Were band-performance payments taxable to John Widell when he received the checks and distributed all of the money to other musicians?

Plain-English summary

John Widell owed New Mexico gross receipts tax on payments that Santa Fe bars made to his band, even though he distributed all of the money to the other musicians and retained none for himself. Widell operated Broomdust Caravan as a sole proprietor, supplied the bars with his Social Security number, received and cashed their checks, and did not have a nontaxable transaction certificate.

The decision rejected Widell's disclosed-agency argument. It found no evidence that he was an agent for the bars or had power to bind them in a contract with a third party. Because services performed in New Mexico and business receipts are presumed taxable, the 2010 assessment remained.

Receiving and passing along the checks did not remove the receipts

The band performed at Tiny's Dine & Dance, Cowgirl Santa Fe, and the Tin Star during 2010. The bars guaranteed a set amount against the door charge, issued Forms 1099 to Widell, and paid him by check. Widell cashed the checks and distributed the entire proceeds to the musicians.

Section 7-9-3.5(A)(3)(f) excludes amounts received solely for another person in a disclosed agency capacity. Regulation 3.2.1.19(C)(1) says an agency relationship exists when a person can bind a principal in a contract enforceable by a third party.

The hearing officer found no contract or other evidence giving Widell authority to bind the bars. Instead, the facts showed that he was in charge of the band and chose to operate it as a sole proprietor. The exclusion therefore did not apply.

Penalty and interest also remained

Widell did not register the band or file its gross receipts tax returns. The decision found negligence because he took no action to register and, as an attorney, had an obligation to research whether tax was due on the band's services.

Interest was mandatory on unpaid principal until payment. For 2010, the amount due was $700.64 tax, $140.13 penalty, and $42.70 interest through February 9, 2015, with interest continuing on unpaid principal.

The 2009 issue was withdrawn, not decided in Widell's favor

The Department had already abated or adjusted other assessments after Widell supplied nontaxable transaction certificates or other acceptable evidence for legal services performed outside New Mexico.

At the hearing, he withdrew his protest for 2009 so he could continue working with the Department to prove that the receipts were out-of-state sales. If he could not prove that, the decision said he would owe $128.52 tax, $63.70 penalty, and $54.13 interest for 2009.

Result: protest DENIED. The 2010 band-performance assessment was upheld, while the withdrawn 2009 matter remained dependent on further substantiation.

What this means for you

Bands and other informal groups

Having one member receive a customer's check and divide it among performers does not by itself establish a disclosed agency exclusion. The legal relationship and authority shown to the customer matter.

Sole proprietors

Register the activity and evaluate gross receipts tax even if you pass all revenue to other participants and retain no profit.

Service providers claiming out-of-state treatment

Keep nontaxable transaction certificates or other evidence acceptable to the Department. The decision shows that substantiation can support abatements, while unsupported receipts remain exposed.

Common questions

Q: Did Widell avoid tax because he kept none of the band money?
A: No. He received the bars' checks as the band's sole proprietor, and the decision found no applicable disclosed agency relationship.

Q: Why did the agency exclusion fail?
A: There was no evidence that Widell was the bars' agent or could bind them in a contract with a third party.

Q: What did the decision uphold for 2010?
A: $700.64 tax, $140.13 penalty, and $42.70 interest through February 9, 2015, plus continuing interest on unpaid principal.

Q: What happened to the 2009 assessment?
A: Widell withdrew that part of his protest to provide evidence of out-of-state sales. If he could not prove them, the stated 2009 tax, penalty, and interest remained due.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-9-3(M), 7-9-3.5(A), and 7-9-5(A) — services, gross receipts, disclosed agency, and presumption that business receipts are taxable
• NMSA 1978, §§ 7-1-17(C), 7-1-67(A), and 7-1-69(A)(1) — assessment presumption, mandatory interest, and negligence penalty
• Regulations 3.2.1.19(C)(1) and 3.1.11.10 NMAC — agency relationship and negligence

Cases cited:

• Wing Pawn Shop v. Taxation and Revenue Department, 1991-NMCA-024 — strict construction of exemptions and deductions
• El Centro Villa Nursing Center v. Taxation and Revenue Department, 1989-NMCA-070 — inadvertent error as negligence
• Marbob Energy Corporation v. New Mexico Oil Conservation Commission, 2009-NMSC-013 — mandatory meaning of “shall” for interest

Source

• Listing: New Mexico Decisions & Orders
• Decision post: John Widell
• Decision PDF: D&O 15-10

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
JOHN WIDELL No. 15-10
TO ASSESSMENTS ISSUED UNDER LETTER
ID NOs. L0653511632, L1727253456, L0385076176 and L1458818000

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on February 10, 2015, before

Monica Ontiveros, Hearing Officer. The Taxation and Revenue Department (“Department”) was

represented by Julia Belles, attorney for the Department. Tom Dillon, Protest Office Supervisor,

appeared and testified as a witness for the Department. John Widell, Esq. (“Taxpayer”) appeared

and testified. The Department introduced into the record Exhibits A-1, A-2 and B. Based on the

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

FINDINGS OF FACT

1. On August 13, 2014, the Department issued four gross receipts tax assessments

against Taxpayer: 1) in the amount of $738.10 in principal tax, $147.62 in penalty, and $151.89 in

interest for the tax period of June 30, 2008 through December 31, 2008 (Letter Id. No.

