Were a library's payments reimbursing Paragon Construction for payroll excluded from gross receipts because Paragon acted as a disclosed payroll agent?

Plain-English summary

Payments from the Embudo Valley Library reimbursing Paragon Construction's payroll expenses were taxable gross receipts. Paragon employed the workers and incurred the payroll obligation itself; it did not prove authority to bind the Library or an affirmative disclosure giving workers enforcement rights against the Library.

Paragon agreed to construct a new 3,000-square-foot library in Dixon for a $45,000 service fee, excluding gross receipts tax.

An anonymous donor funded much of the construction and required local residents to be employed on the project. To meet that condition, Paragon self-performed work and minimized subcontracting.

Paragon was the workers' employer

The Library helped identify local workers and collected their timesheets as a convenience. But the workers were temporarily employed by Paragon, not the Library.

Paragon:

• calculated payroll;
• issued paychecks from its own account in its own name;
• withheld payroll taxes and fees;
• provided workers' compensation insurance; and
• bore the employee-related expenses.

The Library separately reimbursed Paragon for those payroll costs.

For 2013, the Library reported $66,223.28 paid to Paragon, of which $52,378.28 represented payroll expenses. Paragon's Schedule C and W-2s reported $67,532 of wages as its own expense.

Reimbursement of a business's own expense was taxable

Regulation 3.2.1.19(C) NMAC treated reimbursed expenditures connected with performing a service as gross receipts unless the expense was incurred as an agent for a principal in a disclosed agency capacity.

Under MPC Ltd., exclusion required both:

1. authority for the agent to bind the principal to an obligation with a third party; and
2. contractual disclosure telling the third party it could enforce that obligation against the principal.

Paragon proved neither element.

The construction contract barred third-party rights

The contract stated that it created no contractual relationship between anyone other than the Library and Paragon. That language prevented workers from acquiring or enforcing payroll rights under the agreement.

Paragon offered no other contract establishing that it could bind the Library to employment or payroll obligations.

The Library's later letter confirmed the practical reimbursement arrangement but did not create the required authority or third-party enforcement right.

Common knowledge was not affirmative disclosure

Paragon argued that workers generally knew the Library funded the project and submitted timesheets to the Library.

The owners acknowledged they never specifically told workers that Paragon acted as the Library's agent or that workers could proceed against the Library for wages.

General awareness of funding was not enough. The law required an actual affirmative disclosure of the agency relationship and enforcement right.

The regulatory staffing example did not fit

Paragon relied on an example involving a company that administered payroll for another entity's employees.

In that example, the principal—not the payroll company—employed, recruited, supervised, hired, and fired the workers. Here Paragon was the employer. The example therefore did not apply.

Penalty and interest also remained

Paragon did not seek advice from competent tax counsel or an accountant before excluding the receipts. Its bookkeeper had no formal tax-accounting training, and the agency theory was considered only after the fact.

The AHO found no intentional evasion or bad faith, but the failure to report and pay still met the civil-negligence definitions. No good-faith mistake of law on reasonable grounds or other indicator of nonnegligence was proved.

Interest was mandatory until payment of the tax principal.

Result: protest DENIED. As of February 19, 2018, Paragon owed $3,885.66 gross receipts tax, $777.14 penalty, and $573 interest, totaling $5,235.80.

What this means for you

Contractors reimbursed for project payroll

Reimbursement is generally taxable when the contractor employs the workers and incurs the payroll obligation. Separate invoicing does not by itself create an exclusion.

Businesses claiming disclosed-agent treatment

Use contracts that actually authorize the agent to bind the principal, and affirmatively disclose to the third party that it can enforce the obligation against the principal.

Community projects using donor-funded local labor

Decide in advance who legally employs the workers, carries insurance, controls hiring, issues payroll, and bears wage liability. Funding source and project goals do not determine tax treatment.

Businesses relying on regulatory examples

Match every material fact. A payroll-administration example may not apply when your business, rather than the customer, is the employer.

Common questions

Q: Who employed the local workers?
A: Paragon Construction.

Q: Why did the Library reimburse payroll?
A: A donor required local hiring, and the Library agreed to fund Paragon's employee expenses separately from its construction fee.

Q: Did separate payroll invoices make the receipts nontaxable?
A: No. The underlying employer obligation and agency requirements controlled.

Q: Could workers enforce payroll obligations against the Library?
A: No such contractual right or affirmative disclosure was proved.

Q: Why did the staffing-company example fail?
A: The example assumed the customer employed and controlled the workers; Paragon itself employed them here.

