Are voluntary tip-jar payments to a Santa Fe Plaza street musician subject to New Mexico gross receipts tax?

Plain-English summary

Voluntary money placed in a Santa Fe Plaza street musician's tip jar was a gratuity, not taxable gross receipts. The AHO granted Luscous Music's protest and abated $2,213.30 tax, $442.66 penalty, and $348.52 interest.

Roark Barron operated Luscous Music as a sole proprietor. He had a New Mexico CRS number, a Santa Fe business license, a website, and business cards, and sometimes performed paid church or event gigs.

About three times per week, he played music for two hours on the public Plaza, primarily to sell his own compact discs for $10 each. A typical performance produced three or four CD sales and $20 to $50 in the tip jar. Barron kept the two categories separate in his ledger, reported and paid gross receipts tax on CD sales, and reported the tip money on his federal income-tax return but not his CRS returns.

A Schedule C mismatch caused the Department to assess the tip-jar amounts as payment for musical services.

Barron was engaged in business

His license, registrations, website, cards, paid gigs, and CD sales showed a planned activity for financial benefit. The AHO emphasized that this conclusion did not mean every busker in every circumstance was necessarily engaged in business.

Because Barron was operating a business, his receipts were presumed taxable unless the tip rule applied.

Listeners had no obligation to pay

Regulation 3.2.1.18(R)(2) defined a tip as a gratuity offered to service personnel to acknowledge service and excluded gratuities from gross receipts. The rule was not limited to restaurant or hotel workers.

No one had to pay to hear music on the public Plaza. Barron sold no performance tickets, received no city payment, and had no Form 1099 or evidence of a private sponsor paying for the street performance. People could listen without buying a CD or adding money to the jar.

Those who voluntarily gave a quarter, dollar, or five-dollar bill did so without any duty or required consideration. The AHO treated their payments as appreciation for the performance—true gratuities rather than a service charge.

Result: protest GRANTED. The entire assessment was abated. The decision did not disturb gross receipts tax on Barron's CD sales, which he had already reported and paid.

What this means for you

Street performers and buskers

Voluntary contributions may be nontaxable gratuities when the public can freely watch or listen without payment. Required admission, contracted performance fees, or fixed charges would present different facts.

Artists selling merchandise

Separate product sales from voluntary tips in your records. Barron's $10 CD sales were taxable even though his tip-jar receipts were not.

Accountants and tax professionals

Ask whether the payer had any obligation to pay, whether there was a bill or fixed amount, and whether the payment was compensation from a venue or sponsor. The voluntary nature of the Plaza contributions was decisive.

Common questions

Q: Was Luscous Music considered a business?
A: Yes. Barron had registrations, a license, website, business cards, paid gigs, and regular CD sales.

Q: Were his compact-disc sales taxable?
A: Yes. He separately reported and paid gross receipts tax on those sales.

Q: Why were the tip-jar payments different?
A: Plaza listeners had no obligation to pay and voluntarily gave money to acknowledge the performance.

Q: Did Barron hide the tip income?
A: No. He separately tracked it and reported it on his federal return, which is how the state Schedule C mismatch arose.

Q: Did the decision exempt every street performer?
A: No. It expressly limited the business-status analysis and tip result to the particular facts presented.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-9-3.3, 7-9-3.5, 7-9-4, and 7-9-5 — business and gross receipts
• NMSA 1978, §§ 7-1-3 and 7-1-17 — tax definition and assessment presumption
• Regulations 3.2.1.18(R) and 3.2.116.9 NMAC — tips and licensed business activity

Cases cited:

• New Mexico Taxation and Revenue Department v. Casias Trucking, 2014-NMCA-099 — evidence required to overcome an assessment
• MPC LTD. v. New Mexico Taxation and Revenue Department, 2003-NMCA-021 — assessment presumption and burden shifting
• Archuleta v. O'Cheskey, 1972-NMCA-165 — taxpayer burden
• Chevron U.S.A., Inc. v. State ex rel. Department of Taxation and Revenue, 2006-NMCA-050 — weight given to agency regulations

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Luscous Music
• Decision PDF: D&O 16-27

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
LUSCOUS MUSIC No. 16-27
TO ASSESSMENT ISSUED UNDER LETTER
ID NO. L0193420336

DECISION AND ORDER

A protest hearing occurred on the above captioned matter on March 24, 2016 before

Brian VanDenzen, Esq., Chief Hearing Officer, in Santa Fe. At the hearing, Roark Barron

appeared pro se for Luscous Music (“Taxpayer”). Staff Attorney Melinda Wolinsky appeared

representing the State of New Mexico Taxation and Revenue Department (“Department”).

