Are the commissions an authorized dealer earns selling another company's merchandise subject to New Mexico gross receipts tax, even when the manufacturer already pays tax on the sale?

Subject

David J. & Nancy L. DeBusk (D&O 99-11)

Plain-English summary

David and Nancy DeBusk ran a Sears authorized retail dealership in Alamogordo as a sole proprietorship. The merchandise belonged to Sears, and Sears paid gross receipts tax on the full sales price. Their income came from commissions Sears paid on those sales (plus a monthly customer-service fee and hook-up/delivery/installation charges they did not dispute). Believing — based on what other Sears dealers told them — that New Mexico did not tax those commissions, they never reported or paid gross receipts tax on them. A Schedule C income-matching program flagged the gap, and in 1996 the Department assessed $1,945.92 tax, $279.73 interest, and $194.64 penalty for 1995.

Decided the same day as the parallel cases of other Sears dealers (D&O 99-07, Landavazo, Gallup; D&O 99-08, Trulious, Carlsbad; D&O 99-09, Muniz, Silver City; D&O 99-10, Schaefer, Hobbs) on identical reasoning, the Hearing Officer denied the protest as to the tax but abated the penalty.

The commissions are taxable (no unlawful double taxation). The DeBusks argued that taxing their commissions on top of Sears's tax on the sale was double taxation. The Hearing Officer found two separate transactions: Sears's sale of merchandise to the customer, and Sears's separate payment of a commission to the DeBusks for their services. Two different taxpayers, two different receipts — not double taxation. And even genuine double taxation is not unconstitutional (Ft. Smith Lumber Co. v. Arkansas).

The equal-protection and "equal and uniform" arguments failed. The DeBusks pointed out that commissioned employees (exempt under Section 7-9-17), real estate brokers (Section 7-9-66.1), and sellers earning commissions on exempt goods (Section 7-9-66) are treated more favorably. But tax classifications are presumed valid and the challenger must "negative every conceivable basis" for them (Madden v. Kentucky); the Hearing Officer found a rational basis for each distinction. The New Mexico Constitution's "equal and uniform taxation" clause (Article VIII, Section 1) applies to property taxes, not the gross receipts tax, which is a privilege tax (Section 7-9-4; Sunset Package Store).

The disclosed-agency exclusion didn't apply. Section 7-9-3(F)(2)(f) excludes "amounts received solely on behalf of another in a disclosed agency capacity." When the DeBusks collect the sales price for Sears, that's Sears's money and not their gross receipts. But their commissions are received on their own behalf for services they perform — the customer isn't even aware of them — so the exclusion has no application to that second transaction.

But the penalty was abated for reasonable reliance. The DeBusks had a copy of a prior Department decision to abate the tax for a similarly situated Sears catalogue merchant. Although the Department later reversed that position (in Ruling No. 401-95-10 and Decision and Order No. 97-37, Orr, which the Court of Appeals affirmed), there was no proof the DeBusks knew of the reversal, and the earlier documents were not confidential in the hands of another Sears merchant. Relying on the Department's own actions toward a like taxpayer was ordinary business care, so there was no negligence to support a penalty.

What this means for you

• Commissions you earn as an authorized dealer or sales agent are your own taxable gross receipts. The fact that the principal (here, Sears) pays gross receipts tax on the underlying sale does not shelter the commission you earn for making that sale.
• "Double taxation" is rarely a winning argument. Taxing two different parties on two different receipts arising from the same event is not double taxation — and even true double taxation is not unconstitutional.
• The disclosed-agency exclusion covers money you collect for your principal, not your own pay. Sales proceeds you collect and remit to the principal aren't your receipts; the commission the principal pays you for your services is.
• Challenging a tax classification as unfair is very hard. Legislatures get wide latitude in taxation; to win on equal protection you must rule out every conceivable rational basis for the difference — a heavy burden.
• Documented reliance on the Department's own past actions can defeat a penalty. Even reliance on how the Department treated a similarly situated taxpayer — where you didn't know the Department had since changed course — can be "ordinary business care" that abates the penalty (though it does not erase the tax or interest).

Key questions answered

Why were the commissions taxable when Sears already paid tax on the sale?
Because the sale and the commission are two separate transactions between two different taxpayers. Sears has receipts from selling merchandise; the DeBusks have receipts from performing services for Sears, paid as commissions. Taxing each is not double taxation — and double taxation would not be unlawful even if it were present.

Didn't the disclosed-agency rule exempt the commissions?
No. Section 7-9-3(F)(2)(f) excludes only amounts received "solely on behalf of another." The DeBusks collected the customer's payment as Sears's disclosed agent (not their receipts), but they received the commissions on their own behalf for their services, so the exclusion did not reach them.

