frost to purchase the materials in the customer’s name nor do they contain any language

which could be considered as creating an agency relationship with respect to the materials

purchases. Mr. Frost testified that the decisions as to where to purchase materials, and the

quantity and quality of the materials to be used were his decisions.

These terms do not establish an agency relationship. This case is analogous to that in

Brim Healthcare v. State, Taxation and Revenue Department, 119 N.M. 818, 498 P.2d 498 (Ct.

App. 1995). In that case, Brim contracted with hospitals to manage them and also to provide key

management personnel who were employees of Brim. Under its contracts with hospitals, Brim

received compensation for its management services and also reimbursement for the salaries,

fringe benefits and expenses for Brim’s management employees working at the hospitals. Brim

had claimed that its receipts for the reimbursement of the salaries, benefits and expenses of its

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employees should not be considered gross receipts subject to tax because it was acting as an

agent for the hospitals in paying these expenses. The Court of Appeals rejected this argument,

noting that when it received the expense reimbursements under its contract with the hospitals, it

was receiving them for its own account and expended them to meet its own responsibilities

pursuant to its contract. The same holds true in the instant matter. Mr. Frost’s contracts with his

clients are contracts to perform certain construction projects. They obligate Mr. Frost to furnish

both materials and labor to complete the projects for an agreed price. Mr. Frost, in fact, did just

that. He purchased the materials in his own name and used them to build the projects agreed to.

As such, the money he received from his clients under the contracts cannot be characterized as

reimbursements. They are payments for the services Mr. Frost provided pursuant to his

obligations under the contracts. The obligations to the materials suppliers were Mr. Frost’s

obligations incurred in his own name to fulfill his obligations under his contracts with his clients

to provide the materials and labor to complete the agreed upon projects. Thus, all amounts Mr.

Frost received from his customers are gross receipts subject to gross receipts tax.

CONCLUSIONS OF LAW

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

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

2. Mr. Frost was not acting as an agent in a disclosed agency capacity when purchasing

construction materials for use in the construction projects he built for his clients. Rather, Mr.

Frost made those purchases in his own name and to fulfill his own obligations to his clients

pursuant to his contract with his clients.

3. The total amount of money Mr. Frost received from his clients pursuant to his contracts

with his clients are gross receipts pursuant to § 7-9-3(F) NMSA 1978.

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

DONE, this 19th day of September, 2000.

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