Does a Sears authorized dealer owe New Mexico gross receipts tax on the commissions Sears pays it, when Sears already pays gross receipts tax on the merchandise sold?

Plain-English summary

Jesse C. and Shirley Orr operated a Sears authorized retail dealership in Taos, New Mexico, as a sole proprietorship. Sears owned the merchandise, and Sears itself paid gross receipts tax on the full price when goods were sold. The Orrs, as the local dealer, were paid commissions by Sears on those sales (plus a monthly customer-service fee, sales bonuses, and their own hook-up/delivery/installation charges). Believing — based on what other Sears dealers had told them — that dealers didn't owe gross receipts tax on their commissions, the Orrs never reported or paid tax on the commission income. After a Schedule C matching program flagged the gap, the Department issued three assessments totaling roughly $36,500 in gross receipts tax, $15,300 in interest, and $3,650 in penalty covering 1991 through 1995.

The Hearing Officer denied the protest in part and granted it in part: the commissions were taxable, but the penalty was abated.

• The commissions are taxable gross receipts. The dealer performs services for Sears and is paid a commission for them; that is a separate transaction from Sears's sale of the merchandise. Both parties are in business in New Mexico and both are taxed on their own receipts.
• Not double taxation. Even though a single sale triggers both, there are two taxpayers and two transactions. And in any event, there is nothing unconstitutional about double taxation (Ft. Smith Lumber Co. v. Arkansas).
• No equal-protection violation. The dealer argued it was treated worse than commissioned employees (§ 7-9-17), real-estate brokers (§ 7-9-66.1), and sellers of commissions on non-taxable goods (§ 7-9-66). But tax classifications only need a rational basis, the taxpayer must "negative every conceivable basis" (Madden v. Kentucky), and a rational basis existed for each distinction.
• The uniform-taxation clause doesn't apply. Article VIII, Section 1 of the New Mexico Constitution governs property (ad valorem) taxes; the gross receipts tax is a privilege tax (§ 7-9-4), so that clause doesn't limit it (Sunset Package Store).
• The disclosed-agency exclusion doesn't cover the commission. Section 7-9-3(F)(2)(f) excludes money received "solely on behalf of another in a disclosed agency capacity." That covers the sale proceeds the dealer collects and forwards to Sears — but the dealer earns its commission on its own behalf, so the exclusion doesn't reach it.
• Penalty abated. The Orrs relied on documents showing the Department had earlier agreed to abate this same tax for another Sears dealer. Although the Department never directly misled the Orrs, relying on the Department's own actions toward a similarly situated taxpayer was ordinary business care, so there was no negligence to support a penalty (§ 7-1-69(A); Reg. 3 NMAC 1.11.10).

What this means for you

Authorized dealers, agents, and consignment sellers paid on commission

If you sell someone else's goods and are paid a commission, that commission is your own gross receipts, taxable in New Mexico — even if the owner of the goods separately pays gross receipts tax on the full sale price. The two are different transactions between different taxpayers. Don't assume that because "the tax is already paid on the sale," your commission rides along tax-free.

Anyone relying on the disclosed-agency exclusion

Section 7-9-3(F)(2)(f) is real but narrow. It keeps the principal's money you merely collect and pass through from being counted as your receipts. It does not exempt the fee or commission you keep for your own services. Separate the two: pass-through sale proceeds (excluded) versus your earned compensation (taxable).

Businesses deciding whether to get tax advice

The dealer here never consulted a CPA, tax attorney, or the Department. It got lucky on the penalty because it happened to hold documents about the Department's earlier treatment of another dealer — but it still owed years of back tax and interest. Interest is not abatable for good-faith mistakes, so the cheapest path is to confirm your position up front rather than rely on word-of-mouth from others in your industry.

When a penalty can be abated for reliance

This decision shows a penalty can be dropped where a taxpayer reasonably relied on the Department's own prior actions toward a similarly situated taxpayer — even without the Department directly advising you. But note the limits: it turned on specific documents the taxpayer actually held, the Department had since reversed its position publicly, and it abated only the penalty, never the tax or interest.

Accountants and tax professionals

Two durable points: (1) commission income of a dealer/agent is gross receipts distinct from the principal's taxable sale, and the disclosed-agency exclusion under § 7-9-3(F)(2)(f) does not reach it; (2) equal-protection challenges to New Mexico tax classifications face the Madden/Maloof "negative every conceivable basis" burden and rarely succeed, and Article VIII, Section 1 constrains only property taxes, not the privilege-based gross receipts tax.

