Did taxpayers owe New Mexico tax on income earned after moving to Washington when they had already spent more than 185 days in New Mexico that year?

Plain-English summary

Frank and Carol Wagener owed New Mexico tax on wages, interest, and dividends earned after their October 2003 move to Washington because they had already spent more than 185 days in New Mexico that year. The 2003 statutory-residency rule applied even after they changed domicile.

The Wageners lived in New Mexico from January 1 through October 3, 2003. They moved to Washington on October 4, and Frank Wagener began a new job there on October 7. During the rest of the year, they received Washington wages, bonuses, moving subsidies, interest, and dividends.

Their New Mexico return excluded the post-move income. The Department assessed $1,363 of additional personal income tax, plus penalty and interest.

The Department initially released the assessment and told the Wageners they owed nothing further. After another review, it determined the release was erroneous and reassessed the same $1,363, plus $109.04 penalty and $54.20 interest. The Department later abated the penalty and agreed to remove interest accruing during the gap between the erroneous release and reassessment.

The 185-day rule made them full-year residents

Before 2003, New Mexico's statutory definition of resident was based solely on domicile. The Legislature amended Section 7-2-2 for 2003 and later years to include anyone physically present in New Mexico for at least 185 days during the tax year.

The exception for a person who changed abode and intended to live permanently outside New Mexico expressly did not apply to someone who met the 185-day threshold.

Because the Wageners stayed from January 1 through October 3, they were statutory residents for 2003. Their later Washington domicile did not change that result.

Residents allocated all wages, interest, and dividends to New Mexico

Section 7-2-11(A) and Regulation 3.3.11.11 required residents to allocate 100% of those income categories to New Mexico regardless of source.

The Wageners therefore had to include the income received in Washington during October through December.

Washington taxes did not create an income-tax credit

Section 7-2-13 allowed a credit for income tax paid to another state on income also taxed by New Mexico. Washington imposed no personal income tax, so the same wages were taxed only by New Mexico.

Frank Wagener argued that Washington's sales taxes, gasoline taxes, and government fees should count because its overall burden was high. The hearing officer found that the Legislature limited the credit to another state's income tax and did not authorize substitution of unrelated taxes or fees.

Result: protest DENIED on the $1,363 tax. The penalty and interest accruing during the Department's erroneous-release period were ABATED.

What this means for you

Taxpayers moving out of New Mexico late in the year

Count days physically present before assuming part-year treatment. Crossing the statutory threshold can make income earned after the move taxable as resident income for that year.

Taxpayers changing domicile

A bona fide permanent move may not override a separate statutory-residency test. Domicile and day-count rules can operate independently.

Residents moving to a state without income tax

New Mexico's other-state credit required actual income tax paid to the other state. Sales, fuel, property, or fee burdens did not substitute in this decision.

Taxpayers receiving a mistaken release

The Department corrected its erroneous release and reassessed tax. It did, however, abate penalty and the interest attributable to the period between its two actions.

Common questions

Q: How long did the Wageners live in New Mexico during 2003?
A: From January 1 through October 3, more than 185 days.

Q: Did they genuinely move to Washington?
A: Yes. The decision treated the move as a change of domicile but still applied statutory residency.

Q: Why were Washington wages taxed by New Mexico?
A: Residents had to allocate all wages to New Mexico, and the 185-day rule made the Wageners residents for 2003.

Q: Could Washington sales and fuel taxes offset New Mexico income tax?
A: No. Section 7-2-13 covered income tax paid to another state, and Washington imposed none.

Q: What relief did the Wageners receive?
A: The Department abated the penalty and interest accruing between the first assessment's release and the second assessment.

