Was Francis Brown a church employee exempt from gross receipts tax when he was paid hourly to oversee construction and restoration projects?

Plain-English summary

Francis Brown was an independent contractor, not a church employee, when he managed construction and historical-restoration projects. His hourly pay supported employee treatment, but the overall relationship—especially his control over workers and the manner of performing the projects—made his services subject to gross receipts tax.

Brown began as a volunteer in his parish after becoming disabled. Around 2007 or 2008, the priest offered to pay him to oversee church construction and restoration projects.

The priest identified what each project should accomplish and sometimes supplied workers. Brown supervised the work for several years, including 2009 through 2011.

Payroll treatment weighed against employment

The church did not withhold income tax, pay FICA, provide workers' compensation coverage, or make unemployment contributions for Brown.

It issued Brown Forms 1099 while issuing W-2s to some other workers. When it paid him for more than his own hours, its paperwork referred to his services as “Francis Brown Construction.”

Brown was paid hourly and only for particular projects, which supported his employee argument. But he did not provide evidence for his claim that all other workers' pay had been included in his 1099s; the record showed the church also paid and reported other workers separately.

Control over how work was done was decisive

The priest set project objectives, sometimes gave directions, and could start or stop work based on funding. Brown nevertheless controlled the means of accomplishing the work.

He recruited workers, retained at least one worker despite the priest's objection, assigned people according to their skills, directed tasks, supervised timesheets, and personally demonstrated how he wanted work performed.

The AHO used control as the principal employee-versus-contractor factor and also considered construction-industry criteria such as authority to hire and fire. The totality of the evidence did not establish church employment.

Tax, penalty, and interest remained

Brown reported the 1099 income for personal-income-tax purposes but did not file or pay gross receipts tax.

His belief that he was an employee did not remove penalty; the cited Tiffany Construction decision treated lack of knowledge or erroneous belief as negligence. Interest was mandatory on unpaid tax.

Brown paid the 2009 assessment during the protest. At hearing, the remaining balances were $2,675.38 tax, $535.08 penalty, and $392.04 interest for 2010, and $3,005.84 tax, $601.17 penalty, and $331.85 interest for 2011, with interest continuing to accrue.

Result: protest DENIED. All three yearly assessments were upheld.

What this means for you

Churches and nonprofits hiring project supervisors

Nonprofit status does not decide worker classification. Use written agreements and align payroll, withholding, benefits, supervision, and reporting with the actual relationship.

Individuals paid hourly on projects

Hourly pay alone does not establish employment. Authority over personnel, methods, scheduling, and project execution may outweigh the payment method.

Workers receiving Forms 1099

If you believe you are an employee, address classification promptly and keep evidence of the payer's right to control how you perform the work. Reporting income federally does not resolve gross-receipts-tax treatment.

Common questions

Q: Did the priest control the projects?
A: He set goals and sometimes gave directions, but Brown controlled workers and how the construction was performed.

Q: What facts supported employee status?
A: Brown was paid hourly, and the church selected or dismissed some workers.

Q: What facts supported contractor status?
A: No withholding or benefits, Forms 1099, Brown's hiring and retention authority, and his control over work methods and assignments.

Q: Did the church issue W-2s to anyone?
A: Yes. It issued W-2s to some workers and 1099s to others, including Brown.

Q: What happened to the 2009 assessment?
A: Brown paid it in full while the protest was pending; the AHO still upheld it.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-9-17 and 7-1-13 — employee-wage exemption and taxpayer reporting responsibility
• NMSA 1978, § 60-13-3.1(A) — construction-industry independent-contractor criteria used as guidance
• NMSA 1978, §§ 7-1-67 and 7-1-17 — mandatory interest and assessment presumption
• Regulations 3.2.1.18(A) and 3.2.105.7(A) NMAC — New Mexico services and employee factors

Cases cited:

• Mascarenas v. Jaramillo, 1991-NMSC-014 — control as the principal employee-versus-contractor factor
• Reule Sun Corp. v. Valles, 2010-NMSC-004 — construction-industry independent-contractor criteria
• Tiffany Construction Co. v. Bureau of Revenue, 1976-NMCA-127 — erroneous belief as negligence
• Marbob Energy Corp. v. New Mexico Oil Conservation Commission, 2009-NMSC-013 — mandatory interest language

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Francis J. Brown
• Decision PDF: D&O 15-24

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
FRANCIS J. BROWN, No. 15-24
TO THE ASSESSMENTS ISSUED UNDER
LETTER ID NOS. L0854247376, L1927989200, and L0183158736

DECISION AND ORDER

A formal hearing on the above-referenced protest was held June 19, 2015, before Hearing

Officer Dee Dee Hoxie. The Taxation and Revenue Department (Department) was represented by Mr.