Q: What amount remained due?
A: $5,235.80 as of the hearing date, including tax, penalty, and interest.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-9-3.3, 7-9-3.5(A)(1) and (3)(f), 7-9-4, and 7-9-5 — business activity, gross receipts, tax, and disclosed-agency exclusion
• NMSA 1978, §§ 7-1-3(X) and 7-1-17(C) — tax definition and assessment presumption
• NMSA 1978, §§ 7-1-67 and 7-1-69(A) and (B) — interest and civil negligence penalty
• Regulation 3.2.1.19(C) NMAC — reimbursed expenditures and agency, including Example 4
• Regulations 3.1.11.10 and 3.1.11.11 NMAC — negligence and nonnegligence

Cases cited:

• MPC Ltd. v. New Mexico Taxation and Revenue Department, 2003-NMCA-021 — disclosed-agent authority and third-party notice
• Bogle Management Co. v. New Mexico Taxation and Revenue Department, No. A-1-CA-35641 (N.M. Ct. App. Dec. 5, 2017) — affirmative disclosure, cited as nonprecedential
• El Centro Villa Nursing Center v. Taxation and Revenue Department, 1989-NMCA-070 — civil negligence and taxpayer responsibility

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Paragon Construction, LLC
• Decision PDF: D&O 18-09

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
PARAGON CONSTRUCTION LLC
TO ASSESSMENT ISSUED UNDER
LETTER ID NO. L2122476848

v. D&O No. 18-09

NEW MEXICO TAXATION AND REVENUE DEPARTMENT

DECISION AND ORDER

A protest hearing occurred in the above-captioned matter on February 19, 2018 at 10:00

a.m. before Chris Romero, Esq., Hearing Officer, in Santa Fe, New Mexico. Mr. Byron Butcher

and Ms. Leslie Butcher appeared and represented Paragon Construction, L.L.C. (“Taxpayer”).

Staff Attorney, Mr. Marek Grabowski, Esq., appeared representing the Taxation and Revenue

Department of the State of New Mexico (“Department”). Protest Auditor, Mr. Nicholas Pacheco,

appeared and testified on behalf of the Department.

The Hearing Officer took notice of all documents in the administrative file. Taxpayer

Exhibits 1 – 2 and Department Exhibits A – F were admitted into the evidentiary record of the

hearing without objection. A more detailed description of exhibits submitted at the hearing is

included on the Administrative Exhibit Coversheet. Based on the evidence and arguments

presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. On July 26, 2017, the Department assessed the Taxpayer under Letter ID No.

L2122476848 for gross receipts tax in the amount of $3,885.66, penalty in the amount of

$777.14, and interest in the amount of $484.00 for the tax periods from January 1, 2013 through
December 31, 2013. The total assessment was for $5,146.79 after a nominal offset of $0.01. [See

Administrative File].

2. On or about August 7, 2017, Taxpayer executed and filed a Formal Protest that

was received by the Department’s Protest Office on August 11, 2017. [See Administrative File].

3. Taxpayer’s Formal Protest was accompanied by a copy of a Contract for

Construction (Taxpayer Exhibit 1) and correspondence from the Executive Director of the

Embudo Valley Library & Community Center dated June 28, 2017 (Taxpayer Exhibit 2). [See

Administrative File].

4. On September 1, 2017, the Department acknowledged the receipt of Taxpayer’s

Protest under Letter ID No. L1865719088. [See Administrative File].

5. On October 16, 2017, the Department filed a Hearing Request in which it

requested a scheduling hearing. [See Administrative File].

6. On October 17, 2017, the Administrative Hearings Office entered a Notice of

Telephonic Scheduling Hearing that set a hearing to occur on November 3, 2017. [See

Administrative File].

7. On November 3, 2017, a telephonic scheduling hearing occurred in reference to

the above-captioned protest. The parties did not object that the hearing satisfied the 90-day

hearing requirement under NMSA 1978, Section 7-1B-8 (2015). [See Administrative File].

8. On November 6, 2017, the Administrative Hearings Office entered a Scheduling

Order and Notice of Administrative Hearing that set a hearing on the merits of Taxpayer’s

protest for February 19, 2018. [See Administrative File].

9. Mr. Byron Butcher is the managing member of Paragon Construction, LLC

(Taxpayer). [Testimony of Mr. Butcher].
In the Matter of Paragon Construction, L.L.C.
Page 2 of 19

10. Mr. Butcher holds licenses in general and electrical contracting. [Testimony of

Mr. Butcher].

11. Ms. Leslie Butcher is Taxpayer’s bookkeeper and has handled all of Taxpayer’s

accounting and financial functions during all times relevant to Taxpayer’s protest. [Testimony of

Ms. Butcher].

12. Ms. Butcher does not have any formal training or expertise in tax accounting.

[Testimony of Ms. Butcher].

