Could a quality-assurance consultant avoid gross receipts tax as an employee or service-for-resale seller without an NTTC?

Plain-English summary

Yvonne Barnum owed gross receipts tax on quality-assurance and consulting services performed in New Mexico because she was an independent contractor and had no NTTC supporting a service-for-resale deduction. Neither lack of notice nor an unexplained abatement for another taxpayer changed the result.

Barnum inspected New Mexico operations of Vendor Surveillance Corporation's customers, many of which were large corporations performing government contracts. She examined items such as computer hardware and software for contract compliance and sent reports to VSC in California and the New Mexico customer.

She invoiced VSC weekly for time and expenses at her contract rate. VSC issued a Form 1099-MISC reporting $25,352.25 of nonemployee compensation, which Barnum reported as Schedule C business income.

Barnum did not register or pay gross receipts tax. The Department assessed $2,124.01: $1,392.64 tax, $139.26 penalty, and $592.11 interest.

Resale required an NTTC

Section 7-9-48 allowed a deduction for selling a service for resale only when the buyer delivered a nontaxable transaction certificate to the seller.

Barnum never received an NTTC from VSC. Resale by itself was not enough, and failure to follow the statutory documentation method waived the deduction.

The evidence showed independent-contractor status

Barnum argued that she worked as VSC's employee. But VSC's own certification called her an independent contractor, she invoiced at a contract rate, received nonemployee compensation on Form 1099-MISC, and reported business income on Schedule C.

Those documents defeated the employee-wage exemption in Section 7-9-17.

The Department did not have to identify her business first

Barnum believed the Department should have notified her when she became liable. The decision explained that New Mexico's self-reporting system required individuals to investigate the tax consequences of their own contracts and income-producing activity.

She did not consult her accountant or the Department before failing to report. Lack of knowledge did not excuse the tax, penalty, or interest.

Another taxpayer's abatement did not prove unequal treatment

Barnum produced a redacted Department letter abating another assessment and explaining a deduction. The letter did not name VSC, describe the services, or include the documents supporting that result.

The hearing officer could not determine whether the other taxpayer was similarly situated. There was also no evidence of a defined discrimination scheme or fraud, so another person's treatment did not establish Barnum's entitlement to an abatement.

Result: protest DENIED. The $2,124.01 assessment remained due.

What this means for you

Consultants whose work is resold

Confirm whether the buyer must deliver an NTTC and obtain it on time. A subcontract or resale relationship alone did not create the deduction.

Workers deciding between employee and contractor status

Consistent documentation matters. A contractor certification, weekly invoices, Form 1099-MISC, and Schedule C reporting all supported independent-contractor treatment here.

New businesses and solo professionals

Do not wait for the Department to notify you personally. Investigate registration and gross receipts obligations when beginning New Mexico work.

Taxpayers relying on another person's ruling or abatement

Comparable treatment requires comparable facts and documentation. An anonymized result without its underlying record did not prove entitlement.

Common questions

Q: What services did Barnum perform?
A: Consulting, inspection, and quality-assurance work at New Mexico customer locations.

Q: Why was she not an employee?
A: VSC called her an independent contractor, she invoiced contract time and expenses, received Form 1099-MISC, and filed Schedule C.

Q: Why did the resale deduction fail?
A: VSC never delivered an NTTC to her.

Q: Did lack of personal notice excuse the assessment?
A: No. The decision applied New Mexico's self-reporting obligation.

Q: What was the total assessment?
A: $2,124.01, including tax, penalty, and interest.

Citations and references

Statutes:

• NMSA 1978, § 7-1-17 — presumption that an assessment is correct
• NMSA 1978, § 7-9-5 — presumption that business receipts are taxable
• NMSA 1978, § 7-9-17 — employee wage exemption
• NMSA 1978, § 7-9-48 — deduction for selling a service for resale

Cases cited:

• Archuleta v. O'Cheskey, 84 N.M. 428, 504 P.2d 638 (Ct. App. 1972)
• Wing Pawn Shop v. Taxation and Revenue Department, 111 N.M. 735, 809 P.2d 649 (Ct. App. 1991)
• Proficient Food v. New Mexico Taxation & Revenue Department, 107 N.M. 392, 758 P.2d 806 (Ct. App. 1988)
• Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976)
• Appelman v. Beach, 94 N.M. 237, 608 P.2d 1119 (1980)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Yvonne Barnum
• Decision PDF: D&O 05-15

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
YVONNE BARNUM; ID NO. 02-953870-00 0 NO. 05-15
TO ASSESSMENT NOS. 4118218 & 4118219

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on July 18, 2005, before Margaret

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

by Jeffrey W. Loubet, Special Assistant Attorney General. Yvonne Barnum (“Taxpayer”) was

represented by Debi H. Hale, CPA. Based on the evidence and arguments presented, IT IS

DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer is a New Mexico resident with a professional background in

engineering and military defense.