Common questions

Q: Sears already pays gross receipts tax on the sale. Why do I owe it again on my commission?
A: Because your commission is a separate transaction. Sears is taxed on selling merchandise; you are taxed on the services you perform for Sears, which happen to be paid as a commission. Two taxpayers, two transactions — not double taxation, and even genuine double taxation isn't unconstitutional.

Q: I'm a disclosed agent for the company whose goods I sell — doesn't that exclude my receipts?
A: The disclosed-agency exclusion covers the sale money you collect and remit to your principal, which isn't your income. It does not cover the commission you keep for yourself; you receive that on your own behalf, so it's taxable.

Q: Other dealers told me this income isn't taxed. Can I rely on that?
A: That's what happened here, and it produced years of back tax and interest. Word-of-mouth from others in your industry isn't a substitute for a ruling from the Department or advice from a tax professional about your own facts.

Q: If I made an honest mistake, will the penalty be waived?
A: Sometimes — if you can show you weren't negligent, for example by reasonably relying on the Department's own prior conduct. But that abates only the penalty. The tax and interest still had to be paid here.

Q: Does this decision apply to my situation?
A: Not directly. A Decision and Order resolves one taxpayer's protest on its specific facts and the law in effect at the time. It illustrates how New Mexico taxes commission income and the disclosed-agency exclusion, but your facts may differ.

Citations and references

Statutes and regulations:

• § 7-9-4 NMSA 1978 — the gross receipts tax is a privilege tax on engaging in business in New Mexico
• § 7-9-3(F)(2)(f) NMSA 1978 — "gross receipts" excludes amounts received solely on behalf of another in a disclosed agency capacity
• § 7-9-17 NMSA 1978 — wages and commissions of employees are exempt from gross receipts tax
• § 7-9-66 NMSA 1978 — deduction for commissions on the sale of tangible personal property that is itself not subject to gross receipts tax; § 7-9-66.1 and § 7-9-53(A) NMSA 1978 — deduction for real-estate commissions attributable to the value of the seller's improvements
• § 7-1-69(A) NMSA 1978 — negligence penalty of 2% per month, up to 10%, for failure to pay or file without intent to defraud; Regulation 3 NMAC 1.11.10 — defines negligence and lists non-negligence examples (including reliance where the Department affirmatively misled the taxpayer)
• § 7-1-8 NMSA 1978 — return information is confidential in the Department's hands; § 7-1-24 NMSA 1978 — timely written protest
• Article VIII, Section 1, New Mexico Constitution — equal and uniform taxation, which applies to property (ad valorem) taxes

Cases cited:

• Ft. Smith Lumber Co. v. Arkansas, 251 U.S. 532 (1920) — double taxation is not forbidden by the Fourteenth Amendment
• Madden v. Commonwealth of Kentucky, 309 U.S. 83 (1940); Michael J. Maloof & Co. v. Bureau of Revenue, 80 N.M. 485 (1969) — a party challenging a tax classification must negate every conceivable rational basis
• Sunset Package Store, Inc. v. City of Carlsbad, 79 N.M. 260 (1968) — Article VIII, Section 1 does not apply to privilege or non-property taxes
• House of Carpets, Inc. v. Bureau of Revenue, 87 N.M. 747 (Ct. App. 1973) — separate taxpayers on separate transactions

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Jesse C. & Shirley Orr
• Decision PDF: D&O 97-37

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
JESSE C. AND SHIRLEY ORR
ID. NO. 02-059788-00 6, PROTEST NO. 97-37
TO ASSESSMENT NOS. 2013480 &
2013481, AND ID. NO. 02-304255-00 9,
PROTEST TO ASSESSMENT NO. 2052744

DECISION AND ORDER

THIS MATTER comes on for determination based upon a Stipulation of Facts and briefs
of the parties. Jesse C. and Shirley Orr, hereinafter, “Taxpayer”, were represented by Gary D.
Sanders, Esq. and Marylee V. Warwick, Esq. The Taxation and Revenue Department,
hereinafter, “Department”, was represented by Margaret B. Alcock, Special Assistant Attorney
General. Based upon the stipulated facts and exhibits and the briefs of the parties, IT IS
DECIDED AND ORDERED as follows:

