Can the state assess me gross receipts tax on out-of-state income just because I later moved to New Mexico, if I can't find the paperwork years later?

Plain-English summary

A retired Texas professor's sworn testimony that his 1996 consulting income was earned entirely in Texas rebutted a New Mexico gross receipts tax assessment, even though he could no longer produce the paperwork. Protest GRANTED; the assessment was abated in full.

James Brown taught political science at Southern Methodist University in Texas from 1962 until mid-November 1996 and was a Texas resident throughout those 34 years. Alongside teaching, he consulted for various businesses and government agencies — none of that work performed in New Mexico. In mid-November 1996 he retired, moved to New Mexico, and became an employee of Sandia National Laboratories in Albuquerque, doing no outside consulting after that.

The Department's "tape-match" program compares business income New Mexico residents report to the IRS against what they report for gross receipts tax. It flagged $10,500 of 1996 business income on Brown's federal return with no matching New Mexico gross receipts filing, and in July 2000 the Department assessed $553.32 in tax, plus penalty and interest. Brown protested.

Sworn testimony counts as evidence — the presumption is not that taxpayers lie

Gross receipts tax reaches receipts from performing services in New Mexico (or out-of-state services whose product is first used here) under Section 7-9-3(F). Brown testified that all his 1996 consulting was performed outside New Mexico while he lived in Texas. He could not find a Form 1099 or remember which client he had worked for, but he was unequivocal that none of the work was done in New Mexico. The hearing officer explained that the Section 7-1-17(C) presumption that an assessment is correct is "not equivalent to a presumption that all taxpayers are untruthful." At the protest stage, a taxpayer's sworn testimony carries weight equal to documentary evidence, and the absence of old records — by itself — does not make the testimony untruthful, especially where the assessment came more than three years after the return was due and four years after the work, and where Brown, as a Texas resident, was never subject to New Mexico's recordkeeping rules in the first place.

Once the presumption is rebutted, the burden shifts to the Department

Brown's testimony that he lived and worked in Texas for about 10½ of the 12 months and performed no New Mexico consulting rebutted the presumption of correctness. That shifted the burden to the Department to show one of three things: that Brown was actually a New Mexico resident during 1996, that some of his income came from services performed in New Mexico, or that his testimony was inherently unbelievable. The Department could show none of them, and its counsel admitted it had no evidence to dispute his testimony.

A pointed critique of the "limited scope" tape-match audit

The hearing officer emphasized that the tape-match program does no field work; it relies solely on IRS data and the assumption that a New Mexico resident's federal business income was earned in New Mexico. Once a taxpayer shows he was not a New Mexico resident during the period, that rationale "disappears" — the Department would not be justified in assessing self-employed residents of neighboring states on the mere possibility of New Mexico income. Here the Department never checked its own records to see whether Brown filed New Mexico income tax returns before 1996, never checked motor-vehicle records for when he got a New Mexico driver's license or registered a car, and never contacted Sandia to confirm his start date — any of which would have confirmed his testimony. The decision stressed that the Department's Protest Office and Legal Services Bureau, not just its hearing officers, should be able to weigh a taxpayer's credibility and resolve such cases without a full hearing.

Result: protest GRANTED; the Department was ordered to abate the assessment in full. (The decision echoes the same-year D&O 01-06, where the hearing officer similarly criticized forcing a taxpayer with an undisputed out-of-state defense to a formal hearing.)

What this means for you

Residency and place of performance — not just a federal Schedule C figure — decide the tax

The tape-match program assumes a New Mexico resident's federal business income was earned here, but that is only an assumption. If you were a resident of another state and performed the work there, the income is generally not subject to New Mexico gross receipts tax, even if it shows up on your federal return in the year you moved.

Your sworn testimony is evidence, even without the paperwork

At the protest stage, credible sworn testimony carries the same weight as documents. Losing an old 1099 does not automatically doom your case — particularly for years when you were an out-of-state resident with no New Mexico recordkeeping obligation and the assessment comes years later.

Once you rebut the assessment, the state must come forward with proof

An assessment is presumed correct only until you offer evidence against it. After that, the Department must produce evidence of New Mexico residency, New Mexico-source income, or a reason to disbelieve you. It cannot simply rest on the presumption and require you to prove a negative.

Keep what proof of out-of-state residency you can

Brown prevailed on testimony, but the case would have been easier with records of his Texas residency and consulting locations. Prior-state tax returns, driver's-license and vehicle-registration dates, and employment records all help pin down when and where you lived and worked.

Common questions

Q: The income was on my federal return — doesn't that make it New Mexico gross receipts?
A: No. A federal Schedule C figure is not itself New Mexico gross receipts. The tax applies to services performed in New Mexico. If the work was done out of state while you lived elsewhere, it is generally not taxable here.

Q: I can't find my 1099 from years ago. Will I lose automatically?
A: Not necessarily. Sworn testimony counts as evidence, and the absence of old records does not by itself prove you are being untruthful — especially for a period when you were an out-of-state resident with no New Mexico recordkeeping duty and the assessment arrives years later.