2. During tax year 2000, the Taxpayer provided consulting and quality assurance

services in New Mexico to Vendor Surveillance Corporation (“VSC”), which has its headquarters in

Irvine, California.

3. The Taxpayer provided consulting and inspection services to certain VSC customers,

most of which were large corporations performing work in New Mexico under government contracts.

4. The Taxpayer visited the New Mexico offices of these corporations to determine

whether they were in compliance with the terms of their government contracts. For example, the

Taxpayer might inspect a customer’s computer hardware and software to insure that they met

contract specifications.

5. When the Taxpayer completed her inspection, she wrote a report of her findings. A

copy of the report was sent to VSC in California and another copy of the report was provided to

VSC’s customer in New Mexico.

6. The Taxpayer sent VSC weekly invoices of her time and expenses and was paid

based on her contract rate. VSC then billed its customer based on the purchase order the customer

had issued to VSC.

7. The Taxpayer did not realize that she was subject to New Mexico gross receipts tax

on her receipts from performing services in New Mexico and did not report or pay gross receipts tax

on this income.

8. The Taxpayer did not consult with her accountant or with the Department concerning

her liability for gross receipts taxes.

9. The Taxpayer never received a nontaxable transaction certificate from VSC.

10. As part of an information-sharing program with the Internal Revenue Service, the

Department was notified of the business income reported on Schedule C to the Taxpayer’s 2000

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.

11. On April 25, 2003, the Department mailed the Taxpayer a Notice of Limited Scope

Audit for the 2000 tax year, asking the Taxpayer to provide documentation to substantiate any gross

receipts tax exemptions or deductions taken during 2003. The notice also advised the Taxpayer that

she must be in possession of all required NTTCs within 60 days from the date of the notice or any

deductions claimed relating to the NTTCs would be disallowed.

12. The Taxpayer does not remember receiving the April 25, 2003 notice, but

acknowledged that the address shown on the notice was correct.

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13. On August 19, 2003, the Department issued Assessment Nos. 4118218 and 4118219

to the Taxpayer for tax periods January through December 2000 in the total amount of $2,124.01,

representing $1,392.64 gross receipts tax, $139.26 penalty and $592.11 interest.

14. On September 17, 2003, the Taxpayer filed a protest through her certified public

accountant, Debi H. Hale, who stated that the Taxpayer “is in receipt of your notices (copies

attached) and has engaged this firm to respond on her behalf.”

15. As grounds for the protest, Ms. Hale stated that the Taxpayer was a subcontractor of

VSC and that VSC “is responsible for charging sales taxes to the final consumer. Taxpayer is not

subject to charging gross receipts tax.”

16. Enclosed with the protest letter was a copy of a Form 1099 Misc. issued by VSC,

which showed that $25,352.25 of nonemployee compensation was paid to the Taxpayer during tax

year 2000.

17. Sometime after filing the Taxpayer’s protest, Ms. Hale moved her office, but failed to

notify the Department of her new address.

18. On February 26, 2004, the Department’s protest auditor mailed a letter to Ms. Hale

asking for additional information concerning the nature of the services the Taxpayer performed for

VSC. Specifically, the auditor asked Ms. Hale for “a detailed description of the work Ms. Barnum

performs for Video Surveillance as well as supporting documentation.”

19. On April 29, 2004, the auditor sent another letter to Ms. Hale requesting information

concerning the Taxpayer’s services for VSC.

20. On May 18, 2004, the auditor sent a third letter to Ms. Hale marked “Final Request.”

The third letter repeated the Department’s request for a detailed description of the nature of the

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Taxpayer’s services, “as well as supporting documentation,” and advised Ms. Hale that a failure to

respond would result in the matter being forwarded for a formal hearing.

21. Upon receipt of the auditor’s third letter requesting information, Ms. Hale left a

telephone message for the auditor.

22. On July 12, 2004, the auditor called Ms. Hale, but was unable to reach her and left a

telephone message.

23. Ms. Hale did not return the auditor’s telephone call or make any other attempt to

contact the Department. Ms. Hale did not provide the Department with the requested information

concerning the nature of the Taxpayer’s services.

24. On December 17, 2004, the Department’s attorney requested a hearing on the

Taxpayer’s protest.