Citations and references

Statutes and regulation:

• NMSA 1978, § 7-1-17(C) — presumption that an assessment is correct
• NMSA 1978, § 7-1-18(A) — assessment limitation period
• NMSA 1978, §§ 7-2-1 et seq. — New Mexico personal income tax
• NMSA 1978, § 7-2-2(S) — 2003 definition of resident
• NMSA 1978, § 7-2-11(A) — resident allocation of wages, interest, and dividends
• NMSA 1978, § 7-2-13 — credit for income tax paid to another state
• Regulation 3.3.11.11 NMAC — allocation of resident income

Cases cited:

• Holt v. New Mexico Department of Taxation & Revenue, 2002-NMSC-034, 133 N.M. 11, 59 P.3d 491
• Schibuk v. New York State Tax Appeals Tribunal, 733 N.Y.S.2d 801 (2001)
• Tamagni v. Tax Appeals Tribunal, 695 N.E.2d 1125 (N.Y. 1998)
• Stelzner v. Commissioner of Revenue, 621 N.W.2d 736 (Minn. 2001)
• Luther v. Commissioner of Revenue, 588 N.W.2d 502 (Minn. 1999)
• Gwin v. Department of Revenue, 5 OTR 40 (Or. Tax Ct. 1972)
• State ex rel. Taylor v. Johnson, 1998-NMSC-015, 961 P.2d 768

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Frank A. and Carol L. Wagener
• Decision PDF: D&O 06-02

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
FRANK A. WAGENER AND CAROL L. WAGENER No. 06-02
TO NOTICE OF ASSESSMENT OF TAXES
ISSUED UNDER LETTER ID NO. L0859085824

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on January 19, 2006, before

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

represented by Susanne Roubidoux, Special Assistant Attorney General. Frank Wagener, the

taxpayer, represented himself. Based on the evidence and arguments in the record, IT IS

DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. Frank and Carol Wagener were residents of New Mexico prior to 2003.

2. During calendar year 2003, the Wageners lived in New Mexico from January 1st

through October 3rd.

3. On October 4, 2003, the Wageners moved to the State of Washington; on October

7, 2003, Mr. Wagener started a new job with a company in Washington.

4. Between October 7, 2003 and December 31, 2003, Mr. Wagener received wages,

bonuses, and moving subsidies from his new employer in Washington. The Wageners also earned

a small amount of taxable interest and dividends during this three-month period.

5. When the Taxpayers filed their 2003 personal income tax return (PIT-1) with New

Mexico, they excluded the income they received during the three months they were living in

Washington from the New Mexico income listed on Form PIT-B (Allocation and Apportionment

Schedule) to their PIT-1.

6. On June 9, 2004, the Department assessed the Taxpayers for $1,363.00 of

additional personal income tax, plus penalty and interest, on the income the Taxpayers excluded

from New Mexico income on their 2003 PIT-B.

7. On June 16, 2004, the Wageners filed a written protest to the assessment.

8. On June 18, 2004, an employee with the Department’s Farmington district office

informed Mr. Wagener that he and his wife had been released from the assessment and owed no

further taxes to New Mexico. This was later confirmed by the Department’s protest office.

9. The Department’s Personal Income Tax Unit subsequently conducted a further

review of the Wageners’ 2003 income tax return. The revenue agent conducting the review

determined that the assessment had been released in error and that additional tax was due on the

wage, interest, and dividend income the Wageners earned in Washington between October and

December 2003.

10. On July 14, 2004, the revenue agent sent the Wageners a letter notifying them of

her conclusions and enclosing a Statement of Account showing the amount currently due.

11. On July 21, 2004, the Department issued a new assessment under Letter ID

L0859085824 reassessing the Wageners for $1,363.00 of 2003 personal income tax, plus penalty

of $109.04 and interest of $54.20.

12. On July 24, 2004, before receiving the second assessment, the Wageners filed a

written protest to the Statement of Account that was enclosed with the Department’s July 14,

2004 letter, noting in the protest that they had not received a current assessment.

13. A copy of the July 21, 2004 assessment was subsequently faxed to Mr. Wagener

and his July 24, 2004 protest of the Statement of Account was converted to a protest of that

assessment.

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14. The Department abated the $109.04 of penalty assessed against the Wageners.

15. At the administrative hearing, the Department stated that it would abate the

interest that accrued during the period between the abatement of the first assessment in June 2004

and the issuance of the second assessment in July 2004.

