Does a New Mexico resident owe gross receipts tax on pay for consulting work performed entirely outside the state?

Plain-English summary

A New Mexico resident who was paid to do consulting work performed entirely outside the state owed no New Mexico gross receipts tax on that pay. Protest GRANTED; the assessment was abated.

In April 2000 the Department assessed Hilliard Griffin $1,510.80 in gross receipts tax, plus penalty and interest, for the 1996 reporting periods. The assessment came from an IRS information-sharing match: Griffin had reported $28,670.31 of business income on his 1996 federal Schedule C that had not been reported to New Mexico for gross receipts tax.

That income was pay for a specific out-of-state job. In late 1995 Griffin accepted an offer to help set up and manage a satellite telecommunications link that let British Army soldiers serving in the United Nations peacekeeping force in Bosnia telephone home. The work was for a joint venture of North American Intelset (a Diamond Shamrock subsidiary) and Terralink Communications, Ltd. Griffin was sent to Bosnia in February 1996 and worked there until mid-April 1996. The $28,670.31 was made up of $20,003.81 paid by Diamond Shamrock and $8,666.50 paid by Terralink, each reported on a Form 1099.

The tax reaches services performed in New Mexico — and this work was not

New Mexico's gross receipts tax is imposed on receipts from selling property in New Mexico, leasing property used in New Mexico, performing services in New Mexico, or selling services performed outside New Mexico whose product is initially used in New Mexico (Section 7-9-3(F)). Griffin gave undisputed testimony that all of his work was performed outside New Mexico — in Bosnia, apart from a meeting with Terralink officials in Fort Worth and a meeting with British Army officials in Great Britain. None of it was performed in New Mexico. He therefore had no gross receipts subject to the tax.

A pointed note about the Department's use of resources

The hearing officer went out of his way to criticize the Department for taking the case to a formal hearing. Griffin had told the Department his work was performed out of state, the Department had no evidence to the contrary, and it had already been willing to remove the Terralink portion of the assessment. It pressed ahead only because Diamond Shamrock also had New Mexico operations and Griffin could not get cooperation from Diamond Shamrock (which he had to sue to be paid) to document his work. The hearing officer wrote that where a taxpayer has corroborated a legally complete defense and the Department has no contrary evidence, the Department's own Protest Office and Legal Services Bureau should be able to resolve the matter without forcing the taxpayer to retain counsel and attend an evidentiary hearing.

Result: protest GRANTED; the Department was ordered to abate the assessment.

What this means for you

Where you perform the work usually decides New Mexico gross receipts tax on services

For services, the tax generally follows the place of performance: services performed in New Mexico are taxable, and services performed outside New Mexico are generally not, unless their product is initially used in New Mexico. A New Mexico resident is not automatically taxed on income just because they live here — what matters is where the work was done.

Federal Schedule C income can trigger a New Mexico assessment

New Mexico gets business-income data from the IRS. Income you report on a federal Schedule C but never report for gross receipts tax can generate an assessment, even when the underlying receipts turn out not to be taxable. Be ready to show where the work was performed.

Keep proof of where you worked

Griffin prevailed because he could establish, through testimony and what corroboration he could obtain, that the work was done abroad. The taxpayer bears the burden of proving an assessment is wrong (Champion International), so contemporaneous records of the location of your work are worth keeping.

Common questions

Q: Griffin is a New Mexico resident — why wasn't his income taxable here?
A: Gross receipts tax is not an income tax on residents. It applies to receipts from performing services in New Mexico (or out-of-state services whose product is first used here). Because all of Griffin's work was performed outside New Mexico, none of it was subject to the tax.

Q: The income showed up on his federal Schedule C. Doesn't that make it New Mexico gross receipts?
A: No. Schedule C reports business income for federal purposes; it does not decide whether receipts are subject to New Mexico gross receipts tax. Here the receipts were for out-of-state services and were not taxable.

Q: Who has to prove the assessment was wrong?
A: The taxpayer. An assessment is presumed correct, and the taxpayer bears the burden of overcoming it (Champion International). Griffin met that burden with undisputed testimony that the work was performed outside New Mexico.

Q: Why did the hearing officer scold the Department?
A: Because Griffin had a corroborated, legally complete defense and the Department had no evidence contradicting it, yet still required him to hire a lawyer and attend a full hearing to establish an undisputed fact. The hearing officer said such matters should be resolved earlier in the protest process.

Citations and references

Statutes:

• NMSA 1978, § 7-9-3(F) — defines "gross receipts" as money or other consideration from selling property in New Mexico, leasing property employed in New Mexico, selling services performed outside New Mexico the product of which is initially used in New Mexico, or performing services in New Mexico

Cases cited:

• Champion International Corp. v. Bureau of Revenue, 88 N.M. 411, 540 P.2d 1300 (Ct. App. 1975) — a taxpayer bears the burden of proving that an assessment is incorrect

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Hilliard Griffin
• Decision PDF: D&O 01-06

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
HILLIARD GRIFFIN NO. 01-06
ID. NO. 02-431419-00 6, PROTEST TO
ASSESSMENT NO. 2524971

DECISION AND ORDER

This matter came on for formal hearing on May 1, 2001 before Gerald B. Richardson,

Hearing Officer. Mr. Hilliard Griffin, hereinafter, “Taxpayer”, was represented by Guy Tann,

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

Lewis J. Terr, Special Assistant Attorney General. Based upon the evidence and the arguments

presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. On April 30, 2000, the Department issued Assessment No. 2524971 to the Taxpayer,

assessing $1,510.80 in gross receipts tax, $151.08 in penalty and $859.27 in interest for the

reporting periods of January, 1996 through December, 1996.

