If a nonprofit reclassifies a worker as an independent contractor and hands her a New Mexico nontaxable transaction certificate, does she owe gross receipts tax on her fees — and can a slow tax department or financial hardship reduce the bill?

Plain-English summary

Misty Blue worked for a nonprofit child-development center, Bright Beginnings, first as a salaried employee and then — starting in August 1994 — as a part-time independent contractor paid $900 a month for marketing services. When she switched to contractor status, the nonprofit stopped withholding taxes and gave her a New Mexico Type 9 nontaxable transaction certificate (NTTC). She reported the 1995 fees as business income on a federal Schedule C but never registered with New Mexico or paid gross receipts tax. After an IRS "tape match" flagged the income, the Department assessed about $1,513 in gross receipts tax, penalty, and interest.

The Hearing Officer denied the protest (except for a $6,900 profit-sharing payout the Department agreed to abate). Four arguments were rejected:

• Employee or contractor? Gross receipts tax applies to a contractor's receipts but not to an employee's wages (Section 7-9-17). Under the right-to-control test, she was clearly a contractor: paid by result not by the hour, setting her own schedule, working from home, buying her own supplies, and paying self-employment tax. So the fees were taxable.
• The NTTC. A Type 9 certificate can be used only for purchases of tangible personal property, not services — it says so on the back, which she admitted she never read. It gave her no basis to deduct her service receipts.
• The Department's delay. Her return period had no filed return, so the Department had seven years to assess (Section 7-1-18(C)) and acted well within it. The penalty had already hit its 10% maximum before the assessment (it stops accruing after five months), so the delay added no penalty. Interest is mandatory under Section 7-1-67 regardless of fault, and administrative delay is not a defense (Ranchers-Tufco). She could have paid the disputed principal to stop interest (Regulation 3.1.7.9) but didn't.
• Financial hardship. Neither the Secretary nor a hearing officer can compromise a liability because a taxpayer can't afford it (Regulation 3.1.6.14; Taylor v. Johnson).

What this means for you

Freelancers and independent contractors

If you're paid for services as a contractor in New Mexico, your fees are gross receipts and you owe gross receipts tax on them — register and report even if no one withholds for you and even if you honestly thought you were still an employee. Reporting the income on a federal Schedule C is a strong sign you're a contractor for gross receipts tax purposes too.

Anyone handed an NTTC by a client

An NTTC is not a blanket "no tax" pass. Each type is limited, and the limits are printed on the back. A Type 9 certificate from a government or 501(c)(3) buyer covers tangible personal property only — it cannot make your service receipts nontaxable. Read the certificate before relying on it.

Taxpayers frustrated by a slow Department

Agency delay — even delay the Department apologizes for — does not reduce your tax, penalty, or interest. The penalty caps at 10% on its own timetable, and interest runs until you pay. If you're protesting, you can pay the disputed principal to stop interest and get it back if you win. Inability to pay is also not a ground for relief.

Common questions

Q: I switched from employee to independent contractor — do I owe gross receipts tax on my fees?
A: Yes. A contractor's service receipts are subject to gross receipts tax, while an employee's wages are not. If the right-to-control test makes you a contractor, the fees are taxable even if the change wasn't clearly explained to you.

Q: My client gave me an NTTC — doesn't that make my services nontaxable?
A: Not a Type 9 certificate. It applies only to purchases of tangible personal property, not services. The limits are stated on the back of the form, and you can't rely on a certificate that doesn't fit the transaction.

Q: The Department took years to assess and to hear my protest — can that reduce what I owe?
A: No. Assessments for unfiled periods are allowed for seven years, the penalty caps at 10% regardless, interest is mandatory, and administrative delay is not a defense. You can pay the disputed principal to stop interest while you protest.

Q: Does this decision apply to my situation?
A: Not automatically. A Decision and Order resolves one taxpayer's protest on its own facts and the law in effect at the time. It illustrates how New Mexico treats contractor receipts and NTTCs, but your facts may differ.

