Was a commission-only advertising salesperson an employee whose Quick Quarter commissions were exempt from New Mexico gross receipts tax?

Subject

AAA Air and Water Filter Systems (D&O 98-21)

Plain-English summary

Gay Wynnett Stracener sold advertisements for Quick Quarter Want Ads in 1988. She was paid only by commission, received Form 1099 rather than Form W-2, used her own vehicle, chose which businesses to call on, and could leave after completing her work. Quick Quarter required a Tuesday sales meeting and daily reporting but did not control the details of how she made sales.

Stracener reported $23,876 of business receipts on federal Schedule C but did not understand that independent-contractor commissions were subject to New Mexico gross receipts tax. The Department assessed $1,351.44 tax, $135.12 penalty, and $1,292.32 interest for 1988. It used the tax identification number of AAA Air and Water Filter Systems, another business she owned. The Department later abated penalty.

Hearing Officer Gerald B. Richardson held that Stracener was an independent contractor. Quick Quarter expressly hired and reported her that way, did not pay wages or benefits, and controlled the sales result rather than the manner of performance. An IRS employment-status determination concerning the same duties in 1990 likewise found she was not an employee. She therefore could not use the Section 7-9-17 exemption for employee wages, salaries, or commissions.

Stracener also argued that Quick Quarter already paid gross receipts tax on the advertising fees she collected. The decision found two separate taxable transactions. Quick Quarter sold advertising services to customers. Stracener separately sold her commission-based advertising-sales service to Quick Quarter. Taxing each taxpayer's receipts was not double taxation. The protest was DENIED.

What this means for you

• Commission payment alone does not create employee status. The decision examined control, tax forms, benefits, expenses, and the parties' expressed relationship.
• Freedom over sales methods supported contractor status. Stracener chose her prospects and how to make calls, even though Quick Quarter imposed meetings and deadlines.
• Federal classification evidence was relevant. The IRS had classified the same work as nonemployee service for a later year.
• Employee compensation can be exempt, while contractor commissions are taxable. Section 7-9-17 did not apply once Stracener was classified as a contractor.
• Related transactions can each be taxed. Quick Quarter's advertising sale and Stracener's sales service involved different sellers, buyers, and receipts.

Key questions answered

Which facts showed Stracener was not an employee?
She received commissions and Form 1099, lacked employee benefits, used her vehicle, chose sales prospects, and was hired as an independent contractor.

Did Quick Quarter exercise any control?
Yes, it required sales meetings, daily reporting, and advertising deadlines. The Hearing Officer found those controls did not extend to the manner and method of her sales work.

Why didn't Quick Quarter's own gross receipts tax cover her commissions?
Quick Quarter was taxed on selling advertising to customers. Stracener was taxed on the separate service of selling those advertisements for Quick Quarter.

What happened to penalty?
The Department abated it before the decision. The tax and interest remained at issue and were upheld.

Verbatim citations

The commissioned-salesperson rule:

A salesperson who sells for a company on a commission basis is not an employee of the company where the company exercises no direct control over the details of performance of the salesperson’s duties beyond general statements about the scope and nature of the salesperson’s obligations under the contract between the salesperson and the company.

The application to Stracener:

Quick Quarter did not exercise control over how Ms. Stracener did her job. She was free to find her own sales prospects and to make her sales calls as she saw fit, so long as the deadlines for placement of ads were met and the advertising fees were collected and paid.

The separate-transaction analysis:

There were two separate services provided to two different entities or persons and thus there were two separate taxable transactions, although the transactions are related transactions.

The holding:

The Taxpayer was not an employee of Quick Quarter and therefore is not eligible to claim the deduction found at § 7-9-17 NMSA 1978 for her commissions received from Quick Quarter.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: AAA Air and Water Filter Systems
• Decision PDF: D&O 98-21

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
AAA AIR AND WATER FILTER SYSTEMS NO. 98-21
ID. NO. 02-131952-00 9, PROTEST TO
ASSESSMENT NO. 1883591

