Was a home-repair worker an exempt employee, and could he exclude customer reimbursements for materials bought with tax and resold at cost?

Plain-English summary

Bruce Kelly was an independent home-repair contractor and owed gross receipts tax on all customer payments, including materials passed through at cost. He was neither a common-law employee nor a federal statutory "home worker."

Kelly moved from Texas to New Mexico and performed home repairs without a contractor's license. Referrals and word of mouth brought him work from as many as 200 homeowners a year, usually for one hour to two days per job.

He supplied his own tools, determined what materials were needed, bought the materials in his own name, and billed each homeowner for the materials without markup plus labor at an agreed hourly rate. No customer withheld federal or state tax.

Kelly reported the income as Schedule C business income but did not pay New Mexico gross receipts tax. The Department assessed $599.64 of tax, plus interest.

Kelly was not a common-law employee

The decision reviewed federal and New Mexico employee-control factors, including instructions, training, continuity, hours, tools, investment, profit or loss, availability to the public, withholding, and the right to control how work is performed.

The homeowners relied on Kelly's expertise. He selected and purchased materials, used his own tools, freely served many unrelated customers, and had short, noncontinuing relationships. Payment by the hour did not outweigh those facts.

Because no wage withholding applied and the homeowners did not exercise employer-type control, Section 7-9-17's employee-wage exemption did not apply.

Repairing homes did not make him a statutory "home worker"

Kelly argued that the federal statutory-employee category for certain "home workers" covered him. Section 3121(d)(3), however, used that term for a person who worked to specifications on materials or goods supplied by the person receiving the service and returned the goods afterward.

Kelly bought his own materials and did not work on employer-supplied goods for return. He also lacked the continuing relationship contemplated by the provision, with repeat work from only about five of up to 200 annual customers.

Materials charged at cost remained gross receipts

Kelly had paid tax when buying materials and argued that taxing the customer reimbursement again was double taxation. The decision treated the vendor's sale to Kelly and Kelly's charge to the homeowner as two separate transactions by separate taxpayers.

Section 7-9-4 taxed Kelly's total receipts from the repair job. His choice not to add a markup did not remove the material amount from gross receipts, because absence of profit did not change the second sale.

The sole-proprietor name did not invalidate the assessment

The Department issued the assessment under "Kelly's Hardware," a sole-proprietor name Kelly registered in 2004 but never used. The 2001 repair income was unrelated to that proposed business.

The assessment nevertheless bound Kelly individually because the decision found no legal distinction between a sole proprietorship and its owner.

Result: protest DENIED. Kelly owed gross receipts tax on labor and material charges from the home-repair business.

What this means for you

Handymen and home-repair providers

Working at a customer's house and charging hourly does not automatically make you an employee. Control, tools, customer base, continuity, withholding, and business independence all matter.

Contractors purchasing customer materials

Amounts reimbursing material cost can remain part of taxable gross receipts even with no markup, unless a specific deduction or other treatment is established.

Workers claiming statutory-employee status

Federal occupational labels have specialized definitions. "Home worker" did not mean a person who performs services inside homes.

Sole proprietors using trade names

An assessment in the proprietorship's name may still be effective against the individual owner because the two are not separate legal persons.

Common questions

Q: Why was Kelly an independent contractor?
A: He served many customers, controlled how the repairs were done, supplied tools and materials, and received no wage withholding.

Q: Did hourly billing make him an employee?
A: No. It was only one factor and did not overcome the broader evidence of an independent business.

Q: What is a statutory home worker in the cited federal rule?
A: A person working to specifications on another person's supplied materials or goods that must be returned, subject to the other statutory conditions.

Q: Were material reimbursements taxable without markup?
A: Yes. The decision included them in Kelly's total home-repair receipts.

Q: How much tax was assessed?
A: $599.64 of gross receipts tax, plus interest.

Citations and references

Statutes and regulation:

• NMSA 1978, § 7-9-4 — gross receipts tax
• NMSA 1978, § 7-9-17 — employee wage exemption
• NMSA 1978, § 60-13-2(I) — definition of wages under the Construction Industries Act
• NMSA 1978, § 60-13-3(D)(10), (13) — construction-license exemptions
• 26 U.S.C. § 3402(a) — income tax withholding on wages
• 26 U.S.C. § 3121(d)(3) — statutory employees
• Regulation 3.2.105.7 NMAC — employee-status factors

Authorities cited:

• Rev. Rul. 87-41, 1987-1 C.B. 296
• Harger v. Structural Services, Inc., 121 N.M. 657, 916 P.2d 1324 (1996)
• Ft. Smith Lumber Co. v. Arkansas, 251 U.S. 532 (1920)
• House of Carpets, Inc. v. Bureau of Revenue, 84 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)
• New Mexico Enterprises, Inc. v. Bureau of Revenue, 86 N.M. 799, 528 P.2d 212 (Ct. App. 1974)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Bruce A. Kelly
• Decision PDF: D&O 05-23

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
BRUCE A. KELLY; ID NO. 03-010402-00 5 No. 05-23
TO NOTICE OF ASSESSMENT OF TAXES
ISSUED TO KELLY’S HARDWARE
UNDER LETTER ID L1893805056

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on October 11, 2005,

before Margaret B. Alcock, Hearing Officer. The Taxation and Revenue Department

("Department") was represented by Jeffrey W. Loubet, Special Assistant Attorney General.

