Does an independent contractor who stocks shelves for a flat per-case fee owe New Mexico gross receipts tax, and can she avoid it as a sales commission or escape the penalty for not knowing about the tax?

Plain-English summary

Denise Tillman (the decision spells the name "Tillman") worked as an independent contractor stocking shelves at a commissary on a U.S. military base in Albuquerque for two food companies. She was paid a flat 25 cents per case she put on the shelves — regardless of whether the products sold — and she did not take title to the food or negotiate any sales contracts. She and her husband reported this income on federal Schedule C but never registered for or paid New Mexico gross receipts tax. Through IRS information-sharing, the Department found the unreported business income and assessed gross receipts tax, penalty, and interest for 1994–1996 (about $2,033 in tax across two assessments, plus penalties and interest).

The Tillmans raised three arguments; the Hearing Officer rejected all three and denied the protest.

• "I'm just a small independent contractor who can't pass on the tax." Gross receipts tax under § 7-9-4 applies to anyone "engaging in business," which § 7-9-3(E) defines very broadly as any activity for direct or indirect benefit. The law makes no exception for small operators or independent contractors, and the tax is the seller's obligation whether or not the seller can pass it to a customer. So her stocking work was taxable.
• "My pay is a deductible sales commission under § 7-9-66." No. That deduction is for commissions on sales of tangible personal property that are themselves nontaxable. Ms. Tillman took no title to the food, didn't negotiate or solicit the commissary's purchases, and was paid the same flat per-case fee regardless of sales. Her pay was compensation for a stocking service, not a commission on sales, so the deduction didn't apply. (The reason the food companies themselves owed no tax on the sales was the separate § 7-9-54(A) deduction for sales to the United States — which doesn't convert her fee into a commission.)
• "No penalty — we acted in good faith, not fraud." The penalty under § 7-1-69(A) is for negligence, not fraud. New Mexico is a self-reporting system, and every taxpayer has a duty to find out the tax consequences of their activities. The Tillmans used an accountant for their federal returns but never asked about New Mexico gross receipts tax, so the reliance-on-a-tax-advisor defense didn't apply. Good faith did not excuse the failure to inquire, so the penalty stood.

What this means for you

Independent contractors and gig/side-business workers

If you earn money from an activity in New Mexico — even a modest, per-unit side gig like stocking shelves — you are likely "engaging in business" and owe gross receipts tax on those receipts unless a specific exemption or deduction applies. Being small, being an independent contractor, or being unable to add the tax onto your fee does not excuse you. If you report business income on a federal Schedule C, check whether you also need to register and pay New Mexico gross receipts tax.

Anyone thinking their pay is a tax-free "commission"

The commission deduction is narrow. It applies to true commissions on sales of goods where the underlying sale isn't taxed — not to flat fees for a service. If you don't take title to the goods and don't negotiate the sales, a per-unit or per-hour fee is compensation for services and is generally taxable, even if it's connected to someone else's tax-free sales.

Accountants and tax professionals

Two practice points. First, § 7-9-66 requires that the receipts be genuine commissions on nontaxable TPP sales; a flat service fee untethered to price or sale volume won't qualify, and the customer's § 7-9-54(A) government-sales deduction doesn't flow through. Second, the reliance-on-advisor defense under 3 NMAC 1.11.11(4) requires that the taxpayer actually sought and received advice on the tax at issue — hiring someone to prepare federal returns, without asking about gross receipts tax, is not enough to defeat a negligence penalty.

Common questions

Q: I'm just a small independent contractor — do I really owe gross receipts tax?
A: Yes, unless a specific exemption or deduction applies. "Engaging in business" is defined broadly and covers individuals and small operators, not just corporations. The tax is on the seller of goods or services regardless of size or ability to pass the cost to a customer.

Q: Isn't my per-case pay a tax-free sales commission?
A: No. The § 7-9-66 deduction is for commissions on nontaxable sales of goods. Ms. Tillman took no title and didn't negotiate any sales, and she was paid the same flat amount per case no matter what sold. That is a service fee, not a commission, so it was fully taxable.

Q: Why wasn't the penalty waived if there was no fraud?
A: Because the penalty is for negligence, not fraud. In a self-reporting system, taxpayers must take reasonable steps to learn their tax obligations. The Tillmans never inquired about gross receipts tax even though they used an accountant for their federal returns, so their good-faith ignorance was still negligence.

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 applies gross receipts tax to independent contractors and the limits of the commission deduction, but your facts may differ.