Why did the equal-protection argument fail?
Tax classifications are presumed constitutional and require only a rational basis, with the challenger bearing the burden to negate every conceivable justification. The Hearing Officer identified rational bases for the more favorable treatment of employees, real estate brokers, and commissions on exempt goods, and the DeBusks did not carry that burden.

Why was the penalty abated if the tax stood?
Because the DeBusks were not negligent. They reasonably relied on the Department's own earlier decision abating the tax for a similarly situated Sears merchant — documents that were not confidential once shared by that merchant — and there was no proof they knew the Department had later reversed its position. That reliance was ordinary business care, so no penalty could be imposed on the commission tax.

Verbatim citations

Two transactions, so no double taxation:

We have two different taxpayers and two different transactions being taxed. Thus, there is no double taxation.

The heavy burden on an equal-protection tax challenge (quoting Madden v. Kentucky):

[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.

Why the disclosed-agency exclusion did not apply to the commissions:

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.

Why reliance abated the penalty:

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.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: David J. & Nancy L. DeBusk
• Decision PDF: D&O 99-11

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
DAVID J. AND NANCY L. DEBUSK NO. 99-11
ID. NO. 02-270676-00 3, PROTEST TO
ASSESSMENT NO. 2052742

DECISION AND ORDER

This matter comes on for determination based upon a Stipulation of Fact with exhibits

and briefs of the parties. David and Nancy DeBusk, hereinafter, “Taxpayer”, is represented by

Marylee V. Warwick, Esq. and Gary D. Sanders, Esq. of Krafsur Gordon Mott Davis & Woody,

P.C. The Taxation and Revenue Department, hereinafter, “Department”, was represented by

Monica M. Ontiveros, 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. The Taxpayer operates a Sears authorized retail merchandise sales facility located

in Alamogordo, New Mexico.

2. On July 24, 1996, the Department issued the Taxpayer Assessment No. 2052742,

assessing $1,945.92 in gross receipts tax, $279.73 in interest and $194.64 in penalty for the

reporting periods January, 1995 through December, 1995.

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

1
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: (vii) 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, who 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.

2

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.

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.

3

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.

17. 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.

18. 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.

4

19. In January, 1994, the Department’s Hearing Officer entered a nonconfidential

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 retailer merchandiser.

21. On October 20, 1997, Decision and Order No. 97-37 was entered in the matter of

Jesse C. and Shirley Orr, a Sears authorized retail dealer located in Taos, New Mexico. The

decision held that the Orrs were liable for gross receipts tax on commissions received from Sears.

This decision was appealed to the New Mexico Court of Appeals wherein the court upheld the

hearing officer’s decision.

22. 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.

23. The Department received information concerning business income reported by the

Taxpayer to the Internal Revenue service for tax year 1995. 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.

5

24. 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.

25. On July 24, 1996, the Department issued Assessment No. 2052742 to the

Taxpayer for gross receipts tax, interest and penalty for the periods January 1995 through

December, 1995.

26. On August 3, 1996, the Taxpayer sent a letter to the Department requesting an

extension of time to file a formal protest to Assessment No. 2052742.

27. An extension of time was granted until October 22, 1996. On October 18, 1996, a

timely formal protest to Assessment No. 2052742 was filed on behalf of Taxpayer by Gary D.

Sanders, Esq. of Krafsur, Gordon, Mott, Davis & Woody, P.C.

28. On May 13, 1997, Taxpayer appointed Gary D. Sanders, Patrick R. Gordon and

Marylee Warwick 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

1
The Taxpayer also receives a set monthly customer fee from Sears for performing certain customer services, such
as handling returns, and also has receipts from the hook-up, delivery and installation of Sears merchandise. The

6
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

Taxpayer has presented no arguments disputing its liability for gross receipts tax, penalty or interest on those receipts

7
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

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

and it is presumed that the Taxpayer is not disputing its liability for those amounts.

8
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 received by employees or by

taxpayers where the underlying sale upon which the commission was based was not subject to

tax. The Department is correct in its assertion that the mere allegation of a lack of 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

9
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

10
of gross receipts tax upon the value of improvements to real property. Finally, 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 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).

11
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.

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.

12
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;

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

22
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

13
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 Decision and Order and in a 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

evidence or argument upon this issue, the Taxpayer would not be entitled to relief from penalty on these other

14
merchant who must have made them available to other Sears merchants. With respect to the fact

that the Department has issued a more recent ruling and decision to the effect that the Taxpayer’s

commission receipts would not be taxable, if the Department had established that the Taxpayer

was also aware of these, then it would make it unreasonable for the Taxpayer to have relied upon

the Department’s earlier actions. In the absence of such proof, however, I conclude that it was

not unreasonable for the Taxpayer to have relied upon the 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 No. 2052742 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.

receipts because of its failure to meet its burden of proof on that aspect of the case.

15

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

regard to its failure to report and pay gross receipts taxes on the commission portion of its gross

receipts.

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

DONE, this 4th day of February, 1999.

16