FINDINGS OF FACT

1. Taxpayer operates a Sears authorized retail merchandise sales facility located in
   Taos, New Mexico.

2. At issue in this protest are three assessments issued against Taxpayer for gross
   receipts tax on revenue the Taxpayer derived from its operation of its Sears authorized
   dealership:
   Assessment Date Tax Period Tax Interest Penalty
   2013480 3/16/96 1/91-12/91 $ 7,252.92 $4,992.29 $ 725.34
   2013481 3/16/96 1/92-12/92 $ 8,193.48 $4,455.20 $ 819.36
   2052744 7/24/96 1/93-12/95 $21,116.94 $5,882.81 $2,111.76

3. As an authorized Sears retail dealer, Taxpayer sells and distributes Sears
   merchandise to retail customers in its market territory. The relationship between Taxpayer and
   Sears is primarily governed by the terms of a Sears authorized Retailer Dealer Agreement (“the
   Sears Agreement”).

4. Sears also provides the Taxpayer with a Dealer Operating Guide (“the Guide”)
   and a Training Manual (“the Training Manual”) to be used by Taxpayer in operating its Sears
   retail sales facility. In addition, Taxpayer receives directives and other materials from Sears from
   time to time regarding the operation of Taxpayer’s Sears retail sales facility (“the Directives”).
5. The Sears Agreement, the Guide, the Training Manual and the Directives contain
   procedures and controls that Taxpayer must follow covering substantially every aspect of
   operating Taxpayer’s Sears retail sales facility. Sears has established procedures for Taxpayer
   and its other dealers relating to (i) sales floor layout and displays; (ii) inventory requirements
   based on seasonal demands and proper inventory control; (iii) inventory tagging and in-store
   signs; (iv) receiving and returning merchandise inventory shipped from Sears; (v) computer
   system installation, use and maintenance, including the Sears E-mail system and access to on-line
   information (such as warranty information, status of orders, etc.); (vi) proper sales techniques and
   prohibited sales practices; (vii) customer merchandise returns; (viii) inventory pricing and mark-
   down procedures; (ix) repair and installation services; (x) point of sale ordering procedures; (xi)
   daily control procedures (i.e., cash register balancing and daily reporting); (xii) processing credit
   transactions; (xiii) product warranty matters; (xiv) local advertising; (xv) banking procedures;
   (xvi) insurance matters; (xvii) security procedures; and (xviii) required business hours.
6. Taxpayer, which operates as a sole proprietorship, is responsible for all costs
   associated with the operation of its Sears authorized dealership, including the cost of the building
   in which the retail facility is located and costs associated with the employees hired by Taxpayer
   to assist in its sales operation.
7. Generally, Sears provides Taxpayer with a limited inventory of merchandise for
   direct sales to customers. For items not maintained in inventory, Taxpayer places orders for
   merchandise from Sears for its customers. Such items are delivered by Sears to Taxpayer who
   will then deliver the merchandise to the customer.
8. All merchandise inventory, whether it is maintained in inventory at Taxpayer’s
   facility or ordered from Sears, remains the exclusive property of Sears until it is delivered to the
   customer, and all revenues from the sale of the merchandise belong to Sears.