Protest Auditor Sonya Varela appeared as a witness for the Department. Taxpayer Exhibit #1 and

Department Exhibits A-B were admitted into the record. Based on the evidence and arguments

presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. On December 9, 2015, under letter id. no. L0193420336, the Department assessed

Taxpayer for $2,213.30 in gross receipts tax, $442.66 in penalty, and $348.52 in interest for the

CRS reporting periods between January 1, 2009 and December 31, 2011.

2. On January 12, 2016, Taxpayer prepared a letter of protest of the Department’s

assessment.

3. The Department received Taxpayer’s protest on January 14, 2016.

4. On January 20, 2016, the Department’s protest office acknowledged receipt of a

valid protest.

5. On March 1, 2016, the Department filed a request for hearing in this matter with

the Administrative Hearings Office.

6. On March 10, 2016, the Administrative Hearings Office sent Notice of

Administrative Hearing, scheduling this matter for a merits hearing on March 24, 2016.

7. The March 24, 2016 hearing occurred within 90-days of the Department’s

acknowledgment of receipt of a valid protest.

8. Roark Barron is a sole proprietor doing business as Luscous Music as a music

performer and seller of his musical work on a compact disc.

9. Taxpayer has a CRS number with the Department.

10. Taxpayer has a business license with the City of Santa Fe.

11. Taxpayer has a business website and has business cards.

12. Taxpayer would also occasionally perform paid gigs at local churches and events

in Santa Fe.

13. Taxpayer performed as a street musician/busker on the Santa Fe Plaza, primarily

for the purpose of selling his compact disc of music.

14. Taxpayer would perform on the Santa Fe Plaza three-times a week for two-hours

at a time.

15. While performing on the street, Taxpayer sold compact discs for $10.00 and

collected money from people passing-by in a tip jar.

16. Taxpayer sold on average between three and four compact discs, priced at $10.00

per disc, during each of his performances on the Plaza.

17. Taxpayer collected on average between $20 to $50 in his tip jar from people

passing by during each of his performances on the Plaza.

In the Matter of the Protest of Luscous Music, page 2 of 9

18. Taxpayer maintained a ledger where he would note his compact disc sales

separately from the money he received in the tip jar.

19. Taxpayer reported and paid gross receipts tax on his sales of compact discs, but

did not report or pay gross receipts tax on the money collected from people passing by as he

performed because he believed tips were not subject to gross receipts tax from his previous

experience as a waiter.

20. Taxpayer used the volunteer services of AARP to prepare his federal and state

income tax returns.

21. Taxpayer did not discuss his gross receipt tax obligations with the AARP

volunteers.

22. There is no evidence that Taxpayer received a 1099 from any person or entity

related to the money he collected in his tip jar.

23. Taxpayer did report the money he received in his tip jar from the people passing

by on his federal income tax returns.

24. Through its Schedule C mismatch program with the IRS, the Department detected

that Mr. Barron reported business income on his federal Schedule C income tax return that did

not match the reported gross receipts on Taxpayer’s filed CRS returns; this mismatch relates to

money Taxpayer collected in his tip jar while performing street music on the Plaza. [Dept. Ex.

B].

25. As a result of that mismatch, the Department issued its assessment described in

more detail in finding of fact #1.

26. As of the date of hearing, Taxpayer owed $2,213.30 in gross receipts tax, $442.66

in penalty and $348.52 in interest for a total outstanding liability of $3,023.73. [Dept. Ex. A].

In the Matter of the Protest of Luscous Music, page 3 of 9

27. Taxpayer claimed he made approximately a $100 payment towards the liability

which was not reflected on the Department’s updated spreadsheet of liabilities. The Department

agreed to review Taxpayer’s records, review any canceled checks, and perhaps make an

adjustment.