Peter Breen, Staff Attorney. Ms. Milagros Bernardo, Auditor, also appeared on behalf of the

Department. Mr. Francis Brown (Taxpayer) appeared for the hearing and represented himself. Mr.

Raymond Archuleta also appeared as a witness for the Taxpayer. The Hearing Officer took notice of

all documents in the administrative file. Based on the evidence and arguments presented, IT IS

DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. On December 16, 2014, the Department assessed the Taxpayer for gross receipts tax, penalty,

and interest for the tax period from January 1, 2009 through December 31, 2009. The

assessment was for $1,765.09 tax, $353.02 penalty, and $300.83 interest.

2. On December 16, 2014, the Department assessed the Taxpayer for gross receipts tax, penalty,

and interest for the tax period from January 1, 2010 through December 31, 2010. The

assessment was for $2,675.38 tax, $535.08 penalty, and $350.04 interest.

3. On December 16, 2014, the Department assessed the Taxpayer for gross receipts tax, penalty,

and interest for the tax period from January 1, 2011 through December 31, 2011. The

assessment was for $3,005.84 tax, $601.16 penalty, and $284.66 interest

4. On February 2, 2015 and February 12, 2015, the Taxpayer filed formal protest letters to the

assessments.

5. On April 1, 2015, the Department filed a Request for Hearing asking that the Taxpayer’s

protest be scheduled for a formal administrative hearing.

6. On April 7, 2015, the Hearings Office issued a notice of hearing. The hearing date was set

within ninety days of the protest.

7. On April 17, 2015, the Taxpayer requested a continuance of the hearing.

8. On April 23, 2015, the request for continuance was granted, and the delay of the hearing was

attributable to the Taxpayer.

9. On April 23, 2015, the Hearings Bureau sent amended notices of hearing.

10. The Taxpayer has been collecting disability for several years.

11. At some point after he became disabled, the Taxpayer began doing volunteer work for his

local church parish.

12. The Taxpayer was very involved in the church and helped organize a chapter of the

Fraternity of the Secular Franciscan Order to provide goods and services to the needy in his

community.

13. At some point in 2007 or 2008, the priest of the Taxpayer’s parish requested that the

Taxpayer oversee some construction and restoration projects that the church was undertaking.

The priest offered to compensate the Taxpayer for his services.

14. The Taxpayer accepted the offer and began to manage and oversee several projects for the

church. The Taxpayer did this for several years, including 2009, 2010, and 2011.

15. The church offered work on these projects to its parishioners. The church would send

various people to the Taxpayer to work on the projects.

16. The priest occasionally dismissed people from working on the projects.

Francis J. Brown
Letter ID Nos. L0854247376, L1927989200, and L0183158736
page 2 of 8

17. The Taxpayer also recruited people to work on the projects and refused the priest’s request to

dismiss at least one person who was working on a project for him.

18. The priest would instruct the Taxpayer what was to be done on each project, but the

Taxpayer was in charge of accomplishing the goals set by the priest.

19. The Taxpayer had some experience in historical restorations and never had an adverse

inspection on such a project.

20. After the Taxpayer ceased working for the church, the church was given a red tag on an

inspection for violating certain historical restoration restrictions. The church then asked the

Taxpayer to return to work for them, but the Taxpayer was wary of doing so since he did not

feel that the church had dealt fairly with him in issuing 1099s.

21. The church began by paying each worker, including the Taxpayer, separately. The workers

turned in timesheets to the church, and the church would issue checks or cash to the

individual worker.

22. The Taxpayer often took possession of the checks or cash from the church and passed them

out to the individual worker. Usually this occurred when the worker was unable to go to the

church himself on the payday.

23. The Taxpayer was in charge of supervising, keeping, and turning in the timesheets.

24. The church began paying the Taxpayer for the entire amount of time spent on a project with

respect to certain workers’ timesheets. The Taxpayer partially refused this arrangement.

25. The Taxpayer accepted payments on behalf of his own timesheets and certain other workers’

(usually relatives) timesheets, but refused to accept payments based on other workers’

timesheets and insisted that the church issue separate checks for those workers.

