I reported my pay as business income on my federal Schedule C, but I think I was really an employee — do I owe New Mexico gross receipts tax on it?

Plain-English summary

Ruth Dilts worked for years as a live-in nurse-companion for Mrs. T.M. Pepperday. Through 1981 she was treated as an employee — Mrs. Pepperday issued a W-2 and withheld income, FICA and state taxes. Starting in 1982, that changed: Mrs. Pepperday stopped withholding and began paying Mrs. Dilts on a Form 1099 as "nonemployee compensation." For 1988, the 1099 reported $100,948.89 with no taxes withheld.

Mrs. Dilts, who prepared her own returns and whom the Hearing Officer called "very sophisticated about tax matters," reported that money as business income on her federal Schedule C ("Profit or Loss from Business"). But she had registered with the Department only for a small home boarding-house business, "The Garden Spot," and had reported just $400 of gross receipts for 1988. Using its program that matches Schedule C business income to gross receipts filings, the Department found the gap and, in October 1994, issued Assessment No. 1864780: $5,015.46 gross receipts tax, $501.54 penalty, and $4,670.65 interest — $10,187.65 total — for 1988.

Mrs. Dilts protested on two grounds: (1) the assessment was too late and barred by laches, and (2) she was really Mrs. Pepperday's employee, whose wages are exempt from gross receipts tax under § 7-9-17. Hearing Officer Gerald B. Richardson denied the protest:

• The assessment was timely. Because Mrs. Dilts understated her gross receipts by far more than 25%, the Department had six years to assess (§ 7-1-18(D)) — and, since she never filed a gross receipts return for this income at all, arguably seven years (§ 7-1-18(C)). The October 1994 assessment for 1988 was inside either window.
• Laches doesn't apply within the statute of limitations. The limitations period itself gave her constructive notice; she had nearly six years to fix her own characterization if she thought it was a mistake, and didn't.
• She was an independent contractor, not an employee. A Department assessment is presumed correct (§ 7-1-17(C)), and it was Mrs. Dilts's burden to prove otherwise. Weighing the seven employee indicia in Regulation 3 NMAC 2.17.7, her own 1099 showed no withholding, no FICA, and that her payer treated her as a non-employee; she offered no proof of workers'-comp or unemployment coverage, and only a conclusory claim that Mrs. Pepperday controlled her work. The Hearing Officer found her "I considered myself an employee" testimony not credible given her tax sophistication.
• You must treat a transaction the same way for both tax systems. Even an "innocent mistake" wouldn't save her: New Mexico law requires a taxpayer to treat a transaction consistently for state and federal purposes (Stohr), and she never filed an amended federal return changing her 1099 income back to wages. So she was bound by the business-income treatment she chose.

What this means for you

How you report income on your federal return can create a state tax bill

Mrs. Dilts's gross receipts assessment flowed straight from her own Schedule C: by calling the money "business income" federally, she characterized it as receipts from performing services — which is exactly what New Mexico taxes. States routinely match federal Schedule C figures against gross receipts filings, so a number you enter for the IRS can surface a state liability years later.

Employee wages are exempt — but you have to actually be an employee, and prove it

Section 7-9-17 exempts employees' wages from gross receipts tax, but whether you're an employee turns on the substance of the arrangement, not what you call it. The Department weighs concrete indicia — withholding, FICA, workers'-comp and unemployment coverage, and who controls the work (Regulation 3 NMAC 2.17.7). A 1099 with no withholding points hard toward independent-contractor status, and a bare assertion that "they treated me like an employee" won't overcome it.

A late-looking assessment is often still timely

Understating a tax by more than 25% stretches the Department's assessment window to six years, and failing to file the required return can stretch it to seven (§ 7-1-18). "Laches" — the argument that the state simply waited too long — generally fails as long as the assessment lands inside those statutory windows.

Be consistent across your federal and state returns

New Mexico holds you to how you characterized a transaction federally unless you file an amended federal return to change it (Stohr). You can't report income as self-employment profit for the IRS and then, when the state comes calling, recast the same money as exempt wages. Decide the correct treatment once and apply it everywhere.

Common questions

Q: I reported my 1099 income on a federal Schedule C. Does that mean I owe New Mexico gross receipts tax on it?
A: Very likely. Reporting the money as business income characterizes it as receipts from performing services, which New Mexico taxes. That's exactly how the Department found and assessed Mrs. Dilts's unreported receipts.

Q: I think I was really an employee. Aren't my wages exempt?
A: Employee wages are exempt under § 7-9-17, but you must prove employee status. The Department weighs factors like withholding, FICA, workers'-comp coverage, and control (Regulation 3 NMAC 2.17.7). A 1099 with no withholding, plus only a general claim of being "treated like an employee," was not enough here.