13. Mr. Butcher and Ms. Butcher are married. [Testimony of Mr. Butcher].

14. Taxpayer is engaged in the construction business. [Testimony of Mr. Butcher;

Testimony of Ms. Butcher].

15. In March of 2012, Taxpayer entered into a Contract for Construction (hereinafter

“Contract”) with the Embudo Valley Library (hereinafter “Library”). The Contract provided for

the construction of a new, 3,000 sq. ft., library in Dixon, New Mexico. [Testimony of Ms.

Butcher; Testimony of Mr. Butcher; Dept. Ex. A; Dept. Ex. B; Dept. Ex. E; Taxpayer Ex. 1;

Taxpayer Ex. 2].

16. The Contract provided that Taxpayer would be compensated the sum of

$45,000.00, not including gross receipts tax, for its performance under the Contract. [Testimony

of Mr. Butcher; Testimony of Ms. Butcher; Taxpayer Ex. 1; Dept. Ex. E].

17. The Contract was never modified and represented the entire agreement of the

parties during all times relevant to Taxpayer’s protest. [Testimony of Mr. Butcher; Taxpayer Ex.

1, Art. 17; Dept. Ex. E, Art. 17)].

In the Matter of Paragon Construction, L.L.C.
Page 3 of 19

18. The Contract provided that it should not be construed to create a contractual

relationship of any kind between any persons or entities other than the Library and Taxpayer.

[See Dept. Ex. E, Art. 17; Taxpayer Ex. 1, Art. 17)].

19. The Library compensated Taxpayer for gross receipts tax associated with

Taxpayer’s compensation under the Contract. [Testimony of Mr. Butcher].

20. The compensation due under the Contract did not represent the actual cost of

construction. Rather, the Contract amount only represented the fee to Taxpayer for its services.

[Testimony of Mr. Butcher; Testimony of Ms. Butcher].

21. A significant portion of the funds actually expended to construct the library were

provided by an anonymous donor (hereinafter “Donor”). [Testimony of Ms. Butcher; Dept. Ex.

B; Taxpayer Ex. 2].

22. The Donor required, as a condition of the contribution, that residents of the area

be employed in the construction of the new library. [Testimony of Ms. Butcher; Testimony of

Mr. Butcher; Dept. Ex. B; Taxpayer Ex. 2].

23. In order to satisfy the condition of the Donor, Taxpayer agreed to “self-perform”

as much work as possible, and minimize the use of subcontractors. This plan was intended to

maximize employment of local individuals on the project consistent with the Donor’s condition.

[Testimony of Mr. Butcher; Testimony of Ms. Butcher; Taxpayer Ex. 2; Dept. Ex. D].

24. The Library assisted Taxpayer with identifying local individuals for work on the

project. Qualified individuals were thereafter employed by Taxpayer on a temporary basis

(hereinafter “Employees”). Employees were not employed by the Library. [Testimony of Mr.

Butcher; Taxpayer Ex. 2; Dept. Ex. B].

In the Matter of Paragon Construction, L.L.C.
Page 4 of 19

25. Taxpayer was liable for all expenses associated with its Employees. [Testimony

of Mr. Butcher; Testimony of Ms. Butcher].

26. The Library agreed to compensate Taxpayer for all payroll expenses, including

fees, and withholdings due for the Employees. [Testimony of Ms. Butcher; Dept. Ex. A; Dept.

Ex. B; Taxpayer Ex. 2].

27. The arrangement, whereby Employees would be employed by Taxpayer, would

permit employees to be insured under Taxpayer’s worker’s compensation insurance and enjoy

other benefits associated with employment. [Testimony of Mr. Butcher; Testimony of Ms.

Butcher; Dept. Ex. A; Taxpayer Ex. 2].

28. Employees submitted time sheets to the Library’s bookkeeper, Ms. Felicity

Fonseca (now its executive director), as a matter of convenience, because Mr. Butcher was not

always present at the construction site. The Library would then transmit the timesheets to

Taxpayer. [Testimony of Mr. Butcher; Testimony of Ms. Butcher].

29. Taxpayer would compile timesheets and calculate payroll expenses. It then

transmitted its payroll expenses back to the library for payment, either in the form of an email

detailing the amount due for payroll, or in the form of an invoice. The library in response would

then remit payment to Taxpayer. [Testimony of Mr. Butcher; Testimony of Ms. Butcher].

30. Taxpayer’s practice was to submit separate invoices for services performed under

the Contract and payroll. [Testimony of Ms. Butcher].

31. The Library subsequently compensated Taxpayer for the costs of Taxpayer’s

Employees separately from the fees for performance under the Contract. [Testimony of Mr.

Butcher].