DISCUSSION

The issue to be determined is whether the Wageners are liable for New Mexico personal

income tax on the wages, interest, and dividends they earned after leaving New Mexico and

moving to Washington in October 2003. NMSA 1978, § 7-1-17(C) states that any assessment of

taxes made by the Department is presumed to be correct. See also, Holt v. New Mexico

Department of Taxation & Revenue, 2002 NMSC 34, ¶ 4, 133 N.M. 11, 59 P.3d 491.

Accordingly, it is the Wageners’ burden to come forward with evidence and legal argument to

establish that they are entitled to an abatement of the assessment, in full or in part.

Payment of New Mexico personal income tax is governed by NMSA 1978, §§ 7-2-1, et

seq. New Mexico is among the majority of states that use the federal income tax system as the basis

for calculating state income taxes. New Mexico taxable income is calculated by starting with the

taxpayer's federal adjusted gross income, deducting the taxpayer's federal personal exemption and

itemized deductions, and making certain adjustments reflected on Form PIT-ADJ. The amount of

tax is then drawn from the tax rate table or tax schedule.

When a taxpayer has income that is taxable both within and without New Mexico, NMSA

1978, § 7-2-11 allows the taxpayer to file Form PIT-B to allocate and apportion certain categories

of income between New Mexico and non-New Mexico sources. The percentage of total income

allocated or apportioned to New Mexico is then applied to the tax previously calculated to

determine the tax due. Pursuant to § 7-2-11(A), New Mexico residents are required to allocate

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100 percent of certain categories of income—including wages, interest, and dividends—to New

Mexico, regardless of the source of that income. See also, Department Regulation 3.3.11.11

NMAC.

Prior to the 2003 tax year, NMSA 1978, § 7-2-2 of the Income Tax Act defined residency

solely in terms of domicile, and provided that “any individual who, on or before the last day of the

taxable year, changed his place of abode to a place without this state with the bona fide intention

of continuing actually to abide permanently without this state is not a resident for the purposes of

the Income Tax Act.” In 2003, the New Mexico Legislature amended § 7-2-2 and expanded the

definition of residency as follows:

S. “resident” means an individual who is domiciled in this state during any
part of the taxable year or an individual who is physically present in this state for
one hundred eighty-five days or more during the taxable year; but any
individual, other than someone who was physically present in the state for one
hundred eighty-five days or more during the taxable year, who, on or before the
last day of the taxable year, changed his place of abode to a place without this
state with the bona fide intention of continuing actually to abide permanently
without this state is not a resident for the purposes of the Income Tax Act for
periods after that change of abode; (Emphasis added to reflect 2003
amendment).

Laws 2003, ch. 275, § 1. Pursuant to § 7 of the bill, the amended definition of resident applies to

2003 and subsequent tax years.

Among states that impose an income tax, defining residency based on the duration of a

taxpayer’s physical presence in the state, as well as on the taxpayer’s domicile, is quite common.

Note, “Resident” Taxpayers: Internal Consistency, Due Process, and State Income Taxation, 91

Colum. L. Rev. 119 (1991). A survey conducted in 1991 concluded that New Mexico was one of

only three states to limit its definition of a resident to domiciliaries. Id. at n. 19. Far from being

an aberration, the 2003 Legislature’s expansion of the meaning of “resident” in § 7-2-2 brings

New Mexico’s income tax scheme closer to that employed by other states.

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In this case, the Wageners were physically present in New Mexico from January 1

through October 3, 2003. Because they were present in the state for more than 185 days during

the 2003 tax year, the Wageners qualified as residents for purposes of New Mexico’s personal

income tax and were required to allocate all of their 2003 wage, interest, and dividend income to

New Mexico. Although Mr. Wagener believes that he should not be required to pay tax on

income he earned after establishing a new domicile in Washington, he was unable to provide any

legal authority to support his position. The state courts that have addressed this issue have

consistently upheld state taxation of nondomiciliaries based on a finding of statutory residency.

See, Schibuk v. N.Y. State Tax Appeals Tribunal, 733 N.Y.S.2d 801 (2001), appeal denied, 778

N.E.2d 551 (2002) (New York was entitled to tax income of statutory residents who established a

new domicile in Vermont prior to the end of the tax year); Tamagni v. Tax Appeals Tribunal, 695

N.E.2d 1125 (N.Y.), cert. denied, 525 U.S. 931 (1998) (New York’s taxation of statutory

residents taxed on the same income by their state of domicile was not unconstitutional, even

though New York did not allow a credit for taxes paid to the other state); Stelzner v.