DECISION AND ORDER

This matter came on for formal hearing on March 12, 1998, before Gerald B.
Richardson, Hearing Officer. AAA Air and Water Filter Systems, hereinafter,
“Taxpayer”, was represented by its owner, Gay Wynnett Stracener. 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. On December 22, 1994, the Department issued to the Taxpayer Assessment
   No. 1883591, which assessed $ 1,351.44 in gross receipts tax, $135.12 in penalty and
   $1,292.32 in interest for reporting periods of January, 1988 through December, 1988.
2. The Department’s assessment was issued as a result of the Department’s
   information sharing agreement with the Internal Revenue Service (“IRS”). Under that
   agreement the Department receives information from the IRS with respect to the returns
   filed with the IRS by New Mexico residents.
3. The Department’s assessment was based upon information received from the
   IRS that for tax year 1988, Ms. Stracener had reported gross receipts from operating a
   business on federal Schedule C in the amount of $23,876.
4. On February 17, 1995, the Taxpayer wrote the Department, requesting a
   retroactive extension of time to file a protest to Assessment No. 1883591.
5. The Department granted an extension of time to file a protest until March 22,
   1995.
6. On March 17, 1995 the Taxpayer filed a written protest to Assessment No.
   1883591.
7. The receipts which Ms. Stracener reported on her 1988 federal Schedule C as
   gross receipts from a business or profession were commissions Ms. Stracener received
   from selling advertisements for Quick Quarter Want Ads, (“Quick Quarter”).
8. The Department issued Assessment No. 183591 in the name of AAA Air and
   Water Filter Systems because this was a tax identification number assigned to another
   business which was owned by Ms. Stracener.
9. Ms. Stracener was hired by Quick Quarter as a commissioned advertising
   sales person and was hired as an independent contractor. Ms. Stracener received no
   salary but was compensated solely by commissions earned on advertisements she sold on
   behalf of Quick Quarter. She received a federal form 1099 from them at the end of 1988
   reporting the commissions she received during that year on advertisement sales. She did
   not receive a form W-2 from Quick Quarter.
10. Ms. Stracener was naive about taxes in general and did not understand the tax
    ramifications of being an independent contractor. She filed a Schedule C reporting
    income and loss from business in reliance upon her accountant who prepared her income
    tax returns.
11. Ms. Stracener did not have set hours of work at Quick Quarter. She was
    expected to be there on Tuesdays for a mandatory sales meeting and to report in every
    morning and to report when she would be out sick, but she could leave work when her
    work was done, she received no sick leave and accumulated no vacation time.
12. Ms. Stracener called on businesses and attempted to sell them advertisements
    which would be published in the Quick Quarter. She used her own vehicle when making
    sales calls and she made her own determinations as to who she would call upon to sell
    advertisements.
13. Ms. Stracener requested that the IRS make a determination of employment
    status for federal employment tax purposes between Quick Quarter and herself for tax

2
year 1990 when Ms. Stracener was performing the same duties as she had been in 1988.
The IRS determined that Ms. Stracener was not an employee of Quick Quarter.

14. The Department has abated the penalty portion of Assessment No. 1883591.

DISCUSSION

The primary issue to be determined herein is whether Ms. Stracener was an
employee of Quick Quarter or whether she was an independent contractor. If she was an
employee, then her commission receipts would be exempt from gross receipts tax
pursuant to § 7-9-17, which provides an exemption from tax for the wages, salaries or
commissions of employees. An employee is not defined in the Gross Receipts and
Compensating Tax Act, Chapter 7, Article 9 NMSA 1978, so we will look to the common
law definition of employee. 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). The most
recent pronouncement of this rule can be found in Harger v. Structural Services, Inc.,
121 N.M. 657, 663, 916 P.2d 1324, 1330 (1996). In that case the New Mexico Supreme
Court adopted the approach set out in the Restatement (Second) of Agency § 220(1) to
determine a worker’s status as an employee or an independent contractor:
The important distinction is between service in which the
actor’s physical activities and his time are surrendered to
the control of the master, and service under an agreement to
accomplish results or to use care and skill in accomplishing
results. Those rendering service but retaining control over
the manner of doing it are not servants.

Among the factors to be considered are: whether the party employed engages in a distinct

occupation or business; whether the work is part of the employer’s regular business; the

3
skill required in the particular occupation; whether the employer supplies the

instrumentalities, tools or the place of work; the duration of a person’s employment and

whether that person works full-time or regular hours; whether the parties believe they

have created the relationship of employer and employee and the manner and method of

payment. The totality of all of the circumstances must be considered in determining

whether the employer has the right to exercise that degree of control over a worker so as

to make the worker an employee.

The Department has adopted a regulation under § 7-9-17 that uses similar criteria

to determine whether a worker qualifies as an employee. Regulation 3 NMAC 2.17.7

provides as follows:

7.1 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 persons “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”).