In the Matter of Paragon Construction, L.L.C.
Page 5 of 19

32. Paychecks to Employees were drawn on Taxpayer’s financial account, bearing

Taxpayer’s name. [Testimony of Mr. Butcher].

33. The Library made payments to Taxpayer for services under the contract and

payroll expenses from January 11, 2013 through August 5, 2013. [See Administrative File, Form

1099 Detail (Attachment to Formal Protest].

34. For 2013, the Library reported a total amount of $66,223.28 paid to Taxpayer on

Form 1099. Of the total amount paid, $52,378.28 was payroll expenses. The remainder was for

services performed under the Contract. [See Dept. Ex. A; Dept. Ex. D; Form 1099 Detail

(Attachment to Formal Protest)].

35. Taxpayer’s 2013 Schedule C claimed wages as an expense in the amount of

$67,532.00. [Testimony of Mr. Pacheco; Dept. Ex. C, Line 26].

36. In 2013, Taxpayer paid a total sum of $67,532.00 in wages as reported on Forms

W-2. The sum paid corresponds with the amount claimed as an expense in Taxpayer’s Schedule

C. [Testimony of Mr. Pacheco; Dept. Ex. D; Dept. Ex. C, Line 26].

37. The Contract and other correspondence supplied by Taxpayer failed to establish

that Taxpayer was an agent authorized to contractually bind the Library as principal with respect

for any matters, including employment and payroll matters. [Testimony of Mr. Pacheco; Dept.

Ex. E; Dept. Ex B].

38. Funds remitted to Taxpayer by the Library for payroll expenses were specifically

intended as compensation for that purpose. [Testimony of Ms. Butcher].

39. Taxpayer did not seek consultation from any competent tax counsel or accountant

regarding the question of whether receipts intended to compensate it for payroll expenses would

be subject to gross receipts taxes. [Testimony of Ms. Butcher].
In the Matter of Paragon Construction, L.L.C.
Page 6 of 19

40. Although contemplated after-the-fact, Taxpayer did not consider at the time it

entered into the Contract with the Library, whether its relationship with the Library might

establish a disclosed agency relationship. [Testimony of Ms. Butcher].

41. As of February 19, 2018, Taxpayer’s liability under the assessment was $3,885.66

in gross receipts tax, $777.14 in penalty, and $573.00 in interest for a total amount due of

$5,235.80. [Testimony of Mr. Pacheco; Dept. Ex. F].

DISCUSSION

The principal issue in this protest is whether Taxpayer is liable for gross receipts tax on

receipts from the Library which were intended as compensation for payroll expenses. Taxpayer

asserted that such receipts should be excluded from gross receipts because it received them as an

agent on behalf of a principal in a disclosed agency capacity.

Burden of Proof.

Under NMSA 1978, Section 7-1-17 (C) (2007), the assessment from which this protest

arises is presumed correct and the burden is on Taxpayer to overcome the presumption. See

Archuleta v. O’Cheskey, 1972-NMCA-165, ¶11, 84 N.M. 428, 504 P.2d 638. Unless otherwise

specified, for the purposes of the Tax Administration Act, “tax” is defined to include interest and

civil penalty. See NMSA 1978, Section 7-1-3 (X) (2013). Under Regulation 3.1.6.13 NMAC, the

presumption of correctness under Section 7-1-17 (C) encompasses the Department’s assessment

of penalty and interest. See Chevron U.S.A., Inc. v. State ex rel. Dep’t of Taxation & Revenue,

2006-NMCA-50, ¶16, 139 N.M. 498, 503, 134 P.3d 785, 791 (agency regulations interpreting a

statute are presumed proper and are to be given substantial weight).

For that reason, a taxpayer carries the burden to present countervailing evidence or legal

argument to show that it is entitled to an abatement of an assessment. See N.M. Taxation &
In the Matter of Paragon Construction, L.L.C.
Page 7 of 19
Revenue Dep’t v. Casias Trucking, 2014-NMCA-099, ¶8, 336 P.3d 436 .“Unsubstantiated

statements that the assessment is incorrect cannot overcome the presumption of correctness.” See

MPC Ltd. v. N.M. Taxation & Revenue Dep’t, 2003-NMCA-021, ¶13, 133 N.M. 217, 62 P.3d

308; See also Regulation 3.1.6.12 NMAC. If a taxpayer presents sufficient evidence to rebut the

presumption, then the burden shifts to the Department to re-establish the correctness of the

assessment. See MPC Ltd., 2003-NMCA-021, ¶13.

“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.” See Wing Pawn Shop v. Taxation and Revenue Department, 1991-NMCA-024, ¶16,

111 N.M. 735, 809 P.2d 649 (internal citation omitted); See also TPL, Inc. v. N.M. Taxation &

Revenue Dep’t, 2003-NMSC-007, ¶9, 133 N.M. 447, 64 P.3d 474.

