Was a retired tradesman an employee exempt from gross receipts tax when an estate paid him hourly for recurring property-maintenance work?

Plain-English summary

Edward Chavez was an independent contractor, not an employee, when he maintained homes for an estate in 2008 through 2010. His CPA's admitted failure to explain gross receipts tax supported penalty relief, but did not remove the underlying tax or mandatory interest.

Chavez was a retired steel and iron worker. Each week, the estate's personal representative told him which of as many as 14 homes needed attention. Chavez then scheduled 20 to 30 hours of landscaping, interior cleaning, and inspection work.

The estate paid him an hourly amount by check. Chavez reported the Forms 1099-MISC income on federal Schedule C and paid federal and state income tax, but did not have a CRS number or report gross receipts tax.

Hourly pay was the only employee indicator

Section 7-9-17 exempted employee wages from gross receipts tax. Regulation 3.2.105.7 required consideration of seven indicators.

Hourly pay supported employee treatment. Six other indicators pointed the other way:

• the estate withheld no income tax;
• it paid no FICA tax;
• it provided no workers' compensation coverage;
• it made no unemployment-insurance contributions;
• it expressly considered Chavez a contractor; and
• after receiving the weekly property assignments, Chavez determined his own schedule.

The Forms 1099 rather than W-2s were consistent with that treatment. The AHO held that Chavez was engaged in business and his receipts were taxable.

CPA error removed penalty but not tax

Chavez's CPA acknowledged in writing that she had failed to inform him of his gross receipts tax obligations. The Department assessed no penalty, which the decision attributed to the accountant-reliance rule in Regulation 3.1.11.11(D).

But professional error did not eliminate the principal. New Mexico's self-reporting system placed a duty on Chavez to determine the tax consequences of paid business activity. Neither lack of knowledge nor absence of a CRS number changed the taxability of the receipts.

Interest remained mandatory until the tax was paid.

Prehearing adjustments reduced the balance

The Department made small abatements before the hearing. The remaining amounts were:

• 2008: $376.28 tax and $80.80 interest;
• 2009: $1,310.64 tax and $221.64 interest; and
• 2010: $629.99 tax and $87.23 interest.

The order states a total outstanding liability of $2,706.58. Its separate printed 2010 total of “$717.228” contains an apparent extra digit; the tax and interest components are reproduced above exactly.

Result: protest DENIED. The adjusted tax and interest remained due, with no penalty assessed.

What this means for you

Property-maintenance workers

Hourly pay alone does not establish employment. Payroll withholding, employment insurance, the payer's classification, and control over scheduling and performance all affected this result.

Estates and personal representatives

Recurring maintenance arrangements can create independent-contractor payments even when the estate directs which properties need work. Consistent tax forms and worker classification matter.

Taxpayers relying on CPAs

Accountant error may support penalty relief without eliminating tax or interest. This case imposed no penalty but still required full payment of the adjusted principal and interest.

Common questions

Q: Did the estate control Chavez's work?
A: It identified the properties needing attention, but Chavez arranged his own schedule.

Q: Did paying income tax satisfy gross receipts tax?
A: No. Chavez paid federal and state income tax, but the separate gross receipts tax obligation remained.

Q: Why was no penalty assessed?
A: His CPA admitted failing to advise him, and the decision treated the result as accountant-reliance relief.

Q: Did not having a CRS number excuse the tax?
A: No. Registration status did not change whether he engaged in business for direct monetary benefit.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-9-3.3, 7-9-4, and 7-9-5 — engaging in business and gross receipts tax
• NMSA 1978, § 7-9-17 — employee wage exemption
• NMSA 1978, § 7-1-67 — mandatory interest
• Regulations 3.2.105.7(A)-(B) and 3.1.11.11(D) NMAC — employee factors and accountant reliance

Cases cited:

• Wing Pawn Shop v. Taxation and Revenue Department, 1991-NMCA-024 — burden to prove an exemption
• Tiffany Construction Co. v. Bureau of Revenue, 1976-NMCA-127 — duty to determine tax consequences
• Marbob Energy Corp. v. New Mexico Oil Conservation Commission, 2009-NMSC-013 — mandatory interest

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Edward Chavez
• Decision PDF: D&O 14-40

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
EDWARD CHAVEZ No. 14-40
TO ASSESSMENTS ISSUED UNDER LETTER
ID NO.’s L1182583760, L0645712848 and L1719454672

DECISION AND ORDER

A protest hearing occurred on the above captioned matter on November 24, 2014 before

Brian VanDenzen, Esq., Chief Hearing Officer, in Santa Fe. Edward Chavez (“Taxpayer”)

appeared pro se. Maria Chavez, Taxpayer’s daughter, also appeared. Staff Attorney Peter Breen

appeared representing the State of New Mexico, Taxation and Revenue Department

(“Department”). Protest Auditor Sonya Varela appeared as a witness for the Department.

