If a subcontractor's services are resold up a chain and the middleman promised to handle the gross receipts tax but never did, does the subcontractor still owe New Mexico gross receipts tax on what he was paid?

Plain-English summary

A subcontractor owed New Mexico gross receipts tax on the money he was paid, even though the middleman who resold his services had promised to handle the tax and never did. Protest DENIED.

Richard Hall retired as a principal engineer at Allied Signal, then returned to do the same kind of work as an independent contractor. Allied told him it could not reimburse the gross receipts tax if it contracted with him directly, but it could if his services were bought through an existing contractor — Pathfinder Technology. So Hall became a subcontractor of Pathfinder, which resold his services to Allied (which in turn had a contract with the federal government). Pathfinder told Hall it would take care of the gross receipts tax. Hall never verified that with Pathfinder, Allied, or the Department, did not register, and reported his pay only as Schedule C business income on his 1996 federal return. In 2000 the Department learned of that income from the IRS, found no gross receipts tax had been paid, and assessed $6,732.94 in tax, penalty, and interest.

Every sale in a resale chain is separately taxable

Hall argued he owed nothing because he really performed his services "for Allied," not Pathfinder. The hearing officer explained that New Mexico's gross receipts tax makes no distinction between selling for resale and selling to a final consumer — each transaction is taxed. Under House of Carpets, Inc. v. Bureau of Revenue, when a carpet installer's one-time service was resold by a retailer, there were two taxable transactions, not double taxation. Here Hall's services were performed once but sold three times: Hall to Pathfinder, Pathfinder to Allied, and Allied to the federal government. Each sale was taxable. Pathfinder's sale to Allied was covered by a Type 5 nontaxable transaction certificate (NTTC), letting Pathfinder deduct it under Section 7-9-48 — but that NTTC covered only Pathfinder's transaction. Hall's separate sale of services to Pathfinder was not covered, so his receipts remained taxable.

The tax is on the seller — not collecting it from the buyer is no defense

Hall said he should not have to pay a tax he never collected from Pathfinder and could no longer recover. But unlike a sales tax charged to the buyer, New Mexico's gross receipts tax is imposed directly on the seller as a cost of doing business. Sellers commonly pass it along, but the ability (or failure) to charge it to the buyer does not change the seller's legal duty to report and pay it. Hall was the seller of his services and was liable regardless of what he collected from Pathfinder.

A private promise cannot shift a tax duty to the state

Hall argued his agreement with Pathfinder moved the tax responsibility to Pathfinder. The hearing officer held that a taxpayer's duty to pay gross receipts tax cannot be delegated to a third party. Every person has a duty to ascertain the tax consequences of his actions (El Centro Villa, quoting Tiffany Construction), and Hall had an obligation to confirm with Pathfinder or the Department that the tax was actually being paid. His agreement with Pathfinder was a private matter; the state was never a party to it and was not bound by it. (New Mexico does allow a formal "TS-22 agreement" letting one taxpayer pay another's gross receipts tax, but Pathfinder never entered one — or paid the tax.)

No relief for financial hardship

Finally, Hall asked the Department to consider that he and his wife were seniors on a fixed income. Regulation 3.1.6.14 expressly bars the Secretary from compromising a liability because of inability to pay, and the hearing officer has no authority to override the tax laws for a taxpayer's personal circumstances (State ex rel. Taylor v. Johnson).

Result: protest DENIED. Hall owed gross receipts tax on his receipts from Pathfinder.

What this means for you

"Selling for resale" does not make your sale tax-free

New Mexico taxes each transaction in a chain. Even if your work is ultimately resold to someone else — or to the government — your sale of that service is its own taxable transaction. A resale deduction protects only the party who actually holds a valid NTTC for their transaction, not everyone upstream.

The gross receipts tax is yours to pay, whether or not you billed for it

Because the tax falls on the seller, forgetting to add it to your invoice — or being unable to collect it later — does not relieve you. Build the gross receipts tax into your pricing, and remit it on everything you receive for services performed in New Mexico.

You cannot outsource your tax duty by handshake

If another company promises to "handle the tax," that promise binds only that company, not the state. To have someone else legally pay your gross receipts tax, there must be a formal TS-22 agreement with the Department. Otherwise, confirm directly that your tax is being reported and paid — the duty to check is yours.

Hardship will not reduce a valid assessment

Neither the Department nor a hearing officer can waive tax, penalty, or interest because paying is a hardship. The remedy for a cash-flow problem is a payment arrangement, not abatement.

