Was a painter exempt as an employee when he received Forms 1099 and lacked evidence of withholding, benefits, or employer control?

Plain-English summary

A painter who received Forms 1099 did not prove that he was an employee exempt from gross receipts tax, and his NTTC arrived too late and in the wrong form. The AHO upheld $16,520.78 tax and $2,675.47 interest, but abated the $3,304.16 penalty because his company, coworkers, and tax preparer had reasonably misled him about his status.

Luis Fernandez painted for one company from 2008 through 2012 and was paid weekly as an independent contractor. He believed he was an employee and understood that the company used Forms 1099 instead of W-2s only because he lacked a Social Security number. His Spanish-speaking tax preparer never explained New Mexico gross receipts tax.

The evidence did not establish employee status

Employee wages were exempt from gross receipts tax, but the regulations required consideration of withholding, FICA, workers' compensation, unemployment coverage, wage or salary payment, the employer's classification, and control over the work.

There was no evidence that the company withheld tax, paid FICA, provided workers' compensation or unemployment coverage, or controlled how Fernandez performed the painting. The Forms 1099 showed that the company treated him as an independent contractor. Weekly payment alone did not establish wages or salary.

On the available record, Fernandez did not carry his burden to prove employee status.

The NTTC was both late and the wrong type

The Department's November 21, 2015 audit notice set a January 20, 2016 NTTC deadline. Fernandez first sought help from his tax preparer, who promised to handle the matter but stopped responding.

The company was willing to issue a certificate, but its own tax delinquencies made it ineligible until it returned to compliance. It finally executed an NTTC on April 29—more than three months after the deadline—and the certificate covered tangible goods rather than services.

Section 7-9-43 required timely possession of the proper certificate. The AHO therefore denied the deduction and upheld the tax.

Reasonable misunderstanding removed the penalty

Fernandez argued that he was not trying to avoid tax and had relied on the company, coworkers, and his tax preparer. The AHO found that he took reasonable steps to understand and comply with his obligations but was misled into believing he was an employee.

That evidence established ordinary business care and non-negligence, so the penalty was abated. Interest remained mandatory because the tax was unpaid when due.

Result: protest GRANTED IN PART AND DENIED IN PART. Tax and interest remained; penalty was abated.

What this means for you

Workers paid on Forms 1099

Your belief that you are an employee is not enough. Review withholding, benefits, unemployment and workers' compensation coverage, the payer's classification, and its right to control your work.

Subcontractors seeking NTTCs

Confirm that the buyer is eligible to issue certificates and that the certificate covers services rather than tangible goods. A late or wrong-type NTTC will not substantiate the deduction.

Tax preparers and advisers

Explain state gross receipts obligations to 1099 workers explicitly. Here professional and payer misinformation supported penalty relief, but the underlying tax and interest still remained.

Common questions

Q: Did weekly payment make Fernandez an employee?
A: No. The record did not show how his pay was calculated, and the other employee-status evidence was missing or pointed to independent contracting.

Q: Why could the company not issue an NTTC on time?
A: Its own tax delinquencies made it ineligible for certificates until it returned to compliance.

Q: What was wrong with the eventual certificate?
A: It arrived more than three months late and covered sales of tangible goods rather than services.

Q: Why was the penalty abated?
A: Fernandez exercised ordinary care but was misled by the company, coworkers, and his tax preparer into believing he was an employee.

