Does an individual working as an independent contractor owe New Mexico gross receipts tax on his earnings even if he never charged the tax and did not know it applied — and can interest and a penalty be reduced for that lack of knowledge?

Plain-English summary

An individual working as an independent contractor owed New Mexico gross receipts tax on his earnings even though he never charged the tax and did not know it applied, and the interest and negligence penalty were not reduced. Protest DENIED.

In 1996, Marcelino Sanchez did auto-repair work as an independent contractor for Empire Auto Sales in Albuquerque. He set his own hours, supplied his own materials, was paid in cash by the job, and got no benefits and no 1099. He tracked his jobs and expenses in a notebook, and H&R Block used it to prepare his federal return, reporting the income on a Schedule C. He did not know gross receipts tax applied to independent-contractor income, so he never charged it or filed returns. After the IRS shared his Schedule C figures, the Department found the mismatch and assessed about $853 in gross receipts tax, penalty, and interest.

An individual independent contractor is "engaging in business"

Section 7-9-4 taxes the gross receipts of any person "engaging in business," which Section 7-9-3(E) defines broadly as carrying on any activity for direct or indirect benefit. The statute draws no distinction between large corporations, small "mom and pop" shops, and individuals working as independent contractors. Sanchez performed a service (an "activity") for money (a "direct benefit"), so he was engaging in business and his receipts were taxable — even though he had no employees, no separate business location, and never charged the tax.

The tax falls on the seller, not the customer

Gross receipts tax is imposed on the seller of services, not the buyer. Sellers commonly pass the cost along to customers, but the ability to do so does not change the seller's legal obligation to pay the state. Sanchez's failure to charge Empire did not relieve him of the tax.

Interest is mandatory; lack of knowledge is negligence

Interest under Section 7-1-67 is mandatory ("shall") and simply compensates the state for the time value of money it was owed; the reason for late payment is irrelevant. The negligence penalty under Section 7-1-69 also stood. New Mexico is a self-reporting system — the Department cannot know when someone starts an income-producing activity, so the law charges every individual with the duty to determine the tax consequences of their actions. Lack of knowledge or an erroneous belief that no tax is due is itself negligence (Tiffany Construction).

Blaming the tax preparer did not work

Sanchez argued H&R Block should have told him about the gross receipts tax. Regulation 3.1.11.11 can excuse a penalty when a taxpayer reasonably relies on a preparer's or accountant's advice after full disclosure — but there was no evidence Sanchez ever asked H&R Block whether other taxes were due. Because he neither requested nor received advice about gross receipts tax, his failure to file was not an informed decision based on professional advice, and the penalty was not excused.

Result: protest DENIED.

What this means for you

Independent contractors owe gross receipts tax, just like businesses

If you perform services in New Mexico as an individual contractor — even a one-person operation paid in cash by the job — your receipts are generally subject to gross receipts tax. There is no exception for working "just to earn personal income."

Not charging the tax does not eliminate it

Because the tax is on the seller, failing to add it to your invoices does not make it disappear; you still owe it out of your own pocket. Build the tax into your pricing so you are not paying it from your margin later.

The state will not tell you when to start paying — that is on you

New Mexico's self-reporting system puts the duty on you to figure out your tax obligations. Not knowing the tax existed is treated as negligence, so a penalty can apply even to an honest, unintentional mistake.

To use the "I relied on my preparer" defense, you must actually ask

Reliance on a tax preparer or accountant can excuse a penalty only if you disclosed the relevant facts and sought advice on the issue. Having someone prepare your income tax return, without asking about other taxes like gross receipts tax, is not enough.

Common questions

Q: He worked alone and just wanted to earn a living — was that really a "business"?
A: Yes. "Engaging in business" is defined broadly as any activity carried on for direct or indirect benefit, and the statute makes no distinction between corporations and individuals. Performing repair services for pay qualifies.

Q: He never charged the customer the tax — why does he owe it?
A: Gross receipts tax is imposed on the seller, not the buyer. Passing it to customers is optional and commonplace, but not charging it does not remove the seller's obligation to pay the state.

Q: Can the interest or penalty be reduced because he didn't know about the tax?
A: No. Interest is mandatory under Section 7-1-67 regardless of the reason for late payment, and lack of knowledge is treated as negligence, so the penalty applied.