Taxpayer Exhibits #1-10 and Department Exhibits A-B were admitted into the record, as

described more thoroughly in the Administrative Protest Hearing Exhibit Log. Based on the

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

FINDINGS OF FACT

1. On August 21, 2014, the Department assessed Taxpayer for $389.08 in gross

receipts tax, $0.00 in penalty, and $79.36 in interest for a total assessment of $468.44 for the

combined reporting period ending on December 31, 2008. [Letter id. no. L1182583760].

2. On August 21, 2014, the Department assessed Taxpayer for $1,472.03 in gross

receipts tax, $0.00 in penalty, and $233.08 in interest for a total assessment of $1,705.11 for the

combined reporting period ending on December 31, 2009. [Letter id. no. L0645712848].

3. On August 21, 2014, the Department assessed Taxpayer for $700.69 in gross

receipts tax, $0.00 in penalty, and $83.20 in interest for a total assessment of $783.89 for the

combined reporting period ending on December 31, 2010. [Letter id. no. L1719454672].

4. On August 28, 2014, Taxpayer protested the Department’s assessments.

5. On September 10, 2014, the Department acknowledged receipt of Taxpayer’s

protest.

6. On October 17, 2014, the Department requested a hearing in this matter with the

Hearings Bureau.

7. On October 21, 2014, within 90-days of the protest, the Hearings Bureau sent

Notice of Administrative Hearing, setting this matter for a hearing on November 24, 2014.

8. On November 12, 2014, the Hearings Bureau sent Amended Notice of

Administrative Hearing, correcting the spelling of address information, scheduling this matter for

a hearing on November 24, 2014.

9. Taxpayer is a retired steel and iron worker.

10. In 2008, 2009, and 2010, Taxpayer performed maintenance services on homes for

the Estate of Jane Batten, Mr. Kreg B. Hill personal representative.

11. Taxpayer would maintain the landscape, clean the interiors, and inspect up to 14-

homes that were part of the estate.

12. Mr. Hill would call Taxpayer at the beginning of the week and direct him to

which property on the estate needed attention. Taxpayer would then schedule his work

accordingly.

13. Taxpayer would perform between 20 to 30 hours of work each week.

14. Taxpayer received an hourly salary for his work on the Estate.

In the Matter of the Protest of Edward Chavez, page 2 of 9

15. Taxpayer received checks from the estate.

16. The estate did not withhold income or FICA taxes from Taxpayer’s check.

17. The estate did not pay unemployment insurance or worker’s compensation for

Taxpayer’s work.

18. Mr. Hill considered Taxpayer a contractor rather than an employee. [Taxpayer Ex.

2; 11-24-14 CD 25:02-12].

19. The estate provided Taxpayer with 1099-MISC’s in 2008, 2009, and 2010 rather

than W-2’s. [Taxpayer Ex.’s 5-7].

20. Taxpayer did not have a CRS number and Taxpayer was unaware of the gross

receipts tax implications of his services for the estate.

21. Taxpayer’s CPA did not inform him of his gross receipts tax obligations.

Taxpayer’s CPA sent the Department a letter acknowledging her failure to inform Taxpayer

about his gross receipts tax obligations.

22. There is no dispute that Taxpayer filed and paid appropriate federal and state

income tax in 2008, 2009, and 2010.

23. Taxpayer listed the 1099-MISC income he received from the estates on Schedule

C’s in each year.

24. Through its tape match program with the IRS, the Department detected that

Taxpayer had Schedule C income in 2008, 2009, and 2010 that had not been reported on a CRS

return.

25. The Department issued its assessments, as discussed in finding of facts numbers

1-3.

In the Matter of the Protest of Edward Chavez, page 3 of 9

26. The Department made prehearing abatements of the assessment in each year at

issue. In 2008, the Department abated $14.48 including tax and interest. In 2009, the Department

abated $183.71 including tax and interest. In 2010, the Department abated $77.55 including tax

and interest. [Department Ex. A].