Bruce A. Kelly (“Taxpayer”) represented himself. Based on the evidence and arguments

presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer moved to New Mexico in 1998 from El Paso, Texas, where he

had engaged in the home repair business as an independent contractor.

2. The Taxpayer, who does not have a contractor’s license, continued to engage

in the home repair business in New Mexico, obtaining business through referrals and word-

of-mouth.

3. The Taxpayer works for up to 200 different home owners a year, performing

jobs that take anywhere from one hour to two days.

4. When performing home repair projects, the Taxpayer provides his own tools

and materials.

5. After determining what materials were needed, the Taxpayer purchases the

materials in his own name and not as an agent for the home owner.

6. When a job is completed, the Taxpayer charges the home owner for the cost of

materials used, without any markup, and for labor at an agreed upon hourly rate.

7. The Taxpayer reported the income he earned during 2001 as business income

on Schedule C to his federal income tax return, but did not report or pay New Mexico gross

receipts tax on this income.

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

the Department was notified of the business income reported on the Taxpayer’s 2001 federal

income tax return.

9. On June 14, 2004, the Department assessed the Taxpayer under Letter ID

L1893805056 for $599.64 of gross receipts tax, plus interest, on the business income

reported on the Taxpayer’s 2001 federal income tax return.

10. The Department issued the assessment under the name “Kelly’s Hardware,”

which was the name of a sole proprietorship the Taxpayer registered with the Department in

2004 but never actually operated as a business.

11. Although the Taxpayer’s 2001 income was not related to the business the

Taxpayer proposed to operate as Kelly’s Hardware, the Department’s assessment was

effective against the Taxpayer individually because there is no distinction between a sole

proprietorship and its owner.

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DISCUSSION

The issue to be decided is whether the Taxpayer is liable for gross receipts tax on his

income from performing home repairs during the period January through December 2001. The

Taxpayer maintains that he was either a common law or a statutory employee of the home

owners he worked for and is entitled to the exemption from gross receipts provided in NMSA

1978, § 7-9-17. Alternatively, the Taxpayer argues that he should not owe gross receipts tax on

the cost of his materials because he was charged tax on those same materials at the time of

purchase and resold them to his customers at cost. It is the Department’s position that the

Taxpayer was an independent contractor and not an employee. The Department maintains

that the Taxpayer owes gross receipts tax on all of his receipts from performing home repairs,

including receipts representing the cost of his materials.

Gross Receipts Tax Exemption for Employee Wages. The Taxpayer’s first

argument is that he worked as an employee and not as an independent contractor. The

Taxpayer reaches this conclusion based on his belief that he comes within the exemptions set

out in NMSA 1978, § 60-13-3(D)(10) and (13) of the Construction Industries Licensing Act,

which exclude from the Act’s licensing requirements:

(10) an individual who, by himself or with the aid of others who are paid
wages and who receive no other form of compensation, builds or makes
installations, alterations or repairs in or to a single-family dwelling owned and
occupied or to be occupied by him; …. (emphasis added)
….
(13) an individual who works only for wages;

Having decided that his work falls within these exemptions, the Taxpayer argues that he must

be an employee working for wages rather than an independent contractor. The Taxpayer’s

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reasoning puts the cart before the horse. The issue of whether the Taxpayer works for wages

must be determined before any conclusion can be reached concerning his qualification for the

exemptions in § 60-13-3. He cannot start with the conclusion he wants to reach as a method

of proving the facts on which the conclusion is based. The term “wages” is defined in

NMSA 1978, § 60-13-2(I) of the Construction Industries Act as “compensation paid to an

individual by an employer from which taxes are required to be withheld by federal and state

law.” As discussed below, this could refer to common law employees or to statutory

employees.