7.2 If all of the indicia mentioned in 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.

Also pertinent to the facts of this case is Regulation 3 NMAC 2.17.10 dealing with

commissioned salespersons. It provides as follows:

4
A salesperson who sells for a company on a commission
basis is not an employee of the company where the
company exercises no direct control over the details of
performance of the salesperson’s duties beyond general
statements about the scope and nature of the salesperson’s
obligations under the contract between the salesperson and
the company. In addition, where commissions paid to a
salesperson are not subject to withholding taxes or social
security taxes, the salesperson is not considered an
employee of the company. Therefore, receipts from
commissions paid to such salesperson for selling property
in New Mexico are subject to the gross receipts tax.

Evaluating the facts of the instant case, it is clear that Ms. Stracener was not an

employee of Quick Quarter. She was not paid a wage or salary, but rather, only a

commission on sales she made. There is no requirement that Quick Quarter withhold

federal income tax from Ms. Stracener’s commissions or to make payments pursuant to

the Federal Unemployment Tax Act, according to the IRS ruling addressed to Ms.

Stracener. Quick Quarter considered Ms. Stracener to be an independent contractor, as

evidenced by the fact that it reported her commissions on a Form 1099 and by the fact

that at the time she was hired, Quick Quarter made it clear to Ms. Stracener that she was

being hired as an independent contractor. Finally, the course of conduct between Quick

Quarter and Ms. Stracener does not demonstrate the degree of control required to find an

employment relationship. Quick Quarter did not exercise control over how Ms. Stracener

did her job. She was free to find her own sales prospects and to make her sales calls as

she saw fit, so long as the deadlines for placement of ads were met and the advertising

fees were collected and paid. Thus, Ms. Stracener does not meet the definition of an

employee who would be entitled to claim the exemption from gross receipts tax found at

§ 7-1-17 NMSA 1978.

5
Although this addresses the most substantive legal issue raised by Ms. Stracener,

she raised several other issues as well. She raised the fact that the advertising fees she

collected on the sales she made were payable to Quick Quarter and she alleged that she

was certain that Quick Quarter had paid gross receipts tax on those receipts. Assuming

all of this is true, it does not provide a defense to the imposition of gross receipts tax upon

Ms. Stracener’s receipts. This is because there are two transactions involved. One is the

sale of advertising, which was made by Quick Quarter through its salesperson, Ms.

Stracener. Quick Quarter would be subject to gross receipts tax upon its receipts from

performing advertising services for the customers who bought advertisements. The

second transaction is Ms. Stracener’s receipt of a commission from Quick Quarter. Ms.

Stracener had gross receipts from performing a service. The service she performed was

the sale of advertisements for the Quick Quarter. There were two separate services

provided to two different entities or persons and thus there were two separate taxable

transactions, although the transactions are related transactions.

Ms. Stracener also argued that the application of gross receipts tax to her

commissions constitutes illegal double taxation. As noted above, double taxation does

not exist in this case as there are two separate and distinct taxable transactions. Ms.

Stracener’s argument also assumes, as do many persons who are not sophisticated in tax

matters, that double taxation is somehow illegal. It is a popular misconception that there is

something inherently illegal or unconstitutional with double taxation. Almost 80 years ago,

in Ft. Smith Lumber Co. v. Arkansas, 251 U.S. 532 (1920), the United States Supreme

Court summarily disposed of the plaintiff's argument that Arkansas had imposed a double

6
tax on corporate stock in violation of the federal constitution. As stated by Justice Oliver

Wendell Holmes, writing for the majority:

The objection to the taxation as double may be laid on one
side. That is a matter of State law alone. The Fourteenth
Amendment no more forbids double taxation than it does
doubling the amount of a tax..."

251 U.S. at 533. New Mexico courts have also held, on numerous occasions, 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).

It should also be noted that in construing the New Mexico Gross Receipts and

Compensating Tax Act, the New Mexico courts have held that there is no double taxation

where the two taxes complained of are imposed on the receipts of different taxpayers. See,

e.g., 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). That is the case here.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment No. 1883591 and

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

2. The Taxpayer was not an employee of Quick Quarter and therefore is not

eligible to claim the deduction found at § 7-9-17 NMSA 1978 for her commissions

received from Quick Quarter.

7

3. Although Quick Quarter was subject to gross receipts tax on its advertising

sales revenues, it does not constitute double taxation to also impose gross receipts tax

upon Ms. Stracener’s commissions from those advertising sales because there are two

separate taxpayers and two separate taxable transactions.

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

DONE, this 17th day of April, 1998.

8