Common questions

Q: What tax was assessed?
A: New Mexico gross receipts tax on Hall's 1996 compensation from Pathfinder — $6,732.94 total, including penalty and interest.

Q: Weren't his services really "for Allied," so only one tax should apply?
A: No. Each sale in the chain is separately taxable under House of Carpets. Hall sold his services to Pathfinder; that was its own taxable transaction, regardless of who ultimately used the work.

Q: Didn't Pathfinder's NTTC cover him?
A: No. The Type 5 NTTC covered only Pathfinder's resale of services to Allied under Section 7-9-48. It did not cover Hall's separate sale of services to Pathfinder.

Q: He never collected the tax from Pathfinder — why does he owe it?
A: New Mexico's gross receipts tax is imposed on the seller, not collected from the buyer. Failing to charge or collect it from Pathfinder does not relieve Hall of his own liability.

Q: Pathfinder promised to pay the tax. Doesn't that count?
A: Not against the state. A private promise cannot delegate a taxpayer's duty. Only a formal TS-22 agreement lets one taxpayer legally pay another's gross receipts tax, and Pathfinder never entered one.

Q: Can hardship get the assessment reduced?
A: No. Regulation 3.1.6.14 forbids compromising a liability for inability to pay, and the hearing officer cannot waive tax for personal circumstances.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-9-4 — gross receipts tax imposed on persons engaging in business in New Mexico (a tax on the seller)
• NMSA 1978, § 7-9-3(E) — definition of "engaging in business"
• NMSA 1978, § 7-9-3(F) — "gross receipts" includes consideration received from performing services in New Mexico
• NMSA 1978, § 7-9-48 — deduction for selling services for resale, supported by a nontaxable transaction certificate
• Regulation 3.1.6.14 NMAC — the Secretary may not compromise a liability because of the taxpayer's inability to pay

Cases cited:

• House of Carpets, Inc. v. Bureau of Revenue, 87 N.M. 747, 507 P.2d 1078 (Ct. App. 1973)
• El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989)
• Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976)
• State ex rel. Taylor v. Johnson, 1998-NMSC-015, 961 P.2d 768

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Richard & Arlene Hall (Cornerstone)
• Decision PDF: D&O 01-32

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
RICHARD AND ARLENE HALL d/b/a
CORNERSTONE CONTRACT SERVICE No. 01-32
ID NO. 02-402690-00-5
ASSESSMENT NO. 2551992

DECISION AND ORDER

A formal hearing on the above-referenced protest was held November 15, 2001, before

Margaret B. Alcock, Hearing Officer. Richard and Arlene Hall represented themselves. The

Taxation and Revenue Department ("Department") was represented by Bridget A. Jacober, Special

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

ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. In 1994, Richard Hall retired from his employment as a principal engineer at Allied

Signal (“Allied”).

2. Allied subsequently approached Mr. Hall about coming back to work as an

independent contractor to perform services in connection with a contract Allied had entered into with

the federal government.

3. In the course of negotiations, Allied told Mr. Hall that if it contracted with him

directly, it could not compensate him for the cost of the New Mexico gross receipts tax Mr. Hall

would owe on his receipts from performing services for Allied.

4. Allied said it could include the cost of the gross receipts tax if the services were

purchased from a company with which Allied already had a contract. One such company was

Pathfinder Technology (“Pathfinder”).

5. Mr. Hall then entered into an agreement whereby he performed services for Allied as

a subcontractor of Pathfinder, which then resold his services to Allied. As part of this agreement,

Pathfinder told Mr. Hall that it would take care of paying the gross receipts tax due on Mr. Hall’s

receipts from performing services in New Mexico.

6. Under his agreement with Pathfinder, Mr. Hall submitted a weekly time card to

Pathfinder for the hours he spent performing services for Allied. Pathfinder then submitted an

invoice to Allied which included the cost of Mr. Hall’s services plus an additional amount

representing Pathfinder’s profit on its resale of Mr. Hall’s services.

7. Although Mr. Hall assumed Pathfinder was billing Allied for the gross receipts tax

due on Mr. Hall’s receipts and paying this tax to the state on his behalf, Mr. Hall never verified this

with Pathfinder, Allied or the Department.

8. Under certain circumstances, the Department will enter into what is known as a “TS-

22 agreement”, which allows one taxpayer to pay gross receipts tax legally owed by another

taxpayer. Pathfinder never entered into a TS-22 agreement with the Department, nor did it pay the

gross receipts tax Mr. Hall owed on the compensation he received from Pathfinder.

