Does a worker who does piece-work engraving on the side owe New Mexico gross receipts tax on it, even though her employer already paid tax on the engraved goods, and can she treat the pay as exempt wages?

Plain-English summary

Linda Sanchez worked as a regular employee for Luz de Nambe, a retailer of cast-metal "Nambeware." On the side, starting around 1991, she also did engraving for Luz de Nambe — paid by the piece, using her own engraving tool, on her own schedule (at the shop during and after hours, and at home). She ran this engraving work through a registered business, "Que Linda." For 1993, Luz de Nambe gave her a W-2 for her employee wages and a Form 1099 for the engraving pay. She reported the 1099 income on a federal Schedule C but paid no New Mexico gross receipts tax on it. Through IRS information-sharing, the Department assessed about $699 in gross receipts tax plus penalty and interest for 1993 (Assessment No. 2063602).

The Hearing Officer denied the protest and upheld the assessment, rejecting each argument:

• "The engraving pay was exempt employee wages" (§ 7-9-17). No. Under the right-to-control test (and the Department's employee-indicia regulation, 3 NMAC 2.12.7), she was an independent contractor: paid by the piece, no tax withheld, issued a 1099 rather than a W-2, and controlled only as to the result, not the manner, of the engraving. So the wage exemption didn't apply.
• "It's double taxation — Luz de Nambe already paid tax on the engraved pieces." The Hearing Officer agreed the tax is imposed twice, but that's not a defense: there were two separate taxable transactions (her sale of engraving services to Luz de Nambe, and Luz de Nambe's sale of engraved goods to customers). Gross receipts tax is on the privilege of engaging in business (§ 7-9-4), "engaging in business" is broad (§ 7-9-3(E)), and all receipts are presumed taxable (§ 7-9-5). New Mexico does offer a way to avoid this pyramiding — the § 7-9-48 deduction for selling a service for resale — but it requires the buyer (Luz de Nambe) to give the seller a nontaxable transaction certificate. She never got one, so the deduction was unavailable.
• "It's unfair / the Department's fault for not telling me." No. She received a filer's kit when she registered, which explains the tax, deductions, and exemptions. In a self-reporting system, understanding the tax consequences of your activities is the taxpayer's responsibility, and ignorance of the law is not a defense (Tiffany Construction).

(Note: the decision's signature line reads "6th day of February, 1997," but the hearing was held January 28, 1998, the order is numbered 98-07, and it was published February 6, 1998 — so the "1997" is a scrivener's typo and the actual issue date is February 6, 1998.)

What this means for you

Side-gig and moonlighting workers

Doing extra work "on the side" — even for the same company that employs you — can make you an independent contractor for that work, and independent-contractor income is subject to New Mexico gross receipts tax. Getting a 1099 instead of a W-2, being paid by the piece or the job, using your own tools, and setting your own hours all point to contractor status. If you have contractor income, check whether you need to register for and pay gross receipts tax on it.

Contractors who sell a service that a business resells

If you sell a service that your customer resells to its own customers (here, engraving that the retailer resold as part of the finished product), you can avoid being taxed on top of your customer's tax — but only by obtaining a nontaxable transaction certificate from that customer and keeping it on file. Without the certificate, the § 7-9-48 resale deduction is simply not available, even though the economics are exactly what the deduction is meant to relieve.

Accountants and tax professionals

Two points. First, employee-versus-contractor status for the § 7-9-17 wage exemption turns on the right-to-control test and the 3 NMAC 2.12.7 indicia; a 1099, piece-work pay, and no withholding are strong contractor signals. Second, the anti-pyramiding relief in § 7-9-48 is documentation-dependent — the resale deduction requires an NTTC from the buyer, and "I didn't know I needed one" won't rescue it. Advise service providers who sell into resale chains to collect certificates up front.

Common questions

Q: I was basically working for my employer — why wasn't the engraving exempt as wages?
A: Because for the engraving work she was an independent contractor, not an employee. She was paid by the piece with no withholding, received a 1099, used her own tool, and controlled how and when she did the work. The § 7-9-17 wage exemption only covers actual employees.