Q: What amounts remained?
A: $16,520.78 gross receipts tax and $2,675.47 interest. The $3,304.16 penalty was abated.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-1-13, 7-9-17, and 7-9-43 — reporting duty, employee receipts, and NTTC deadline
• NMSA 1978, §§ 7-9-48 and 7-9-52 — service deductions
• NMSA 1978, §§ 7-1-3 and 7-1-17 — tax definition and assessment presumption
• NMSA 1978, §§ 7-1-67 and 7-1-69 — interest and negligence penalty
• Regulations 3.2.105.7(A), 3.1.11.10, and 3.1.11.11 NMAC — worker status and non-negligence

Cases cited:

• Proficient Food Co. v. New Mexico Taxation and Revenue Department, 1988-NMCA-042 — failure to possess the proper timely NTTC
• Public Services Co. v. New Mexico Taxation and Revenue Department, 2007-NMCA-050 — taxpayer's burden to prove a deduction
• Security Escrow Corp. v. State Taxation and Revenue Department, 1988-NMCA-068 — strict proof of deductions
• Marbob Energy Corp. v. New Mexico Oil Conservation Commission, 2009-NMSC-013 — mandatory meaning of “shall”

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Luis M. Fernandez
• Decision PDF: D&O 16-41

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
LUIS M. FERNANDEZ, No. 16-41
TO ASSESSMENT ISSUED UNDER
LETTER ID NO. L0796504624

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on July 7, 2016 before

Hearing Officer Dee Dee Hoxie. The Taxation and Revenue Department (Department) was

represented by Mr. Marek Grabowski, Staff Attorney. Mr. Tom Dillon, Auditor, also appeared on

behalf of the Department. Mr. Luis Fernandez (Taxpayer) appeared for the hearing. At the

Taxpayer’s request, his brother and sister-in-law, Mr. Leonardo Fernandez and Ms. Amanda

Ruggles, also appeared for the hearing. The Taxpayer, his brother, Ms. Ruggles, and Mr. Dillon

testified at the hearing. No exhibits were submitted. After the record was closed, with all of the

parties still in the hearing room, Mr. Grabowski gave the Taxpayer and the Hearing Officer a

copy of the updated liability amounts. The document was placed with the administrative file, but

as the document was not submitted on the record, it was not considered in the decision. 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 February 23, 2016, the Department assessed the Taxpayer for gross receipts tax,

penalty, and interest for the tax period from January 1, 2008 through December 31, 2012.

The assessment was for $16,520.78 tax, $3,304.16 penalty, and $2,675.47 interest.

2. On May 3, 2016, the Taxpayer filed a formal protest letter.
3. On May 16, 2016, the Department filed a Request for Hearing asking that the Taxpayer’s

protest be scheduled for a formal administrative hearing.

4. On May 17, 2016, the Hearings Office issued a notice of hearing. The hearing was held

within 90 days of the protest.

5. During 2008 through 2012, the Taxpayer was working as a painter for a particular

company (the Company).

6. The Taxpayer was paid weekly and was issued 1099s as an independent contractor.

7. The Taxpayer believed that he was an employee of the Company.

8. The Company, his co-workers, and his tax preparer led the Taxpayer to believe that he

was receiving 1099s instead of W-2s because he did not have a social security number,

but that he was still an employee.

9. The Taxpayer used a tax preparer who spoke Spanish and trusted that she was telling him

how to handle his taxes appropriately. The tax preparer never explained gross receipts

tax to the Taxpayer.

10. The Department issued a notice of audit to the Taxpayer on November 21, 2015. The

notice also advised the Taxpayer of his responsibility to obtain nontaxable transaction

certificates (NTTCs) within 60 days of the letter (the 60-day letter).

11. The deadline for NTTCs was January 20, 2016.

12. The Taxpayer first contacted his tax preparer for assistance. The tax preparer said she

would take care of it and would send the documentation to the Department. The tax

preparer did not do so and stopped responding to the Taxpayer.

13. The Taxpayer contacted the Company and requested a NTTC.

Luis Fernandez
Letter ID No. L0796504624
page 2 of 8

14. The Company was willing to execute a NTTC to the Taxpayer before the 60-day

deadline, but was unable to do so at that time because the Company was ineligible for

NTTCs due to its own tax delinquencies.

15. The Company came into compliance, and was issued NTTCs from the Department. The

Company then executed a NTTC to the Taxpayer on April 29, 2016, which was more

than three months past the 60-day deadline.