27. As of the date of hearing, for 2008, Taxpayer owed $376.28 in gross receipts tax

and $80.80 in interest for a total 2008 liability of $457.08. In 2009, Taxpayer owed $1,310.64 in

gross receipts tax and $221.64 in interest for a total 2009 liability of $1532.28. In 2010,

Taxpayer owed $629.99 in gross receipts tax and $87.23 in interest for a total 2010 liability of

$717.228. As of the date of hearing, Taxpayer had a total outstanding liability of $2,706.58.

[Department Ex. B].

DISCUSSION

At issue in this protest is whether Taxpayer was an employee or an independent

contractor during 2008, 2009, and 2010. Also at issue is whether Taxpayer’s liability may be

excused because his CPA failed to inform him of his gross receipts tax obligations. Because

Taxpayer was an independent contractor not an employee and because lack of knowledge of the

gross receipts requirement is not a defense to liability, Taxpayer’s protest is denied.

Under NMSA 1978, Section 7-1-17 (C) (2007), the assessments issued in this case are

presumed correct. Consequently, Taxpayer has the burden to overcome the assessments. See

Archuleta v. O'Cheskey, 1972-NMCA-165, ¶11, 84 N.M. 428. Moreover, “[w]here 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, 1991-NMCA-024, ¶16, 111 N.M. 735 (internal citation omitted); See also

In the Matter of the Protest of Edward Chavez, page 4 of 9
TPL, Inc. v. N.M. Taxation & Revenue Dep't, 2003-NMSC-7, ¶9, 133 N.M. 447. Once a taxpayer

rebuts the presumption of correctness, the burden shifts to the Department to show the correctness

of the assessed tax. See MPC Ltd. v. N.M. Taxation & Revenue Dep't, 2003 NMCA 21, ¶13, 133

N.M. 217.

For the privilege of engaging in business, New Mexico imposes a gross receipts tax on the

receipts of any person engaged in business. See NMSA 1978, § 7-9-4 (2002). “Engaging in

business” is defined as “carrying on or causing to be carried on any activity with the purpose of

direct or indirect benefit.” NMSA 1978, § 7-9-3.3 (2003). Taxpayer was performing activities for

direct monetary benefit, meaning that Taxpayer was a person engaged in business. A lack of a

CRS number does not alter these statutory definitions subjecting Taxpayer to gross receipts tax.

Under the Gross Receipts and Compensating Tax Act, there is a statutory presumption that all

receipts of a person engaged in business are taxable. See NMSA 1978, § 7-9-5 (2002).

Exempted from gross receipts taxes are the wages of employees. See NMSA 1978, § 7-9-17.

Regulation 3.2.105.7 (A) NMAC lists seven criteria for the Department to use in determining

whether a person is an employee for the purposes of the exemption under Section 7-9-17:

A. In determining whether a person is an employee, the department will
consider the following indicia:
(1) is the person paid a wage or salary;
(2) is the "employer" required to withhold income tax from the person's
wage or salary;
(3) is F.I.C.A. tax required to be paid by the "employer";
(4) is the person covered by workmen's compensation insurance;
(5) is the "employer" required to make unemployment insurance
contributions on behalf of the person;
(6) does the person's "employer" consider the person to be an employee;
(7) does the person's "employer" have a right to exercise control over the
means of accomplishing a result or only over the result (control does not
mean "mere suggestion").

In the Matter of the Protest of Edward Chavez, page 5 of 9
Under Regulation 3.2.105.7 (B) NMAC, “[i]f all of the indicia mentioned Subsection A of Section

3.2.105.7 NMAC are present, the department will presume that the person is an employee.

However, a person may be an employee even if one or more of the indicia are not present.”

Applying those criteria under Regulation 3.2.105.7 (B) NMAC to the facts of this case,

Taxpayer was an independent contractor and not an employee. Taxpayer was paid an hourly wage,

the only factor that might suggest Taxpayer was an employee. However, the estate did not withhold

any taxes from Taxpayer’s checks, did not pay FICA, did not pay worker’s compensation insurance,

and did not make unemployment insurance payments on behalf of Taxpayer. Taxpayer was issued

1099-MISC’s rather than W-2’s. Mr. Hill considered Taxpayer a contractor rather than an

employee. Taxpayer determined his schedule. Since Taxpayer was an independent contractor in

2008, 2009, and 2010 for the estate rather than an employee, Taxpayer did not establish he was

entitled to the exemption from gross receipts tax under Section 7-9-17.