Citations and references

Statutes and regulations:

• Section 7-9-17 NMSA 1978 — employees' wages are not gross receipts
• Section 7-1-13(B), (E); 7-1-17(C); 7-1-18(C); 7-1-24(D); 7-1-67; 7-1-69(A) NMSA 1978
• Regulation 3.2.105.7 NMAC (employee vs. contractor factors); 3.1.7.9 NMAC (paying disputed principal to stop interest); 3.1.6.14 NMAC (no compromise for inability to pay)

Cases cited:

• Burruss v. B.M.C. Logging Co., 38 N.M. 254; Harger v. Structural Services, Inc., 121 N.M. 657 (right-to-control test)
• Ranchers-Tufco Limestone Project Joint Venture, 100 N.M. 632 (administrative delay is no defense)
• State ex rel. Taylor v. Johnson, 1998-NMSC-015 (agency cannot override the Legislature)
• Archuleta v. O'Cheskey, 84 N.M. 428; Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16; State v. Lujan, 90 N.M. 103

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Misty Blue
• Decision PDF: D&O 02-26

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
MISTY BLUE a/k/a Misty Montgomery No. 02-26
ID NO. 02-341362-00-0
ASSESSMENT NO. 2279823

DECISION AND ORDER

A formal hearing on the above-referenced protest was held October 23, 2002, before

Margaret B. Alcock, Hearing Officer. Misty Blue (“Taxpayer”) represented herself. The Taxation

and Revenue Department ("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. From February 1988 through July 1994, the Taxpayer worked as the marketing

director of Bright Beginnings Child Development Centers in Albuquerque, which qualified as a

nonprofit organization under Section 501(c)(3) of the Internal Revenue Code.

2. In addition to paying her salary (from which state and federal income and social

security taxes were withheld), Bright Beginnings made contributions into a profit-sharing plan on the

Taxpayer’s behalf and usually gave her a small holiday bonus.

3. In 1994, Bright Beginnings determined that it no longer needed the Taxpayer’s

services full time, but asked her to continue to provide marketing services on a part-time basis as an

independent contractor.

4. Effective August 1, 1994, the Taxpayer and Bright Beginnings entered into a contract

under which the Taxpayer was paid $900.00 per month to provide the company with a marketing

plan and various marketing services.

5. At the time the contract was signed, Bright Beginnings told the Taxpayer that it

would no longer withhold income or social security taxes from her paychecks and that she would be

responsible for her own taxes. Bright Beginnings continued to make contributions into its profit-

sharing plan on behalf of the Taxpayer and continued to pay the Taxpayer a small holiday bonus.

6. Bright Beginnings issued the Taxpayer a Type 9 New Mexico non-taxable

transaction certificate (“NTTC”). The back of the NTTC form states that Type 9 certificates may be

issued by governmental agencies and 501(c)(3) organizations “for the purchase of TANGIBLE

PERSONAL PROPERTY ONLY. These certificates may not be used for the purchase of

services....” (Emphasis in the original).

7. The Taxpayer did not read the back of the NTTC form and did not understand that

the NTTC was not applicable to her sale of marketing services to Bright Beginnings.

8. The tasks the Taxpayer was required to perform under her contract with Bright

Beginnings included preparing an annual budget, assessing mass mailing and survey programs,

preparing brochures for each program area, working with advertising vendors, assessing the

company’s opportunity for growth, and attending and participating in workshops and meetings as

requested.

9. The contract was result-oriented and did not require the Taxpayer to work any

specified number of hours in return for the $900 monthly payment.

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10. Bright Beginnings asked the Taxpayer to be in the office on certain days when the

owner of the company would be present. Except for these requests, the Taxpayer set her own

schedule and performed much of her work at home.

11. The Taxpayer purchased her own office supplies and used her home telephone and

personal automobile in performing services for Bright Beginnings. During 1995, the Taxpayer also

paid her own way to a child development conference held in Chicago.

12. Bright Beginnings was sold in August or September 1995, at which time it made

lump-sum distributions from its profit-sharing plan. The Taxpayer received a $6,900 payment from

the plan.

13. The Taxpayer’s contract for marketing services continued under the new owners and

was finally terminated in November 1996.

14. The Taxpayer filed a 1995 federal income tax return reporting the income from her

marketing services as business income on Schedule C to her federal return. The Taxpayer also claimed

a number of business expenses on Schedule C, including mileage for commuting between her home

and the office, her travel expenses to the child development conference in Chicago, the portion of her

telephone bills attributable to calls made on behalf of Bright Beginnings, and the cost of office supplies.