Common Law Employees. 26 U.S.C. § 3402(a) of the Internal Revenue Code requires

every employer making payment of wages to withhold income taxes. In Revenue Ruling 87-

41, 1987-1 C.B. 296, the IRS developed a twenty-factor test to determine whether an

individual is an employee subject to withholding. The weight to be given these factors varies

depending on the occupation and the factual context in which the services are performed. A

summary of the factors supporting a finding of employee status are set out below:

1. The worker is required to comply with the employer’s instructions about when,
   where, and how he is to work.
2. The worker receives training from the employer.
3. The worker’s services are an integral part of the employer’s business.
4. The worker’s services are rendered personally and cannot be subcontracted.
5. The worker is hired, supervised, and paid directly by the employer.
6. The worker has a continuing relationship with the employer.
7. The worker has set hours established by the employer.
8. The worker devotes substantially full time to the business of the employer.
9. The worker performs his work on the employer’s premises.

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10. The worker is required to perform his services in the order or sequence set by
    the employer and must follow the established routines and schedules of the
    employer.
11. The worker is required to submit regular or written reports.
12. The worker is paid by the hour, week, or month, provided that this method of
    payment is not just a convenient way of paying a lump sum agreed upon as the
    cost of a job.
13. The employer pays the worker’s business or travel expenses and has the right
    to control such expenses.
14. The employer furnishes the worker with significant tools, materials, and other
    equipment.
15. The worker does not have a significant investment in the facilities used to
    perform his services.
16. The worker receives a set salary and does not realize a profit or loss from his
    services.
17. The worker does not perform services for persons or firms unrelated to the
    employer.
18. The worker cannot make his services available to the general public on a
    regular and consistent basis.
19. The worker can be discharged at any time, even if he performs in accordance
    with the terms of his contract with the employer.
20. The worker can end his relationship with the employer at any time without
    incurring liability for unfinished work.

The factors set out in Revenue Ruling 87-41 are based on common law principles governing

the employer-employee relationship. A similar test was adopted by the New Mexico

Supreme Court in Harger v. Structural Services, Inc., 121 N.M. 657, 916 P.2d 1324 (1996),

which addressed the distinction between an employee and an independent contractor in the

context of a worker’s compensation claim. For purposes of determining whether a worker

qualifies as an employee under NMSA 1978, § 7-9-17 of the Gross Receipts and

Compensating Tax Act, Regulation 3.2.105.7 NMAC lists various factors the Department

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will consider, 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.”

In this case, the evidence weighs against the Taxpayer’s claim to be an employee

rather than an independent contractor. At the administrative hearing, the Taxpayer

acknowledged that many home owners do not know how to do the work they hire the

Taxpayer to perform and are relying on his expertise to complete the job. The Taxpayer

provides his own tools, determines what materials are needed for each job, and purchases

those materials in his own name. The Taxpayer is free to perform services for anyone he

chooses and works for as many as 200 different home owners each year. The duration of the

Taxpayer’s jobs range from one hour to two days. Each home owner pays the Taxpayer at

the end of the job based on the cost of materials and the number of hours worked. No state or

federal taxes are withheld. Given these facts, the Taxpayer does not qualify as a common

law employee subject to state and federal wage withholding and cannot claim the exemption

provided in NMSA 1978, § 7-1-19.

Statutory Employees. In certain circumstances, workers who are independent

contractors under common law rules still may be treated as employees subject to withholding

for purposes of social security, Medicare, and federal unemployment taxes. See, 26 U.S.C. §

3101 et seq. In this case, the Taxpayer maintains that he is a statutory employee based on

language in the IRS’s instructions to the 2004 Form 1040, which states that statutory

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employees “include full-time insurance agents, certain agent or commission drivers and

traveling salespersons, and certain home workers.” The Taxpayer believes he qualifies as a

“home worker.”

As a threshold issue, there is some question as to whether the exemption from gross

receipts provided in NMSA 1978, § 7-9-17 applies to statutory employees. This issue need

not be addressed, however, because the Taxpayer does not come within the definition of a

statutory employee set out in the Internal Revenue Code. Pursuant to 26 U.S.C. §

3121(d)(3), a person who does not qualify as an employee under common law rules is treated

as a statutory employee for employment tax purposes if that person performs services for

remuneration:

(A) as an agent-driver or commission-driver engaged in distributing
meat products, vegetable products, fruit products, bakery products, beverages
(other than milk), or laundry or dry-cleaning services, for his principal;

(B) as a full-time life insurance salesman;

(C) as a home worker performing work, according to specifications
furnished by the person for whom the services are performed, on materials or
goods furnished by such person which are required to be returned to such
person or a person designated by him; or

(D) as a traveling or city salesman…;

if the contract of service contemplates that substantially all of such services are
to be performed personally by such individual; except that an individual shall
not be included in the term "employee" under the provisions of this paragraph
if such individual has a substantial investment in facilities used in connection
with the performance of such services (other than facilities for transportation),
or if the services are in the nature of a single transaction not part of a
continuing relationship with the person for whom the services are performed.

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The Taxpayer argues that he is a statutory employee because he qualifies as a “home worker.”