Gross Receipts Tax and Reimbursed Expenditures in New Mexico.

For the privilege of engaging in business, New Mexico imposes a gross receipts tax on

the receipts of any person engaged in business. See NMSA 1978, Section 7-9-4 (2002). Under

NMSA 1978, Section 7-9-3.5 (A) (1) (2007), the term “gross receipts” is defined to mean the

total amount of money or the value of other consideration received from selling property in New

Mexico, from leasing or licensing property employed in New Mexico, from granting a right to

use a franchise employed in New Mexico, from selling services performed outside New Mexico,

the product of which is initially used in New Mexico, or from performing services in New

Mexico. The term “engaging in business” is further defined as “carrying on or causing to be

carried on any activity with the purpose of direct or indirect benefit.” See NMSA 1978, Section

7-9-3.3 (2003).
In the Matter of Paragon Construction, L.L.C.
Page 8 of 19
Accordingly, there is a statutory presumption that all receipts of a person engaged in

business in New Mexico are taxable. See NMSA 1978, Section 7-9-5 (2002). In this protest,

Taxpayer does not dispute that compensation for services it provided under its Contract were

subject to gross receipts.

The central dispute in this protest arises from separate payments intended to compensate

Taxpayer for payroll expenses which were not addressed in the Contract. In support of its

position that those receipts should not be taxed, Taxpayer relies on NMSA 1978, Section 7-9-3.5

(A) (3) (f) which provides an exclusion from gross receipts for “amounts received solely on

behalf of another in a disclosed agency capacity.” Regulation 3.2.1.19 (C) (1) NMAC, which

implements the statute, further provides:

The receipts of any person received as a reimbursement of expenditures
incurred in connection with the performance of a service or the sale or
lease of property are gross receipts as defined by Section 7-9-3.5 NMSA
1978, unless that person incurs such expense as agent on behalf of a
principal while acting in a disclosed agency capacity. An agency
relationship exists if a person has the power to bind a principal in a
contract with a third party so that the third party can enforce the
contractual obligation against the principal.

In considering the application of the statutory exclusion, MPC Ltd., 2003-NMCA-21,

¶36, construed Regulation 3.2.1.19 (C) NMAC to mean:

(1) the agent [taxpayer] has the authority to bind the principal . . . to an
obligation . . . created by the agent [taxpayer], and (2) the beneficiary of
that obligation . . . is informed by contract that he or she has a right to
proceed against the principal . . . to enforce the obligation.

Consequently, the general rule may be summarized in the following manner.

Reimbursement of expenditures in connection with the performance of a service are considered

to be gross receipts subject to tax. See id. However, reimbursements may be excluded from

In the Matter of Paragon Construction, L.L.C.
Page 9 of 19
gross receipts if the expense is incurred by an “agent on behalf of the principal while acting in a

disclosed agency capacity.” Id.

Taxpayer asserted that it was a disclosed agent of the Library because the Library was

ultimately responsible for the payment of its payroll expenses, and because Taxpayer’s

Employees were aware of that arrangement. The Hearing Officer will first address the issue of

disclosure which requires “making known something that was previously unknown; a revelation

of facts.” See Black’s Law Dictionary, 531 (9th ed. 2009).

Mr. Butcher candidly acknowledged that he did not have specific discussions with

Taxpayer’s Employees concerning the arrangement for the Library to compensate Taxpayer for

its payroll expenses. On the other hand, Mr. and Ms. Butcher expressed that there was some

degree of common knowledge for those involved in the project concerning the manner in which

the construction was being funded, and the Taxpayer further suggested that the arrangement was

evident from the Library serving as the initial depository for Employee timesheets.

Although Employees may have submitted timesheets to the Library, and even if they had

additional knowledge concerning the facts by which their work was being funded, mere

awareness is not sufficient to show that the Employees knew that they could enforce a payroll

obligation against the Library. See MPC Ltd. v. N.M. Taxation & Revenue Dep’t, 2003-NMCA-

021, ¶38, 133 N.M. 217, 62 P.3d 308. Rather, the law requires an affirmative disclosure to the

Employee of the agency relationship. See id. at ¶37. Addressing a comparable scenario in which

a taxpayer similarly asserted common knowledge in support of a disclosed agency relationship,

the Court of Appeals recently recognized, while applying MPC to the facts of that case, that

“[t]axpayer fails to direct us to any specific communication between it and its managers that

supports its claims. An actual, affirmative statement disclosing the agency relationship is
In the Matter of Paragon Construction, L.L.C.
Page 10 of 19
necessary.” See Bogle Management Co., Inc. v. N.M. Taxation & Revenue Dep’t, No. A-1-CA-

35641, dec. at 18 - 19 (N.M. Ct. App. Dec. 5, 2017) (non-precedential).