16. The NTTC provided to the Taxpayer was the wrong type. It was a NTTC for sale of

tangible goods rather than one for the sale of services.

DISCUSSION

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

penalty, and interest that were assessed.

The Taxpayer argued that he did not know about gross receipts tax, believed he was an

employee, and was not trying to evade his taxes.

The Department argued that the Taxpayer did not obtain the NTTC within the statutory

time frame and that deductions are prohibited by the statute.

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 Taxpayer’s burden to present evidence and legal argument to show that he is entitled

to an abatement. The burden is on the Taxpayer to prove that he is entitled to an exemption or

Luis Fernandez
Letter ID No. L0796504624
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deduction. See Public Services Co. v. N.M. Taxation and Revenue Dep’t., 2007-NMCA-050, ¶

32, 141 N.M. 520. See also Till v. Jones, 1972-NMCA-046, 83 N.M. 743. “Where an

exemption or deduction from tax is claimed, the statute must be construed strictly in favor of the

taxing authority, the right to the exemption or deduction must be clearly and unambiguously

expressed in the statute, and the right must be clearly established by the taxpayer.” Sec. Escrow

Corp. v. State Taxation and Revenue Dep’t., 1988-NMCA-068, ¶ 8, 107 N.M. 540. See also

Wing Pawn Shop v. Taxation and Revenue Dep’t., 1991-NMCA-024, ¶ 16, 111 N.M. 735. See

also Chavez v. Commissioner of Revenue, 1970-NMCA-116, ¶ 7, 82 N.M. 97.

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). A taxpayer engaged in

business may also be able to deduct certain gross receipts when they are provided with NTTCs

from buyers. See NMSA 1978, § 7-9-43 (20011). The Taxpayer admitted that he was working

as a painter for the Company during the tax periods at question. However, the Taxpayer believed

that he was an employee, not an independent contractor engaged in his own business.

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

Luis Fernandez
Letter ID No. L0796504624
page 4 of 8
employee under workman’s compensation, and should be paying unemployment insurance. See

id. There was no indication that the Company was doing any of these things.

Another factor is whether the person was paid a wage or salary. See id. There was no

evidence on how the Taxpayer’s pay was calculated; just that he was paid weekly. Another

factor is whether the employer considered the person to be an employee. See id. The

Company’s use of 1099s is an indication that it was treating the Taxpayer as an independent

contractor rather than an employee. The final factor is whether the employer had the right to

exercise control over the work. See id. There was no evidence on how the work was assigned or

conducted. Based upon the totality of the evidence, there is not sufficient proof that the

Taxpayer was an employee rather than an independent contractor.

NTTCs.

A taxpayer may deduct certain gross receipts only when they are provided with NTTCs

from buyers. See NMSA 1978, § 7-9-43 (2011). A taxpayer should be in possession of NTTCs

when the receipts from the transaction are due, but may also produce NTTCs within 60 days of

notice from the Department. See id. The seller must accept the NTTC in good faith. See id. A

person who is providing services may take a deduction if the person is in possession of a NTTC.

See NMSA 1978, § 7-9-48 and § 7-9-52.

The Taxpayer was served with the 60-day letter by mailing on November 21, 2015, and

the 60-day deadline was January 20, 2016. The Taxpayer received a NTTC from the Company

on April 29, 2016. Therefore, the NTTC was not received timely. See NMSA 1978, § 7-9-43.

