Does a commissioned salesperson owe New Mexico gross receipts tax on their commissions, even though the company already pays gross receipts tax on the product sold?

Plain-English summary

James G. Champion worked since 1992 as an independent-contractor salesman for Craft-Matic Pacific, which sells adjustable beds directly to consumers. He visited customers at home, wrote up the sale, and forwarded it (with any deposit) to Craft-Matic; after the bed was delivered, Craft-Matic paid him a commission (typically $300–$400 on an average $2,500 bed). Craft-Matic charged gross receipts tax in the bed's price and paid that tax on its bed sales. Mr. Champion believed that covered everything, so he never reported or paid gross receipts tax on his commissions — though he did report the commission income to the IRS on a Schedule C. The Department's Schedule C matching program flagged the gap and assessed gross receipts tax on his 1993 and 1994 commissions, plus penalty and interest.

The Hearing Officer denied the protest:

• Commissions are gross receipts. The statute expressly includes "the total commissions or fees derived from the business of buying, selling or promoting ... as an agent or broker" (§ 7-9-3(F)). So one bed sale produces two taxable transactions — Craft-Matic's sale of the bed, and Champion's commission for selling it — and no exemption or deduction prevents that overlap.
• Independent contractor vs. employee is a lawful distinction. An employee's commissions are exempt (§ 7-9-17), but Champion chose to operate as an independent contractor, and that form has tax consequences. The Legislature may classify and tax differently; to win an equal-protection challenge he'd have to prove there is no conceivable rational basis for the distinction (Maloof), which he didn't.
• Penalty upheld. He said he simply didn't know he owed the tax and hadn't tried to hide anything (he reported the income federally). But in a self-reporting system, failing to learn the tax consequences of your business is negligence (§ 7-1-69(A); Tiffany Construction), so the penalty applied. (No fraud was alleged; the 50% fraud penalty under § 7-1-69(B) was not at issue.)
• Interest is mandatory. Section 7-1-67(A) requires interest on unpaid tax with no exceptions; it compensates the state for not having the money when due and isn't a punishment (State v. Lujan).

What this means for you

Commissioned salespeople and independent agents

If you earn commissions selling someone else's product as an independent contractor, those commissions are your own gross receipts, taxable in New Mexico — separately from any tax the company pays on the product itself. The company paying gross receipts tax on the sale does not cover your commission. Register, report, and pay gross receipts tax on your commission income, or build the tax into what you keep.

Independent contractor vs. employee

This is a recurring New Mexico distinction with real cost. An employee's wages and commissions are exempt from gross receipts tax (§ 7-9-17); an independent contractor's commissions are not. If you're paid as a contractor (a Schedule C, no withholding), expect to owe gross receipts tax that an employee doing the same selling wouldn't. The perceived unfairness isn't a legal defense.

Reporting income to the IRS doesn't cover state gross receipts tax

Champion honestly reported his commissions to the IRS — which is exactly how the Department found the unpaid state tax, through Schedule C matching. Federal income-tax reporting is a different obligation from New Mexico gross receipts tax. Being transparent federally is good, but it doesn't satisfy (and can surface) your state gross receipts tax duty.

"I didn't know" won't stop the penalty or interest

An honest misunderstanding — even a reasonable-sounding one, like assuming the company's tax covered everything — is treated as negligence and supports the penalty, and interest is mandatory regardless. If you're unsure whether commission income is taxable, confirm it before you skip the tax.

Common questions

Q: The company already pays gross receipts tax on the sale. Why do I owe it on my commission?
A: Because your commission is a separate transaction. The statute specifically includes an agent's or broker's commissions in gross receipts, so one sale can generate two taxable receipts — the company's and yours. There's no exemption for the overlap.

Q: An employee wouldn't pay gross receipts tax on commissions. Why do I?
A: Because you're an independent contractor, not an employee. Employee commissions are exempt (§ 7-9-17), but the Legislature can tax contractors differently, and that distinction is lawful.

Q: I reported the income to the IRS and hid nothing. Why the penalty?
A: Honesty helps show there was no fraud, but the penalty here is for negligence — failing to learn that your commissions were subject to gross receipts tax. In a self-reporting system, that duty is on you, so the penalty stands and interest is mandatory.