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9. Taxpayer is also responsible for providing installation, hook-up and delivery for
   merchandise purchased through its facility. Taxpayer pays all of the costs associated with
   providing these services and is entitled to retain all of the revenues from such services.
10. Taxpayer, as an authorized Sears dealer, is responsible for collecting the proceeds
    from sales of Sears merchandise by Taxpayer, including the applicable gross receipts tax.
11. Taxpayer deposits all cash sales proceeds (including the applicable gross receipts
    tax collected by Taxpayer) daily into a local bank account established for and owned by Sears,
    and Sears sweeps the account daily (i.e., electronically transfers the proceeds to its corporate
    accounts).
12. For credit sales, Taxpayer obtains the necessary approvals for the credit
    transaction from Sears (or the third-party credit card company), processes the credit transaction
    for Sears, and sends the credit sales receipts to Sears on a daily basis.
13. Sears pays Taxpayer a commission on the sale of Sears merchandise and the sale
    of maintenance agreements by Taxpayer. The commission rate varies depending on the type of
    merchandise sold. Sears will pay a sales volume bonus to Taxpayer if Taxpayer attains a
    specified net commissionable merchandise sales goal.
14. Sears also pays Taxpayer a set monthly customer fee for performing certain
    customer services, including, but not limited to, handling non-commissioned returns, adjustment
    transactions, credit complaints, credit payments, processing NSF checks, service orders and
    repair handling.
15. Under the terms of the Sears Agreement between Taxpayer and Sears, Taxpayer is
    responsible for payment of all license fees and local and state taxes, with the exception of taxes
    on Sears owned merchandise present at the Taxpayer’s sales facility. Sears is responsible for
    paying sales, use, gross receipts and/or retail excise taxes applicable to the sale of Sears owned
    merchandise by Taxpayer, and Taxpayer has no responsibility for those taxes.
16. Based on information obtained from other Sears authorized retail dealers, it was
    Taxpayer’s understanding that the New Mexico Taxation and Revenue Department did not
    require Sears authorized dealers to pay gross receipts tax on their sale of Sears merchandise or
    on the commissions they received from Sears. Accordingly, Taxpayer did not report or pay gross
    receipts tax on commissions received from Sears during the assessment period.

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17. Taxpayer did not consult with a tax attorney or a certified public accountant
    concerning its liability for gross receipts tax on its revenues from acting as a Sears authorized
    retail dealer, nor did the Taxpayer contact the Department directly on this issue.
18. The information Taxpayer relied on in determining it did not owe gross receipts
    tax on its commissions included a November 23, 1988 protest letter filed with the Department by
    the law firm of Miller, Stratvert, Torgerson & Schlenker, P.A. in connection with an assessment
    issued against a Sears authorized dealer located in Portales, New Mexico, and a September 25,
    1990 letter from the Department to the Miller firm stating that the Department would abate the
    assessment.
19. In January, 1994, the Department’s Hearing Officer entered a non-confidential
    Decision and Order in the protest of Maria Lujan Scoggin, a Sears authorized retail dealer located
    in Artesia, New Mexico. The decision held that Ms. Scoggin was liable for gross receipts tax on
    the commissions she received from Sears.
20. In October, 1995, the Department issued Ruling No. 401-95-10 based on facts
    virtually identical to the facts in this case. The ruling concluded that someone acting as an
    authorized dealer for a retail merchandiser is liable for gross receipts tax on commissions
    received from the retail merchandiser.
21. The Department receives information from the Internal Revenue Service with
    respect to income reported by New Mexico residents. Through its Schedule C. matching
    program, the Department attempts to match a Taxpayer’s receipts from engaging in business as
    reported on Schedule C. of the Taxpayer’s federal form 1040 to the receipts reported to the
    Department for gross receipts tax purposes.
22. In 1995, the Department received information concerning business income
    reported by the Taxpayer to the Internal Revenue service for tax years 1991 and 1992. The
    Department then contacted the Taxpayer to determine the source of Taxpayer’s Schedule C.
    income. Taxpayer responded with the information that it was a Sears authorized retail dealer.
23. The Department’s records showed that the Taxpayer had never reported or paid
    gross receipts tax to the Department. Nor had anyone filed a Form TS-22 agreement to pay tax
    on behalf of the Taxpayer. A Form TS-22 agreement is a means by which one Taxpayer can
    apply to the Department to pay gross receipts tax on behalf of another Taxpayer.

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24. On March 16, 1996, the Department assigned Taxpayer Identification Number
    02-059788-00 6 to the Taxpayer and issued Assessment Nos. 2013480 and 2013481 for gross
    receipts tax, interest and penalty for the periods January 1991 through December, 1992.
25. On March 27, 1996, the Taxpayer filed a timely protest to Assessment Nos.
    2013480 and 2013481.
26. The Department then obtained the Taxpayer’s Schedule C. information from the
    Internal Revenue Service for calendar years 1993, 1994 and 1995. On July 24, 1996, the
    Department issued Assessment No. 2052744 for gross receipts tax, interest and penalty for the
    periods January, 1993 through December, 1995. This assessment was issued under Taxpayer ID.
    No. 02- 059788-00 6, the number under which the Taxpayer had registered for payment of
    withholding tax.
27. On August 14, 1996, the Taxpayer sent a letter to the Department requesting an
    extension of time to file a formal protest to Assessment No. 2052744.
28. An Extension of time was granted until October 22, 1996. On October 18, 1996,
    a timely protest was filed on behalf of the Taxpayer by Gary D. Sanders, Esq., of Krafsur,
    Gordon, Mott, Sanders & Miranda, P.C.
29. On May 13, 1997, Taxpayer appointed Gary D. Sanders Esq., Patrick R. Gordon,
    Esq. and Marylee Warwick, Esq. as Taxpayer’s representatives. Ms. Warwick is an attorney
    licensed to practice law in New Mexico.

