If I lose the paperwork proving my sales commissions came from tax-free sales, can New Mexico still tax those commissions?

Plain-English summary

A commissioned salesperson could deduct commissions tied to tax-free sales — but only for the portion she could document. Because she had not kept the invoices and certificates for the rest, and the store had since been sold, she could not prove the remaining commissions were nontaxable and owed the tax. Protest DENIED.

In 1996, Kimberly Ann Caylor was an independent contractor earning commissions as a salesperson for "Elements," a store selling antiques and fabrics. Commissions a salesperson earns on nontaxable sales of tangible personal property are deductible from gross receipts under Section 7-9-66 — so her commissions on out-of-state sales and on sales for resale backed by a valid nontaxable transaction certificate (NTTC) were not subject to gross receipts tax. She did not know her commissions were taxable and never registered. After an IRS tape match, the Department opened a limited-scope audit of her 1996 income in January 2000 and asked her to explain the Schedule C income on which no gross receipts tax had been paid.

Caylor documented that roughly 80 percent of her 1996 commissions qualified for the Section 7-9-66 deduction. She could not document the other 20 percent: she had not made copies of every invoice and NTTC at the time (not realizing the tax applied), and when she went back to Elements for the paperwork, the business had been sold and the former owners could supply only a few certificates. The Department assessed $690.80 in gross receipts tax, penalty, and interest on the unsupported portion, and she protested.

The self-reporting system and the burden of proof

Caylor argued that circumstances beyond her control — her lack of knowledge, the Department's delay in contacting her, and the sale of the business — should excuse the remaining tax. The hearing officer explained why they did not:

• New Mexico is a self-reporting system. Taxpayers, who know their own activities best, must determine and report their own liabilities (Section 7-1-13(B)). The Department cannot audit everyone, and every individual has a duty to ascertain the possible tax consequences of an income-producing activity (Tiffany Construction). It was Caylor's responsibility to register and report.
• The assessment was timely. The Department has three years from the end of the year a tax is due to assess (Section 7-1-18(A)). Tape-match information reaches the Department only after a delay, and the April 2000 assessment for 1996 was well within the limitations period.
• The taxpayer bears the burden. An assessment is presumed correct (Section 7-1-17(C); Archuleta v. O'Cheskey), and a deduction must be clearly established by the taxpayer, with the statute construed strictly in favor of the taxing authority (Wing Pawn Shop). Her lack of knowledge showed there was no fraud, but it did not shift the burden. Without the invoices and NTTCs, she could not prove the disputed commissions came from nontaxable sales.

Result: protest DENIED — the $690.80 assessment on the undocumented 20 percent of her commissions stood.

What this means for you

Keep the records that support every deduction — even if you think you're exempt

The deduction for commissions on nontaxable sales is real, but you have to prove it transaction by transaction. Keep copies of the invoices and NTTCs at the time of each sale. You cannot rely on getting them later from an employer or store that may close, sell, or lose the files.

Not knowing the tax applies is not a defense — but it does show good faith

A genuine lack of knowledge means you did not commit fraud, which can matter for the harshest penalties. It does not excuse the tax itself or relieve you of the burden of proving your deductions. If you earn business income, find out whether gross receipts tax applies and register.

The state has three years, and tape-match delays don't help you

The Department can assess up to three years after the end of the year the tax was due, and IRS tape-match data reaches it only after a lag. A late notice is still timely, so do not assume that time or the Department's silence has cleared your obligation — keep your records for the full period.

Partial proof gets you a partial deduction

Caylor's documentation carried about 80 percent of her commissions. Good records for part of your activity will support the deduction for that part; the tax falls only on what you cannot substantiate. Thorough records protect the whole.

Common questions

Q: Are sales commissions subject to New Mexico gross receipts tax?
A: Commissions are generally taxable business receipts, but Section 7-9-66 lets you deduct commissions earned on nontaxable sales — such as out-of-state sales or sales for resale supported by a valid NTTC. You must be able to prove the underlying sales were nontaxable.

Q: I didn't keep the invoices and certificates. Can I still claim the deduction?
A: Only if you can otherwise prove the sales were nontaxable. Here the salesperson could document about 80 percent and lost the deduction on the 20 percent she could not support. The burden is on the taxpayer.