L0653511632); 2) in the amount of $318.52 in principal tax, $63.70 in penalty, and $51.02 in

interest for the tax period of April 1, 2009 through December 31, 2009 (Letter Id. No.

L1727253456); 3) in the amount of $1,443.07 in principal tax, $288.61 in penalty, and $174.00 in

interest for the tax period of April 1, 2010 through December 31, 2010 (Letter Id. No.

L0385076176); 4) and in the amount of $1,245.00 in principal tax, $249.00 in penalty, and

$105.11 in interest for the tax period of April 1, 2011 through December 31, 2011 (Letter Id. No.

L1458818000).

2. Taxpayer filed a protest to the assessments on November 12, 2014.

3. The Department acknowledged the protest on December 9, 2014. Letter Id. No.

L1139541968.

4. On January 21, 2015, the Department requested a hearing in this matter.

5. The Hearings Bureau mailed a Notice of Administrative Hearing on January 21,

2015, setting the hearing for February 10, 2015.

6. Taxpayer is an attorney licensed in the State of New Mexico.

7. Taxpayer performed legal services, outside of New Mexico, during the tax periods.

8. The Department made a number of abatements or adjustments to Taxpayer’s gross

receipts tax liability based on Taxpayer’s production of nontaxable transaction certificates or other

evidence acceptable to the Secretary for the legal services he performed outside of New Mexico.

9. Taxpayer’s remaining liability after the abatements was $128.52 in principal tax,

$63.70 in penalty and $54.13 for the tax period 2009 and $700.64 in principal tax, $140.13 in pen-

alty and $42.70 in interest for the tax period 2010. The interest is accrued through February 9,

2015. Exhibit B.

2016. At the hearing, Taxpayer withdrew his protest as to the 2009 tax year and will work

with the Department on providing nontaxable transaction certificates or other evidence to substan-

tiate that the receipts for 2009 were out of state sales. [02-10-15 CD 9:35-11:35].

11. During the 2010 tax period, Taxpayer also was the sole proprietor of a band,

Broomdust Caravan (“the band”).

12. The band performed services for Tiny’s Dine & Dance, Cowgirl Santa Fe and the

Tin Star (collectively known as “the Bars”) in Santa Fe during the tax period in 2010. Taxpayer

received 1099s from the Bars.

In the Matter of John Widell
page 2 of 9

13. Taxpayer did not register the band with the Department and the band was a non fil-

er for the tax periods at issue.

14. When Taxpayer performed at the Bars, Taxpayer performed with other musicians.

15. Taxpayer was the only member of the band that provided the Bars’ owners with a

social security number for payment for services.

16. The Bars guaranteed a set amount of income against the fee charged at the door for

the band.

17. Taxpayer received payment in the form of a check from the Bars which he cashed

and he distributed the receipts to the band members.

18. Taxpayer distributed the entire receipts to his band members and did not retain any

receipts or income for himself.

19. Taxpayer does not have in his possession a nontaxable transaction certificate.

DISCUSSION

The sole issue to be determined is whether the Department properly assessed Taxpayer for

gross receipts tax, penalty and interest for the tax period April 1, 2010 through December 31, 2010

for receipts of payments from the Bars for services performed. Taxpayer argued that any receipts

of payments from the Bars he distributed to the members of the band and those receipts were re-

ceived in a disclosed agency capacity.

Burden of Proof and Standard of Review.

Section 7-1-17(C) provides that any assessment of taxes made by the Department is

presumed to be correct. NMSA 1978, Section 7-1-17(C) (2007). Accordingly, it is Taxpayer’s

burden to present evidence and legal argument to show that he is entitled to an abatement, in full

or in part, of the assessment issued against it. See, TPL, Inc. v. Taxation and Revenue Dep’t.,

In the Matter of John Widell
page 3 of 9
2000-NMCA-083, ¶8, 129 N.M. 539, rev’d on other grounds, 2003-NMSC-7, 133 N.M. 447.