Commissioner of Revenue, 621 N.W.2d 736 (Minn.), cert. denied, 534 U.S. 825 (2001)

(application of Minnesota’s nondomiciliary resident statute did not implicate the commerce

clause); Luther v. Commissioner of Revenue, 588 N.W.2d 502 (Minn.), cert. denied, 528 U.S. 821

(1999); (Minnesota’s taxation of worldwide income of nondomiciliary resident did not violate

due process or commerce clauses); Gwin v. Department of Revenue, 5 OTR 40 (Oregon Tax Ct.

1972) (neither the federal nor the state constitution prevented Oregon from taxing

nondomiciliaries). Cf., Huckaby v. New York State Div. of Tax Appeals, 829 N.E.2d 276, 284-285

(N.Y. 2005), cert. denied, 126 S.Ct. 546 (2005) and Zelinsky v. Tax Appeals Tribunal, 801 N.E.2d

840, 848 (N.Y. 2003), cert. denied, 541 U.S. 1009 (2004) (upholding the constitutionality of New

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York’s taxation of income paid by New York employers for work the taxpayers performed

outside the state).

In New Mexico, the potential for double taxation of taxpayers who are treated as residents

of more than one state is mitigated by the provisions of NMSA 1978, § 7-2-13, which provides as

follows:

When a resident individual is liable to another state for tax upon income derived
from sources outside this state but also included in net income under the Income
Tax Act as income allocated or apportioned to New Mexico pursuant to Section 7-
2-11 NMSA 1978, the individual, upon filing with the secretary satisfactory
evidence of the payment of the tax to the other state, shall receive a credit against
the tax due this state in the amount of tax paid to the other state with respect to
income that is required to be either allocated or apportioned to New Mexico….

Based on this provision, Mr. Wagener’s income from his Washington employer is subject to tax

only once. If the State of Washington taxed this income, the Wageners would be entitled to a

credit against the tax New Mexico imposed on the same income. Because Washington does not

have an income tax, however, the credit is not applicable, and tax on the full amount of the

Wageners’ income is due to New Mexico.

At the administrative hearing, Mr. Wagener argued that it is unfair for New Mexico to

limit its credit to the payment of other state income taxes. Although Washington does not have an

income tax, Mr. Wagener contends that the state’s overall tax burden is equal to or higher than

New Mexico’s. For this reason, he believes he should be able to offset New Mexico’s tax on his

Washington income with the higher sales taxes, gasoline taxes, and government fees he pays to

Washington. There is a certain logic to this argument. Nonetheless, the fact remains that the

New Mexico Legislature has not chosen to extend the credit provided in § 7-2-13 to taxes or fees

unrelated to income tax, and it is not within the power of the Department or its hearing officer to

override the Legislature’s decision. In State ex rel. Taylor v. Johnson, 1998-NMSC-015 ¶ 022,

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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 individuals who are physically present in the

state for more than 185 days to report their income as residents and to allocate 100 percent of their

wage, interest, and dividend income to New Mexico. There is no question that the Wageners meet

the statutory definition of residents for the 2003 tax year. That being the case, there is no legal basis

for abating the additional New Mexico income tax assessed by the Department.

CONCLUSIONS OF LAW

A. The Wageners filed a timely, written protest to the assessment of personal income

tax issued under Letter ID L0859085824, and jurisdiction lies over the parties and the subject matter

of this protest.

B. The Department’s July 21, 2004 assessment was issued within the time limits

provided for assessments of tax in NMSA 1978, § 7-1-18(A).

C. The Wageners met the statutory definition of residents for the 2003 tax year and

were required to allocate all of their wage, interest, and dividend income to New Mexico, including

income earned while they were domiciled in the State of Washington.

For the foregoing reasons, the Wageners’ protest IS DENIED, except with respect to the

interest that accrued between the Department’s abatement of its June 9, 2004 assessment and the

issuance of its July 21, 2004 assessment, which the Department has agreed to abate.

DATED January 23, 2006.

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