26. The church issued 1099s to some of the workers, and issued W-2s to others.

Francis J. Brown
Letter ID Nos. L0854247376, L1927989200, and L0183158736
page 3 of 8

27. When it began issuing the Taxpayer the payments for more than his individual hours, the

church began referring to the Taxpayer’s services as Francis Brown Construction in its

paperwork.

28. The Taxpayer utilized forms printed out by the church that referred to his business in this

way.

29. The church issued 1099s to the Taxpayer for the 2009, 2010, and 2011 tax years.

30. The Taxpayer included the income from those 1099s in his personal income taxes. However,

the Taxpayer was not filing or paying gross receipts taxes for those time periods.

31. The Taxpayer argues that he was an employee of the church and was not an independent

contractor who should be subject to gross receipts.

32. While the protest was pending, the Taxpayer paid the 2009 assessment in full.

33. As of the hearing date, the Taxpayer’s outstanding balances are $2,675.38 tax, $535.08

penalty, and $392.04 interest for the 2010 tax year, and $3,005.84 tax, $601.17 penalty, and

$331.85 interest for the 2011 tax year. Interest continues to accrue until the tax principal is

paid.

DISCUSSION

The issue to be decided is whether the Taxpayer is liable for gross receipts tax, penalty, and

interest under the assessments.

Burden of Proof.

Assessments by the Department are presumed to be correct. See NMSA 1978, § 7-1-17. Tax

includes, by definition, the amount of tax principal imposed and, unless the context otherwise

requires, “the amount of any interest or civil penalty relating thereto.” NMSA 1978, § 7-1-3. See

also El Centro Villa Nursing Ctr. v. Taxation and Revenue Department, 1989-NMCA-070, 108 N.M.

795. Therefore, the assessment issued to the Taxpayer is presumed to be correct, and it is the

Francis J. Brown
Letter ID Nos. L0854247376, L1927989200, and L0183158736
page 4 of 8
Taxpayer’s burden to present evidence and legal argument to show that he is entitled to an

abatement.

Gross Receipts Tax.

Generally, services performed within the State of New Mexico are subject to the gross

receipts tax. See 3.2.1.18 (A) NMAC (2003). It is the responsibility of the taxpayer, who is in the

position to know the details of his business activities, to determine accurately and to report his tax

liabilities to the Department. See NMSA 1978, § 7-1-13. However, an employee’s receipts of

wages, salary, commissions, and other forms of payments for personal services are exempt from the

gross receipts tax. See NMSA 1978, § 7-9-17 (1969).

Employees.

Several factors should be considered in determining whether a person is an employee or an

independent contractor. See 3.2.105.7 (A) NMAC (2001). Four factors deal with whether the

employer should be withholding tax from the pay, should be paying FICA, should cover the

employee under workman’s compensation, and should be paying unemployment insurance. See id.

There was no indication that the church was doing any of these things. These factors weigh against

the Taxpayer’s claim that he was an employee

Another factor is whether the employer considers the person to be an employee. See id.

There was no evidence that the church considered the Taxpayer to be an employee. The church

issued 1099s to the Taxpayer, while it also issued W-2s to other workers. This indicates that the

church did not consider the Taxpayer to be an employee. This factor weighs against the Taxpayer’s

claim that he was an employee.

Another factor is whether the person is paid a wage or a salary. See id. The Taxpayer was

paid by the hour and was only paid for work on certain projects. The Taxpayer also claimed that the

church included all of the workers’ pay in his 1099s. There was no evidence to support this

Francis J. Brown
Letter ID Nos. L0854247376, L1927989200, and L0183158736
page 5 of 8
allegation, and the Taxpayer admitted that the church issued 1099s or W-2s to its other workers.

This factor weighs in favor of the Taxpayer’s claim that he was an employee as he was being paid an

hourly wage.

Another factor is whether the employer has the right to exercise control over the means of

performing the service. See id. Generally, this factor is the one principally used to determine

whether a person was acting as an independent contractor or as an employee. See Mascarenas v.

Jaramillo, 1991-NMSC-014, ¶ 7, 111 N.M. 410. See also Reule Sun Corp. v. Valles, 2010-NMSC-

004, ¶ 26, 147 N.M. 512 (determining whether a person was an employee or an independent

contractor under the Construction Industries Licensing Act and under Section 60-13-3.1). Although

Section 60-13-3.1 is not directly applicable in this case, it is helpful in setting out general criteria for

determining if a person is an independent contractor. Meeting only one standard set out in Section

60-13-3.1 (A) will classify a person as an independent contractor and not as an employee. See Reule

Sun Corp. at ¶ 30.

