If someone reports handyman income on a federal Schedule C but actually only fixed up their own home for free, do they owe New Mexico gross receipts tax on it?

Plain-English summary

Timothy and Sandra Read moved to Silver City, New Mexico in 1993 and bought a "fixer-upper" home. Mr. Read, a former handyman, spent the rest of 1993 and all of 1994 remodeling and repairing his own house. When the couple filed their federal income tax returns, Mr. Read filled out a Schedule C (the form for business income) reporting "handyman" gross receipts of about $16,532 for 1993 — not because anyone paid him, but because he wanted to create a record of income in case he needed to borrow from a bank. No money ever changed hands; all the work was on his own home.

Through its information-sharing agreement with the IRS, the Department saw the Schedule C figures and, in March 1997, assessed the Reads $1,985.96 in gross receipts tax plus $198.60 penalty and $926.46 interest for 1993 and 1994, treating the reported handyman receipts as taxable.

The Hearing Officer granted the protest and ordered the entire assessment abated. New Mexico gross receipts tax reaches receipts from "performing services in New Mexico" (§ 7-9-3(F)), and "service" is defined as activities engaged in "for other persons for a consideration" (§ 7-9-3(K)). Because Mr. Read worked for himself, on his own home, and received no consideration, he had no gross receipts from performing services. With no gross receipts, the assessment was erroneous as a matter of law.

What this means for you

Homeowners doing their own work

Fixing up your own home is not a taxable service in New Mexico, no matter how much labor it involves, because you aren't performing the work for another person for pay. Gross receipts tax attaches to money (or other consideration) you actually receive for services — not to the value of sweat equity in your own property.

Anyone tempted to report phantom income on a Schedule C

This case is a warning about "creating a paper trail." Mr. Read reported handyman income he never earned to build a credit record, and that self-reported figure came straight back to him as a state tax bill through IRS–state information sharing. What you put on a federal Schedule C can trigger a New Mexico gross receipts tax assessment. Report only income you actually received, and keep records showing the true nature of the activity.

Accountants and tax professionals

The decision turns on the "for other persons for a consideration" element of the § 7-9-3(K) definition of "service." Work performed for oneself, without consideration, generates no gross receipts even if it was reported on a Schedule C. It also illustrates how the Department's IRS information-sharing agreement converts federal return entries into state assessments — and that the fix is to prove the underlying facts (here, that no receipts existed), which the taxpayers did by their own testimony.

Common questions

Q: Why didn't the Schedule C figure create gross receipts tax liability?
A: Because gross receipts tax applies to services performed for other people for consideration. Mr. Read worked only on his own home and received no payment, so despite what the Schedule C showed, he had no gross receipts and nothing was taxable.

Q: How did the Department find out about the reported income?
A: New Mexico's Taxation and Revenue Department has an information-sharing agreement with the IRS. It received the Schedule C figures the Reads reported federally and assessed gross receipts tax based on them.

Q: Could reporting fake income to build credit really cause a tax bill?
A: Yes. That is exactly what happened here — the invented handyman receipts led to a gross receipts tax assessment. The Reads only escaped it by proving the work was on their own home for no consideration. Report only income you actually received.

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 defines a taxable "service," but your facts may differ.

Citations and references

Statutes:

• § 7-9-3(F) NMSA 1978 — "gross receipts" means money or other consideration received from selling or leasing property in, or performing services in, New Mexico
• § 7-9-3(K) NMSA 1978 — "service" means activities engaged in for other persons for a consideration, predominantly the performance of a service (work for oneself, without consideration, does not qualify)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Timothy and Sandra Read
• Decision PDF: D&O 98-02

Original ruling text

BEFORE THE HEARING OFFICER
OF THE TAXATION AND REVENUE DEPARTMENT
OF THE STATE OF NEW MEXICO

IN THE MATTER OF THE PROTEST OF
TIMOTHY AND SANDRA READ, NO. 98-02
ID. NO. 02-331586-00 5,
PROTEST TO ASSESSMENT NO. 2121178

DECISION AND ORDER

THIS MATTER came on for formal hearing on January 12, 1998 before Gerald B.