15. In 1998, the Department received information from the Internal Revenue Service

concerning the business income reported on the Taxpayer’s 1995 federal income tax return. When

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

had not reported or paid gross receipts tax on this income.

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16. On August 2, 1998, the Department issued Assessment No. 2279823 to the Taxpayer

in the total amount of $1,513.03, representing gross receipts tax, penalty and interest on her business

receipts for tax periods January through December 1995.

17. On August 20, 1998, the Taxpayer filed a written protest to the Department’s

assessment.

18. On July 3, 2002, the Department filed a request for hearing on the Taxpayer’s protest.

On July 10, 2002, a hearing was scheduled for October 23, 2002.

19. At the hearing, the Department stipulated that the Taxpayer is not liable for the gross

receipts tax, penalty and interest assessed on the $6,900 lump sum payment she received in 1995 as a

distribution from Bright Beginnings’ profit-sharing plan.

DISCUSSION

The Taxpayer challenges the Department’s assessment of gross receipts tax, penalty and

interest on the income she earned under her contract with Bright Beginnings on the following

grounds: (1) it was not clear to the Taxpayer that she was performing services as an independent

contractor rather than as an employee; (2) the Taxpayer was entitled to rely on the Type 9 NTTC

issued by Bright Beginnings; (3) the Department’s delay in assessing the Taxpayer and in responding

to the Taxpayer’s correspondence should relieve the Taxpayer of her liability for all or part of the

taxes, interest and penalty assessed; and (4) the Taxpayer has limited financial resources as a result

of her decision to dedicate most of her time to volunteer community service, and she is unable to pay

the full amount of the Department’s assessment.

Burden of Proof. Section 7-1-17(C) NMSA 1978 provides that any assessment of tax by the

Department is presumed to be correct. Accordingly, the Taxpayer has the burden of producing

evidence to establish that the Department's assessment of gross receipts tax, penalty and interest on

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her 1995 income is incorrect. Archuleta v. O'Cheskey, 84 N.M. 428, 431, 504 P.2d 638, 641 (Ct. App.

1972).

Employee v. Independent Contractor. The Taxpayer maintains that it is not clear whether

she was performing services during 1995 as an independent contractor or as an employee. This

distinction is important because income earned as an independent contractor is subject to gross

receipts tax while income earned as an employee is not. See, Section 7-9-17 NMSA 1978.

In determining whether a person is an independent contractor or an employee, the principal

consideration is the right to control. The relationship of employer and employee usually results

where there is control over the manner and method of performance of the work to be performed.

Where there is only control over the results, and not the details of the performance, the worker is

usually considered to be an independent contractor. Burruss v. B.M.C. Logging Co., 38 N.M. 254,

31 P.2d 263 (1934). See also, Harger v. Structural Services, Inc., 121 N.M. 657, 663, 916 P.2d

1324, 1330 (1996). Department Regulation 3.2.105.7 NMAC sets out several factors to be

considered in determining whether a worker qualifies as an employee, including whether taxes are

withheld, whether worker’s compensation and unemployment insurance contributions are made on

behalf of the employee, and whether the employer has “a right to exercise control over the means of

accomplishing a result or only over the result.”

From February 1988 through the end of July 1994, the Taxpayer worked for Bright Beginnings

as an employee and had income and social security taxes withheld from her paychecks. Beginning in

August 1994, the parties changed their relationship and entered into a contract under which the

Taxpayer was paid a flat monthly fee for the performance of her services. The Taxpayer’s

compensation was based on results, not on the number of hours worked. She was no longer required to

keep regular office hours and much of her work was done at home. The Taxpayer purchased her own

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office supplies and used her home telephone and personal automobile in performing her services. At

the time the contract was signed, the Taxpayer understood that Bright Beginnings would not

withhold income or social security taxes from the payments she received. The Taxpayer reported her

1995 income as business income on Schedule C to her federal income tax return and claimed a

deduction for the expenses she incurred for mileage, travel, telephone calls and office supplies. The

Taxpayer also paid both the employee’s and the employer’s share of social security tax due on her

income based on her understanding that she was now self-employed.