25. On December 20, 2004, a Notice of Administrative Hearing was sent to the

Taxpayer’s CPA scheduling a hearing for February 23, 2005. The notice included an information

sheet concerning hearing procedures which advised taxpayers as follows:

A taxpayer challenging the Department’s assessment, refund denial, or other action
has the burden of proving that the action taken by the Department does not comply
with New Mexico law. It is the taxpayer’s responsibility to gather all documents or
other evidence supporting the protest, including nontaxable transaction certificates,
tax returns, invoices, bank statements, etc….

In addition to presenting the facts, the taxpayer is responsible for researching the
statutes, regulations and case law supporting the protest. The purpose of the
administrative hearing is to determine whether the action taken by the Department is
authorized by law. Arguments that the law is unfair or creates an undue hardship on
the taxpayer will not be considered by the hearing officer. The taxpayer should
discuss the statutes and regulations applicable to the protest with the Department’s
protest auditor or attorney. The hearing officer cannot discuss the case with either
party prior to the formal hearing.

26. At the Taxpayer’s request, the hearing on her protest was continued three times: first

to April 12, 2005, then to June 1, 2005, and finally, to July 13, 2005.

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27. During these continuances, the Taxpayer’s CPA provided the Department with some

information concerning the nature of the Taxpayer’s services, but did not provide a copy of the

Taxpayer’s contract with VSC or any other supporting documentation.

DISCUSSION

The issue to be decided is whether the Taxpayer is liable for the gross receipts tax, penalty, and

interest assessed on her receipts from performing services in New Mexico during the 2000 tax year.

The Taxpayer argues that she is not liable for tax because: (1) her services were sold for resale; (2) she

worked for VSC as an employee; (3) the Department never notified her of the requirement to pay gross

receipts tax; and (4) the Department abated an assessment of gross receipts tax against another,

similarly situated taxpayer.

Burden of Proof. NMSA 1978, § 7-1-17 states that any assessment of taxes made by the

Department is presumed to be correct, and it is the taxpayer's burden to overcome this presumption.

Archuleta v. O'Cheskey, 84 N.M. 428, 431, 504 P.2d 638, 641 (Ct. App. 1972). Further, NMSA 1978,

§ 7-9-5 creates a statutory presumption "that all receipts of a person engaging in business are subject to

the gross receipts tax." Where an exemption or deduction from tax is claimed, the statute must be

construed strictly in favor of the taxing authority, the right to the exemption or deduction must be

clearly and unambiguously expressed in the statute, and the right must be clearly established by the

taxpayer. Wing Pawn Shop v. Taxation and Revenue Department, 111 N.M. 735, 740, 809 P.2d 649,

654 (Ct. App. 1991). Accordingly, it is the Taxpayer’s burden to come forward with evidence to show

that she is not liable for gross receipts tax on her receipts from performing services in New Mexico.

Services for Resale. The Gross Receipts and Compensating Tax Act provides several

deductions from gross receipts for taxpayers who meet the statutory requirements set by the New

Mexico Legislature. At the administrative hearing, the Taxpayer’s CPA argued that the Taxpayer is

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entitled to the deduction for receipts from selling services for resale. The CPA acknowledged,

however, that she has never read the statutes or regulations pertaining to this deduction. Had she done

so, she would have realized that selling services for resale does not—by itself—provide the basis for a

deduction. NMSA 1978, § 7-9-48 states as follows:

Receipts from selling a service for resale may be deducted from gross receipts ... if the
sale is made to a person who delivers a nontaxable transaction certificate to the
seller…. (emphasis added)

The requirements of the statute are very specific. The buyer of services must deliver an NTTC to the

seller before the seller is entitled to claim a deduction from gross receipts. In this case, there is no

dispute that the Taxpayer never received an NTTC from VSC. Where a party claiming a tax exemption

or deduction fails to follow the method prescribed by statute or regulation, he waives his right thereto.

Proficient Food v. New Mexico Taxation & Revenue Department, 107 N.M. 392, 397, 758 P.2d 806,

811 (Ct. App.), cert. denied, 107 N.M. 308, 756 P.2d 1203 (1988). By failing to obtain possession of

the NTTC required by the statute, the Taxpayer waived her right to claim a deduction under Section 7-

9-48.