DISCUSSION
The Taxpayer sells and distributes Sears merchandise to retail customers in a designated
market territory pursuant to the terms of a Sears Authorized Retailer Dealer Agreement. The
merchandise sold by the Taxpayer is owned by Sears and Sears pays gross receipts taxes upon the
total sales price of the merchandise. At issue herein is whether the Taxpayer is liable for gross
receipts tax upon the commissions it receives on the sale of Sears merchandise.1

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The Taxpayer also receives a set monthly customer fee from Sears for performing certain customer services, such
as handling returns, may receive a sales volume bonus depending on reaching certain levels of sales volume, and also
has receipts from the hook-up, delivery and installation of Sears merchandise. The Taxpayer has presented no
arguments disputing its liability for gross receipts tax, penalty or interest on those receipts and it is presumed that the
Taxpayer is not disputing its liability for those amounts.

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The first argument the Taxpayer raises is that because Sears has already paid gross
receipts taxes upon the total receipts from the sale of merchandise, that to subject the Taxpayer to
additional gross receipts tax upon the commissions it receives constitutes unlawful double
taxation. There are two problems with this argument. The first is that there is no double taxation
under the circumstances of this case. Although the Taxpayer argues that it is a single transaction
which is being taxed, the sale of merchandise, there are two separate transactions involved,
although a single event triggers the two transactions. First, there is the sale of Sears merchandise
to a retail customer. The second transaction, however, is the payment of a commission by Sears
to the Taxpayer. Both Sears and the Taxpayer are engaged in business in New Mexico and both
are subject to gross receipts tax upon their receipts from engaging in business in New Mexico.
Sears has receipts from the sale of its merchandise and the Taxpayer has receipts from
performing services for Sears which are compensated on a commission basis pursuant to the
terms of the agreement between the Taxpayer and Sears. We have two different Taxpayers and
two different transactions being taxed. Thus, there is no double taxation. See, House of
Carpets, Inc. v. Bureau of Revenue, 87 N.M. 747, 507 P.2d 1078 (Ct. App. 1973), New Mexico
Sheriffs & Police Association v. Bureau of Revenue, 85 N.M. 565, 514 P.2d 616 (Ct. App.
1973).
The second problem with the Taxpayer’s argument is that although double taxation is not
desirable from a tax policy perspective, there is nothing inherently illegal or unconstitutional
about it. As noted by the Supreme Court in Ft. Smith Lumber Co. v. Arkansas, 251 U.S. 532,
533 (1920), “[T]he Fourteenth Amendment no more forbids double taxation than it does
doubling the amount of a tax...” New Mexico’s courts have also held that there is no
constitutional prohibition against double taxation. New Mexico State Board of Public
Accountancy v. Grant, 61 N.M. 287, 299 P.2d 464 (1956); Amarillo-Pecos Valley Truck Line,
Inc. v. Gallegos, 44 N.M. 120, 99 P.2d 447 (1940); State ex rel. Attorney General v. Tittmann,
42 N.M. 76, 75 P.2d 701 (1938).
Next, the Taxpayer argues that the imposition of gross receipts tax upon its commissions
is unconstitutional because it violates the principles of equal protection guaranteed by the federal
and New Mexico constitutions. Specifically, the Taxpayer argues that it is treated differently
than three other types of Taxpayers who receive commissions. First, it is treated differently than

