Were Jose Arrieta's 1999 paralegal receipts exempt employee wages or deductible services for resale when he reported Schedule C income and issued an NTTC to the attorney instead of receiving one?

Plain-English summary

Jose Arrieta's 1999 paralegal income was taxable independent-contractor gross receipts, not exempt employee wages, and his self-issued NTTC did not support a services-for-resale deduction. The attorney buying the services had to deliver the certificate to Arrieta as seller; Arrieta issued it in the opposite direction.

Arrieta reported $17,394 of "Legal Services" receipts on federal Schedule C, deducted $8,781 of business expenses, filed Schedule SE, and paid self-employment tax. He did not report New Mexico gross receipts tax.

The Department assessed $1,042.44 tax, $104.28 penalty, and $436.52 interest, totaling $1,583.24.

Independent contracting was engaging in business

Arrieta argued that he had no sole proprietorship and simply worked as a paralegal independent contractor.

Sections 7-9-3(E) and 7-9-4 broadly taxed any activity carried on for direct or indirect benefit. The law did not require a formal business entity or distinguish an individual contractor from a larger company.

Paid independent paralegal services therefore constituted engaging in business.

The employee-wage exemption did not apply

Section 7-9-17 exempted remuneration received by employees. Arrieta's own protest called him an independent contractor.

His federal treatment supported that status: Schedule C business income, business deductions, Schedule SE, and self-employment tax rather than W-2 wages.

No evidence established an employee relationship with the Las Cruces attorney.

The NTTC traveled in the wrong direction

Section 7-9-48 allowed a services-for-resale deduction only when the buyer delivered an NTTC to the seller.

Arrieta issued a certificate to the attorney who bought his services. The Department had previously explained that the attorney needed to issue the certificate to Arrieta, but he never obtained one and resubmitted the same self-issued document.

Failure to follow the statutory certificate method waived the claimed deduction.

Failure to appear left the presumption unrebutted

The hearing notice was sent by certified mail and received on December 4, 2002. Arrieta did not appear at the January 13, 2003 hearing.

Section 7-1-17 presumed the assessment correct. By not appearing to present evidence and argument, he failed to meet his burden, although the Department also presented evidence addressing his written claims.

Result: protest DENIED. The $1,583.24 assessment remained due.

What this means for you

Independent professionals providing legal support

Schedule C and self-employment treatment generally align with contractor status and can trigger New Mexico gross receipts tax consequences.

Workers claiming employee-wage treatment

Preserve facts showing supervision, control, workplace, equipment, and payroll treatment. A bare assertion cannot overcome contrary federal reporting.

Sellers claiming a resale deduction

The buyer must issue and deliver the appropriate NTTC to the seller. A seller cannot create its own deduction by issuing the certificate to the customer.

Taxpayers with a scheduled protest hearing

Appear or obtain an approved continuance. Failure to participate can leave the presumed-correct assessment unrebutted.

Common questions

Q: How did Arrieta report the income federally?
A: As $17,394 of Schedule C legal-services receipts with $8,781 of business deductions.

Q: Why was the employee exemption denied?
A: His own statements and federal filings treated him as an independent contractor.

Q: Who should have issued the NTTC?
A: The attorney buying the paralegal services.

Q: What was wrong with Arrieta's certificate?
A: He issued it as seller to the buyer, reversing the statutory direction.

Q: Did Arrieta attend the hearing?
A: No.

Citations and references

Statutes:

• NMSA 1978, § 7-1-17 — presumption that a Department assessment is correct
• NMSA 1978, §§ 7-9-3(E) and 7-9-4 — engaging in business and gross receipts tax
• NMSA 1978, § 7-9-17 — employee wage exemption
• NMSA 1978, § 7-9-48 — services-for-resale deduction requiring buyer delivery of an NTTC

Cases cited:

• Archuleta v. O'Cheskey, 84 N.M. 428, 504 P.2d 638 (Ct. App. 1972)
• Proficient Food v. New Mexico Taxation & Revenue Department, 107 N.M. 392, 758 P.2d 806 (Ct. App. 1988)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Jose L. and Clara Arrieta
• Decision PDF: D&O 03-02

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
JOSE L. AND CLARA ARRIETA No. 03-02
ID NO. 02-440248-00 6
ASSESSMENT NO. 2777430