Q: Does this decision apply to my situation?
A: Not directly. A Decision and Order resolves one taxpayer's protest on its specific facts and the law in effect at the time. It illustrates how New Mexico taxes commission income of independent contractors, but your facts may differ.

Citations and references

Statutes and regulations:

• § 7-9-3(F) NMSA 1978 — "gross receipts" includes the total commissions or fees derived from buying, selling, or promoting sales as an agent or broker
• § 7-9-17 NMSA 1978 — exemption for employees' wages, salaries, and commissions
• § 7-1-69(A) NMSA 1978 — negligence penalty of 2% per month up to 10%; § 7-1-69(B) NMSA 1978 — 50% penalty for failure to pay based on intent to defraud; Regulation TA 69:3 — definition of negligence
• § 7-1-67(A) NMSA 1978 — mandatory interest on unpaid tax, without regard to any extension; § 7-1-24(B) NMSA 1978 — 30-day protest deadline, which the Department may extend retroactively

Cases cited:

• Michael J. Maloof & Co. v. Bureau of Revenue, 80 N.M. 485, 458 P.2d 89 (1969) — a party challenging a tax classification must prove there is no conceivable rational basis for it
• Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976) — taxpayers must ascertain the tax consequences of their actions; failing to do so is negligence
• State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977) — "shall" is mandatory unless a contrary intent is clear

Source

• Listing: New Mexico Decisions & Orders
• Decision post: James G. Champion
• Decision PDF: D&O 97-25

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
JAMES G. CHAMPION, NO. 97-25
ID. NO. 02-321661-00 1, PROTEST
TO ASSESSMENT NOS. 2078499 & 2083144

DECISION AND ORDER

This matter came on for hearing before Gerald B. Richardson on June 6, 1997. James G.

Champion, hereinafter, "Taxpayer", represented himself at the hearing. The Taxation and

Revenue Department, hereinafter, "Department", was represented by Frank D. Katz, Chief Counsel.

Based upon the evidence and the arguments presented, IT IS DECIDED AND ORDERED AS

FOLLOWS:

FINDINGS OF FACT

1. Since 1992, the Taxpayer has worked as an independent contractor for Craft-Matic

Pacific, a company which sells adjustable beds directly to consumers. The Taxpayer works as a

salesman and receives compensation for his efforts in the form of a commission on the sales he

generates.

2. The price of the Taxpayer's average sale is approximately $2,500. His average

commission is in the $300 to $400 range.

3. The Taxpayer contacts potential customers in their homes. If the customers

decide to buy a bed, the Taxpayer writes up the paperwork and forwards it with any customer

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deposit to Craft-Matic Pacific.

4. All of the money paid for beds is handled by Craft-Matic Pacific. After delivery of

the bed to the customer, the Taxpayer is paid his commission on the sale.

5. Craft-Matic Pacific includes New Mexico gross receipts tax in the purchase price

charged the customer, and reports and pays gross receipts tax on its receipts from the sale of beds in

New Mexico.

6. The Taxpayer believed that Craft-Matic Pacific's payment of gross receipts tax upon

the sale of the bed satisfied all gross receipts tax obligations from the sale of the beds and he did not

report or pay gross receipts tax upon the commission he received from Craft-Matic Pacific.

7. The Taxpayer did report his income from commissions to the Internal Revenue

Service on a Schedule C, which form is used to report income or loss from a business or

profession.

8. The Department has a program in which it receives information from the Internal

Revenue Service with respect to income reported by New Mexico residents. Through its Schedule

C matching program, the Department attempts to match a taxpayer's receipts from engaging with

business as reported on Federal Schedule C to receipts reported to the Department for gross

receipts tax purposes.

9. As a result of the information the Department received concerning the Taxpayer's

commissions, on October 13, 1996, the Department issued Assessment No. 2078499, assessing

gross receipts tax upon the Taxpayer's commissions in calendar year 1993. The Assessment

assesses $1,455.84 in gross receipts tax, $700.62 in interest and $145.56 in penalty.

10. As a result of the information the Department received concerning the Taxpayer's

commissions, on November 8, 1996, the Department issued Assessment No. 2083144, assessing

gross receipts tax upon the Taxpayer's commissions in calendar year 1994. The Assessment

assesses $2,749.56 in gross receipts tax, $747.74 in interest and $275.04 in penalty.