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commissioned employees, whose wages and commissions are exempt from gross receipts tax
pursuant to Section 7-9-17 NMSA 1978. Second, it is treated differently than real estate brokers
who receive sales commissions on the sale of real property under certain circumstances. Section
7-9-66.1 provides a deduction from gross receipts tax on that portion of the transaction which is
subject to gross receipts tax under Section 7-9-53(A) NMSA 1978. Section 7-9-53(A) provides
for a deduction from gross receipts tax for receipts from the sale of real property, except for the
portion of the receipts attributable to the value of improvements constructed on the real property
by the seller in the ordinary course of his construction business. Thus, the effect of Section 7-9-
66.1 is to provide a deduction for real estate commissions on the sale of real property to the
extent that those receipts are attributable to the value of improvements constructed on the real
property by the seller in the ordinary course of its construction business. The third situation in
which the Taxpayer alleges a denial of equal protection is that pursuant to Section 7-9-66
NMSA 1978, commissions received on the sale of tangible personal property are deductible if the
sale of the tangible personal property is not subject to gross receipts tax.
It is not disputed that New Mexico’s gross receipts tax scheme operates to subject the
Taxpayer’s commissions to gross receipts tax and that under the circumstances outlined above,
the commissions of the real estate brokers, employees and other Taxpayers receiving
commissions under the circumstances outlined above would not be subject to gross receipts tax.,
but the Department disputes that such differential taxation violates equal protection and disputes
that the Taxpayer has carried its burden of proving such a violation.
The standards for determining whether a violation of the equal protection clauses of the
New Mexico and United States constitutions are the same. Garcia v. Albuquerque Public
Schools Board of Education, 95 N.M. 391, 622 P.2d 699 (Ct. App. 1980). Unless a challenged
statute trammels fundamental personal rights or is drawn upon an inherently suspect
classification, such as race, religion, sex, or national origin, the constitutionality of the statutory
discrimination is presumed and requires only that the classification challenged be rationally
related to a legitimate state interest. Id.
In making its equal protection argument, the Taxpayer has merely asserted that there is no
rational basis for the differential tax treatments of commissions under New Mexico’s tax statutes
as outlined above. The Department is correct in its assertion that the mere allegation of a lack of

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a rational basis does not sustain the Taxpayer’s burden of proof on this issue. This is because the
courts have long recognized that in the area of taxation, especially, that the legislature must have
broad discretion to impose taxes differently upon different classifications of Taxpayers. As noted
by the Supreme Court in Madden v. Commonwealth of Kentucky, 309 U.S. 83, 87-88 (1940):
[I]n taxation, even more than in other fields, legislatures possess the greatest
freedom in classification....The presumption of constitutionality can be overcome
only by the most explicit demonstration that a classification is a hostile and
oppressive discrimination against particular persons and classes. The burden is on
the one attacking the legislative arrangement to negative every conceivable basis
which might support it. (emphasis added.)

The New Mexico Supreme Court has adopted this standard of proof for equal protection
challenges to tax classifications. See, Michael J. Maloof & Co. v. Bureau of Revenue, 80 N.M.
485, 458 P.2d 89 (1969).
Not only has the Taxpayer failed to meet its burden of proof on this issue, there are
rationales which can be posited for each of the scenarios of differential taxation. With respect to
the deduction for wages and commissions received by employees, there are substantial
differences between employees and those engaged in business to whom the gross receipts tax
applies. An employee is subject to income tax on his entire income, including wages and
commissions earned. A business is allowed to deduct business expenses in determining taxable
income prior to the imposition of income tax, among other differences. This distinction alone
provides a rational basis for the legislature to determine that they should be taxed differently for
gross receipts tax purposes.
With respect to the deduction provided at Section 7-9-66.1 for real estate commissions
attributable to the value of improvements constructed on a property by the seller in the ordinary
course of its construction business, there is also a rational basis for this distinction. The value of
the improvements would already be subject to the imposition of gross receipts tax upon their sale
because the seller who is engaged in the construction business who built those improvements
would be liable for gross receipts tax upon its receipts from performing those construction
services. Thus, the deduction at Section 7-9-66.1 operates to prevent the pyramiding or stacking
of gross receipts tax upon the value of improvements to real property.
There is also a rational basis for providing a deduction for commissions received on the
sale of tangible personal property where the sale of the tangible personal property itself was not

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subject to gross receipts tax. This merely provides consistency of taxation. If the legislature saw
fit to provide an exemption or deduction on the sale of certain tangible personal property, then it
makes sense to provide a deduction for commissions derived from the sale of the same property.
The Taxpayer has also argued that the differential taxation which occurs with respect to
its commissions and other commissions received violates the requirement of equal and uniform
taxation contained in Article VIII, Section 1 of the New Mexico Constitution, which provides as
follows:
Taxes levied upon tangible property shall be in proportion to the value thereof,
and taxes shall be equal and uniform upon subjects of taxation of the same class.
Different methods may be provided by law to determine value of different kinds
of property but the percentage of value against which tax rates are assessed shall
not exceed thirty-three and one-third percent.