Q: Isn't taxing both her and the retailer double taxation?
A: Yes, the tax applies to both transactions, but that isn't a defense. New Mexico's gross receipts tax reaches each separate business transaction. The law offers relief through the § 7-9-48 resale deduction, but only if the seller obtains a nontaxable transaction certificate from the buyer.

Q: She didn't know she needed a certificate — shouldn't the Department have told her?
A: The Department gave her a filer's kit at registration explaining the tax and its deductions, and in a self-reporting system it's the taxpayer's job to learn how the tax applies. Ignorance of the law is not a defense, so the missing certificate defeated the deduction.

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 distinguishes employees from contractors and applies the resale deduction, but your facts may differ.

Citations and references

Statutes and regulation:

• § 7-9-17 NMSA 1978 — exemption for wages paid to employees
• § 7-9-4 NMSA 1978 — imposition of gross receipts tax on the privilege of engaging in business
• § 7-9-3(E) NMSA 1978 — "engaging in business" means carrying on any activity for direct or indirect benefit
• § 7-9-5 NMSA 1978 — presumption that all receipts of a person engaging in business are taxable
• § 7-9-48 NMSA 1978 — deduction for receipts from selling a service for resale, available only if the buyer delivers a nontaxable transaction certificate
• 3 NMAC 2.12.7 — indicia the Department considers in determining employee status

Case law cited:

• Burruss v. B.M.C. Logging Co., 38 N.M. 254, 31 P.2d 263 (1934) — employee status turns on the right to control the manner and method of the work
• Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976), cert. denied, 90 N.M. 255, 561 P.2d 1348 (1977) — taxpayers must ascertain the tax consequences of their activities; ignorance is no defense

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Que Linda
• Decision PDF: D&O 98-07

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
QUE LINDA, ID. NO. 02-163233-00 2 NO. 98-07
PROTEST TO ASSESSMENT NO. 2063602

DECISION AND ORDER

THIS MATTER came on for formal hearing on January 28, 1998, before Gerald B.

Richardson, Hearing Officer. Que Linda, hereinafter, “Taxpayer”, was represented by Mr.

Robert Sanchez, co-owner. The Taxation and Revenue Department, hereinafter, “Department”,

was represented by Bridget A. Jacober, Esq. Based upon the evidence and the arguments

presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. Luz de Nambe is a business engaged in retailing cast metal serving pieces and

candlesticks which are commonly known as “Nambeware”.

2. For many years, Linda Sanchez, co-owner of the Taxpayer, has worked for Luz de

Nambe as an employee in one of their retail outlets, selling Nambeware.

3. Customers who purchase Nambeware sometimes desire to have it engraved. Luz

de Nambe offered these customers engraving services for an add-on to the price of the piece

purchased. Luz de Nambe reports and pays gross receipts tax on the total amount of money they

charge their customers for the piece(s) sold and for any additional engraving charges.

4. Starting in about 1991, Linda Sanchez, in order to earn additional income, agreed

to do engraving for Luz de Nambe, in addition to her duties as an employee. She was paid on a

piece-work basis, using her own engraving tool. She could choose where she did the engraving

and she did it at the shop, both during and after hours, and she also took work home to engrave.

5. The Taxpayer registered with the Department as a business under the name, Que

Linda, on January 14, 1991, and obtained a taxpayer identification number with the Department.

Que Linda was the business through which Linda Sanchez ran her engraving business. Ms.

Sanchez had hoped she would pick up other engraving business from customers other than Luz

de Nambe, but that never materialized.

6. For tax year 1993, Linda Sanchez received a W-2 form from Luz de Nambe

reporting the wages she earned as an employee. For that same year, she also received a federal

form 1099 from Luz de Nambe reporting as non-employee compensation the amounts paid to

Mrs. Sanchez for the engraving services she performed for them.