Q: The Department waited until 1994 to assess 1988. Isn't that too late?
A: No. Understating by more than 25% gives the Department six years to assess (§ 7-1-18(D)), and never filing the required return can extend that to seven years (§ 7-1-18(C)). The assessment fell within that period, and laches does not apply inside the statutory window.

Q: Can I report income one way to the IRS and a different way to the state?
A: No. New Mexico requires consistent treatment of a transaction for state and federal purposes and holds you to your federal characterization unless you file an amended federal return (Stohr).

Citations and references

Statutes and regulations:

• § 7-9-17 NMSA 1978 — employees' receipts from wages, salaries, commissions or other pay for personal services are exempt from gross receipts tax
• § 7-9-3(F) NMSA 1978 — "gross receipts" includes the total amount received from performing services in New Mexico
• § 7-1-17(C) NMSA 1978 — a Department assessment is presumed correct; the taxpayer must present evidence to overcome the presumption
• § 7-1-18(D) NMSA 1978 — the Department may assess within six years where a return understates liability by more than 25%; § 7-1-18(C) — within seven years where no required return was filed
• § 7-1-24 NMSA 1978 — protest procedure and jurisdiction
• Regulation 3 NMAC 2.17.7 — seven indicia the Department considers in deciding whether a person is an employee (wage/salary; income-tax withholding; FICA; workers'-comp coverage; unemployment contributions; the payer's treatment; and right of control)

Cases cited:

• Champion International Corp. v. Bureau of Revenue, 88 N.M. 411, 540 P.2d 1300 (Ct. App. 1975) — the taxpayer bears the burden of presenting evidence to dispute the factual correctness of an assessment
• Stohr v. Bureau of Revenue, 90 N.M. 43, 559 P.2d 420 (Ct. App. 1976) — a taxpayer must treat a taxable transaction consistently for both state and federal tax purposes

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Ruth Dilts dba The Garden Spot
• Decision PDF: D&O 97-04

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
RUTH DILTS D/B/A THE GARDEN SPOT, No. 97-04
I.D. NO. 01-152043-00 4, PROTEST
TO ASSESSMENT NO. 1864780

DECISION AND ORDER

This matter came on for formal hearing before Gerald B. Richardson, Hearing Officer, on

January 22, 1997. Mrs. Ruth Dilts, hereinafter, "Mrs. Dilts," represented herself at the hearing.

The Taxation and Revenue Department, hereinafter, "Department," was represented by Bridget A.

Jacober, Special Assistant Attorney General. Based upon the evidence and arguments presented,

IT IS DECIDED AND ORDERED AS FOLLOWS:
FINDINGS OF FACT

1. Mrs. Dilts has worked as a nurse-companion since at least 1978.

2. In 1978, Mrs. Dilts was an employee of Medical Personnel Pool of New Mexico,

Inc. Medical Personnel Pool assigned Mrs. Dilts to work as a home nurse companion for Mrs.

T.M. Pepperday.

3. In 1980, Mrs. Pepperday asked Mrs. Dilts if she would come to work for her

directly, on the same terms and conditions as she worked for Medical Personnel Pool. Mrs. Dilts

agreed to do so. Mrs. Dilts continued to also work for Medical Personnel Pool, as evidenced by

her 1982 federal form W-2 from Medical Personnel Pool.

4. Mrs. Dilts worked for Mrs. Pepperday as an employee during 1980 and 1981. For

tax year 1981, Mrs. Dilts was given a federal form W-2 from Mrs. Pepperday showing that she had

been paid $17,741.75 in wages and that federal income taxes, FICA tax and New Mexico income
tax was withheld from those wages by Mrs. Pepperday.

5. At some time during 1982, Mrs. Pepperday changed how she treated Mrs. Dilts for

tax purposes, and no longer treated her as an employee. Mrs. Pepperday stopped withholding

federal and state income taxes and social security taxes from the payments she made to Mrs. Dilts.

For 1982, Mrs. Pepperday provided Mrs. Dilts with both W-2 forms showing wages paid and taxes

withheld and a form 1099 showing that she had paid Mrs. Dilts $13,728.09 in "nonemployee

compensation." Thereafter, Mrs. Pepperday provided form 1099s to Mrs. Dilts for each tax year

showing the amounts she paid Mrs. Dilts to be nonemployee compensation.

6. During at least tax year 1988, Mrs. Dilts also ran a boarding house business out of

her home. The business was called "The Garden Spot." Mrs. Dilts registered that business with

the Department and paid gross receipts taxes on $400 in rental income during 1988 to the

Department.

7. For tax year 1988, Mrs. Pepperday provided Mrs. Dilts a form 1099, showing that

Mrs. Dilts was paid $100,948.89 in "nonemployee compensation." The 1099 form reflects no

deductions from that amount for federal income tax, FICA tax, state income tax, or any other type

of deduction.