DECISION AND ORDER

A formal hearing on the above-referenced protest was held January 13, 2003, before

Margaret B. Alcock, Hearing Officer. The Taxation and Revenue Department ("Department") was

represented by Bridget A. Jacober, Special Assistant Attorney General. Jose L. Arrieta (“Taxpayer”)

failed to appear for the hearing. Based on the evidence and arguments presented, IT IS DECIDED

AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. For tax year 1999, the Taxpayer reported income of $17,394.00 as “gross receipts” on

Schedule C, Profit or Loss from Business, to his federal income tax return. The Taxpayer listed his

principal business as “Legal Services.”

2. The Taxpayer deducted $8,781.00 of business expenses on his 1999 Schedule C,

including expenses for advertising, car and truck expenses, depreciation, postage, dues and

continuing education.

3. The Taxpayer also filed Schedule SE, Self-Employment Tax, with his 1999 federal

income tax return and paid self-employment tax on the business income reported on his 1999

Schedule C.

4. As part of an information-sharing program with the Internal Revenue Service, the

Department was notified of the business income reported on Schedule C to the Taxpayer’s 1999
federal income tax return. When the Department investigated, it found that the Taxpayer had not

paid New Mexico gross receipts tax on this income.

5. On January 23, 2002, the Department sent the Taxpayer a letter asking him to explain

why the business income reported on his 1999 federal income tax return was not reported to the

Department for gross receipts tax purposes.

6. The Department’s January 23, 2002 letter also advised the Taxpayer that he must be

in possession of all nontaxable transaction certificates (“NTTCs”) required to support his deductions

within 60 days or those deductions would be disallowed.

7. On February 15, 2002, the Taxpayer sent the Department a letter stating that he did

not report gross receipts tax on his 1999 income because he did not have a sole proprietorship in

1999, but worked as a paralegal for a Las Cruces attorney. The Taxpayer said that he had already

submitted an NTTC to the Department, stating: “I was misinformed that the attorneys should file a

certificate of non-taxable event for my compensation. I have filed a certificate of non-taxable

event.”

8. On May 3, 2002, the Department issued Assessment No. 2777430 to the Taxpayer,

assessing him for $1,042.44 gross receipts tax, $436.52 interest and $104.28 penalty on the

$17,394.00 of business income reported on his 1999 federal income tax return.

9. On May 8, 2002, the Taxpayer filed a written protest to the Department’s assessment.

As grounds for his protest, the Taxpayer stated: “As a paralegal in 1999, I received wages as an

independent contractor.... There are no gross receipts on wages.”

10. In his May 8, 2002 protest letter, the Taxpayer noted that the Department had

previously assessed him for gross receipts tax on his 1996 earnings as a paralegal.

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11. The 1999 assessment referenced in the Taxpayer’s protest letter was partially abated

after the Taxpayer provided proof that most of his 1996 income was earned in California. The

Taxpayer paid the portion of the 1999 assessment attributable to gross receipts tax on his 1996

earnings from providing paralegal services in New Mexico.

12. During the protest proceeding on the 1999 assessment, the Taxpayer provided the

Department with a copy of an NTTC that he had issued to the attorney for whom he worked in 1996.

At that time, the Department’s attorney notified the Taxpayer that the Department could not accept

the NTTC because it was the buyer of the Taxpayer’s services—not the Taxpayer—who was

required to issue the NTTC.

13. The Taxpayer never obtained an NTTC from the attorney to whom he sold his

paralegal services, but continued to rely on the NTTC he issued to the attorney. The Taxpayer

resubmitted this same NTTC in connection with his protest to the Department’s 2002 assessment of

gross receipts tax.

14. On November 27, 2002, the Department filed a Request for Hearing asking that the

Taxpayer’s protest to the Department’s 2002 assessment be scheduled for a formal hearing.

15. On December 2, 2002, the undersigned hearing officer notified the Taxpayer by

certified mail, return receipt requested, that a hearing on his protest would be held on January 13,

2003 at 1:30 p.m. in the Department’s offices in Santa Fe, New Mexico.

16. The green receipt card returned to the Department by the Post Office shows that the

Taxpayer received the letter notifying him of the hearing on December 4, 2002.

