Did a Texas resident employed as a federal customs inspector at New Mexico's Santa Teresa Port of Entry owe New Mexico income tax on those wages?

Plain-English summary

Stella Owens owed New Mexico personal income tax on wages earned as a federal customs inspector working at the Santa Teresa Port of Entry, even though she lived in El Paso, Texas. New Mexico law taxed nonresidents on income from employment within the state, and federal employment did not create an exemption.

The United States Customs Service withheld $905.62 of New Mexico tax from Owens's 2001 wages. On her New Mexico return, she reported the wages as federal income but did not allocate them to New Mexico and claimed a refund of all withholding.

The Department reallocated the wages to New Mexico and allowed only a $16 refund.

Nonresident wages were sourced to New Mexico

Section 7-2-3 imposed income tax on a nonresident individual employed in New Mexico or deriving income from employment within the state.

Owens was a Texas resident, but she was assigned to and performed her senior-inspector duties at the Santa Teresa Port of Entry in southern New Mexico. Her wages therefore fell within the statute.

Federal employment did not prevent state tax

Owens argued that New Mexico could not tax a nonresident federal employee working within the state but offered no supporting legal authority.

In Lung v. O'Cheskey, the New Mexico Supreme Court had upheld state income tax on Texas residents employed by the federal government at White Sands Missile Range. It rejected both federal-property immunity and insufficient-state-benefit arguments.

That binding precedent controlled Owens's wages.

Other employees' refunds did not establish a right to the same error

Owens and another customs employee testified that some co-workers had filed the same way and received refunds. They did not identify those employees, so the Department could not verify the claims.

Even assuming erroneous refunds occurred, one taxpayer's undetected error did not excuse another taxpayer's liability. Without a defined scheme of discrimination or fraud, the remedy was to correct the underassessment of others, not repeat it for Owens.

Policy objections belonged with the Legislature

Owens also raised policy reasons not to tax nonresident federal workers. The hearing officer could apply the statute but could not alter the Legislature's rule.

As written, New Mexico law taxed every nonresident on income earned from employment within the state.

Result: protest DENIED. Owens was not entitled to recover the New Mexico income tax withheld from her 2001 wages beyond the $16 refund the Department had allowed.

What this means for you

Nonresidents commuting into New Mexico

Wages are generally tied to where the work is performed. Living in another state does not by itself remove New Mexico tax on in-state employment.

Federal employees working in New Mexico

Federal status did not exempt wages from state income tax when the employee performed services in New Mexico.

Taxpayers completing Form PIT-B

Report and allocate New Mexico work income correctly. Listing wages as federal income without assigning them to New Mexico led to the refund adjustment.

People comparing outcomes with co-workers

Another person's refund does not establish that the same legal treatment is correct. A discrimination claim requires more than isolated, unverified inconsistencies.

Common questions

Q: Where did Owens live?
A: El Paso, Texas.

Q: Where did she work?
A: The Santa Teresa Port of Entry in southern New Mexico.

Q: How much New Mexico tax was withheld?
A: $905.62.

Q: How much refund did the Department allow?
A: $16.

Q: Did federal employment exempt the wages?
A: No. Lung v. O'Cheskey upheld New Mexico tax on nonresident federal employees working in the state.

Citations and references

Statute:

• NMSA 1978, § 7-2-3 — tax on nonresidents deriving income from employment within New Mexico

Cases cited:

• Lung v. O'Cheskey, 94 N.M. 802, 617 P.2d 1317 (1980)
• Skinner v. New Mexico State Tax Commission, 66 N.M. 221, 345 P.2d 750 (1959)
• Appelman v. Beach, 94 N.M. 237, 608 P.2d 1119 (1980)
• State ex rel. Taylor v. Johnson, 1998-NMSC-015, 961 P.2d 768

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Stella Owens
• Decision PDF: D&O 03-07

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
STELLA OWENS No. 03-07
TO THE REFUND DENIAL OF 2001 NEW
MEXICO PERSONAL INCOME TAX

DECISION AND ORDER

A formal hearing on the above-referenced protest was held May 8, 2003, before Margaret B.

Alcock, Hearing Officer. The Taxation and Revenue Department ("Department") was represented by

Javier Lopez, Special Assistant Attorney General. Stella Owens (“Taxpayer”) represented herself.

Based on the evidence and arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer is a resident of El Paso, Texas, and is an employee of the United States

Custom Service.

2. During 2001, the Taxpayer was assigned and worked as a senior inspector at the

Santa Teresa Port of Entry located in southern New Mexico.

3. The Customs Service withheld $905.62 of New Mexico personal income tax from the

wages it paid to the Taxpayer during 2001.

4. In February 2002, the Taxpayer filed a New Mexico personal income tax return,

Form PIT-1, claiming a refund of the entire amount of New Mexico personal income tax withheld by

the Customs Service. The Taxpayer attached a Form PIT-B to her return that reported the wages she

earned in New Mexico under the column “Total Federal Income” but failed to allocate that income

to New Mexico.

5. On May 3, 2002, the Department sent the Taxpayer a notice denying all but $16.00 of

the personal income tax refund she claimed for 2001. The notice stated that the Department had
adjusted the Taxpayer’s return by reallocating her New Mexico wages to New Mexico on Form PIT-

B.

6. On May 16, 2002, the Taxpayer filed a written protest to the Department’s denial of

her claim for refund.

7. The Taxpayer has been told by other Customs Service employees working at the

Santa Teresa Port of Entry that they filed New Mexico personal income tax returns claiming a refund

of New Mexico taxes withheld by the Customs Service and received a refund from the Department.

