As an independent contractor, do I owe New Mexico gross receipts tax on the materials I buy and get reimbursed for, when the store already charged me tax?

Plain-English summary

An independent maintenance contractor owed New Mexico gross receipts tax on everything the company paid him — including the materials he bought and was reimbursed for — because he was engaging in business, was not a disclosed agent, and being taxed alongside the vendors was not illegal double taxation. Protest DENIED.

In 1996, Larry L. Cotton did maintenance work as an independent contractor for a rental-management company, earning a flat hourly rate plus reimbursement for materials. He bought the materials in his own name, paid with his own cash or credit card, and the vendors charged him gross receipts tax as part of the price. Cotton did not charge the company gross receipts tax and did not register or pay any himself. In 2000 the IRS reported his Schedule C business income to the Department, which found he was unregistered and assessed $1,427.40 in gross receipts tax, penalty, and interest for 1996. He raised three arguments; all failed.

1. He was "engaging in business"

Section 7-9-4 taxes the gross receipts of any person "engaging in business" in New Mexico, and Section 7-9-3(E) defines that phrase broadly as "carrying on... any activity with the purpose of direct or indirect benefit." The statute draws no line between big corporations and individual independent contractors. Cotton contracted to perform services for pay, so he was engaging in business and owed tax on his receipts.

2. His reimbursed expenses were not received as a "disclosed agent"

Gross receipts do not include amounts a person receives "solely on behalf of another in a disclosed agency capacity" — but Regulation 3 NMAC 2.1.19.3.1 makes clear that reimbursed expenses are ordinarily taxable gross receipts unless the person incurred them as an agent who can legally bind a disclosed principal. The test: could the third party enforce the obligation against the principal? Here it could not. Cotton bought materials in his own name; the company's name was not on the invoices; and if his check had bounced, the vendor could have pursued only Cotton, not the company. In most cases the vendor did not even know he was buying for someone else. So the reimbursements were his own taxable receipts, not pass-throughs received in a disclosed agency capacity.

3. Taxing him too is not illegal "double taxation"

Cotton argued that taxing his reimbursed materials duplicated the tax the vendors had already charged him. The hearing officer explained that double taxation is a "popular misconception" — New Mexico courts have repeatedly held there is no prohibition against it (Grant; Amarillo-Pecos Valley Truck Line; Ft. Smith Lumber Co. v. Arkansas). More to the point, there was no double taxation at all: the vendor's sale to Cotton and Cotton's billing to the company were two separate transactions between different taxpayers (House of Carpets; New Mexico Sheriffs & Police Association). The vendor alone owed tax on the first; Cotton alone owed tax on the second. That a seller passes the tax on to a buyer as part of the price does not shift the legal incidence — the seller remains liable to the state either way.

Result: protest DENIED — the gross receipts tax on Cotton's full receipts, including reimbursed materials, stood.

What this means for you

Independent contractors owe gross receipts tax like any business

"Engaging in business" is defined broadly and includes a solo contractor working for an hourly fee. If you perform services for pay in New Mexico, your receipts are generally subject to gross receipts tax even if you think of yourself as just an hourly worker — register and either charge the tax or build it into your rate.

Reimbursed materials are usually taxable unless you are a true disclosed agent

Getting "reimbursed" does not make the money tax-free. To keep pass-through purchases out of your gross receipts, you generally must buy as a disclosed agent — in the principal's name, with the vendor able to collect from the principal. Buying in your own name makes the reimbursement your taxable receipt.

"Double taxation" is not a defense in New Mexico

New Mexico does not prohibit double taxation, and taxing successive sellers in a chain of transactions is not double taxation at all. The fact that your supplier already charged you tax does not excuse the tax on your own sale or service.

Passing the tax to your customer does not move who owes it

Gross receipts tax is legally on the seller. Whether or not you separately state it and collect it from your customer, you remain responsible for remitting it to the state.

Common questions

Q: I'm an independent contractor, not a company. Do I really owe gross receipts tax?
A: Yes. "Engaging in business" under Section 7-9-3(E) is broad and covers individual independent contractors. Your receipts for services performed in New Mexico are subject to gross receipts tax.

Q: I only pass the cost of materials through to my client. Isn't that reimbursement tax-free?
A: Not usually. Reimbursed expenses are taxable gross receipts unless you incurred them as a disclosed agent who can bind the client — typically buying in the client's name so the vendor could collect from the client. Buying in your own name makes it your taxable receipt.

Q: The store already charged me tax on the materials. Isn't taxing me again double taxation?
A: No. The store's sale to you and your billing to your client are two separate transactions between different taxpayers, and New Mexico does not prohibit double taxation in any event.