Q: He used H&R Block — doesn't that shift the blame?
A: No. He never asked H&R Block about gross receipts tax, so he did not rely on advice after full disclosure. The reliance defense in Regulation 3.1.11.11 requires actually seeking and receiving advice on the issue.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-9-4 — imposes gross receipts tax on persons engaging in business in New Mexico
• NMSA 1978, § 7-9-3(E) — defines "engaging in business" as carrying on any activity for direct or indirect benefit
• NMSA 1978, § 7-9-3(F) — gross receipts include money received from performing services in New Mexico
• NMSA 1978, § 7-1-17(C) — a Department assessment is presumed correct
• NMSA 1978, § 7-1-3(X) — "tax" includes related interest and civil penalty
• NMSA 1978, § 7-1-67 — interest on late-paid tax is mandatory ("shall")
• NMSA 1978, § 7-1-69 — negligence penalty for failing to pay tax when due
• Regulation 3.1.11.10 NMAC — defines taxpayer negligence
• Regulation 3.1.11.11 NMAC — non-negligence situations, including reasonable reliance on a preparer's advice after full disclosure

Cases cited:

• El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989)
• State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977)
• 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)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Marcelino Sanchez
• Decision PDF: D&O 01-22

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
MARCELINO SANCHEZ No. 01-22
ID NO. 02-404230-00-7
ASSESSMENT NO. 2475914

DECISION AND ORDER

A formal hearing on the above-referenced protest was held September 10, 2001, before

Margaret B. Alcock, Hearing Officer. Marcelino Sanchez (“Taxpayer”) represented himself. The

Taxation and Revenue Department ("Department") was represented by Monica M. Ontiveros, Special

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

ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. During 1996, the Taxpayer performed auto repair services for Empire Auto Sales

(“Empire”) in Albuquerque, New Mexico.

2. Empire provided the Taxpayer with work space to perform his services.

3. Empire told the Taxpayer he would be working as contract labor and did not offer

him health insurance, sick leave, vacation or other benefits.

4. The Taxpayer set his own hours and provided his own supplies and materials.

5. The Taxpayer was paid by the job, not by the hour.

6. Empire paid the Taxpayer in cash and did not withhold any income or social security

taxes.

7. Empire did not issue a Form 1099 or any other tax form to the Taxpayer to indicate

how much the Taxpayer had earned from performing services for Empire.

8. The Taxpayer kept a notebook where he listed the money he earned from his auto

repair jobs and the cost of the supplies and materials used in each job.

9. The Taxpayer did not realize that New Mexico gross receipts tax applied to his

receipts from working as an independent contractor for another business. Accordingly, the Taxpayer

did not charge Empire gross receipts tax on his services and did not report or pay gross receipts tax to

the Department.

10. The Taxpayer went to H&R Block to prepare his 1996 personal income tax returns.

11. H&R Block used the information in the Taxpayer’s notebook to determine his

income and expenses from performing auto repair services and reported this information on

Schedule C (Profit or Loss from Business) of his federal income tax return.

12. On December 15, 1999, as a result of information obtained from the IRS, the

Department mailed the Taxpayer a notice of limited scope audit concerning the discrepancy between

business income reported to the IRS on Schedule C of the Taxpayer’s 1996 federal income tax return

and business income reported to the Department for gross receipts tax purposes.

13. On December 30, 1999, the Department issued Assessment No. 2475914 to the

Taxpayer in the total amount of $852.95, representing gross receipts tax, penalty and interest for the

period January-December 1996.

14. The Taxpayer filed a written protest with the Department, which was received by the

Department on February 1, 2000.

DISCUSSION

The Taxpayer has challenged his liability for the gross receipts tax, penalty and interest

assessed on his receipts from performing auto repair services during 1996. The Taxpayer raises the

following issues: (1) whether the Taxpayer’s services for Empire qualified as a business subject to

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gross receipts tax, and (2) whether penalty and interest should be reduced because the Taxpayer was

not aware of his liability for gross receipts tax.

Section 7-1-17(C) NMSA 1978 provides that any assessment of tax by the Department is

presumed to be correct. Section 7-1-3(X) NMSA 1978 defines tax to include not only the amount of

tax principal imposed but also, unless the context otherwise requires, “the amount of any interest or

civil penalty relating thereto." See also, El Centro Villa Nursing Center v. Taxation and Revenue

Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989). Accordingly, the assessment of gross

receipts tax, penalty and interest is presumed to be correct, and it is the Taxpayer’s burden to present

evidence showing he is entitled to an abatement of these amounts.

Liability of Independent Contractors for Gross Receipts Tax. The Taxpayer does not

dispute that he worked as an independent contractor performing services for Empire Auto Sales. He

does not believe, however, that the work he did qualified as a business because he worked simply to

earn personal income for himself. The Taxpayer did not have other employees or a separate business

location, nor did he charge gross receipts tax on his services.

Section 7-9-4 NMSA 1978 imposes an excise tax on the gross receipts of any person

engaging in business in New Mexico. “Engaging in business” is defined in Section 7-9-3(E) NMSA

1978 to mean “carrying on or causing to be carried on any activity with the purpose of direct or

indirect benefit.” (Emphasis added.) The term “gross receipts” is defined in Section 7-9-3(F) NMSA

1978 to include the total amount of money or the value of other consideration received from

performing services in New Mexico. The statutes make no distinction between large corporations,

small “mom and pop” operations, or individuals acting as independent contractors. In this case, the

Taxpayer entered into an agreement with Empire to perform auto repair services—which qualifies as

an “activity”—in return for money—which was a direct benefit to him. The Taxpayer’s work for

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Empire meets the statutory definition of engaging in business and his receipts from that business are

subject to gross receipts tax.