Q: Doesn't the taxpayer always bear the burden of proof?
A: The assessment starts out presumed correct, so you must first offer evidence against it. Once you credibly rebut it — as Brown did with his testimony — the burden shifts to the Department to prove residency, New Mexico-source income, or that you are not credible.

Q: Why was the Department criticized here?
A: Because its "limited scope" tape-match audit rested on an assumption about residency, yet it made no effort to verify Brown's account through its own income-tax or motor-vehicle records or his employer, and it admitted it had no evidence contradicting him.

Citations and references

Statutes:

• NMSA 1978, § 7-9-3(F) — defines "gross receipts," including receipts from performing services in New Mexico and from out-of-state services whose product is initially used in New Mexico
• NMSA 1978, § 7-1-17(C) — an assessment of tax is presumed correct; the hearing officer stressed this is not a presumption that taxpayers are untruthful

Source

• Listing: New Mexico Decisions & Orders
• Decision post: James Brown
• Decision PDF: D&O 01-08

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 JAMES BROWN No. 01-08
ID NO. 02-432277-00 6
ASSESSMENT NO. 25511986

DECISION AND ORDER

A formal hearing on the above-referenced protest was held June 13, 2001, before

Margaret B. Alcock, Hearing Officer. James Brown (“Taxpayer”) represented himself. The

Taxation and Revenue Department ("Department") was represented by Lewis J. Terr, Special

Assistant Attorney General. Based on the evidence and arguments presented, IT IS DECIDED

AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. On July 12, 2000, the Department issued Assessment No. 25511986 to the

Taxpayer, assessing $553.32 in gross receipts tax, $55.32 in penalty and $328.54 in interest for

reporting periods January through December 1996.

2. The Department’s assessment was based on information provided to the

Department by the Internal Revenue Service (“IRS”) pursuant to an information sharing

agreement between the Department and the IRS. The Department’s “tape-match program”

compares the amount of business income reported on federal income tax returns filed by New

Mexico residents to the amount of business income those residents reported to New Mexico for

gross receipts tax purposes.

3. For tax year 1996, the Department determined that the Taxpayer reported business

income in the amount of $10,500 on his federal income tax return but did not file corresponding

gross receipts tax reports with New Mexico. This discrepancy led to the issuance of Assessment

No. 25511986.

4. On August 7, 2000, the Taxpayer filed a written protest to the assessment.

5. From 1962 until mid-November 1996, the Taxpayer taught political science at

Southern Methodist University in Texas. During those 34 years, the Taxpayer was a resident of

Texas.

6. In addition to his teaching career, the Taxpayer provided consulting services to

various businesses and government agencies. None of the Taxpayer’s consulting work was

performed in New Mexico.

7. In mid-November 1996, the Taxpayer retired from teaching and moved from

Texas to New Mexico to take a position with Sandia National Laboratories in Albuquerque.

8. The Taxpayer has worked as an employee of Sandia National Laboratories since

November 1996 and has not performed any outside consulting work during this period.

DISCUSSION

The sole issue to be determined in this protest is whether the business income the

Taxpayer reported on his 1996 federal income tax return was subject to New Mexico gross

receipts tax. “Gross receipts” is defined at Section 7-9-3(F) NMSA 1978 to mean:

the total amount of money or the value of other consideration
received from selling property in New Mexico, from leasing
property employed in New Mexico, from selling services
performed outside New Mexico the product of which is initially
used in New Mexico or from performing services in New Mexico.

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At the June 13, 2001 hearing, the Taxpayer testified that he did not move to New Mexico until

mid-November 1996 when he accepted employment with Sandia National Laboratories and that

none of his business income was attributable to services performed in New Mexico. Although

the Department had no evidence to dispute this testimony, it was unwilling to accept the

Taxpayer’s assertions without corroborating documentary evidence. The Taxpayer explained

that after conducting a diligent search, he was unable to find a Form 1099 relating to the business

income reported on his 1996 federal income tax return. He also stated that he could not

remember which company or agency he did consulting work for during 1996. The Taxpayer was

unequivocal, however, in his testimony that none of his consulting work was performed in New

Mexico.

Although taxpayers are expected to retain tax records in case of audit, it must be noted

that the Department’s assessment was not issued until more than three years after the due date of

the Taxpayer’s 1996 federal income tax return and four years after the work at issue was

performed. In addition, assuming the Taxpayer’s work was performed outside New Mexico

while he was a resident of Texas, the Taxpayer was not subject to the record keeping

requirements set out in New Mexico’s Tax Administration Act and Gross Receipts &

Compensating Tax Act. Given these circumstances, the absence of records—by itself—is not

sufficient to establish that the Taxpayer’s testimony is untruthful.

Prior to the hearing, the Department’s only contact with the Taxpayer was by letter. The

protest auditor said he did not attempt to speak with the Taxpayer personally because the tape-

match auditor’s notes indicated the Taxpayer’s telephone number was unlisted. The Taxpayer

disputed this, and Department counsel acknowledged that when he tried to reach the Taxpayer

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the day before the hearing, he had no trouble obtaining a telephone number from information.