Q: If I don't add the tax to my invoice, am I off the hook?
A: No. The gross receipts tax falls on the seller. If you do not collect it from your customer, you still owe it to the state out of your receipts.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-9-4 — imposes the gross receipts tax on the gross receipts of any person engaging in business in New Mexico
• NMSA 1978, § 7-9-3(E) — defines "engaging in business" broadly as carrying on any activity for the purpose of direct or indirect benefit
• NMSA 1978, § 7-9-3(F) — defines "gross receipts"; excludes amounts received solely on behalf of another in a disclosed agency capacity
• Regulation 3 NMAC 2.1.19.3.1 — reimbursed expenditures are gross receipts unless incurred as agent for a disclosed principal; an agency relationship requires the power to bind the principal in a contract enforceable by the third party

Cases cited:

• New Mexico State Board of Public Accountancy v. Grant, 61 N.M. 287, 299 P.2d 464 (1956) — no prohibition against double taxation
• Amarillo-Pecos Valley Truck Line, Inc. v. Gallegos, 44 N.M. 120, 99 P.2d 447 (1940) — no prohibition against double taxation
• Ft. Smith Lumber Co. v. Arkansas, 251 U.S. 532 (1920) — double taxation is not unconstitutional
• House of Carpets, Inc. v. Bureau of Revenue, 87 N.M. 747, 507 P.2d 1078 (Ct. App. 1973) — no double taxation where the tax falls on different taxpayers in separate transactions
• New Mexico Sheriffs & Police Association v. Bureau of Revenue, 85 N.M. 565, 514 P.2d 616 (Ct. App. 1973) — tax on successive transactions between different taxpayers is not double taxation

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Larry L. Cotton
• Decision PDF: D&O 00-32

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
LARRY L. COTTON No. 00-32
ID NO. 02-404695-00-7
ASSESSMENT NO. 2514719

DECISION AND ORDER

A formal hearing on the above-referenced protest was held November 1, 2000, before

Margaret B. Alcock, Hearing Officer. Larry L. Cotton (“the Taxpayer”) represented himself. The

Taxation and Revenue Department ("the Department") was represented by Bruce J. Fort, Special

Assistant Attorney General. Based on the evidence and arguments presented, IT IS DECIDED AND

ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. During 1996, the Taxpayer worked as an independent contractor performing

maintenance services for a rental management company (“the Company”).

2. Pursuant to his contract with the Company, the Taxpayer earned a flat rate per hour,

payable upon completion of each job, plus reimbursement for any expenses he incurred in

connection with the performance of his services.

3. The Taxpayer was instructed to purchase materials a cheaply as possible, but he

made the decision as to where to purchase the items needed.

4. The Taxpayer purchased materials in his own name and paid for them with cash or

with his own credit card.

5. The vendors who sold materials to the Taxpayer included the New Mexico gross

receipts tax as part of the price charged to the Taxpayer.

6. The Taxpayer did not include gross receipts tax as part of his charges to the

Company, nor did the Taxpayer report or pay gross receipts tax on his receipts from the Company.

7. The Taxpayer’s 1996 federal income tax return reported all receipts from his

maintenance services, including reimbursed expenses, as business income on Schedule C to federal

Form 1040.

8. In 2000, the Department received information from the Internal Revenue Service

concerning the business income reported on the Taxpayer’s 1996 federal income tax return. When

the Department investigated, it found the Taxpayer was not registered with the Department and had

not reported or paid gross receipts tax on this income.

9. On April 9, 2000, the Department issued Assessment No. 2514719 to the Taxpayer in

the total amount of $1,427.40, representing gross receipts tax, penalty and interest on his business

receipts for tax periods January through December 1996.

10. On April 24, 2000, the Taxpayer filed a written protest to the Department’s

assessment.

DISCUSSION

The Taxpayer makes the following arguments in support of his protest to the Department’s

assessment of gross receipts tax: (1) the Taxpayer did not have a business, but simply provided

services in return for an hourly wage; (2) the Taxpayer was purchasing materials as an agent for the

Company and should not be liable for gross receipts tax on these reimbursed expenses; and (3)

imposing tax on the Taxpayer’s reimbursed expenses results in double taxation.

Engaging in Business. Section 7-9-4 NMSA 1978 imposes an excise tax on the gross

receipts of any person engaging in business in New Mexico. The definition of “engaging in

business” is quite broad and includes “carrying on or causing to be carried on any activity with the

2
purpose of direct or indirect benefit.” (emphasis added). Section 7-9-3(E), NMSA 1978. The statute

makes no distinction between activities engaged in by large corporations and activities engaged in by

small “mom and pop” operations or by individuals acting as independent contractors. In this case,

the Taxpayer entered into a contract to perform maintenance services as an independent contractor in

return for an hourly fee, plus expenses. Because this is an activity carried on for the purpose of

obtaining a direct benefit (i.e., payment), the Taxpayer’s work meets the statutory definition of

engaging in business.