DISCUSSION

This case involves a question about whether money received in a tip jar while performing

as a street musician is subject to gross receipts tax. Taxpayer asserted that he believed (based on

his previous experience as a waiter) that tips were not subject to gross receipts and therefore,

while he reported and paid gross receipts tax on his sales of compact discs to customers, he did

not report and pay gross receipts tax on the money he received in a tip jar. The Department

argues that the money Taxpayer received in the “tip” jar was not a tip, but actual payment for his

services as a street musician on the Santa Fe Plaza, and thus subject to gross receipts tax.

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

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

Archuleta v. O'Cheskey, 1972-NMCA-165, ¶11, 84 N.M. 428. Accordingly, it is Taxpayer’s

burden to present some countervailing evidence or legal argument to show that he is entitled to

an abatement, in full or in part, of the assessments issued against him. See N.M. Taxation &

Revenue Dep't v. Casias Trucking, 2014-NMCA-099, ¶8. “Unsubstantiated statements that the

assessment is incorrect cannot overcome the presumption of correctness." See MPC Ltd. v. N.M.

Taxation & Revenue Dep't, 2003 NMCA 21, ¶13, 133 N.M. 217; See also Regulation 3.1.6.12

NMAC. 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., 2003 NMCA 21, ¶13.

In the Matter of the Protest of Luscous Music, page 4 of 9
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 maintained a business

website, had business cards, performed music gigs, sold CD’s, had a business license with the City

of Santa Fe, and had a business identification number registered with the Department for purposes

of filing and paying CRS taxes. Under Regulation 3.2.116.9 NMAC, a person licensed to do

business is considered to be engaged in business for gross receipts tax purposes. See Chevron

U.S.A., Inc. v. State ex rel. Dep't of Taxation & Revenue, 2006-NMCA-50, ¶16, 139 N.M. 498, 503

(agency regulations interpreting a statute are presumed proper and are to be given substantial

weight). These facts make clear that Taxpayer was a person engaged in business in New Mexico

under Section 7-9-3.31. 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).

In pertinent part under NMSA 7-9-3.5 (A) (1), the Legislature has defined “gross

receipts” to mean “the total amount of money or the value of other consideration received from

selling property in New Mexico… or from performing services in New Mexico.” Taxpayer’s

receipts from sale of compact discs of music are subject to gross receipts tax, and Taxpayer in

fact reported and paid gross receipts tax on those receipts. The question in this case is whether

the money placed in his tip jar as Taxpayer performed street music on the Plaza constituted gross

1
That does not necessarily mean that all buskers and street performers are people engaged in business in every
circumstance, only that in this particular case where Taxpayer developed a website, issued business cards, accepted
paid musical gigs, sold compact discs, and had a business license, this Taxpayer planned and carried out an activity
for a direct financial benefit, meeting the definition under Section 7-9-3.3 and the condition articulated under
Regulation 3.2.116.9 NMAC.

In the Matter of the Protest of Luscous Music, page 5 of 9
receipts subject to gross receipt s tax or whether it constituted a “tip” or “gratuity” not subject to

gross receipts tax.

The Department has promulgated numerous regulations clarifying what is and what is not

considered gross receipts, particularly as it relates to performance of services. See generally

Regulation 3.2.1.18 NMAC. There regulations are presumed to be proper interpretations of the

statute. See Chevron U.S.A., Inc., 2006-NMCA-50, ¶16. Regulation 3.2.1.18 (R) NMAC addresses

tips in the gross receipts tax context. Regulation 3.2.1.18 (R) NMAC states:

R. Service charges; tips.

(1) Except for tips, receipts of hotels, motels, guest lodges, restaurants and other
similar establishments from amounts determined by and added to the customer's bill
by the establishment for employee services, whether or not such amounts are
separately stated on the customer's bill, are gross receipts of the establishment.

(2) A tip is a gratuity offered to service personnel to acknowledge service given.
An amount added to a bill by the customer as a tip is a tip. Because the tip is a
gratuity, it is not gross receipts.

(3) Amounts denominated as a "tip" but determined by and added to the
customer's bill by the establishment may or may not be gross receipts. If the
customer is required to pay the added amount and the establishment retains the
amount for general business purposes, clearly it is not a gratuity. Amounts retained
by the establishment are gross receipts, even if labeled as "tips". If the customer is
not required to pay the added amount and any such amounts are distributed entirely
to the service personnel, the amounts are tips and not gross receipts of the
establishment.