Rather, the evidence established that Taxpayer employed the Employees, their paychecks

were issued in the name of Taxpayer, it withheld taxes and other payroll fees on their behalf, it

provided their worker’s compensation insurance, and it never made an affirmative disclosure to

the Employee of an agency relationship.

The evidence suggests there was no disclosure in this matter because the parties never

actually contemplated the formation of an agency relationship within the definition of Regulation

3.2.1.19 (C) NMAC, which leads to the second issue of discussion.

“An agency relationship exists if a person has the power to bind a principal in a contract

with a third party so that the third party can enforce the contractual obligation against the

principal.” See Regulation 3.2.1.19 (C) (1) NMAC. The initial source of such authority, should it

exist in this matter, may originate from the Contract itself. However, the Contract specifically

stated that neither the Contract nor any of the documents referenced therein could be construed

as creating a contractual relationship of any kind between persons or entities other than the

Library and Taxpayer. [See Dept. Ex. E.6, Art.17]. In other words, the parties’ intended to

prohibit third parties, such as the Employees, from acquiring, asserting, or enforcing rights under

the Contract. This prohibition clearly precludes third parties, such as Taxpayer’s Employees,

from asserting claims directly against the Library for any matter arising under the Contract,

including payroll disputes, contradicting the definition of “agency relationship.”

Therefore, the Contract exemplifies an intention to avert creation of an agency

relationship in that no third party could acquire rights under the contract which could then be

enforced against either party. Applied to this scenario, the Taxpayer’s Employees’ have no rights
In the Matter of Paragon Construction, L.L.C.
Page 11 of 19
under the Contract to proceed against the Library to enforce any purported payroll obligation.

See Benz v. Town Ctr. Land, Ltd. Liab. Co., 2013-NMCA-111, ¶31, 314 P.3d 688 (the purpose,

meaning, and intent of the parties to a contract is to be deduced from the language employed by

them; and where such language is not ambiguous, it is conclusive).

Although the Contract fails to establish the existence of an agency relationship, Mr.

Butcher explained that there may be other communications, either written or verbal, which

potentially address this issue. However, Taxpayer did not seek to introduce evidence of such

communications and admitted that the Contract was effective during all times relevant to the

protest and that it was never amended.

The Hearing Officer is prohibited from engaging in speculation with concern for the

substance or legal effect of such communications, but notes that the parties did not intend for

their Contract to be casually modified. The Contract stated that it represented “the entire and

integrated Agreement between the parties and supersede[d] prior negotiations, representations or

agreements, either written or oral[,]” which could only be modified if agreed upon in writing by

both parties. See Dept. Ex. E.6, Art. 17; Dept. E.1, Art. 1, ¶B.

Likewise, correspondence from the Library’s former bookkeeper, who now serves as its

Executive Director, corroborates Taxpayer’s narrative of its arrangement with the Library, but

also fails to establish the existence of a disclosed agency relationship within Regulation 3.2.1.19

(C) NMAC.

Despite the foregoing, Taxpayer asserted that Example 4 at Regulation 3.2.1.19 (C) (7)

should apply in its favor. However, reliance on Example 4 is misplaced. Example 4 provides the

following scenario (while the example refers to parties “X” and “Y”, the Hearing Officer has

In the Matter of Paragon Construction, L.L.C.
Page 12 of 19
substituted such designations for clarification. Every occurrence of “X” has been substituted for

“Taxpayer,” and “Y” for “Library”):

[Taxpayer] contracts with [Library] to perform administrative
functions relating to the employment relationship between
[Library] and its workers. [Library] pays [Taxpayer] the costs for
[Library]’s employees’ payroll, payroll taxes, worker’s
compensation, contributions to employee benefits and healthcare
and other amounts [Taxpayer] pays to or on behalf of [Library]’s
workers. [Library] separately pays [Taxpayer] a two percent (2%)
fee for the administrative services. [Library] or [Taxpayer] recruits
workers, selects them for work assignments, establishes their rate
of pay, assigns their schedule, instructs them when and where to
work, assigns them their duties, supervises and monitors the
performance of their duties, authorizes leaves of absence, handles
worker’s complaints, union grievances or disputes, and disciplines,
lays off or terminates the workers. [Taxpayer] issues payroll
checks, with [Taxpayer] as payor. The checks are distributed by
[Library] to workers. [Taxpayer] also secures worker’s
compensation coverage for the workers, calculates, withhold and
submits payroll taxes to appropriate taxing authorities, calculates
and makes contributions to union health, pension and welfare
benefit trust funds for workers, funds unemployment insurance
contributions and responds to unemployment compensation claims,
and processes garnishment orders. [Taxpayer] can require
[Library] to post a bond or other security for the payment of
payroll. [Library] agrees to indemnify [Taxpayer] against worker’s
claims for non-payment of wages, any claims arising from the acts
of worker at the work site, grievances by unions representing the
worker arising from acts of [Library], wage and hour claims, tax
claims, and failure of [Library] to provide training to workers.
[Taxpayer] has no gross receipts from the amount representing the
payroll, payroll taxes, worker’s compensation and benefits; this
amount is not subject to the gross receipts tax. The additional two
percent (2%), however is [Taxpayer]'s fee for performing services
and is subject to tax.