Based on the evidence presented, there is no question that the Taxpayer was working as an

independent contractor during 1995. Although the Taxpayer’s failure to pay gross receipts tax on her

income resulted from her lack of knowledge and not from an intent to evade her responsibilities to

the state, that does not excuse her from payment of the tax due.

Reliance on NTTC. Bright Beginnings issued the Taxpayer a Type 9 New Mexico non-

taxable transaction certificate (“NTTC”). The Taxpayer maintains that she relied on the following

sentence appearing on the front of the NTTC form: “The seller must accept this certificate in good

faith that the buyer will employ the property or service transferred in a nontaxable manner.” This

sentence must be read in conjunction with the information set out on the back of each NTTC, which

explains the limitations on the use of each type of NTTC issued by the Department. The back of the

Type 9 NTTC clearly states that Type 9 certificates may be issued by governmental agencies and

501(c)(3) organizations “for the purchase of TANGIBLE PERSONAL PROPERTY ONLY. These

certificates may not be used for the purchase of services....” (Emphasis in the original). The

Taxpayer acknowledged that she never read the back of the NTTC she accepted from Bright

Beginnings. Had she done so, she would have known that she could not rely on the NTTC to deduct

her receipts from the sale of marketing services to Bright Beginnings.

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Delay in Assessment. The Taxpayer questions why the Department took so long to notify

her of her gross receipts tax liability. By the time she received the Department’s assessment in

August 1998, the penalty had reached its statutory maximum of 10 percent and substantial interest

had accrued. The Taxpayer testified that she would have paid the gross receipts tax if she had been

alerted sooner, and believes the Department is at fault for the accrual of additional penalty and

interest.

This argument is based on a misunderstanding of New Mexico’s self-reporting tax system. It is

the obligation of taxpayers, who have the most accurate and direct knowledge of their activities, to

determine their tax liabilities and accurately report those liabilities to the state. See, Section 7-1-13(B)

NMSA 1978; Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 17, 558 P.2d 1155, 1156

(Ct. App. 1976), cert. denied, 90 N.M. 255, 561 P.2d 1348 (1977). There are insufficient government

resources available for the Department to continually audit every citizen to determine whether he or she

has fully complied with state tax laws. Although the Department performs periodic "tape matches"

that compare information reported to the IRS with information reported to New Mexico, there is

some delay before the federal tape match information is made available to the Department. Section

7-1-18(C) NMSA 1978 gives the Department seven years to assess taxes relating to any period for

which required returns were not filed. The August 1998 assessment issued to the Taxpayer was well

within the time limits provided by the New Mexico Legislature.

Delay in Setting a Hearing. Section 7-1-24(D) NMSA 1978 states: "Upon timely receipt of

a protest, the department or hearing officer shall promptly set a date for hearing and on that date hear

the protest or claim." The Taxpayer’s protest of the Department’s assessment was filed on August

20, 1998. On July 3, 2002, the Department’s attorney filed a Request for Hearing, and on July 10,

2002, the Department’s hearing officer scheduled a hearing for October 23, 2002. There is no

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question that the Department was dilatory in its handling of the Taxpayer’s protest. At the

administrative hearing, the Department’s attorney apologized to the Taxpayer for the delay in

bringing this matter to hearing. The issue remains as to whether there is any legal basis for adjusting

the amount of additional penalty and interest attributable to the Department’s delay.

Section 7-1-69(A) NMSA 1978 imposes a negligence penalty of two percent per month, up

to a maximum of ten percent, for a taxpayer’s failure to pay taxes in a timely manner. Based on this

statutory formula, penalty stops accruing five months after the due date of the tax. Here, the penalty

assessed against the Taxpayer reached its maximum of ten percent prior to the date of the

Department’s assessment, and no additional penalty accrued as a result of the Department’s delay in

handling the Taxpayer’s protest.

Section 7-1-67 NMSA 1978 governs the imposition of interest on late payments of tax and

provides, in pertinent part:

A. If any tax imposed is not paid on or before the day on which it
becomes due, interest shall be paid to the state on such amount from
the first day following the day on which the tax becomes due, without
regard to any extension of time or installment agreement, until it is
paid... (emphasis added).