When a taxpayer presents sufficient evidence to rebut the presumption, the burden shifts to the

Department to show that the assessment is correct. See, MPC LTD. v. Taxation and Revenue

Dep’t., 2003-NMCA-021, ¶ 13, 133 N.M. 217; Grogan v. Taxation and Revenue Dep’t., 2003-

NMCA-033, ¶11, 133 N.M. 354. Under Section 7-1-17(C), the assessment issued in this case is

presumed to be correct.

Consequently, Taxpayer has the burden to show that the Department’s assessment is

incorrect and establish that he was entitled to an exemption or deduction for the services he

provided to the Bars. See Archuleta v. O'Cheskey, 1972-NMCA-165, ¶7, 84 N.M. 428. The courts

have held that “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 Dep’t., 1991-NMCA-024, ¶16, 111 N.M. 735.

Gross Receipts.

In New Mexico, the general rule is that services performed within the State of New Mexico

are taxable. The term “gross receipts” is broadly defined in § 7-9-3.5(A)(1):

(1) “gross receipts” means the total amount of money or the value of other
consideration received from selling property in New Mexico, from leasing or
licensing property employed in New Mexico, from granting a right to use a franchise
employed in New Mexico, from selling services performed outside New Mexico, the
product of which is initially used in New Mexico, or from performing services in New
Mexico. In an exchange in which the money or other consideration received does not
represent the value of the property or services exchanged, “gross receipts” means the
reasonable value of the property or services exchanged;”

NMSA 1978, Section 7-9-3.5(A) (1) (2003). Section 7-9-3(M) defines “service” as “all activities

… which activities engaged in for other persons for a consideration, which activities involve pre-

dominately the performance of a service as distinguished from selling or leasing property. … In
In the Matter of John Widell
page 4 of 9
determining what a service is, the intended use, principal objective or ultimate objective of the

contracting parties shall not be controlling.” NMSA 1978, Section 7-9-3(M) (2007). The Su-

preme Court in 1937 decided in Comer v. State Tax Comm'n, 1937-NMSC-032, ¶37, 41 N.M. 403,

that gross receipts shall include “all activities or acts engaged in (personal, professional and corpo-

rate) or caused to be engaged in with the object of gain, benefit[,] or advantage either direct or in-

direct."

In addition thereto, “…it is presumed that all receipts of a person engaging in business are

subject to the gross receipts tax.” NMSA 1978, Section 7-9-5(A) (2002). Therefore, the

presumption is that Taxpayer’s receipts from the services performed for the Bars are presumed to

be taxable.

Disclosed Agent.

Taxpayer argued that the receipts or income he received from the Bars in 2010, while gross

receipts were not taxable to Taxpayer because an exemption applied to the receipts or that

Taxpayer received those receipts in a disclosed agency capacity for the other members of the band

pursuant to NMSA 1978, §7-9-3.5(A)(3)(f) (2007). Section 7-9-3.5(A)(3)(f) states that excluded

from gross receipts are “amounts received solely on behalf of another in a disclosed agency

capacity.” The Department defines what the test is to determine whether an agency relationship

exists. Regulation 3.2.1.19(C) (1) NMAC (12/30/03) provides that “(a)n agency relationship

exists if a person has the power to bind a principal in a contract with a third party so that the third

party can enforce the contractual obligation against the principal.”

In applying Section 7-9-3(F)(2)(f) and Regulation 3.2.1.19(C)(1) (12/30/03), the central

inquiry is whether Taxpayer had the power to legally bind the Bars in a contract with a third party.

There is no evidence that Taxpayer was an agent for the Bars or had the power to bind the Bars in

In the Matter of John Widell
page 5 of 9
a contract. The Bars did not enter into any contracts with Taxpayer permitting Taxpayer to be

their agent. Instead the facts show that Taxpayer was in charge of the band and chose to act as the

sole proprietor of the band. Therefore, the exemption does not apply and Taxpayer is liable for the

gross receipts tax.

Civil Penalty.

Civil penalty is imposed when a taxpayer is “negligent” or disregards the Department’s

rules and regulations in not filing a return or paying tax when it is due. Section 7-1-69(A)(1)

states that:

(e)xcept as provided in Subsection C of this section, in the case of failure due to
negligence or disregard of department rules and regulations, but without intent
to evade or defeat a tax, to pay when due the amount of tax required to be paid,
to pay in accordance with the provisions of Section 7-1-13.1 NMSA 1978 when
required to do so or to file by the date required a return regardless of whether a
tax is due, there shall be added to the amount assessed a penalty in an amount
equal to the greater of:

(1) two percent per month or any fraction of a month from the date the tax
was due multiplied by the amount of tax due but not paid, not to exceed twenty
percent of the tax due but not paid;

(Emphasis added). NMSA 1978, Section 7-1-69(A)(1) (2007). The Department’s Regulation

provides that, “negligence” includes “failure to exercise that degree of ordinary business care and

prudence which reasonable taxpayers would exercise under like circumstances; inaction by

taxpayers where action is required; inadvertence, indifference, thoughtlessness, carelessness,

erroneous belief or inattention” for either failing to file a return on time or failing to make a

payment on time. Regulation 3.1.11.10 NMAC (2001). Inadvertent error is defined as

“negligence.” See El Centro Villa Nursing Ctr. v. Taxation & Revenue Dep’t, 1989-NMCA-070,

¶14, 108 N.M. 795.