Although Taxpayer was subject to gross receipts tax, he argues that because he did not

register for a CRS number and because no one ever told him of the requirements of gross receipts

tax, he should not be held liable for the outstanding tax. It is true that Taxpayer’s CPA failed to

advise him of the gross receipts tax obligations for his work with the state. In recognition of the

admitted lapse, the Department did not assess penalty in this case, presumably under Regulation

3.1.11.11 (D) NMAC (allows for abatement of penalty when a “taxpayer proves that the failure

to pay a tax… was caused by reasonable reliance on the advice of competent tax counsel or

accountant as to the taxpayer’s liability after full disclosure of all relevant facts.”). However, the

CPA’s failure to advise Taxpayer of his gross receipts tax liability does not excuse Taxpayer’s

underlying tax liability. Under New Mexico's self-reporting tax system, “every person is charged

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

In the Matter of the Protest of Edward Chavez, page 6 of 9
Construction Co. v. Bureau of Revenue, 1976-NMCA-127, ¶5, 90 N.M. 16. As a consequence of

engaging in an activity for the purpose of direct monetary benefit, Taxpayer was required to pay

gross receipts tax.

Regarding interest, when a taxpayer fails to make timely payment of taxes due to the state,

“interest shall be paid to the state on that amount from the first day following the day on which the

tax becomes due...until it is paid.” NMSA 1978, § 7-1-67 (2007) (italics for emphasis). Under the

statute, regardless of the reason for non-payment of the tax, the Department has no discretion in

the imposition of interest, as the statutory use of the word “shall” makes the imposition of

interest mandatory. See Marbob Energy Corp. v. N.M. Oil Conservation Comm'n, 2009-NMSC-

013, ¶22, 146 N.M. 24 (use of the word “shall” in a statute indicates provision is mandatory absent

clear indication to the contrary). The language of Section 7-1-67 also makes it clear that interest

begins to run from the original due date of the tax until the tax principal is paid in full. The

Department has no discretion under Section 7-1-67 and must assess interest against Taxpayer from

the time the 2008, 2009, and 2010 gross receipts tax was due but not paid until Taxpayer satisfies

the gross receipts tax principal.

Aside from the prehearing abatements that the Department made in this matter, Taxpayer is

liable for the assessed gross receipts tax and interest in 2008, 2009, and 2010. Taxpayer’s protest is

denied.

CONCLUSIONS OF LAW

A. Taxpayer filed a timely, written protest to the assessments. Jurisdiction lies over the

parties and the subject matter of this protest. The hearing was timely set and held in compliance

with NMSA 1978, Section 7-1-24.1 (A) (2013).

In the Matter of the Protest of Edward Chavez, page 7 of 9
B. Taxpayer was a person engaged in business under NMSA 1978, Section 7-9-4

(2002), and therefore all of Taxpayer’s receipts in 2008, 2009, and 2010 are presumed subject to

gross receipts tax under NMSA 1978, Section 7-9-5 (2002).

C. Six of the seven criteria under Regulation 3.2.105.7 (A) NMAC established that

Taxpayer was an independent contractor and not an employee.

D. Since Taxpayer was an independent contractor rather than an employee, Taxpayer

did not establish that he was entitled to the wages exemption from gross receipts tax under NMSA

1978, Section 7-9-17. See Wing Pawn Shop v. Taxation and Revenue Department, 1991-NMCA-

024, ¶16, 111 N.M. 735.

E. Under NMSA 1978, Section 7-1-67 (2007), Taxpayer is liable for accrued interest

under the assessment. Interest continues to accrue until the tax principal is satisfied.

For the foregoing reasons, Taxpayer’ protest IS DENIED. As of the date of hearing, for

2008, Taxpayer owed $376.28 in gross receipts tax and $80.80 in interest for a total 2008

liability of $457.08. In 2009, Taxpayer owed $1,310.64 in gross receipts tax and $221.64 in

interest for a total 2009 liability of $1532.28. In 2010, Taxpayer owed $629.99 in gross receipts

tax and $87.23 in interest for a total 2010 liability of $717.228. As of the date of hearing,

Taxpayer had a total outstanding liability of $2,706.58.

DATED: December 17, 2014.

Brian VanDenzen, Esq.,
Chief Hearing Officer
Taxation & Revenue Department
Post Office Box 630
Santa Fe, NM 87504-0630

In the Matter of the Protest of Edward Chavez, page 8 of 9
In the Matter of the Protest of Edward Chavez, page 9 of 9