7. In reporting their income to the Internal Revenue Service for tax year 1993, Mr.

and Mrs. Sanchez reported the amount reported on the form 1099 as income from a business on

federal Schedule C. Business expenses were also claimed against the income reported.

8. The Taxpayer did not report the compensation it received for performing

engraving services for Luz de Nambe during 1993 to the Department as gross receipts from

engaging in business and no gross receipts taxes were paid on those amounts.

9. The Taxpayer has not produced a non-taxable transaction receipt from Luz de

Nambe in support of any claim of deduction for its receipts from performing engraving services

for Luz de Nambe.

2

10. The Department has an information sharing agreement with the Internal Revenue

Service whereby information contained in the federal income tax returns of New Mexico

residents is shared with the Department.

11. As a result of information, the Department received from the Internal Revenue

Service about the income reported by Mr. and Mrs. Sanchez on their Schedule C for 1993, on

August 24, 1996, the Department issued Assessment No. 2063602 to the Taxpayer, assessing

$699.42 in gross receipts tax, $69.95 in penalty and $292.42 in interest for tax year 1993.

12. On September 21, 1996, the Taxpayer filed a written protest to Assessment No.

2063602 with the Department.

DISCUSSION

The Taxpayer disputes its liability for the taxes assessed on several grounds. First, the

Taxpayer alleges that Mrs. Sanchez was an employee of Luz de Nambe with respect to the

engraving services she performed and that as such, her receipts would be exempt from gross

receipts tax under the exemption found at Section 7-9-17 NMSA 1978, which provides an

exemption for wages paid to employees. In determining whether a person is an employee or an

independent contractor, the rule in New Mexico, and in general, is that the principal

consideration is the right to control. Thus, the relationship of employer and employee usually

results where there is control over the manner and method of performance of the work to be

performed. Where there is only control over the results, however, and not the details of the

performance, the worker is usually considered to be an independent contractor. Buruss v.

B.M.C. Logging Co., 38 N.M. 254, 31 P.2d 263 (1934). There are many factors to be evaluated

in making the determination of employee or independent contractor status. The Department has

3
adopted a regulation under Section 7-9-17 to provide criteria by which the status may be

determined. Regulation 3 NMAC 2.12.7. provides as follows:

In determining whether a person is an employee, the department
will consider the following indicia:

1. is the person paid a wage or salary;
2. is the “employer” required to withhold income tax from the
   person’s wage or salary;
3. is F.I.C.A. tax required to be paid by the “employer”;
4. is the person covered by workmen’s compensation insurance;
5. is the “employer” required to make unemployment insurance
   contributions on behalf of the person;
6. does the person’s “employer” consider the person to be an
   employee;
7. does the person’s “employer” have a right to exercise control
   over the means of accomplishing a result or only over the
   result (control does not mean “mere suggestion’).
   If all of the indicia mentioned are present, the department will
   presume that the person is an employee. However, a person may
   be an employee even if one or more of the indicia are not present.

Applying these criteria to Mrs. Sanchez’ work as an engraver, it is clear that she was not an

employee. She was not paid a wage or salary. She was paid by the piece. There was no income

tax or F.I.C.A. tax withheld. Luz de Nambe considered Mrs. Sanchez to be an independent

contractor and not an employee as evidenced by the fact that the amounts it paid her for

engraving were reported on a Form 1099, rather than a W-2. Finally, and most significantly, it is

clear that Luz de Nambe only exercised control over the result, the engraved end product,

because Mrs. Sanchez could choose when and where she performed the engraving work.

Because Mrs. Sanchez’ compensation for performing engraving services was not performed as an

employee, the exemption for wages of employees would not apply to exempt Mrs. Sanchez’

gross receipts from performing engraving services from gross receipts tax.