Richardson, Hearing Officer. Mr. and Mrs. Timothy Read, hereinafter, “Taxpayers”,

represented themselves at the hearing. The Taxation and Revenue Department,

hereinafter, “Department”, was represented by Bruce J. Fort, Esq. Based upon the

evidence and the arguments submitted, IT IS DECIDED AND ORDERED AS

FOLLOWS:

FINDINGS OF FACT

1. In June of 1993, the Taxpayer’s bought a “fixer-upper” home in Silver

City, New Mexico and moved to New Mexico.

2. The home was purchased with proceeds from the estate of Mrs. Read’s

mother.

3. Prior to moving to New Mexico, Mr. Read worked as a “handyman.”

4. After moving to New Mexico, Mr. Read worked for the remainder of 1993

and all of 1994 fixing up the home he and his wife had purchased.

5. When filing their 1993 and 1994 federal personal income tax returns, the

Taxpayers filed federal Schedule Cs which are used to report business income and loss.

Mr. Read reported on Schedule C that he was the proprietor of Timothy F. Read, that the

nature of his business was “handy man”. For 1993, he reported that he had $16,532 in

gross receipts or sales. Mr. Read’s 1993 Schedule C also reflected the deduction of

$7,495 in expense for supplies, $120 in expense for advertising, and $95 for legal and

professional services.

6. Mr. Read reported business income on his 1993 and 1994 Schedule C

because he wished to create a record, should he need credit from a bank, of income for

those years.

7. In fact, Mr. Read worked solely for himself and his wife while in New

Mexico in 1993 and 1994, remodeling and repairing their home. The amount of gross

receipts was an estimate. No money or other consideration changed hands to compensate

Mr. Read for his work on his own home.

8. The Department has an information sharing agreement with the Internal

Revenue Service whereby information reported by New Mexico taxpayers upon their

federal returns is shared with the Department.

9. Pursuant to this information sharing agreement, the Department received

information reflecting the amount of gross receipts the Taxpayers’ reported on their 1993

and 1994 federal Schedule C as Mr. Read’s receipts from performing handyman services.

10. Based upon this information, on March 19, 1997, the Department issued

Assessment No. 2121178 to the Taxpayers, assessing $1,985.96 gross receipts tax,

$198.60 in penalty and $926.46 in interest for the 1993 and 1994 tax years.

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11. On April 11, 1997 the Taxpayers filed a protest to the Assessment No.

2121178.

DISCUSSION

The sole issue to be determined herein is whether the Taxpayers had gross receipts

during 1993 and 1994 upon which the Department’s assessment of gross receipts tax,

interest and penalty was based. “Gross receipts” is defined in pertinent part at Section 7-

9-3(F) NMSA 1978 as:

the amount of money or the value of other consideration
received from selling property in New Mexico, from
leasing property employed in New Mexico,...or from
performing services in New Mexico.

Because Mr. Read’s remodeling and repair work can best be characterized as a service,

the definition of “service” will be consulted. “Service” is defined in the Gross Receipts

and Compensating Tax at Section 7-9-3(K) NMSA 1978. In pertinent part, it provides:

“service” means all activities engaged in for other persons
for a consideration, which activities involve predominantly
the performance of a service as distinguished from selling
or leasing property....(emphasis added).

In this case, because the services the Taxpayers performed were for themselves and not

for other persons, they did not have gross receipts from performing services. Having no

gross receipts, the Department’s assessment for gross receipts tax, penalty and interest is

erroneous.

CONCLUSIONS OF LAW

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1. The Taxpayer’s filed a timely, written protest to Assessment No. 2121178

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

2. The Taxpayer’s had no gross receipts from performing services in New

Mexico in 1993 or 1994.

3. Assessment No. 2121178 is erroneous as a matter of law.

For the foregoing reasons, the Taxpayer’s protest IS HEREBY GRANTED. THE

DEPARTMENT IS HEREBY ORDERED TO ABATE ASSESSMENT NO. 2121178.

DONE, this 20th day of January, 1998.

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