9. Pathfinder accepted a Type 5 nontaxable transaction certificate (“NTTC”) from

Allied, which allowed Pathfinder to deduct its receipts from Allied pursuant to Section 7-9-48

NMSA 1978. The Type 5 NTTC issued to Pathfinder did not cover Mr. Hall’s receipts or affect Mr.

Hall’s liability for gross receipts tax on the compensation he received from Pathfinder.

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10. Because Mr. Hall believed Pathfinder was paying the gross receipts tax on his behalf,

he did not register with the Department and did not report or pay gross receipts tax on the

compensation he received from Pathfinder.

11. Mr. Hall did report his compensation from Pathfinder as business income on

Schedule C of the Halls’ 1996 federal income tax return.

12. Sometime in 2000, the Department received information from the Internal Revenue

Service concerning the business income reported on the Halls’ 1996 federal income tax return.

When the Department investigated, it found that no New Mexico gross receipts tax had been

reported or paid on this income.

13. On July 12, 2000, the Department issued Assessment No. 2551992 to the Halls under

the name “Cornerstone Contract Service”, which was the name of a sole proprietorship Mr. Hall

registered after he stopped doing business with Pathfinder.

14. Assessment No. 2551992 was issued in the total amount of $6,732.94, representing

gross receipts tax, plus penalty and interest accrued through July 25, 2000, on the compensation Mr.

Hall received from Pathfinder during 1996.

15. On August 7, 2000, the Halls filed a written protest to the Department’s assessment.

DISCUSSION

The issue presented is whether the Halls are liable for gross receipts tax on the compensation

Mr. Hall received from performing services for Allied as a subcontractor of Pathfinder. Mr. Hall

maintains he is not liable for the gross receipts tax because: (1) all of his services were performed

for Allied and not for Pathfinder; (2) he did not collect the gross receipts tax from Pathfinder and it is

now impossible for him to recover the tax; (3) his agreement with Pathfinder shifted the

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responsibility for payment of his gross receipts tax to Pathfinder; and (4) payment of the tax will

create a financial hardship.

(1) Application of Gross Receipts Tax to Sales for Resale. Mr. Hall argues that he should

not be liable for tax on the payments he received from Pathfinder because all of his services were

performed for Allied. Mr. Hall’s argument is based on a misunderstanding of the nature of the

transactions at issue and the structure of New Mexico’s gross receipts tax.

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. The term “gross receipts” is defined in Subsection F of Section 7-9-3 NMSA 1978

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

services in New Mexico. The statute makes no distinction between persons selling services for resale

and persons selling services to the final consumer. Each separate transaction is subject to gross

receipts tax.

The application of the gross receipts tax to resale transactions is illustrated by the New

Mexico Court of Appeals’ decision in House of Carpets, Inc. v. Bureau of Revenue, 87 N.M. 747,

507 P.2d 1078 (Ct. App. 1973). That case involved two taxpayers, a retailer of wall-to-wall carpet

and an installer of carpet. The retailer sold carpet to the public and included installation as part of

the sales package. Once a sales contract was entered into, the installer went to the customer’s home

and installed the carpet. The installer then billed the retailer, who resold the installation service to

the customer. The court found that while the installer’s services were performed only once, there

were two taxable transactions: the first transaction was the installer’s sale of his services to the

retailer; the second transaction was the retailer’s resale of the installer’s services to the customer.

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The court held that gross receipts tax was due on both transactions, rejecting the retailer's argument

that this resulted in "double assessment" on the services provided by the installer.

In this case, Allied had a contract to provide certain services to the federal government.

Allied subcontracted those services to Pathfinder who further subcontracted them to Mr. Hall. This

fact pattern is the same as that in House of Carpets, supra, with one added layer of complexity.

Although Mr. Hall performed his services only once, those service were sold three times: the first

sale was from Mr. Hall to Pathfinder; the second sale was from Pathfinder to Allied; and the third

sale was from Allied to the federal government. As established by the court’s decision in House of

Carpets, each of these transactions was subject to gross receipts tax. In this case, however, Allied

delivered a Type 5 NTTC to Pathfinder. This allowed Pathfinder to deduct its receipts from Allied

pursuant to Section 7-9-48 NMSA 1978, which provides a deduction for selling services for resale

when certain conditions are met. Because the NTTC only covered Pathfinder’s sale of services to

Allied, and did not cover Mr. Hall’s separate sale of services to Pathfinder, his receipts from that

transaction remain subject to gross receipt tax.