By its very wording, this provision applies to ad valorem or property taxes, which are imposed as
a percentage of value of the property. Although “gross receipts” upon which the gross receipts
tax is imposed may be measured by the value of the goods or services sold, Section 7-9-3(F)
NMSA 1978, the gross receipts tax is a privilege tax, imposed upon the privilege of engaging in
business in New Mexico. See, Section 7-9-4 NMSA 1978. The New Mexico Supreme Court
has recognized that this section of the constitution does not apply to privilege taxes or non-
property taxes. Sunset Package Store, Inc. v. City of Carlsbad, 79 N.M. 260, 442 P.2d 572
(1968).
Next, the Taxpayer argues that its commissions are not subject to gross receipts tax
because Section 7-9-3(F)(2)(f) excludes from “gross receipts” “amounts received solely on behalf
of another in a disclosed agency capacity.” There is no dispute that the Taxpayer is a disclosed
agent for Sears. This agency relationship is disclosed to the public according to the requirements
of Paragraph 2.04 of the Sears Agreement, which provides:
[I]n order to maintain a clear distinction between the Dealer’s business and the
business of Sears, Dealer agrees ...to clearly display on or near the principal
entrance to the Dealer Facility the statement “Sears Authorized Retail Dealer.
Independently owned and operated by (Dealer’s name).”

Thus, Section 7-9-3(F)(2)(f) operates to establish that when the Taxpayer collects sales revenue
as a disclosed agent of Sears, those are not the Taxpayer’s gross receipts.

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The Taxpayer’s argument, however, would turn the disclosed agency relationship on its
head. When the Taxpayer receives commissions on sales it makes, the commissions are treated
as gross receipts by the Department. The Taxpayer does not receive those commissions “solely
on behalf of another [Sears] in a disclosed agency capacity.” The Taxpayer receives those
commissions on its own behalf. There is no evidence that the customer is even aware of the
commissions being paid the Taxpayer. The customer only knows that it is paying an established
price for the merchandise being purchased. This reaffirms that there are two separate
transactions occurring. There is the sale of merchandise by Sears, which the Taxpayer makes as
a disclosed agent for Sears, and there is a separate, and non-disclosed transaction between the
Taxpayer and Sears whereby the Taxpayer has performed certain services for Sears and receives
compensation in the form of a commission on sales for performing those services. Section 7-9-
3(F)(2)(f) simply has no application to the second transaction.
The final issue to be determined is whether the Taxpayer should be held liable for penalty
assessed on the commissions received by the Taxpayer.2 The imposition of penalty is governed
by the provisions of NMSA 1978, Section 7-1-69(A)(1995 Repl. Pamp.), which imposes a penalty
of two percent per month, up to a maximum of ten percent:
In the case of failure, due to negligence or disregard of rules and regulations, but
without intent to defraud, to pay when due any amount of tax required to be paid or
to file by the date required a return regardless of whether any tax is due,....

This statute imposes penalty based upon negligence (as opposed to fraud) for failure to timely pay
tax. Thus, there is no contention that the failure to report and pay taxes was based upon any
conscious attempt by the Taxpayer to underreport taxes. What remains to be determined is whether
the Taxpayer was negligent in failing to report its taxes properly. Taxpayer "negligence" for
purposes of assessing penalty is defined in Regulation 3 NMAC 1.11.10 (formerly TA 69:3) as:
1) failure to exercise that degree of ordinary business care and prudence which
reasonable taxpayers would exercise under like circumstances;

2) inaction by taxpayers where action is required;

2
Because the Taxpayer did not protest the imposition of gross receipts tax upon its receipts from installation, hook-
up and delivery charges, or upon its set monthly customer fee, and because the evidence submitted with respect to
abatement of penalty only addressed commissions received from Sears, it is presumed that the Taxpayer has not
protested the imposition of penalty upon its receipts other than commissions. Even if it had, having failed to submit
evidence or argument upon this issue, the Taxpayer would not be entitled to relief from penalty on these other
receipts because of its failure to meet its burden of proof on that aspect of the case.