The legislature’s use of the word “shall” indicates that the assessment of interest is mandatory rather

than discretionary. State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977). The legislature has directed the

Department to assess interest whenever taxes are not timely paid and has provided no exceptions to the

mandate of the statute. The assessment of interest is not designed to punish taxpayers, but to

compensate the state for the time value of unpaid revenues; issues of negligence or nonnegligence

are simply not relevant. Even taxpayers who obtain a formal extension of time to pay tax are liable

for interest from the original due date of the tax to the date payment is made. See, Section 7-1-13(E)

NMSA 1978.

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In this case, the Taxpayer failed to pay gross receipts tax due to the state. Although this

failure was clearly not intentional, the fact remains that the state has been denied the use of funds to

which it is legally entitled. In In re Ranchers-Tufco Limestone Project Joint Venture, 100 N.M. 632,

635, 674 P.2d 522, 525 (Ct. App.), cert. denied, 100 N.M. 505, 672 P.2d 1136 (1983), the New

Mexico Court of Appeals held that administrative delay cannot serve as a defense to a taxpayer’s

statutory liability to the state:

Assuming, but not deciding, that the tax collector violated Section 7-1-24(D),
how does a taxpayer benefit from the violation? The statute says nothing as to
the consequence of a violation. The general rule is that tardiness of public
officers in the performance of statutory duties is not a defense to an action by the
state to enforce a public right or to protect public interests. State, ex rel. Dept. of
Human Services v. Davis, 99 N.M. 138, 654 P.2d 1038 (1982). The general rule
is applicable in these cases unless Section 7-1-24(D) makes it inapplicable.
Section 7-1-24(D) does not make the general rule inapplicable.

Based on the holding in Ranchers-Tufco, the Department’s delay in setting a hearing on the

Taxpayers’ protest does not provide a basis for granting the Taxpayer’s protest. I also note that

Regulation 3.1.7.9 NMAC gives taxpayers the option of making principal payments on a disputed

liability to stop the accrual of additional interest during the pendency of the administrative

proceeding. If the taxpayer prevails on his or her protest, those payments are returned. No payments

were made in this case. As a result, the Taxpayer, not the state, continued to have use of her unpaid

gross receipts taxes.

Financial Hardship. Finally, the Taxpayer asks the Department to consider the fact that she

has devoted most of her time to voluntary community service and has limited financial resources to

pay the assessment. Unfortunately, these factors are not something the Department can consider.

Department Regulation 3.1.6.14 NMAC specifically states that the Secretary “may not compromise a

taxpayer’s liability because of the taxpayer’s inability to pay.” Nor does the hearing officer have

authority to relieve a taxpayer of his statutory liability for tax, penalty or interest. In State ex rel.

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Taylor v. Johnson, 1998-NMSC-015 ¶ 022, 961 P.2d 768, 774-775, the supreme court made the

following observations concerning the power of administrative agencies:

Generally, the Legislature, not the administrative agency, declares the policy and
establishes primary standards to which the agency must conform. See State ex rel.
State Park & Recreation Comm'n v. New Mexico State Authority, 76 N.M. 1, 13, 411
P.2d 984, 993 (1966). The administrative agency's discretion may not justify
altering, modifying or extending the reach of a law created by the Legislature....

The legislature has not granted the Department or its hearing officer the authority to abate or adjust

tax assessments based on the financial or personal situations of individual taxpayers.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment No. 2279823, and

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

2. During 1995, the Taxpayer was performing services for Bright Beginnings as an

independent contractor and gross receipts tax was due on those receipts.

3. There was no undue delay in the Department’s assessment, which was issued within the

time limitations set by the New Mexico Legislature in Section 7-1-18 NMSA 1978.

4. The Department’s delay in setting a hearing on the Taxpayer’s protest does not

provide a legal basis for abating or reducing the Department’s assessment.

5. The hearing officer does not have authority to override the provisions of New Mexico’s

tax laws to relieve the Taxpayer of her statutory obligation for payment of tax, penalty and interest due

to the state.

For the foregoing reasons, the Taxpayer's protest IS DENIED, except for gross receipts tax,

penalty and interest assessed on the $6,900 lump sum payment the Taxpayer received as a

distribution from Bright Beginnings’ profit-sharing plan, which the Department stipulated it would

abate.

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DATED October 29, 2002.

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