8. For tax year 1988, Mrs. Dilts filed separately from her husband, Mr. Dale Dilts, for

state and federal income taxes. She reported the $100,848.89 paid to her by Mrs. Pepperday on

Schedule C of her 1988 federal return. Schedule C is captioned "Profit or Loss from Business,"

and the entire $100,849.89 was reported as net profit. That amount was carried forward to Line 12

of her form 1040 and reported as "business income." Mrs. Dilts also reported the $400 in boarding

house rental income under Schedule E, as rental income. She described the property as a

boarding home and business office, and she claimed over $75,000 in rental expenses against the

rental income, claiming a loss of $75,886.64.

9. Among the expenses Mrs. Dilts claimed on Schedule E were $1,675 for new

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nursing uniforms, which Mrs. Dilts wore when she worked for Mrs. Pepperday.

10. The Department and the Internal Revenue Service ("IRS") have an agreement

whereby information about taxpayers is shared.

11. The Department has a program where it attempts to match amounts reported by

taxpayers as business income on Schedule C to amounts reported to it for gross receipts tax

purposes. Based upon the fact that Mrs. Dilts had only reported $400 in gross receipts for 1988,

the Department assessed additional gross receipts tax on $100,449.89, which is the difference

between the $100,849.89 in business income reported by Mrs. Dilts on her 1988 Schedule C and

the $400 she had already reported.

12. Because Mrs. Dilts already was registered with the Department for gross receipts tax

purposes as The Garden Spot, the Department issued the assessment to her under that name.

13. On October 21, 1994, the Department issued Assessment No. 1864780 to The

Garden Spot, assessing $5,015.46 in gross receipts tax, $501.54 in penalty and $4,670.65 in interest

for a total of $10,187.65 for the reporting periods of January, 1988 through December, 1988.

14. On November 14, 1994, Mrs. Dilts filed a written protest to Assessment No.

1864788 with the Department.

15. Mrs. Dilts prepares her own tax returns.

16. Mrs. Dilts is very sophisticated about tax matters.

DISCUSSION
The primary issue to be determined herein is whether the $100,849.89 which Mrs.

Pepperday paid to Mrs. Dilts in 1988 was wages paid to Mrs. Dilts as an employee, or was it gross

receipts from the performance of home nurse companion services. NMSA 1978, Section 7-9-17

(1988 Repl. Pamp.) provides:
Exempted from the gross receipts tax are the receipts of employees from wages, salaries,
commissions or from any other form of remuneration for personal services.

Mrs. Dilts testified that she considered herself an employee of Mrs. Pepperday. She testified that

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prior to 1982, Mrs. Pepperday had paid unemployment insurance taxes, worker's compensation

tax, FICA tax, and withheld income taxes from her pay. Mrs. Dilts claimed that after 1982, that

Mrs. Pepperday continued to treat her the same, although she provided no proof that any of the

taxes or unemployment or worker's compensation insurance coverages continued to be paid. In

fact, the evidence, in the form of the 1099 forms Mrs. Pepperday provided to Mrs. Dilts indicate

that Mrs. Pepperday no longer treated Mrs. Dilts as an employee for tax purposes since she no

longer withheld any taxes from the compensation paid.

NMSA 1978, Section 7-9-3(F)(1988 Repl. Pamp.) defines "gross receipts" in pertinent part as

follows:
"gross receipts" means the total amount of money or the value of other consideration
received from selling property in New Mexico, from leasing property employed in New
Mexico or from performing services in New Mexico....

The Department considers that the compensation paid to Mrs. Dilts to be money received from

performing services in New Mexico. The Department based its assessment of gross receipts tax

upon Mrs. Dilts 1988 federal tax returns. Mrs. Dilts made out these returns herself. She attached

her 1099 form from Mrs. Pepperday which classified her compensation as "nonemployee

compensation." She filled out Schedule C, captioned "Profit or Loss from Business" and declared

the compensation to be "gross receipts or sales" and carried the total to line 12 of form 1040,

declaring it to be "business income." She now claims that this was a "mistake."

NMSA 1978, Section 7-1-17(C) provides that there is a presumption of correctness which

attaches to the Department's assessment of tax. This places a duty on a taxpayer challenging an

assessment to present evidence tending to dispute the factual correctness of the assessment and to

overcome this presumption. Champion International Corp. v. Bureau of Revenue, 88 N.M. 411,

540 P.2d 1300 (Ct. App. 1975).

Mrs. Dilts first argues that the assessment is untimely and that it should be barred by the

application of the doctrine of laches. The Department issued the assessment in October of 1994.

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NMSA 1978, Section 7-1-18(D) (1993 Repl. Pamp.) provides:
If a taxpayer in a return understates by more than twenty-five percent of the amount of
his liability for any tax for the period to which the return relates, appropriate
assessments may be made by the department at any time within six years from the end
of the calendar year in which payment of the tax was due.