The scenario described in Example 4, were it to potentially apply, initially requires that

the Library, not the Taxpayer, employ the Employees. However, the undisputed evidence in this

protest established that Taxpayer employed the Employees. For that reason, Example 4 is not

analogous to the facts in this protest.
In the Matter of Paragon Construction, L.L.C.
Page 13 of 19
Taxpayer also asserted that it encountered a similar issue in reference to one or more

reporting periods in 2012, but that the Department resolved that issue to its satisfaction without

need to protest. Taxpayer provided no further evidence with respect to the issues arising in 2012

or how they were resolved, but suggested that the current protest should be resolved in a similar

manner. However, without evidence establishing what transpired in 2012, further consideration

would require impermissible speculation.

Since there is nothing in the record to establish that Taxpayer had the power or authority

as an agent to bind the Library in its interactions with third parties, and because there was no

actual disclosure of such authority or power, the Taxpayer failed to establish that it was acting as

the Library’s disclosed agent. See Bogle Management Co., Inc. v. N.M. Taxation & Revenue

Dep’t, No. A-1-CA-35641, dec. at 19 (N.M. Ct. App. Dec. 5, 2017) (non-precedential).

Therefore, Taxpayer’s receipts for payroll expenses should not be excluded from gross

receipts because they were not received solely on behalf of another in a disclosed agency

capacity.

Penalty and Interest.

When a taxpayer fails to make timely payment of taxes due to the state, “interest shall be

paid to the state on that amount from the first day following the day on which the tax becomes

due...until it is paid.” See NMSA 1978, Section 7-1-67 (2007) (italics for emphasis). Under the

statute, regardless of the reason for non-payment of the tax, the Department has no discretion in

the imposition of interest, as the statutory use of the word “shall” makes the imposition of

interest mandatory. See Marbob Energy Corp. v. N.M. Oil Conservation Comm’n, 2009-NMSC-

013, ¶22, 146 N.M. 24, 32, 206 P.3d 135, 143 (use of the word “shall” in a statute indicates the

provision is mandatory absent clear indication to the contrary). The language of Section 7-1-67 also
In the Matter of Paragon Construction, L.L.C.
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makes it clear that interest begins to run from the original due date of the tax until the tax principal

is paid in full. The Department has no discretion under Section 7-1-67 and must assess interest

against Taxpayer until Taxpayer satisfies the gross receipts tax principal.

When a taxpayer fails to pay taxes due to the State because of negligence or disregard of

rules and regulations, but without intent to evade or defeat a tax, NMSA 1978 Section 7-1-69

(2007) requires:

there shall be added to the amount assessed a penalty in an amount equal
to the greater of: (1) two percent per month or any fraction of a month
from the date the tax was due multiplied by the amount of tax due but not
paid, not to exceed twenty percent of the tax due but not paid.

(italics added for emphasis).

The statute’s use of the word “shall” makes the imposition of penalty mandatory in all instances

where a taxpayer’s actions or inactions meet the legal definition of “negligence.” See Marbob

Energy Corp., 2009-NMSC-013, ¶22.

Regulation 3.1.11.10 NMAC defines negligence in three separate ways: (A) “failure to

exercise that degree of ordinary business care and prudence which reasonable taxpayers would

exercise under like circumstances;” (B) “inaction by taxpayer where action is required”; or (C)

“inadvertence, indifference, thoughtlessness, carelessness, erroneous belief or inattention.”

Although the Hearing Officer was persuaded that Taxpayer’s underreporting and underpaying of the

gross receipts taxes was not intentional in this case or in bad faith, Taxpayer was nevertheless civilly

negligent under Regulation 3.1.11.10 (B) & (C) NMAC because Taxpayer failed to take action to

report and pay the appropriate amount of taxes when required through an erroneous belief that tax

was not due for receipts received as compensation for payroll. This erroneous belief constitutes

In the Matter of Paragon Construction, L.L.C.
Page 15 of 19
negligence subject to penalty under Section 7-1-69. See El Centro Villa Nursing Ctr. v. Taxation &

Revenue Dep’t., 1989-NMCA-070, ¶9-11, 108 N.M. 795, 779 P.2d 982.