The second argument raised by the Taxpayer is that it should not be held liable for gross

receipts tax on the engraving services because gross receipts tax was already paid on the value of

4
those services when they were sold to the ultimate purchaser by Luz de Nambe. While the

Taxpayer is correct that gross receipts tax is imposed twice under these circumstances, it does not

provide a defense to the assessment at issue. This is because there were two separate

transactions, which are each subject to tax under the definition of gross receipts. New Mexico’s

gross receipts tax is imposed for the privilege of engaging in business in New Mexico. Section

7-9-4 NMSA 1978. “Engaging in business” is broadly defined at Section 7-9-3(E) to mean

“carrying on or causing to be carried on any activity with the purpose of direct or indirect

benefit.” Additionally, Section 7-9-5 provides that, “[T]o prevent evasion of the gross receipts

tax and to aid in its administration, it is presumed that all receipts of a person engaging in

business are subject to the gross receipts tax.” Given the broad definition of engaging in

business, it is apparent that the Taxpayer was engaged in the business of providing engraving

services and its receipts from performing those services are subject to the gross receipts tax. Luz

de Nambe is in the business of selling Nambeware, some of which is custom engraved. Both

transactions are subject to gross receipts tax unless a deduction or exemption applies. In fact, the

Gross Receipts and Compensating Tax Act, Chapter 7, Article 9 NMSA 1978 does provide for

certain deductions to avoid the pyramiding of tax. There is a deduction which could have been

applicable to the Taxpayer’s receipts in this instance. Section 7-9-48 NMSA 1978 provides a

deduction for receipts from selling a service for resale, which is what the Taxpayer did, since Luz

de Nambe resold the engraving services. The problem for the Taxpayer is that the statute

requires that in order to claim the deduction, the buyer of the service must have delivered a non-

taxable transaction certificate to the seller for the seller to claim the deduction. The Taxpayer

never produced a nontaxable transaction certificate from Luz de Nambe, nor was there any

evidence that they ever had one. Thus, the deduction is not available to the Taxpayer.

5
The Taxpayer argued that this is somehow unfair. The Taxpayer argued that if it had

known that it needed such a nontaxable transaction certificate, it would have gotten one, and the

Taxpayer implied that somehow, this was the Department’s fault.

While I have no question that the Taxpayer was not aware of the need for a non-taxable

transaction certificate, the Taxpayer admitted to receiving a filers kit when it registered with the

Department. Had the Taxpayer read those materials, it would have explained how the gross

receipts tax applies and provided information about deductions and exemptions. While the

Department does try to provide information to assist taxpayers with their responsibility to

accurately report and pay taxes, ultimately, it is the taxpayer’s responsibility to understand the tax

consequences of its activities. Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558

P.2d 1155 (Ct. App. 1976), cert. denied, 90 N.M. 255, 561 P.2d 1348 (1977). Thus, the

Department’s failure to do more than provide the Taxpayer with the filer’s kit and registration

materials, does not provide a defense to the assessment at issue. In this regard, the Taxpayer never

did provide an explanation as to why gross receipts taxes were not reported and paid, other than that

it did not know taxes were due. While I do not doubt the veracity of this statement, as the Tiffany

Construction case above notes, taxpayer ignorance is not a defense to a tax liability. Taxpayers are

under an obligation to make inquiry, either with the Department, by reading the statutes and

published materials of the Department, or by consulting with a tax expert, to understand how the

tax laws apply to their activities. Having failed to do so, the Taxpayer may not now complain of the

consequences which flow from that failure.

CONCLUSIONS OF LAW

6

1. The Taxpayer filed a timely, written protest to Assessment No. 2063602 and

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

2. The Taxpayer was not an employee of Luz de Nambe and thus may not claim the

exemption from gross receipts tax found at Section 7-9-17 NMSA 1978.

3. Because the Taxpayer did not receive a nontaxable transaction certificate from Luz

de Nambe, it was not entitled to claim a deduction pursuant to Section 7-9-48 NMSA 1978.

4. Ignorance of how the tax laws apply to the Taxpayer’s activities is no defense to an

otherwise proper assessment of tax.

For the foregoing reasons, the Taxpayer’s protest IS HEREBY DENIED.

DONE, this 6th day of February, 1997.

7