One standard under that statute is whether the person has the authority to hire and fire

employees. See NMSA 1978, § 60-13-3.1 (A) (4). The Taxpayer presented some evidence that the

church was the one hiring and firing workers. However, the Taxpayer also presented evidence that

he hired and retained workers against the wishes of the church. The Taxpayer mentioned a specific

worker who has lost a leg, or possibly both legs. The Taxpayer described this man as sort of a rough-

looking character. The Taxpayer explained that the priest and other church organizers did not want

that man doing any work on their projects. Mr. Archuleta confirmed that the church did not want

that man working on their projects. However, the Taxpayer retained that man’s services and had him

help with ceiling installation on at least one project. Therefore, there was evidence that the Taxpayer

had the authority to hire and fire employees.

Francis J. Brown
Letter ID Nos. L0854247376, L1927989200, and L0183158736
page 6 of 8
Another standard of work as an independent contractor is whether the person was free to

control the manner and means of accomplishing the work. See NMSA 1978, § 60-13-3.1 (A) (1).

See also 3.2.105.7 (A) NMAC. The Taxpayer argued that the priest was directing the course of

work, what was to be done, by whom, and when. The priest also directed that work be done or halted

based on funding or other considerations. Mr. Archuleta confirmed that he was hired by the priest,

was paid by the church, and that the priest sometimes came by and gave directions on projects.

However, the Taxpayer also explained that he was in charge of the workers and directed them on

what to do. The Taxpayer explained that he used the workers where they were qualified. The

Taxpayer explained that one worker sent over by the priest was the priest’s relative and had no

construction knowledge or skills. The Taxpayer felt obligated to use this worker as he was the

priest’s relative, but his work was mostly limited to sweeping up or other jobs that did not require

any construction skills. The Taxpayer also explained that he injured his back when he climbed up to

show a worker how he wanted a particular job done. Based upon the totality of the evidence, the

Taxpayer had the right to exercise control over how the work was being conducted. Therefore, there

is insufficient evidence to establish that the Taxpayer was actually an employee of the church.

Consequently, the Taxpayer was an independent contractor and his services were subject to the gross

receipts tax.

Assessment of Penalty.

A taxpayer’s lack of knowledge or erroneous belief that the taxpayer did not owe tax is

considered to be negligence for purposes of assessment of penalty. See Tiffany Const. Co., Inc. v.

Bureau of Revenue, 1976-NMCA-127, 90 N.M. 16. Therefore, penalty was properly assessed to the

Taxpayer.

Assessment of Interest.

Francis J. Brown
Letter ID Nos. L0854247376, L1927989200, and L0183158736
page 7 of 8
Interest “shall be paid” on taxes that are not paid on or before the date on which the tax is due.

NMSA 1978, § 7-1-67 (A). The word “shall” indicates that the assessment of interest is mandatory, not

discretionary. See Marbob Energy Corp. v. N.M. Oil Conservation Comm’n., 2009-NMSC-013, ¶ 22,

146 N.M. 24. The assessment of interest is not designed to punish taxpayers, but to compensate the

state for the time value of unpaid revenues. Because the tax was not paid when it was due, interest

was properly assessed.

CONCLUSIONS OF LAW

A. The Taxpayer filed a timely written protest to the Notices of Assessment of 2009, 2010,

and 2011 gross receipts taxes issued under Letter ID numbers L0854247376, L1927989200, and

L0183158736, and jurisdiction lies over the parties and the subject matter of this protest.

B. The Taxpayer failed to overcome the presumption of correctness. See NMSA 1978, § 7-

1-17.

C. The Taxpayer was working as an independent contractor and was not an employee. See

3.2.105.7 (A) NMAC (2001). See Mascarenas v. Jaramillo, 1991-NMSC-014, ¶ 7, 111 N.M. 410.

See also Reule Sun Corp. v. Valles, 2010-NMSC-004, ¶ 26, 147 N.M. 512.

D. Therefore, the Taxpayer was properly assessed.

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

DATED: July 15, 2015.

Dee Dee Hoxie
DEE DEE HOXIE
Hearing Officer
Administrative Hearings Office
Post Office Box 6400
Santa Fe, NM 87502

Francis J. Brown
Letter ID Nos. L0854247376, L1927989200, and L0183158736
page 8 of 8