Q: The state took years to contact me, and by then the records were gone. Isn't that unfair?
A: The Department has three years from the end of the year the tax was due to assess, and it acted within that window. The delay does not excuse the tax, and the duty to keep records rests with the taxpayer.

Q: I genuinely didn't know my commissions were taxable. Does that help?
A: It shows you did not act fraudulently, which matters for fraud penalties, but it does not excuse the tax or shift the burden of proving your deductions. New Mexico's self-reporting system expects you to determine and report your own liability.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-9-66 — deduction from gross receipts for commissions derived from sales of tangible personal property that are themselves nontaxable transactions
• NMSA 1978, § 7-1-13(B) — New Mexico's self-reporting system; taxpayers must determine and report their own liabilities
• NMSA 1978, § 7-1-18(A) — the Department has three years from the end of the calendar year in which a tax is due to issue an assessment
• NMSA 1978, § 7-1-17(C) — an assessment of tax is presumed correct

Cases cited:

• 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) — every individual has a duty to ascertain the possible tax consequences of an income-producing activity
• Archuleta v. O'Cheskey, 84 N.M. 428, 504 P.2d 638 (Ct. App. 1972) — the taxpayer bears the burden of overcoming the presumption of correctness
• Wing Pawn Shop v. Taxation and Revenue Department, 111 N.M. 735, 809 P.2d 649 (Ct. App. 1991) — deductions are construed strictly in favor of the taxing authority and must be clearly established by the taxpayer

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Kimberly Ann Caylor
• Decision PDF: D&O 00-34

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
KIMBERLY ANN CAYLOR No. 00-34
ID NO. 02-405075-00-0
ASSESSMENT NO. 2511074

DECISION AND ORDER

A formal hearing on the above-referenced protest was held November 9, 2000, before

Margaret B. Alcock, Hearing Officer. Kimberly Ann Caylor (“Taxpayer”) represented herself. The

Taxation and Revenue Department ("Department") was represented by Lewis Terr, Esq. Based on the

evidence and arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. Between January and November of 1996, the Taxpayer worked as a commissioned

salesperson for Elements, a business engaged in the sale of antiques, fabrics, and similar items.

2. The Taxpayer was an independent contractor who received a fixed percentage of

each sale she made on behalf of the store.

3. Although most of the customers the Taxpayer worked with were either located out-

of-state or purchasing items for resale, the Taxpayer also made some retail sales to the final

consumer of the goods purchased.

4. Elements maintained a file of nontaxable transaction certificates (“NTTCs”) received

from its customers.

5. At the time of each sale, the Taxpayer checked the NTTC file to determine whether

gross receipts tax should be included on the sales invoice.

6. Because she was paid on commission, the Taxpayer retained copies of invoices from

most of the sales she made, together with copies of relevant NTTCs.

7. The Taxpayer’s 1996 federal income tax return reported her sales commissions as

business income on Schedule C to federal Form 1040.

8. The Taxpayer was not aware that she was subject to New Mexico gross receipts tax

on her business income.

9. In late 1999, the Department received information from the Internal Revenue Service

concerning the business income reported on the Taxpayer’s 1996 federal income tax return. When

the Department investigated, it found the Taxpayer was not registered with the Department and had

not reported or paid gross receipts tax on this income.

10. In January 2000, the Department sent the Taxpayer notice that it was conducting a

limited scope audit of her 1996 tax reporting and asked her to explain why she had not paid gross

receipts tax on the business income reported on Schedule C of her 1996 federal income tax return.

11. The Taxpayer responded to the Department’s inquiry with documents showing that

approximately 80 percent of the Taxpayer’s 1996 income was deductible under Section 7-9-66

NMSA 1978 because it was income derived from commissions on sales of tangible personal property

that were not subject to gross receipts tax. The documents established that these underlying sales

were either out-of-state sales or sales for resale supported by a valid NTTC.

12. The Taxpayer was unable to provide additional documentation to show that she was

entitled to deduct the remaining 20 percent of her income.

13. The Taxpayer attempted to obtain copies of sales invoices and NTTCs from

Elements. One of the owners provided copies of a few NTTCs, but stated that he and his partner had

sold the business and he no longer had all of the paperwork relating to the 1996 period.