Tax on Reimbursed Expenses. As previously noted, Section 7-9-4 NMSA 1978 imposes an

excise tax on the gross receipts of any person engaging in business in New Mexico. Section 7-9-3(F)

defines the term “gross receipts” to include receipts from selling property in New Mexico, leasing

property employed in New Mexico or selling services performed in New Mexico. The term "gross

receipts" does not include amounts received solely on behalf of another in a disclosed agency capacity.

As Regulation 3 NMAC 2.1.19.3.1 explains, reimbursed expenses are treated as receipts received in a

disclosed agency capacity in only limited circumstances:

19.3 REIMBURSED EXPENDITURES:
19.3.1 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 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, the Taxpayer’s reimbursed expenses were subject to gross receipts tax, unless he had the

authority to legally bind the Company to pay for the purchases he made. Assume, for example, that

the Taxpayer purchased a screen door and the check he gave to the store owner was returned for

3
insufficient funds. If the Taxpayer purchased the door as a disclosed agent for the Company, the

store owner would have the right to take collection action directly against the Company.

Based on the facts presented at the hearing, the Taxpayer was not acting in a disclosed

agency capacity. Instead, the Taxpayer was purchasing materials in his own name. The Company’s

name did not appear on any of the invoices, and the vendor would not have had the right to enforce

payment against the Company in the event the Taxpayer’s check bounced or his credit card was

refused. In most cases, the vendor did not even know the Taxpayer was purchasing the materials for

a third party. Given these facts, the reimbursements the Taxpayer received for expenditures made on

behalf of the Company were not received in a disclosed agency capacity and were subject to gross

receipts tax.

Double Taxation. The Taxpayer argues that imposing tax on his reimbursed expenses

results in double taxation because the vendors who sold materials to the Taxpayer included the gross

receipts tax as part of the purchase price. It is a popular misconception that double taxation is illegal

or unconstitutional. In fact, New Mexico’s courts have held, on numerous occasions, that there is no

prohibition against double taxation. See, e.g., New Mexico State Board of Public Accountancy v.

Grant, 61 N.M. 287, 299 P.2d 464 (1956); Amarillo-Pecos Valley Truck Line, Inc. v. Gallegos, 44 N.M.

120, 99 P.2d 447 (1940). See also, Ft. Smith Lumber Co. v. Arkansas, 251 U.S. 532 (1920).

In construing the New Mexico Gross Receipts and Compensating Tax Act, the New Mexico

courts have also held that there is no double taxation where the taxes complained of are imposed on

the receipts of different taxpayers resulting from separate transactions. See, House of Carpets, Inc. v.

Bureau of Revenue, 87 N.M. 747, 507 P.2d 1078 (Ct. App. 1973); New Mexico Sheriffs & Police

Association v. Bureau of Revenue, 85 N.M. 565, 514 P.2d 616 (Ct. App. 1973). That is the case here.

Gross receipts tax was imposed on each vendor who sold goods to the Taxpayer. In that transaction,

4
the vendor was the only person liable for gross receipts tax on the sale—the Taxpayer had no

obligation to report or pay tax on the vendor’s receipts. Gross receipts tax was also imposed on the

Taxpayer when he billed the Company for the cost of materials used in performing his maintenance

services. The Taxpayer was the only person liable for gross receipts tax on this transaction—neither

the vendor nor the Company had any obligation to report or pay tax on the Taxpayer’s receipts.

In summary, the gross receipts tax is imposed on every seller of goods and services.

Although it is common practice for a seller to pass the cost of the gross receipts tax on to the buyer,

this does not change the legal incidence of the tax. If the buyer refuses or neglects to pay the amount

of the passed-on gross receipts tax, the seller is still responsible for paying the tax to the state. When

there are two sellers and two transactions, the courts have held that it is not double taxation to

impose a tax on each successive transaction. Accordingly, it is not illegal to impose gross receipts

tax on the Taxpayer’s receipts from reimbursed expenses, even though the vendor included gross

receipts tax in its charge to the Taxpayer.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment No. 2514719, and

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

2. The Taxpayer was engaging in business in New Mexico as defined in Section 7-9-3(E)

NMSA 1978 and was subject to gross receipts tax on his receipts from performing maintenance

services during 1996.

3. The reimbursements the Taxpayer received for the purchase of materials were not

received solely on behalf of another in a disclosed agency capacity. These reimbursements were

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

5

4. The imposition of gross receipts tax on the Taxpayer’s reimbursed expenses does not

constitute illegal or unconstitutional double taxation.

For the foregoing reasons, the Taxpayer's protest IS DENIED.

DATED November 14, 2000.

6