Taxpayer testified that he simply did not take any action to register the band for gross

In the Matter of John Widell
page 6 of 9
receipts. Taxpayer is an attorney and had an obligation to research the law and ascertain whether

any gross receipts were due for the services the band rendered. Therefore, Taxpayer owes the

penalty amount.

Interest.

New Mexico law is very clear on the imposition of interest when the principal

amount of tax is unpaid when due. Section 7-1-67(A) (2007) states that interest “shall be

paid” on taxes that are not paid on or before the date on which the tax is due. NMSA

1978, §7-1-67(A) (2007). The word “shall” is interpreted to mean that the Department

does not have discretion and must assess interest if principal tax is due and owing.

Marbob Energy Corporation v. NM Oil Conservation Commission, 2009-NMSC-013,

¶22, 146 N.M. 24. The assessment of interest is not designed to punish taxpayers, but to

compensate the state for the time value of unpaid revenues. Because the principal

amount of tax was not paid when it was due, interest was properly assessed on the

principal amount until the date it is paid. Therefore, Taxpayer owes the interest amount

calculated through date of payment of the principal.

CONCLUSIONS OF LAW

A. Taxpayer filed a timely written protest to the Notice of Assessments Letter Id. Nos.

L0653511632, L1727253456, L0385076176 and L1458818000 for gross receipts tax principal,

penalty and interest for the tax period of June 30, 2008 through December 31, 2008 (Letter Id. No.

L0653511632); for the tax period of April 1, 2009 through December 31, 2009 (Letter Id. No.

L1727253456); for the tax period of April 1, 2010 through December 31, 2010 (Letter Id. No.

L0385076176); and for the tax period of April 1, 2011 through December 31, 2011 (Letter Id. No.

L1458818000).

In the Matter of John Widell
page 7 of 9
B. Jurisdiction lies over the parties and the subject matter of this protest.

C. The hearing was timely set as required by NMSA 1978, Section 7-1-24.1(A) (2013).

D. Pursuant to NMSA 1978, Section 7-1-17(C) (2007), the Department’s assessment

is presumed to be correct, and it is Taxpayer’s burden to come forward with evidence and legal

argument to establish that it was entitled to an abatement.

E. The Department made a number of abatements or adjustments to Taxpayer’s gross

receipts tax liability based on Taxpayer’s production of nontaxable transaction certificates or other

evidence acceptable to the Secretary for the legal services he performed outside of New Mexico.

F. Taxpayer’s remaining liability after the abatements was $128.52 in principal tax,

$63.70 in penalty and $54.13 in interest for the tax period 2009 and $700.64 in principal tax,

$140.13 in penalty and $42.70 in interest for the tax period 2010. The interest is accrued through

February 9, 2015. Exhibit B.

G. At the hearing, Taxpayer withdrew his protest as to the 2009 tax year and will work

with the Department on providing nontaxable transaction certificates or other evidence to substan-

tiate that the receipts for 2009 were out of state sales. [02-10-15 CD 9:35-11:35]. If Taxpayer is

unable to prove with certainty that the receipts for tax year 2009 were not out of state sales, Tax-

payer is liable for $128.52 in principal tax, $63.70 in penalty and $54.13 in interest.

H. Taxpayer was not in a disclosed agency relationship with the Bars.

I. Taxpayer was not exempt from gross receipts tax for the tax periods at issue.

J. Taxpayer was negligent in not filing his gross receipts returns and paying his gross

receipts tax when due for the tax year 2010; accordingly, he owes penalty.

K. Interest is due on the amount of unpaid principal tax and continues to accrue on the

unpaid principal amount until the principal amount of tax due is paid.

In the Matter of John Widell
page 8 of 9
L. The total amount due for tax year 2010 is $700.64 in principal tax, $140.13 in penalty

and $42.70 in interest. Exhibit B. The interest amount is calculated through February 9, 2015.

Exhibit B.

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

DATED: March 6, 2015

Monica Ontiveros
Monica Ontiveros
Hearing Officer
Taxation & Revenue Department
Post Office Box 630
Santa Fe, NM 87504-0630

In the Matter of John Widell
page 9 of 9