2. The Department’s assessment was based upon information provided to the

Department by the Internal Revenue Service (“IRS”) pursuant to an information sharing

agreement between the Department and the IRS. The Taxpayer had reported business income in

the amount of $28,670.31 on his Federal Schedule C for the 1996 tax year which had not been

reported to the Department for gross receipts tax purposes.

3. On May 25, 2000, the Taxpayer filed a written protest to Assessment No. 2524971.

4. During the 1996 tax year the Taxpayer was a resident of New Mexico.

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5. In December, 1995, the Taxpayer accepted an offer to work for a business joint

venture to set up and manage a satellite telecommunications link which would provide telephone

service to the British Army and its soldiers who were part of the United Nations peacekeeping

force stationed in Bosnia, enabling them to telephone British authorities and the families of the

British soldiers in the United Kingdom.

6. The business joint venture under contract with the British Army was composed of

North American Intelset (“NAI”), a wholly owned subsidiary of Diamond Shamrock

Corporation, and Terralink Communications, Ltd.

7. In February, 1996, the Taxpayer was sent to Bosnia to begin his work to implement

and manage the telecommunications system. He remained there until mid-April, 1996, working

under contract for the joint venture.

8. The $28,670.31 in income that the Taxpayer reported on his 1996 Federal Schedule C

was composed of $20,003.81 which was paid to him by Diamond Shamrock Corporation and

$8,666.50 which was paid to him by Terralink Communications, Ltd. Both corporations

reported this income to the IRS and the Taxpayer on a Federal From 1099 for the 1996 tax year.

9. None of the work for which the Taxpayer was compensated by Diamond Shamrock

Corporation or Terralink Communications, Ltd. during the 1996 tax year was performed in New

Mexico.

DISCUSSION

The sole issue to be determined in this protest was whether the compensation received by

the Taxpayer from Diamond Shamrock Corporation and Terralink Communications, Ltd. was

subject to gross receipts tax. “Gross receipts” is defined at § 7-9-3(F) NMSA 1978 to mean:

…the total amount of money or the value of other consideration
received from selling property in New Mexico, from leasing

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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.

The Taxpayer offered undisputed testimony that all of the compensation he received from

Diamond Shamrock Corporation and Terralink Communications, Ltd. was performed outside of

New Mexico.1 Thus, the Taxpayer had no gross receipts which were subject to gross receipts

tax.

It concerns me that the Department felt it necessary to take this case to hearing. The

Taxpayer had informed the Department that all of his work had been performed out-of-state and

the Department had no evidence to the contrary. Yet, the Taxpayer was required to attend a

formal hearing and incurred the expense of retaining counsel simply to establish this fact through

sworn testimony before the Department’s Hearing Officer. In the course of the hearing it was

revealed that the Taxpayer had been able to provide confirmation from Terralink

Communications, Ltd., that his work had been performed out-of-state and that the Department

had been willing to adjust the assessment to remove the Taxpayer’s receipts from Terralink

Communications, Ltd. from the assessment. The Department was also aware that there was a

business relationship between Terralink and Diamond Shamrock. The Taxpayer had been unable

to provide similar confirmation from Diamond Shamrock Corporation, however, because he had

been required to sue Diamond Shamrock Corporation to obtain payment for their portion of his

compensation and Diamond Shamrock had not been cooperative in providing the documentation

the Department required.

Although the Hearing Officer is ultimately responsible for determining the facts of

matters taken to hearing, the Department’s hearing officers should not be the only Department

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With the exception of a meeting with Terralink officials in Fort Worth and meeting with British Army officials in
Great Britain, all of the Taxpayer’s work was performed in Bosnia.

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employees capable of making determinations of credibility for purposes of resolving protests.

The Department’s Protest Office and its Legal Services Bureau should also be capable of making

such determinations as part of the protest resolution process. Apparently, the Department was

concerned in this matter because Diamond Shamrock also has operations in New Mexico and it

was possible that the Taxpayer’s compensation could have been related to work performed in

New Mexico. While it is true that ultimately, a taxpayer bears the burden of proof in

establishing that an assessment is incorrect, Champion International Corp. v. Bureau of

Revenue, 88 N.M. 411, 540 P.2d 1300 (Ct. App. 1975), when a taxpayer has provided some

evidence to corroborate his defense to an assessment, thereby providing some proof of his

credibility, and when the Department has no information or evidence to dispute the factual basis

for a taxpayer’s legally complete defense, the matter should be able to be resolved without

expending the resources involved in conducting a full blown evidentiary hearing. Surely, the

Department can use its limited resources in a more productive manner and just as surely,

taxpayers who have demonstrated the general reliability of the facts upon which their defense to

an assessment rests should not be put to the burden of retaining counsel and attending a formal

hearing simply because the Department has the statutory authority to require them to prove their

case.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment No. 2524971 and

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

2. The Taxpayer had no gross receipts subject to gross receipts tax during calendar year

1996.

For the foregoing reasons, the Taxpayer’s protest IS HEREBY GRANTED.

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IT IS FURTHER ORDERED that the Department abate Assessment No. 2524971.

DONE, this 7th day of May, 2001.

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