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11. By letter postmarked December 2, 1996, the Taxpayer timely protested Assessment

No. 2083144. The letter also protested Assessment No. 2078499, but was not within the 30 day

time limit of NMSA 1978, § 7-1-24(B). On January 23, 1997, the Department, however, granted a

retroactive extension of time to file a protest, pursuant to its authority under the same statute,

thereby rendering the Taxpayer's protest to Assessment No.2078499 timely.

DISCUSSION

The Taxpayer disputes the imposition of gross receipts tax upon his commissions and the

imposition of penalty and interest for failing to report and pay gross receipts tax.

Gross receipts tax is imposed upon the gross receipts of any person engaging in business in

New Mexico for the privilege of engaging in business. Gross receipts is defined at NMSA 1978, §

7-9-3(F). In pertinent part, it provides:
"gross receipts" means the total amount of money or the value of other consideration received
from selling property in New Mexico,...or from performing services in New Mexico....

(1) "Gross receipts" includes:

...

(b) the total commissions or fees derived from the business of buying, selling or
promoting the purchase, sale or leasing, as an agent or broker on a commission or fee
basis, of any property, service, stock, bond or security; ....

Applying this definition, Craft-Matic Pacific had gross receipts amounting to the total amount of

money received from selling beds in New Mexico. The Taxpayer also has gross receipts

amounting to the total commissions received from his business of selling or promoting the sale of

the beds. The net effect is that there are two taxable transactions arising from the same sale of a

bed by the Taxpayer. There is no applicable exemption or deduction in the Gross Receipts and

Compensating Tax Act, Chapter 7, Article 9 NMSA 1978 which can be found which would apply

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to prevent the double taxation which results from the application of the Act to the circumstances of

this case.

The Taxpayer objects to the imposition of tax based upon the differential treatment he

receives as an independent contractor as opposed to an employee of Craft-Matic Pacific who would

not be subject to gross receipts taxes. It is true that there is an exemption in the Gross Receipts and

Compensating Tax Act for wages, salaries and commissions received by employees. NMSA 1978,

§ 7-9-17. There is a difference in the form in which the Taxpayer has chosen to conduct his

business affairs and that choice of form has tax consequences. The Taxpayer objects to the

unequal treatment of employees and independent contractors, but there is nothing unlawful about

this differential treatment. Especially in the area of taxation, the legislature is free to make different

classifications and to treat different classifications differently for tax purposes. In order to succeed

in challenging a tax classification as a violation of constitutional requirements of equal protection of

the laws, the person challenging the classification has the burden of proving that there is no

conceivable rational basis to support the legislative classification. Michael J. Maloof & Co. v.

Bureau of Revenue, 80 N.M. 485, 458 P.2d 89 (1969). This, the Taxpayer has not done, and the
imposition of gross receipts tax is upheld.

The Taxpayer also challenges the imposition of penalty and interest on the basis that his

failure to report tax was based upon a misconception that all applicable gross receipts taxes were

paid by Craft-Matic Pacific and that he was simply unaware of his obligation to report and pay gross

receipts taxes on his commissions. The Taxpayer also argues that he reported and paid income

taxes on his commissions and made no attempt to conceal the nature or source of his receipts or

otherwise deceive the Department with respect to his tax liabilities.

The imposition of penalty is governed by the provisions of NMSA 1978, Section 7-1-69(A)

NMSA 1978 (1995 Repl. Pamp.), which imposes a penalty of two percent per month, up to a

maximum of ten percent:

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In the case of failure, due to negligence or disregard of rules and regulations, but without intent
to defraud, to pay when due any amount of tax required to be paid or to file by the date
required a return regardless of whether any tax is due,....

This statute imposes penalty based upon negligence (as opposed to fraud)1 for failure to timely pay

tax. Thus, there is no contention that the failure to report and pay taxes was based upon any

conscious attempt by the Taxpayer to underreport taxes. What remains to be determined is

whether the Taxpayer was negligent in failing to report its taxes properly. Taxpayer "negligence" for

purposes of assessing penalty is defined in Regulation TA 69:3 as:
1) failure to exercise that degree of ordinary business care and prudence which reasonable
taxpayers would exercise under like circumstances;

2) inaction by taxpayers where action is required;

3) inadvertence, indifference, thoughtlessness, carelessness, erroneous belief or inattention.