When a taxpayer “is not in possession of the required [NTTCs] within sixty days from the date

that the notice…is given…, deductions claimed by the seller or lessor that require delivery of

these nontaxable transaction certificates shall be disallowed”. NMSA 1978, § 7-9-43 (A)

Luis Fernandez
Letter ID No. L0796504624
page 5 of 8
(emphasis added). The word “shall” indicates that the denial of the deduction is mandatory, not

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

22, 146 N.M. 24. A right to a deduction must be established by the taxpayer claiming the

deduction, and the failure of the taxpayer to possess a NTTC in the right form and within the

time prescribed by the Department is a valid reason to deny the deduction even though form is

not favored over substance. See Proficient Food Co. v. N.M. Taxation and Revenue Dep’t.,

1988-NMCA-042, ¶ 22, 107 N.M. 392 (holding that the Department had properly denied the

deduction when the taxpayer had not received the proper form from the buyer within the time

limit). Therefore, the Department properly denied the deductions, and the Taxpayer is liable for

the gross receipts tax.

Assessment of Penalty.

The Taxpayer argued that he should not be subject to penalty. The Taxpayer argued that

he was not trying to avoid his taxes; he was just unaware that he owed them. The Taxpayer also

argued that he was led to believe that he was an employee by the Company and his co-workers,

and that he had relied on his tax preparer’s advice.

Penalty “shall be added to the amount assessed” when a tax is not paid on time due to

negligence. See NMSA 1978, § 7-1-69 (2007) (emphasis added). Again, the word “shall”

indicates that the assessment of penalty is mandatory, not discretionary. See Marbob Energy

Corp., 2009-NMSC-013, ¶ 22. A taxpayer is not negligent when relying on the advice of an

accountant. See 3.1.11.11 NMAC (2001). A taxpayer is not negligent if he/she exercises

ordinary business care. See 3.1.11.10 NMAC (2001). The Taxpayer took reasonable steps to

understand and comply with his tax obligations, but the Taxpayer was misled by the Company,

Luis Fernandez
Letter ID No. L0796504624
page 6 of 8
his co-workers, and his tax preparer. Therefore, the Taxpayer was not negligent. Consequently,

the penalty is abated.

Assessment of Interest.

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). Again, the word “shall” indicates that the assessment of interest

is mandatory, not discretionary. See Marbob Energy Corp., 2009-NMSC-013, ¶ 22. 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 Notice of Assessment of gross

receipts taxes issued under Letter ID number L0796504624, and jurisdiction lies over the parties

and the subject matter of this protest.

B. There was not sufficient proof that the Taxpayer was an employee rather than an

independent contractor. See 3.2.105.7 (A) NMAC (2001).

C. The Taxpayer failed to obtain a timely NTTC. See NMSA 1978, § 7-9-43. See also

3.2.201.8 NMAC. See also Proficient Food Co., 1988-NMCA-042 (holding that failure to timely

possess a NTTC was a valid reason to deny the deduction).

D. Therefore, the deductions were properly denied, and the Taxpayer was

appropriately assessed for gross receipts taxes. See NMSA 1978, § 7-9-43.

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Letter ID No. L0796504624
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E. The Taxpayer exercised ordinary business care, but was misled by others on his

status as an employee. Therefore, the Taxpayer was not negligent, and penalty is HEREBY

ABATED. See NMSA 1978, § 7-1-69. See 3.1.11.10 NMAC (2001).

F. The Taxpayer failed to pay the tax when it was due, so interest was appropriately

assessed. See NMSA 1978, § 7-1-67.

For the foregoing reasons, the Taxpayer's protest is GRANTED IN PART AND DENIED

IN PART.

DATED: July 27, 2016.

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

NOTICE OF RIGHT TO APPEAL

Pursuant to NMSA 1978, § 7-1-25, the parties have the right to appeal this decision by

filing a notice of appeal with the New Mexico Court of Appeals within 30 days of the date

shown above. See Rule 12-601 NMRA. If an appeal is not filed within 30 days, this Decision

and Order will become final. A copy of the Notice of Appeal should be mailed to John Griego,

P. O. Box 6400, Santa Fe, New Mexico 87502. Mr. Griego may be contacted at 505-827-0466.

Luis Fernandez
Letter ID No. L0796504624
page 8 of 8