(2) Failure to Collect Gross Receipts Tax from the Buyer. Mr. Hall maintains he should

not be required to pay gross receipts tax that he never collected from Pathfinder and that it is now

impossible for him to recover. The problem with this argument is that, unlike many other states,

New Mexico does not have a sales tax that is charged to and collected from the buyer. New Mexico

has a gross receipts tax that is imposed directly on the seller of goods and services. In effect, the

gross receipts tax is part of the seller’s cost of doing business. Although it is a common practice for

sellers to pass the gross receipts tax on to the buyer, the seller’s ability to separately charge or obtain

reimbursement of the tax does not affect his legal obligation to report and pay gross receipts tax to

the state. In this case, Mr. Hall was legally liable for payment of gross receipts tax on the payments

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he received from performing services as a subcontractor of Pathfinder. The fact that he did not

charge or collect the tax from Pathfinder does not relieve him of this liability.

(3) Pathfinder’s Agreement to Pay Gross Receipts Tax. Mr. Hall’s third argument is that

his agreement with Pathfinder shifted responsibility for payment of his gross receipts tax to

Pathfinder. A taxpayer’s responsibility for payment of gross receipts tax is not something that can be

delegated to a third party. As stated by the New Mexico Court of Appeals in El Centro Villa

Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 799, 779 P.2d 982, 986 (Ct. App.

1989):

"[e]very person is charged with the reasonable duty to ascertain the possible tax
consequences of his action [or inaction]." Tiffany Constr. Co. v. Bureau of Revenue,
90 N.M. at 17, 558 P.2d at 1156. We are not inclined to hold that the taxpayer can
abdicate this responsibility merely by appointing an accountant as its agent in tax
matters.

In this case, Mr. Hall was charged with the duty to insure that his gross receipts taxes were paid in a

timely manner. He was not entitled to simply turn this responsibility over to Pathfinder. He had an

obligation to check with Pathfinder or the Department to confirm that the taxes for which he was liable

were being paid. Mr. Hall’s agreement with Pathfinder was a private matter. The state was never

consulted and never became a party to the agreement. Accordingly, the agreement had no effect on Mr.

Hall’s legal obligations to the state and does not serve to relieve Mr. Hall of his liability for the

Department’s assessment of gross receipts tax.

(4) Financial Hardship. Finally, Mr. Hall asks the Department to consider the fact that he

and his wife are senior citizens living on a fixed income and that payment of the assessment will

create a financial hardship. Unfortunately, these factors are not something the Department can

consider. Department Regulation 3.1.6.14 NMAC specifically states that the Secretary “may not

compromise a taxpayer’s liability because of the taxpayer’s inability to pay.” Nor does the hearing

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officer have authority to relieve a taxpayer of his statutory liability for tax, penalty or interest. In State

ex rel. Taylor v. Johnson, 1998-NMSC-015 ¶ 022, 961 P.2d 768, 774-775, the supreme court made

the following observations concerning the power of administrative agencies:

Generally, the Legislature, not the administrative agency, declares the policy and
establishes primary standards to which the agency must conform. See State ex rel.
State Park & Recreation Comm'n v. New Mexico State Authority, 76 N.M. 1, 13, 411
P.2d 984, 993 (1966). The administrative agency's discretion may not justify
altering, modifying or extending the reach of a law created by the Legislature. See,
e.g., Chalamidas v. Environmental Improvement Div. ( In re Proposed Revocation of
Food and Drink Purveyor's Permit), 102 N.M. 63, 66, 691 P.2d 64, 67 (Ct. App.
1984) (stating that an "agency cannot amend or enlarge its authority through rules
and regulations"); Rainbo Baking Co. v. Commissioner of Revenue, 84 N.M. 303,
306, 502 P.2d 406, 409 (Ct. App. 1972).

The legislature has not granted the Department or its hearing officer the authority to abate or adjust

tax assessments based on the financial or personal situations of individual taxpayers.

CONCLUSIONS OF LAW

1. The Halls filed a timely, written protest to Assessment No. 2551992, and jurisdiction

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

2. Mr. Hall was liable for gross receipts tax on his receipts from performing services for

Allied as a subcontractor of Pathfinder.

3 The fact that Mr. Hall did not charge or collect gross receipts tax from Pathfinder does

not relieve him of his legal obligation for payment of the tax.

4. Mr. Hall’s private agreement with Pathfinder did not relieve him of his legal obligation

for payment of gross receipts tax due on his receipts.

5. The hearing officer does not have authority to override the provisions of New Mexico’s

tax laws to relieve the Halls from payment of tax, penalty or interest due to the state.

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

DATED November 29, 2001.

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