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3) inadvertence, indifference, thoughtlessness, carelessness, erroneous belief or
inattention.

In this case, the Taxpayer contends that it was not negligent because it relied upon
information provided to it from other Sears retailers where the Department agreed that a Sears
catalogue merchant, who also received commissions from Sears upon its sales, was determined
not to be subject to gross receipts tax upon its commissions from the sale of Sears merchandise.
The information that the Taxpayer had was a copy of the protest filed on behalf of the Sears
catalogue merchant by its attorney and the Department’s response agreeing to abate the tax based
upon a 1974 Decision and Order of the Department which had, in essence, concluded that Sears
was paying the tax on the commissions on behalf of its authorized merchants.
Regulation 3 NMAC 1.11.10 contains examples of what the Department considers to be
indications of non-negligence, justifying the abatement of penalty. One of those examples is
where the Taxpayer proves that it was affirmatively misled by a Department employee. The
Department argues that the correspondence relied upon by the Taxpayer does not establish an
affirmative misleading by the Department because it was not addressed to the Taxpayer, and
because these documents are confidential documents which the Taxpayer would not be entitled to
rely upon. The Department also points out that it has now reversed its prior position in a
subsequent non-confidential Decision and Order and in a published ruling issued at the request of
another Sears retailer.
The Department also argues that because the Taxpayer never consulted with a tax professional
about its gross receipts tax liability nor did it seek a ruling itself, it should not be entitled to rely
upon the information provided it by other Sears retailers.
No doubt, the most prudent action by the Taxpayer in this case would have been to have
consulted with a tax professional or to seek a ruling from the Department. Depending upon
when that advice was sought, however, there could have been differing results, given the
Department’s change of position on this issue. Although the documents relied upon by the
Taxpayer would be confidential in the hands of the Department, pursuant to Section 7-1-8
NMSA 1978, they are not confidential when provided by another source, such as the Sears
merchant who must have made them available to other Sears merchants. I conclude that it was
not unreasonable, under the circumstances of this case, for the Taxpayer to have relied upon the

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Department’s own actions with respect to another Sears merchant who was compensated on a
commission basis. Although the Department in no way affirmatively misled this particular
Taxpayer, the Taxpayer was exercising ordinary business care and prudence in relying upon the
Department’s actions with respect to a similarly situated taxpayer under the circumstances of this
case. There being no Taxpayer negligence upon which to base the imposition of penalty, the
penalty should be abated with respect to the gross receipts tax upon the Taxpayer’s commissions.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest, pursuant to Section 7-1-24 NMSA
   1978 to Assessment Nos. 2013480, 2013481 and 2052744 and jurisdiction lies over both the
   parties and the subject matter of this protest.
2. The imposition of gross receipts tax upon the Taxpayer’s commissions does not
   amount to double taxation and is not unlawful.
3. The Taxpayer has not been denied the equal protection of the law as guaranteed
   by the New Mexico and United States Constitutions with respect to New Mexico’s statutory
   scheme imposing gross receipts tax upon the commissions received by the Taxpayer.
4. The guaranty of equal and uniform taxation as contained in Article VIII, Section 1
   of the New Mexico Constitution does not apply to the imposition of the gross receipts tax upon
   the commissions received by the Taxpayer.
5. The Taxpayer does not receive the commissions received from Sears “solely on
   behalf of another in a disclosed agency capacity” as required by Section 7-9-3(F)(2)(f) NMSA
   1978 in order for the Taxpayer to claim an exemption from gross receipts tax.
6. The Taxpayer was not negligent for purposes of Section 7-1-69 NMSA 1978 with
   respect to its failure to report and pay gross receipts taxes upon the commissions it received from
   Sears, and therefore the imposition of penalty was improper with respect to those commissions.

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For the foregoing reasons, the Taxpayer’s protest IS HEREBY DENIED IN PART AND
GRANTED IN PART. THE DEPARTMENT IS HEREBY ORDERED TO ABATE PENALTY
WITH RESPECT TO THE TAXPAYER’S RECEIPTS FROM COMMISSIONS.
DONE, this 20th day of October, 1997.

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