Most pertinent to this case, is subparagraph (2), which states that a gratuity offered to

service personnel to acknowledge a service given is not gross receipts. While such a tip usually

arises in the context of hotels and restaurants, there is nothing about Regulation 3.2.1.18 (R) NMAC

that limits a gratuity specifically to service personal in those industries. A street musician performs

services that someone could certainly acknowledge through giving voluntary tips. While the

Department argued that a tip is only something that can be added to a bill, there are many

In the Matter of the Protest of Luscous Music, page 6 of 9
circumstances were a person provides a tip entirely independent of a bill, such as to a house cleaner

at a hotel, to the person who carries luggage at a hotel or airport, or to a bartender at a restaurant

before moving onto the dinner table (where the bill comes after the meal). The method of how the

tip is left is less important than the notion that it is a gratuity offered as acknowledgement for a

service rendered by service personal.

Applying this regulation to the facts of this case, the money that Taxpayer received in the jar

was a gratuity, not gross receipts. Black’s Law Dictionary (10th Edition, 2014) defines “gratuitous”

or “gratuity” as something “done or performed without obligation to do so; given without

consideration in circumstances that do not otherwise impose a duty.” In this case, no one who heard

Taxpayer’s street music performance on the Plaza was under a duty or obligation to remunerate

Taxpayer in any manner. The Plaza is a public place, and no one was required to pay to listen to any

of the music being performed on the Plaza. Taxpayer did not sell tickets for his performance, was

not paid by the City of Santa Fe to perform on the Plaza, and there was no evidence, such as a 1099,

that he was paid by any private entity or business to perform on the Plaza. Surely, many people who

heard Taxpayer playing music on the Plaza choose to listen to Taxpayer’s performance without

purchasing a compact disc or placing any money in Taxpayer’s jar. Although there was no

requirement for anyone to do so, some people choose to give Taxpayer money in appreciation for

his service of performing street music. People voluntarily throwing a quarter, or a dollar, or five

dollar bill into Taxpayer’s jar on the street, when there was absolutely no requirement to do so,

constitutes the giving of a gratuity under the Black’s Law Dictionary definition and for the purposes

of Regulation 3.2.1.18 (R) (2) NMAC. As such, these receipts under the particular facts and

circumstances of this case are not included in gross receipts and therefore are not subject to the

gross receipts tax. Taxpayer’s protest IS GRANTED.

In the Matter of the Protest of Luscous Music, page 7 of 9
CONCLUSIONS OF LAW

A. Taxpayer filed a timely, written protest to the Department’s assessment, and

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

B. The hearing was timely set and held within 90-days of protest under NMSA 1978,

Section 7-1B-8 (2015).

C. Under Regulation 3.2.116.9, Taxpayer was licensed and thus Taxpayer was a person

engaged in business under NMSA 1978, Section 7-9-3.3. As such, all of Taxpayer’s receipts were

presumed subject to gross receipts tax under NMSA 1978, Section 7-9-5.

D. Taxpayer reported and paid gross receipts tax on the sale of his compact discs.

E. Voluntary amounts of money placed in Taxpayer’s tip jar by satisfied members of

the public on the Plaza constituted gratuities under the Black’s Law definition and under Regulation

3.2.1.18 (R) (2) NMAC, and thus under that regulation did not constitute gross receipts subject to

gross receipts tax.

For the foregoing reasons, the Taxpayers’ protest IS GRANTED. IT IS ORDERED that

the Department’s assessment IS ABATED.

DATED: June 17, 2016.

Brian VanDenzen
Chief Hearing Officer
Administrative Hearings Office
P.O. Box 6400
Santa Fe, NM 87502

In the Matter of the Protest of Luscous Music, page 8 of 9
NOTICE OF RIGHT TO APPEAL

Pursuant to NMSA 1978, Section 7-1-25 (1989), the parties have 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 Rule 12-601 NMRA. If an appeal is not filed within 30 days, this

Decision and Order will become final. Either party filing an appeal shall file a courtesy copy of

the appeal with the Administrative Hearings Office contemporaneous with the Court of Appeals

filing so that the Administrative Hearings Office may being preparing the record proper.

In the Matter of the Protest of Luscous Music, page 9 of 9