17. On January 13, 2003 at 1:30 p.m., Bridget Jacober, the Department’s attorney, and

Alexis Lotero, the Department’s protest auditor, appeared for the scheduled hearing on the

Taxpayer’s protest. The Taxpayer failed to appear at the hearing.

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DISCUSSION

The issue presented is whether the Taxpayer is subject to gross receipts tax on his 1999

income from working as a paralegal. NMSA 1978, § 7-1-17 provides that any assessment of tax 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). By failing to appear at the hearing to present evidence and argument

in support of his protest, the Taxpayer failed to meet this burden. Nonetheless, the Department

decided not to rely solely on the presumption of correctness, but chose to present testimony and

documentary evidence in response to the arguments raised in the Taxpayer’s protest.

The first argument concerns the Taxpayer’s claim that he did not have a business or sole

proprietorship during 1999, but simply performed services as an independent contractor. The

Taxpayer misunderstands the scope of New Mexico’s gross receipts tax. NMSA 1978, § 7-9-4

imposes an excise tax on the gross receipts of any person engaging in business in New Mexico. The

definition of “engaging in business” is quite broad and includes “carrying on or causing to be carried

on any activity with the purpose of direct or indirect benefit.” NMSA 1978, § 7-9-3(E). The statute

makes no distinction between activities engaged in by large corporations and activities engaged in by

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

the Taxpayer’s protest letter acknowledges that he was an independent contractor performing

paralegal services in return for payment. This activity meets the statutory definition of engaging in

business.

The Taxpayer’s second argument is that he is entitled to claim the exemption from gross

receipts tax set out in NMSA 1978, § 7-9-17, which states:

Exempted from the gross receipts tax are the receipts of employees from
wages, salaries, commissions or from any other form of remuneration for
personal services.

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There is no evidence that the Taxpayer was an employee of the attorney for whom he performed

services during 1999. The Taxpayer’s May 8, 2002 protest letter states that he was working as an

independent contractor. In addition, the evidence shows that for federal income tax purposes, the

Taxpayer reported his 1999 income as business income and not as employee wages. The Taxpayer

deducted certain business expenses that would not have been fully deductible by an employee. The

Taxpayer also filed a Schedule SE, Self-Employment Tax, and paid self-employment tax on the

business income reported on his 1999 Schedule C. Based on this evidence, the Taxpayer is not

entitled to the exemption for employee wages set out in NMSA 1978, § 7-9-17.

The final issue is whether the Taxpayer is entitled to claim the deduction set out in NMSA

1978, § 7-9-48, which states as follows:

Receipts from selling a service for resale may be deducted from gross
receipts...if the sale is made to a person who delivers a nontaxable transaction
certificate to the seller.

In this case, the Taxpayer provided the Department with an NTTC that he issued to the attorney for

whom he performed paralegal services. The NTTC was rejected by the Department because it was

issued by the wrong party. As the Department had previously advised the Taxpayer in connection

with his 1999 protest, the buyer of services (the attorney) is required to issue an NTTC to the seller

of those services (the Taxpayer). Unfortunately, the Taxpayer refused to accept the Department’s

advice. As stated in his February 15, 2002 letter to the Department: “I was misinformed that the

attorneys should file a certificate of non-taxable event for my compensation. I have filed a certificate

of non-taxable event.”

Where a party claiming a right to a tax exemption or deduction fails to follow the method

prescribed by statute or regulation, he waives his right thereto. Proficient Food v. New Mexico

Taxation & Revenue Department, 107 N.M. 392, 397, 758 P.2d 806, 811 (Ct. App.), cert. denied, 107

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N.M. 308, 756 P.2d 1203 (1988). The NTTC that the Taxpayer issued to the buyer of his paralegal

services does not meet the requirements of NMSA 1978, § 7-9-48 and was properly disallowed by

the Department.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment No. 2777430, and

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

2. The Taxpayer failed to meet his burden of proving that the Department’s assessment

was incorrect.

3. The Taxpayer performed services as an independent contractor during 1999 and is not

entitled to the exemption for employee wages set out in NMSA 1978, § 7-9-17.

4. The Taxpayer was not in possession of required NTTCs and is not entitled to the

deduction for receipts from selling services for resale provided in NMSA 1978, § 7-9-48.

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

DATED January 16, 2003.

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