DISCUSSION

The issue presented is whether the Taxpayer, a Texas resident employed by the United States

Customs Service and performing services as a customs inspector within the State of New Mexico, is

liable for payment of New Mexico personal income tax on the wages she earned in New Mexico.

Income Taxation of Nonresidents. NMSA 1978, § 7-2-3 states:

A tax is imposed at the rates specified in the Income Tax Act upon the net
income of every resident individual and upon the net income of every nonresident
individual employed or engaged in the transaction of business in, into or from this
state, or deriving any income from any property or employment within this state.

During 2001, the Taxpayer was a nonresident individual who was employed and derived income from

employment within the State of New Mexico. While the Taxpayer argues that New Mexico is

prohibited from taxing the wages of nonresident federal employees working within the state, she

acknowledges that she cannot provide any legal authority in support of her position. There is clear

legal authority, however, to support the Department’s position that her wages are subject to tax.

In Lung v. O'Chesky, 94 N.M. 802, 617 P.2d 1317 (1980), appeal dismissed, 450 U.S. 961

(1981), the New Mexico Supreme Court upheld New Mexico’s right to tax the wages of Texas

residents who were employed by the federal government at White Sands Missile Range. The court

specifically rejected the same argument made by the Taxpayer in this case, i.e., that New Mexico does

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not have authority to tax the income of federal employees working on federal property within the state.

The court also rejected the argument that New Mexico had not provided sufficient services to the out-

of-state residents to subject them to New Mexico tax, stating:

[P]laintiffs present evidence that New Mexico has in fact spent very little money on
their behalf. We find such an inquiry necessarily incomplete and unpersuasive. The
power to tax does not rest on a measurable economic duty of the State toward its
citizens, but on less tangible benefits, on the "fruits of civilization." J.C. Penney
Co., at 466, 61 S. Ct. at 250, quoting Compania de Tobacos v. Collector, 275 U.S.
87, 100, 48 S. Ct. 100, 105, 72 L. Ed. 177 (1927) (Holmes, J., dissenting). The
opportunity to exercise "intelligence, skill, and labor while employed in the State of
New Mexico" has been held to be sufficient benefit to support on income tax.
Jackling v. State Tax Commission, 40 N.M. 241, 248, 58 P.2d 1167, 1171 (1936).
Under this test, plaintiffs have a sufficient nexus with New Mexico to be taxed.

94 N.M. at 804, 617 P.2d at 1319. At the administrative hearing, the Taxpayer failed to provide any

facts or legal authority that would override the supreme court’s holding in Lung. Accordingly, that

decision is binding precedent in New Mexico and is dispositive of the Taxpayer’s challenge to the tax

imposed on her New Mexico wages.

Inconsistent Treatment of Taxpayers. At the administrative hearing, the Taxpayer and

Ernesto Vasquez, another Customs Service employee, testified that while they were denied a refund of

New Mexico income tax withheld on their wages, other co-workers who filed in the same way received

the refunds they claimed. The Taxpayer questions why her refund was denied while the refunds of

other, similarly situated taxpayers were granted.

First, it must be noted that the testimony concerning the Taxpayer’s co-workers is hearsay.

Because the Taxpayer refused to identify the Santa Teresa employees who received income tax refunds,

the Department was unable to verify this information. Even assuming the information is correct,

however, the fact that other taxpayers’ erroneous claims escaped detection by the Department does not

relieve the Taxpayer from her obligation to pay taxes due to the state. In Skinner v. New Mexico State

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Tax Commission, 66 N.M. 221, 223-4, 345 P.2d 750, 752 (1959), the New Mexico Supreme Court

made the following observation in connection with a challenge to a property tax assessment:

In New Mexico, it has long been the rule that a taxpayer who is not assessed
more than the law provides has no cause for complaint in the courts in the
absence of some well-defined and established scheme of discrimination or some
fraudulent action, (citations omitted). The taxpayer's remedy is to have the
assessing authority raise the value on the property claimed to be valued too low to
a level with his own, (citations omitted).

See also, Appelman v. Beach, 94 N.M. 237, 608 P.2d 1119, cert. denied, 449 U.S. 839 (1980). There is

no evidence of systematic discrimination or fraud in this case. Accordingly, the proper way to remedy

the inconsistent treatment of employees working at the Santa Teresa Port of Entry is to reassess any

employees who received erroneous refunds, not to refund taxes the Taxpayer clearly owes to the State.

Policy Considerations. Finally, the Taxpayer raises several policy arguments as to why

New Mexico should not impose income tax on the wages of nonresident federal employees. These

arguments cannot be considered by the hearing officer, but must be addressed to the New Mexico

Legislature. In State ex rel. Taylor v. Johnson, 1998-NMSC-015 ¶ 022, 961 P.2d 768, 774-775, the

New Mexico Supreme Court made the following statement 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....

As currently written, New Mexico’s tax laws require every nonresident individual who is employed or

derives income from employment in New Mexico to pay tax on that income. The Department is not

authorized to substitute its judgment for that of the Legislature or to excuse the Taxpayer from payment

of taxes legally due to the state.

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CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to the Department’s denial of her claim for

refund of New Mexico income tax for tax year 2001.

2. As a nonresident deriving income from services performed for her employer within the

State of New Mexico, the Taxpayer is subject to New Mexico personal income tax on that income.

3. The Taxpayer is not entitled to a refund of New Mexico income tax withheld from her

wages during 2001.

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

DATED May 14, 2003.

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