Had someone from the Department tried to call the Taxpayer earlier, the Department might have

been able to make its own determination of the Taxpayer’s credibility. Instead, the Department

chose to rely on the statutory presumption of correctness that attaches to Department assessments

and require the Taxpayer to come to hearing to present his case to the hearing officer.

The presumption of correctness set out in Section 7-1-17(C) NMSA 1978 is not

equivalent to a presumption that all taxpayers are untruthful. Before rejecting a taxpayer’s

statements out-of-hand, the Department should make every effort to confirm—or disprove—

those statements through independent investigation. Aside from requesting documents from the

Taxpayer, the Department made no effort to verify the Taxpayer’s statements concerning his

1996 income. The Department’s own records would have provided some evidence concerning

the timing of the Taxpayer’s change of residence from Texas to New Mexico. Nonetheless, the

protest auditor assigned to the case never checked the Department’s tax records to see whether

the Taxpayer had filed a New Mexico income tax return prior to 1996 or checked the

Department’s motor vehicle records to determine when the Taxpayer first obtained a New

Mexico driver’s license or registered his automobile in this state. Nor did the Department make

any effort to contact Sandia National Laboratories to confirm when the Taxpayer’s employment

commenced or whether the Taxpayer performed any consulting services for Sandia prior to his

employment.

The Department’s failure to uncover any evidence to dispute the Taxpayer’s testimony

concerning his move to New Mexico is important because residency is the key factor supporting

the assessment. Referred to as a “limited scope audit”, the Department’s tape match program

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does not encompass any audit field work or examination of taxpayer records. The program relies

solely on information received from the IRS and is based on the assumption that a New Mexico

resident who reports business income on his federal income tax return is likely to have earned

that income in New Mexico. Once a taxpayer provides evidence that he was not a resident of

New Mexico during the period at issue, the underlying rationale for the assessment disappears.

While it is certainly possible that an out-of-state resident could have income from New Mexico

sources, that fact cannot be assumed. Clearly, the Department would not be justified in issuing

gross receipts tax assessments to self-employed residents of bordering states based on the mere

possibility that some of their income was derived from business activities in New Mexico.

In this case, the presumption of correctness of the Department’s assessment against the

Taxpayer was rebutted by the Taxpayer’s testimony that he lived and worked in Texas for 10½ of

the 12 months covered by the assessment and that none of his consulting work was performed in

New Mexico. At that point, the burden shifted to the Department to come forward with evidence

to show (1) that the Taxpayer was, in fact, a resident of New Mexico during the assessment

period; (2) that part or all of the Taxpayer’s business income was derived from services

performed in New Mexico; or (3) that the Taxpayer’s testimony was inherently unbelievable or

otherwise untrustworthy. The Department failed to meet this burden of proof. As the Taxpayer

noted in his protest letter and reiterated at the hearing, when he offered the Department’s tape-

match auditor proof of the Taxpayer’s Texas residency, the auditor “never indicated he was

interested in having this information, nor required it.” Similarly, the protest auditor never felt it

was important to verify whether the Taxpayer was a Texas or a New Mexico resident during

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1996, although it would have been easy enough to do so through Department records or an

inquiry to the Taxpayer's employer.

The root of the problem in this case appears to be the belief among Department personnel

that testimony is not reliable evidence and that only the hearing officer can determine credibility.

Although auditors are trained to rely on books of account and other taxpayer records, they must

recognize that once a matter reaches the protest stage, a taxpayer’s sworn testimony carries

weight equal to that of documentary evidence. And while the hearing officer is ultimately

responsible for determining the facts of matters taken to hearing, the Department’s hearing

officers should not be the only Department employees capable of making determinations of

credibility for purposes of resolving protests. The Department’s Protest Office and its Legal

Services Bureau also should be capable of making such determinations as part of the protest

resolution process. When a taxpayer has provided testimony in defense to his liability for an

assessment, and when the Department has no information or evidence to dispute that testimony

or the credibility of the taxpayer, it should be possible to resolve the matter without expending

the resources involved in conducting a full-blown evidentiary hearing.

In this case, the Taxpayer provided testimony that he lived and worked in Texas until

mid-November 1996 and that none of the business income he earned during 1996 was

attributable to services performed in New Mexico. Department counsel affirmatively stated that

the Department had no evidence to dispute the Taxpayer’s testimony. Based on the evidence

presented, the Taxpayer’s 1996 business income is not subject to New Mexico gross receipts tax.

CONCLUSIONS OF LAW

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1. The Taxpayer filed a timely, written protest to Assessment No. 25511986, and

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

2. The Taxpayer had no gross receipts subject to New Mexico gross receipts tax

during calendar year 1996.

For the foregoing reasons, the Taxpayer's protest IS GRANTED and the Department is

ordered to abate Assessment No. 25511986 in full.

DATED June 14, 2001.

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