Mrs. Dilts only reported $400 in gross receipts during calendar year 1988. Her failure to report

over $100,000 in gross receipts for that year 1 certainly meets the criteria of understating gross

receipts by more than 25%. Since the assessment was issued within six years from the end of

calendar year 1988, when her payment of gross receipts taxes would have been due, the assessment

was issued within the statute of limitations which the legislature has provided for the assessment of

the taxes at issue. In any event, Mrs. Dilts claims that this money was received separate from her

boarding house business, The Garden Spot. The Department could have assessed the tax separately

against Mrs. Dilts, and the statute of limitations would be seven years in that instance. This is

because Section 7-1-18(C) allows assessments up to seven years after payment of the tax was due

where a taxpayer has failed to complete and file any required return, and Mrs. Dilts never reported

these receipts to the Department for gross receipts tax purposes.

Additionally, there is no basis for applying the doctrine of laches where the assessment falls

within the statute of limitations prescribed by the legislature. This is because the statute of

limitations provided Mrs. Dilts with at least constructive notice that the Department could assess

gross receipts tax on the compensation which she characterized as gross receipts upon her own

Federal Schedule C. If she thought that her characterization was a mistake, or wrong, she had almost

six years to correct it prior to the Department's assessment of tax.

Turning to the issue of whether the compensation Mrs. Pepperday paid to Mrs. Dilts was

wages, I find that Mrs. Dilts failed to carry her burden of proof. Regulation 3 NMAC 2.17.7 provides

as follows:

1
This assumes, for purposes of the discussion of this issue that her compensation is not exempt
from gross receipts taxation as wages.

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7.1In 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 means"mere suggestion").

7.2If all of the indicia mentioned 3 NMAC 2.17.7.1 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.

Mrs. Dilts provided no evidence to meet the first five criteria. Mrs. Dilts 1988 Form 1099 shows her

compensation to be nonemployee compensation, not wages or salary. It also shows no deductions for

FICA tax, or income tax withholding. Mrs. Dilts presented no evidence to show that she was covered

by unemployment insurance or workmen's compensation insurance during 1988. With respect to

criteria 6, the 1099 form itself serves to demonstrate that at least Mrs. Pepperday considered Mrs.

Dilts to not be an employee. With respect to criteria 7, Mrs. Dilts provide only a conclusory

statement that Mrs. Pepperday treated her like an employee, but she gave no specifics to support her

conclusion which would have demonstrated that Mrs. Pepperday exercised the degree of control over

Mrs. Dilts to make Mrs. Dilts an employee rather than an independent contractor.

Mrs. Dilts offered her own testimony that she considered herself to be an employee of Mrs.

Pepperday in support of her position. I do not consider her testimony to be credible. Mrs. Dilts

demonstrated herself to be a highly sophisticated taxpayer. In presenting her case, she cited to both

statutory and case law. A review of her 1988 income tax return shows that she understood how to fill

out a return so that she paid virtually no tax on nearly $115,000 in income. A review of her Schedule

E shows that she claimed over $75,000 in deductions against $400 of rental income from her boarding

house business. Mrs. Dilts admitted that the $1675 that she deducted for new nursing uniforms was

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for uniforms that she wore when working for Mrs. Pepperday. Mrs. Dilts also failed to offer any

satisfactory explanation as to how it had escaped her notice that in the six years between 1982 and

1988 that Mrs. Pepperday was no longer treating her compensation as wages, was no longer

withholding FICA or income taxes and was, in fact, classifying her compensation as nonemployee

compensation. Mrs. Dilts is simply too sophisticated about filling out her income tax returns for this

to have escaped her notice.

Even had it been an innocent mistake in how she filled out her income tax return, the case law

in New Mexico is clear that in filing state and federal taxes, that a taxpayer must treat taxable

transactions consistently for both taxing jurisdictions. Stohr v. Bureau of Revenue, 90 N.M. 43, 559

P.2d 420 (Ct. App. 1976). Mrs. Dilts is bound by the manner in which she filed for federal tax

purposes in the absence of the filing of an amended return, and there was no evidence that Mrs. Dilts

filed an amended return with the Internal Revenue Service for 1988.
CONCLUSIONS OF LAW

1. Mrs. Dilts filed a timely, written protest to Assessment No. 1864780 pursuant to

NMSA 1978, Section 7-1-24 and jurisdiction lies over both the parties and the subject matter of this

protest.

2. The compensation Mrs. Dilts received from Mrs. Pepperday for providing

nurse-companion services in 1988 was payment for service rendered as an independent contractor and

not wages received as an employee of Mrs. Pepperday.

For the foregoing reasons, Mrs. Dilts protest IS HEREBY DENIED.

DONE, this 31st day of January, 1997.

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