Employee v. Independent Contractor. The Taxpayer testified that she worked for VSC as an

employee, raising the issue of whether she was entitled to claim the exemption for employee wages

provided in NMSA 1978, § 7-9-17. From the evidence presented at the hearing, however, neither the

Taxpayer nor her CPA understands the legal distinction between an employee and an independent

contractor. The Taxpayer’s opening argument began with the statement that the Taxpayer worked for

VSC as a subcontractor. The Taxpayer then introduced a document signed by Maria B. Sara, VSC’s

vice president of operations, which states:

This is to certify that Yvonne Barnum is a quality services independent contractor for
Vendor Surveillance Corporation (VSC). She performs services in New Mexico for the
benefit of our customers…. She sends VSC an invoice of her time and expenses and is

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paid based on her contract rate. VSC in turn bills our customer based on the Purchase
Order issued to us.

This certification supports the conclusion that the Taxpayer worked for VSC as an independent

contractor and not as an employee. Further confirmation can be found in the fact that VSC issued the

Taxpayer a Form 1099 Misc. for tax year 2000 reporting $25,352.25 of “nonemployee compensation.”

The Taxpayer then reported this income as business income on Schedule C to her 2000 federal income

tax return. Based on the evidence, the Taxpayer is not entitled to the exemption provided in § 7-9-17.

Lack of Notice. The Taxpayer believes the Department should have notified her that she

was liable for gross receipts tax on her receipts from performing services for VSC. The Taxpayer’s

position is based on a misunderstanding of New Mexico’s self-reporting tax system. Although the

Department makes a continuing effort to educate taxpayers through workshops, regulations,

instructions and other publications, the Department is not omniscient, and cannot be expected to know

when a particular individual enters into a contract, starts a business or undertakes some other income-

producing activity that is subject to the gross receipts tax. For this reason, the law charges every

individual with the reasonable duty to ascertain the possible tax consequences of his or her actions.

Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976), cert.

denied, 90 N.M. 255, 561 P.2d 1348 (1977). Here, the Taxpayer’s lack of knowledge of New Mexico

tax law does not excuse her from liability for gross receipts tax imposed by the New Mexico

Legislature or for the penalty and interest due on late payment of that tax.

Treatment of Other Taxpayers. The Taxpayer maintains that the Department abated an

assessment of gross receipts tax issued against another, similarly situated taxpayer and that this justifies

an abatement of the assessment issued against her. In support of her argument, the Taxpayer introduced

a February 27, 2004 letter from a Department attorney to an unidentified taxpayer which states, in

pertinent part:

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Thank you for being so prompt in getting me the materials that enabled us to make a
decision on your protest. I passed them along to the appropriate people and have been
advised the assessment has been abated….

I did, nevertheless, want to answer your question about the proper procedure for you to
follow in the future. So long as your working arrangement remains generally the same
as that apparent from the documents sent to this Department, the same deduction
applies, and you will not be liable for New Mexico gross receipts taxes. Because your
compensation results from services you perform in New Mexico, the law requires you
to file CRS-1 reports…. On this report, you will simply report your gross receipts from
services performed in New Mexico and then list the same amount as a deduction,
showing no tax due….

Although the Taxpayer testified that this letter was sent to another subcontractor of VSC who

performed the same type of services as the Taxpayer, there is nothing in the document itself to

corroborate this testimony. The name of the other taxpayer has been blocked out and no mention of

VSC appears in the letter. The letter does not describe the nature of the unknown taxpayer’s services.

The documentation that provided the basis for the Department’s abatement was not attached to the

letter or separately introduced by the Taxpayer in this case. In short, the February 27, 2004 letter does

not provide sufficient information to draw any conclusions concerning the circumstances surrounding

the Department’s actions in that case.

In any event, it has long been the rule in New Mexico that a taxpayer who has not been

assessed more than the law allows has no cause for complaint in the absence of some well-defined and

established scheme of discrimination or some fraudulent action. Appelman v. Beach, 94 N.M. 237, 608

P.2d 1119, cert. denied, 449 U.S. 839 (1980). There is no evidence of fraud or discrimination in this

case. The Taxpayer does not dispute that she had receipts from performing services in New Mexico

during the 2000 tax year. In the absence of any evidence that the Taxpayer qualifies for one of the

exemptions or deductions provided by the Legislature, gross receipts tax was properly imposed on the

Taxpayer’s receipts.

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CONCLUSIONS OF LAW

A. The Taxpayer filed a timely, written protest to Assessment Nos. 4118218 and 4118219,

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

B. The Taxpayer’s receipts from performing services in New Mexico during tax year 2000

are subject to New Mexico’s gross receipts tax.

C. The Taxpayer failed to meet her burden of establishing that she is entitled to any of the

exemptions or deductions provided in the Gross Receipts and Compensating Tax Act.

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

DATED July 21, 2005.

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