In this case the Taxpayer's failure to report and pay taxes was based upon Mr. Champion's

lack of knowledge about New Mexico taxes. New Mexico has a self-reporting tax system which

requires that taxpayers voluntarily report and pay their tax liabilities to the state. Because of this,

the case law is well settled that every person is charged with the reasonable duty to ascertain the

possible tax consequences of his actions, and the failure to do so has been held to amount to

negligence for purposes of the imposition of penalty pursuant to Section 7-1-69 NMSA 1978.

Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976), cert.
denied, 90 N.M. 255, 561 P.2d 1348 (1977). In this case, the Taxpayer was negligent in that he
failed to take steps to ascertain the tax consequences of engaging in business as an independent

contractor. Thus, the imposition of penalty is proper. Although the imposition of penalty is

intended to penalize taxpayers who fail to report and pay taxes in a timely manner, there are sound

policy reasons behind the imposition of penalty. A self-reporting tax system relies upon taxpayers

1
There is a 50% of tax penalty provided for the failure to pay tax due the State when such failure to pay is based
upon an intention to defraud the State. See, NMSA 1978, Section 7-1-69(B).

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accurately reporting their tax liabilities to the government. There are insufficient government

resources to audit every taxpayer periodically to otherwise assure tax compliance. The imposition

of penalty provides taxpayers with an incentive to understand the tax consequences of their actions

and to accurately report their taxes. Otherwise, if the only consequence of an audit and

determination of underpayment of tax was the payment of the tax which was owed, it would always

advantage a taxpayer to simply underreport taxes and to pay them if they were found out.

Section 7-1-67(A) NMSA 1978 addresses the imposition of interest on tax deficiencies and

provides as follows:
A. If any tax imposed is not paid on or before the day on which it becomes due, interest
shall be paid to the state on such amount from the first day following the day on which
the tax becomes due, without regard to any extension of time or installment agreement,
until it is paid. (emphasis added)

It is a well settled rule of statutory construction that the use of the word "shall" in a statute indicates

that the provisions are intended to be mandatory rather than discretionary, unless a contrary

legislative intent is clearly demonstrated. State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977).

Applying this rule to Section 7-1-67, the statute requires that interest be paid to the state on any

unpaid taxes and no exceptions to the imposition of interest are countenanced by the statute.

Thus, it doesn't matter why taxes were unpaid. Interest is imposed for the period of time that they

are unpaid.
The Taxpayer's argument essentially conceives of interest as a penalty imposed to punish a

taxpayer for the late payment of taxes. This argument misapprehends the nature of the assessment

of interest. Interest is imposed to compensate the state for the lost value of having tax revenues at

the time they are required to be paid. Those tax revenues could have been invested by the state

and interest earned upon those revenues, until the state needed to use the money to meet its

obligations. While one may disagree with the rate of interest set by the legislature, as being

excessive in comparison with market rates of interest, that is a matter within the sound discretion of

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the legislature, and the Department is without authority to substitute its own judgment for that of the

legislature in setting the rate of interest to be imposed. Because the Taxpayer failed to pay tax on

his commission receipts at the time such taxes were due, interest is properly imposed.

CONCLUSIONS OF LAW

1. The Taxpayer filed timely, written protests to Assessment Nos. 2078499 and

2083144 and jurisdiction lies over both the parties and the subject matter of this protest.

2. The Taxpayer's receipts from commissions are a separate transaction from the sale

of the beds which generated the commissions paid to the taxpayer, and gross receipts tax was

properly assessed upon the Taxpayer's commissions.

3. The Taxpayer was negligent in failing to take steps to ascertain the tax consequences

of engaging in business as an independent contractor compensated on a commission basis, and thus

penalty was properly imposed for failure to timely report and pay gross receipts taxes on the

Taxpayer's commissions.

4. The Taxpayer was late in paying gross receipts taxes upon his commission receipts

and interest was properly imposed.

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For the foregoing reasons, THE TAXPAYER'S PROTEST IS HEREBY DENIED.

DONE, this 2nd day of July, 1997.

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