In instances where a taxpayer might otherwise fall under the definition of civil negligence

generally subject to penalty, Section 7-1-69 (B) provides a limited exception: “[n]o penalty shall

be assessed against a taxpayer if the failure to pay an amount of tax when due results from a

mistake of law made in good faith and on reasonable grounds.” Here, there is no evidence that

Taxpayer engaged in any formal consultation or study of the issue before engaging in the activity

giving rise to the assessment, or subsequent to any reporting or payment obligations. See C & D

Trailer Sales v. Taxation & Revenue Dep’t, 1979-NMCA-151, ¶8-9, 93 N.M. 697, 604 P.2d 835

(penalty upheld where there was no evidence that the taxpayer “relied on any informed

consultation” in deciding not to pay tax). Consequently, this mistake of law provision of Section

7-1-69 (B) does not mandate abatement of penalty in this case. Additionally, there was no

evidence that might arguably support abatement of penalty under Regulation 3.1.11.11 NMAC.

Consequently, Taxpayer is liable for both penalty and interest.

CONCLUSIONS OF LAW

A. Taxpayer filed a timely, written protest to the Department’s assessment, and

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

B. A hearing was timely held within 90-days of protest under NMSA 1978, Section 7-

1B-8 (2015).

C. Taxpayer was engaged in business for the purposes of NMSA 1978, Section 7-9-3.3

(2003). As such, all of Taxpayer’s receipts are presumed subject to gross receipts tax under NMSA

1978, Section 7-9-5 (2002).

In the Matter of Paragon Construction, L.L.C.
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D. Taxpayer did not establish it was a disclosed agent and thus, did not meet the

requirements under NMSA 1978, Section 7-9-3.5(A) (3) (f) or Regulation 3.2.1.19 (C) NMAC in

order to exclude from gross receipts tax its compensation for payroll expenses. See MPC Ltd. v.

N.M. Taxation & Revenue Dep’t, 2003-NMCA-021, ¶36, 133 N.M. 217, 62 P.3d 308.

E. Taxpayer did not overcome the presumption of correctness, including the assessed

penalty and interest, that attached to the assessment under NMSA 1978, Section 7-1-17 (C) (2007)

and Archuleta v. O’Cheskey, 1972-NMCA-165, ¶11, 84 N.M. 428, 504 P.2d 638.

F. Under NMSA 1978, Section 7-1-69 (2007), Taxpayer is liable for civil negligence

penalty because Taxpayer’s inaction in failing to accurately report gross receipts during the

relevant period met the definition of civil negligence under Regulation 3.1.11.10 NMAC.

G. Taxpayer did not establish a good faith, mistake of law made on reasonable grounds

that would allow for abatement of penalty under Section 7-1-69 (2007).

H. None of the indicators of nonnegligence found under Regulation 3.1.11.11 NMAC

allow for abatement of penalty in this protest.

For the foregoing reasons, the Taxpayer’s protest is DENIED. As of February 19, 2018,

Taxpayer’s liability under the assessment was $3,885.66 in gross receipts tax, $777.14 in

penalty, and $573.00 in interest for a total amount due of $5,235.80.

DATED: March 15, 2018

Chris Romero
Hearing Officer
Administrative Hearings Office
P.O. Box 6400
Santa Fe, NM 87502

In the Matter of Paragon Construction, L.L.C.
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NOTICE OF RIGHT TO APPEAL

Pursuant to NMSA 1978, Section 7-1-25 (2015), 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. If an appeal is not timely filed with the Court of Appeals within 30 days, this

Decision and Order will become final. Rule of Appellate Procedure 12-601 NMRA articulates

the requirements of perfecting an appeal of an administrative decision with the Court of Appeals.

Either party filing an appeal shall file a courtesy copy of the appeal with the Administrative

Hearings Office contemporaneous with the Court of Appeals filing so that the Administrative

Hearings Office may begin preparing the record proper. The parties will each be provided with a

copy of the record proper at the time of the filing of the record proper with the Court of Appeals,

which occurs within 14-days of the Administrative Hearings Office receipt of the docketing

statement from the appealing party. See Rule 12-209 NMRA.

In the Matter of Paragon Construction, L.L.C.
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CERTIFICATE OF SERVICE

On March ___, 2018, a copy of the foregoing Decision and Order was mailed to the parties

listed below in the following manner:

First Class Mail Interagency Mail

In the Matter of Paragon Construction, L.L.C.
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