New Mexico’s gross receipts tax is imposed on the seller of goods and services, not on the

buyer. As a practical matter, the tax is simply part of the seller’s cost of doing business. Although it

is a common practice for sellers of services (such as the Taxpayer) to pass the cost of the gross

receipts tax on to the buyer of those services (in this case, Empire), the seller’s ability to separately

charge or obtain reimbursement of the tax does not affect the seller’s legal obligation to pay tax to

the state. Accordingly, the Taxpayer is liable for gross receipts tax on his receipts from performing

services for Empire, even though he never charged or collected gross receipts tax on his earnings.

Lack of Knowledge of the Gross Receipts Tax. The Taxpayer maintains that the amount

of penalty and interest assessed is too high and should be reduced. The Taxpayer argues that his

failure to pay the tax was due to his lack of knowledge and points to the fact that neither the

Department nor H&R Block notified him that he owed gross receipts tax on his income.

Interest. Section 7-1-67 NMSA 1978 governs the imposition of interest on late payments of

tax and provides, in pertinent part:

A. If any tax imposed is not paid on or before the day on which it
becomes due, interest shall be paid to the state on such amount from
the first day following the day on which the tax becomes due, without
regard to any extension of time or installment agreement, until it is
paid... (emphasis added).

The legislature’s use of the word “shall” indicates that the assessment of interest is mandatory rather

than discretionary. State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977). The legislature has directed the

Department to assess interest whenever taxes are not timely paid and has provided no exceptions to the

mandate of the statute.

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The assessment of interest is not designed to punish taxpayers, but to compensate the state

for the time value of unpaid revenues. Here, the Taxpayer failed to pay gross receipts tax due to the

state on his 1996 income. Although this failure was based on the Taxpayer’s lack of knowledge and

was not intentional, the fact remains that the Taxpayer had the use of those tax funds during the

period at issue. Section 7-1-67 NMSA 1978 requires interest to be paid for any period of time during

which the state is denied the use of the funds to which it is legally entitled. Accordingly, interest was

properly assessed against the Taxpayers and there is no basis for abatement.

Penalty. Section 7-1-69 NMSA 1978 governs the imposition of penalty. Subsection A

imposes a penalty of two percent per month, up to a maximum of ten percent, when a taxpayer fails

“due to negligence or disregard of rules and regulations” to pay taxes in a timely manner. Taxpayer

negligence for purposes of assessing penalty is defined in Regulation 3.1.11.10 NMAC 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's failure to pay gross receipts tax was due to his lack of knowledge of New

Mexico law. The Taxpayer's belief that the Department should have notified him of his liability for

gross receipts tax is based on a misunderstanding of New Mexico’s self-reporting tax system. Although

the Department makes a continuing effort to educate taxpayers through workshops, regulations,

instructions and other publications, the Department is not omniscient, 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.

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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). A taxpayer’s lack of knowledge or erroneous belief that no tax is due has been held to

constitute negligence for purposes of Section 7-1-69 NMSA 1978. Id.

The Taxpayer’s argument that he was not negligent because H&R Block failed to advise him of

his gross receipts tax liability raises a more difficult issue. Regulation 3.1.11.11 NMAC sets out several

situations that may indicate a taxpayer has not been negligent, including “reasonable reliance on the

advice of competent tax counsel or accountant as to the taxpayer’s liability after full disclosure of all

relevant facts....” Although the Taxpayer relied on H&R Block to prepare his state and federal income

tax returns for the 1996 tax year, there is no evidence he ever asked whether there might be other taxes

due in connection with the business income reported on his federal return. Given these facts, the

Taxpayer cannot claim that his failure to file gross receipts tax returns was an informed decision based

on advice received from his tax advisor. The Taxpayer neither requested nor received advice from

H&R Block concerning the gross receipts tax, and there is no basis to excuse the Taxpayer from

payment of penalty under Regulation 3.1.11.11 NMAC.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment No. 2475914, and

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

2. The Taxpayer was engaging in business in New Mexico as defined in Section 7-9-3(E)

NMSA 1978 and was subject to gross receipts tax on his receipts from performing auto repair services

as an independent contractor.

3. Pursuant to Section 7-1-67 NMSA 1978, interest was properly assessed against the

Taxpayer on his unreported gross receipts tax for the period January-December 1996.

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4. Pursuant to Section 7-1-69 NMSA 1978, the Taxpayer was negligent in failing to report

gross receipts tax during the period January-December 1996 and penalty was properly assessed.

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

DATED September 12, 2001.

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