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14. On April 7, 2000, the Department issued Assessment No. 2511074 to the Taxpayer in

the total amount of $690.80, representing gross receipts tax, penalty and interest on the business

income for which the Taxpayer was unable to produce documents to support her claim to a

deduction under Section 7-9-66 NMSA 1978.

15. On May 3, 2000, the Taxpayer filed a written protest to the assessment.

DISCUSSION

The issue presented is whether the Taxpayer’s inability to prove that her 1996 sales

commissions were derived from out-of-state sales or sales for resale supported by a valid NTTC

forecloses the Taxpayer from deducting her receipts from these transactions. The Taxpayer

maintains that circumstances outside her control prevented her from obtaining the invoices and

NTTCs needed to establish her right to the deduction claimed. She testified that she could have

made copies of the necessary documents at the time of each transaction, but did not do so because

she did not know her commissions were subject to gross receipts tax. The Taxpayer questions why

the Department took so long to notify her of her tax liability. By the time she received the

Department’s audit notice in January 2000, Elements had been sold and the former owners were

either unwilling or unable to provide her with the NTTCs and other documents needed to establish

her right to deduct her commissions. The Taxpayer believes these circumstances should excuse her

from payment of the gross receipts tax on the balance of her 1996 income.

The Taxpayer’s arguments are based on a misunderstanding of New Mexico’s self-reporting

tax system. It is the obligation of taxpayers, who have the most accurate and direct knowledge of their

activities, to determine their tax liabilities and accurately report those liabilities to the state. See,

Section 7-1-13(B), NMSA 1978. There are insufficient government resources available for the

Department to continually audit every citizen to determine whether he or she has fully complied with

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state tax laws. Although the Department performs periodic "tape matches" that compare information

reported to the IRS with information reported to New Mexico, there is some delay before the federal

tape match information is made available to the Department. Under the Tax Administration Act, the

Department has three years from the end of the calendar year in which a tax is due to issue an

assessment. Section 7-1-18(A) NMSA 1978. The April 2000 assessment issued to the Taxpayer was

well within the statutory limitations period provided by the New Mexico Legislature.

In conjunction with its audit work, the Department makes a continuing effort to educate

taxpayers concerning New Mexico’s gross receipts tax. The Department holds regular workshops at its

district offices; it has a variety of publications addressing issues of concern to various businesses; it

issues regulations interpreting the state’s gross receipts tax statutes; and it gives taxpayers the

opportunity to ask for written rulings on issues not specifically covered in the Department’s regulations

and instructions. The Department is not omniscient, however, and cannot be expected to know when a

particular individual starts a business or undertakes some other income-producing activity that is

subject to the gross receipts tax. For this reason, the law charges every individual with the reasonable

duty to ascertain the possible tax consequences of his or her actions. 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). In this case, it was the Taxpayer’s responsibility to register with the Department and

obtain the forms needed to properly report gross receipts tax on her business income.

While there is no question that the Taxpayer’s failure to file required returns or provide

adequate records to the Department was due to a lack of knowledge, and not to any fraudulent intent,

the burden remains with the Taxpayer to establish her right to the deductions claimed. Section 7-1-

17(C) NMSA 1978 states that any assessment of taxes made by the Department is presumed to be

correct. See also, Archuleta v. O'Cheskey, 84 N.M. 428, 431, 504 P.2d 638, 641 (Ct. App. 1972).

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Where an exemption or deduction from tax is claimed, the statute must be construed strictly in favor of

the taxing authority, the right to the exemption or deduction must be clearly and unambiguously

expressed in the statute, and the right must be clearly established by the taxpayer. Wing Pawn Shop v.

Taxation and Revenue Department, 111 N.M. 735, 740, 809 P.2d 649, 654 (Ct. App. 1991). In this

case, the Taxpayer has been unable to provide the invoices and NTTCs needed to show that the sales

underlying the commissions in dispute were nontaxable transactions, entitling her to the deduction

provided in Section 7-9-66 NMSA 1978. Accordingly, she has not met her burden of proof and the

assessment must be upheld.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment No. 2511074 and

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

2. The Taxpayer failed to meet her burden of proving that the sales commissions in

dispute were derived from nontaxable transactions, and the Taxpayer is not entitled to claim the

deduction provided in Section 7-9-66 NMSA 1978.

For the foregoing reasons, the Taxpayer's protest IS DENIED.

DATED November 29, 2000.

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