That term has a specialized meaning, however, and does not include everyone who works or

performs services within a home. Under § 3121(d)(3)(C), a home worker is someone who

performs work on material or goods furnished by the employer, which goods must be returned

to the employer or a person designated by the employer. In addition, a person shall not be

treated as an employee under § 3121 “if the services are in the nature of a single transaction not

part of a continuing relationship with the person for whom the services are performed.” In this

case, the Taxpayer does not perform work on material or goods provided by the home owners

for whom he works. Nor does the Taxpayer have a continuing relationship with these home

owners. The Taxpayer testified that he works for up to 200 separate customers a year and

estimated that he has repeat business from only five of them. These customers do not use the

Taxpayer’s services on a regular basis, but may call upon him three or four times a year. Based

on these facts, the Taxpayer does not qualify as a statutory employee.

Double Taxation. Finally, the Taxpayer argues that he should not have to pay gross

receipts tax on receipts attributable to the cost of materials because he paid tax on those

materials at the time of purchase. The Taxpayer complains that this amounts to double

taxation, particularly in light of the fact that he charged the materials to his customers at cost.

Contrary to popular belief, there is no prohibition against double taxation. See, Ft.

Smith Lumber Co. v. Arkansas, 251 U.S. 532, 533 (1920) (the United States Constitution

does not forbid double taxation). See also, 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.

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Gallegos, 44 N.M. 120, 99 P.2d 447 (1940); State ex rel. Attorney General v. Tittmann, 42

N.M. 76, 75 P.2d 701 (1938). In construing the Gross Receipts and Compensating Tax Act,

New Mexico courts have also held that double taxation does not exist when the taxes

complained of are imposed on the receipts of different taxpayers. See, e.g., House of

Carpets, Inc. v. Bureau of Revenue, 84 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); New Mexico Enterprises, Inc. v. Bureau of Revenue, 86 N.M. 799, 528 P.2d 212

(Ct. App. 1974).

In this case, the Taxpayer and the vendors from whom he purchased materials are

separate taxpayers, each of which is engaged in business in New Mexico and is subject to

payment of gross receipts tax. Pursuant to NMSA 1978, § 7-9-4, gross receipts tax is

imposed on a vendor’s receipts from selling materials to the Taxpayer. Gross receipts tax is

also imposed on the Taxpayer’s receipts from home repair jobs, including receipts

attributable to the cost of materials. When a lumber yard pays gross receipts tax to the State

on receipts from selling 2x4s to the Taxpayer, this does not excuse the Taxpayer from paying

gross receipts tax on the total amount he receives from his home repair project, including the

amount he charges the home owner for the 2x4s. The fact that the Taxpayer chooses not to

add a markup to the cost of the lumber is immaterial. In New Mexico Enterprises, supra, 86

N.M. at 800, 528 P.2d at 213, the court of appeals specifically rejected the argument that a

lack of profit excuses payment of gross receipts tax, noting: “In the instant case there were

two distinct sales—the sale to the taxpayer, and the sales from the taxpayer to the client. The

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absence of a profit does not change taxpayer's position….” Based on settled New Mexico

law, the Taxpayer is liable for gross receipts tax on all of his receipts from his home repair

jobs, including receipts attributable to the cost of materials.

CONCLUSIONS OF LAW

A. The Taxpayer filed a timely, written protest to the assessment of gross receipts

tax issued under LETTER ID L1893805056, and jurisdiction lies over the parties and the

subject matter of this protest.

B. The Taxpayer provided home repair services as an independent contractor rather

than as an employee and is not entitled to the exemption provided in NMSA 1978, § 7-9-17.

C. The Taxpayer is liable for gross receipts tax on all of his receipts from his home

repair jobs, including receipts attributable to the cost of materials.

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

DATED October 19, 2005.

MARGARET B. ALCOCK
Hearing Officer
Taxation & Revenue Department
Post Office Box 630
Santa Fe, NM 87504-0630

NOTICE OF RIGHT TO APPEAL
Pursuant to NMSA 1978, § 7-1-25, the Taxpayer has the right to appeal this decision
by filing a notice of appeal with the New Mexico Court of Appeals within 30 days of the date
shown above. See, NMRA, 12-601 of the Rules of Appellate Procedure. If an appeal is not
filed within 30 days, this Decision and Order will become final.

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CERTFICATE OF SERVICE
On October 19, 2005, a copy of the foregoing Decision and Order was mailed by
certified mail # 7003 0500 0002 3966 6030 to Bruce A. Kelly, HC 70 Box 32, Black Lake, NM
87734, and delivered by interoffice mail to Jeffrey W. Loubet, Special Assistant Attorney
General, Taxation and Revenue Department, Santa Fe, New Mexico.

MARGARET B. ALCOCK

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