Citations and references

Statutes and regulations:

• § 7-9-4 NMSA 1978 — imposes gross receipts tax on persons engaging in business in New Mexico
• § 7-9-3(E) NMSA 1978 — "engaging in business" means carrying on any activity for direct or indirect benefit
• § 7-9-66 NMSA 1978 — deduction for commissions on sales of tangible personal property that are not subject to gross receipts tax
• § 7-9-54(A) NMSA 1978 — deduction for receipts from selling tangible personal property to the United States or a governmental unit
• § 7-1-69(A) NMSA 1978 — penalty for negligent failure to pay (2% per month, up to 10%)
• § 7-1-24 NMSA 1978 — taxpayer protest procedure
• 3 NMAC 2.66.1.12 — commissions on exempt or deductible sales qualify for the § 7-9-66 deduction
• 3 NMAC 1.11.10 — definition of negligence; 3 NMAC 1.11.11(4) — reliance on a competent tax advisor as a penalty defense

Case law cited:

• 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) — every person has a duty to ascertain the possible tax consequences of their actions

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Shawn and Denise Tilman
• Decision PDF: D&O 98-05

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
SHAWN AND DENISE TILLMAN 98-05
ID. NO. 02-339395-005
ASSESSMENT NOs. 2136423 & 2143093

DECISION AND ORDER

This matter came on for formal hearing on January 22, 1998 before Margaret B. Alcock,

Hearing Officer. Shawn and Denise Tillman (“Tillmans” or "Taxpayers"), were represented by Rob

Beltran, their tax preparer and authorized representative. The Taxation and Revenue Department

("Department"), was represented by Bruce J. Fort, Special Assistant Attorney General. Based upon the

evidence and the arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. Denise Tillman works as an independent contractor for two companies that sell food

products to a commissary located on a United States military base in Albuquerque, New Mexico.

2. Ms. Tillman is hired to insure that the shelves of the commissary remain fully stocked

with each company’s food products. She is responsible for monitoring the stock, ordering additional

products when needed, stocking the shelves when the cases of food come in and setting up displays.

3. Ms. Tillman is paid 25 cents for each case of food products she puts on the shelves.

Payment is not contingent on the price or sale of the food, although Ms. Tillman benefits if sales are

good because this requires the shelves to be restocked more often.

4. Ms. Tillman does not take title to any of the food products she orders to restock the

shelves.

5. Ms. Tillman is not involved in negotiating the sales contracts between the food

companies and the commissary, nor is she familiar with the terms of those contracts.

6. Ms. Tillman is hired by and takes direction from the local sales representative for each

company, although her contract is with the company itself.

7. Ms. Tillman has been told by the sales representatives that the food companies do not

pay gross receipts tax on their sale of food products to the commissary.

8. For the 1994, 1995 and 1996 tax years, Ms. Tillman and her husband, Shawn

Tillman, reported Ms. Tillman’s income from her stocking contracts to the Internal Revenue Service

(“IRS”) on Schedule C of Federal Form 1040, Profit or Loss from Business. The Tillmans took

certain business deductions for the vehicle Ms. Tillman used to travel to and from the commissary

and to transport displays and signs provided to her by the sales representatives.

9. The Tillmans hired an accountant to prepare their 1994, 1995 and 1996 Federal

Forms 1040. The Tillmans did not have any discussions with the accountant concerning the New

Mexico gross receipts tax.

10. The Department has an information sharing agreement with the IRS whereby

information about taxpayers who are residents of New Mexico is shared between the two agencies.

11. The Department received information from the IRS concerning the Tillmans’

Schedule C business income. When the Department investigated, it found that neither of the

Tillmans was registered with the Department to pay gross receipts taxes.

12. As a result of the information received from the IRS, the Department assigned a

taxpayer identification number to the Tillmans and on May 18, 1997, the Department issued

Assessment No. 2136432 for calendar year 1994 in the amount of $575.86 gross receipts tax, $57.58

penalty, and $223.15 interest. On June 14, 1997, the Department issued Assessment No. 2143093

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for calendar years 1995 and 1996 in the amount of $1,457.38 gross receipts tax, $145.74 penalty,

and $236.07 interest.

13. On June 9, 1997, the Tillmans filed a protest to Assessment No. 2136432. On June

25, 1997, the Tillmans filed a protest to Assessment No. 2143093.

DISCUSSION

At the hearing, the Taxpayers raised the following arguments in support of their protest to the

Department’s assessments: (1) because Ms. Tillman was not in a position to bargain with the

companies for which she worked as an independent contractor and was not able to pass on the cost of

the gross receipts tax, she should not be required to pay gross receipts tax to the state; (2) gross receipts

tax is not due on Ms. Tillman’s receipts because she was entitled to claim the deduction from gross

receipts provided in Section 7-9-66, NMSA 1978; and (3) the Taxpayers should not be subject to

penalty because they did not act in bad faith or with intent to defraud the state.

Liability of Independent Contractors for Gross Receipts Tax.

The Taxpayers do not dispute that Ms. Tillman worked as an independent contractor and not as

an employee of the two food companies with which she held contracts. The Taxpayers nonetheless

argue that Ms. Tillman should not be treated as engaging in business for purposes of the New Mexico

gross receipts tax because she was not in a position to bargain with the companies in order to pass on

the cost of the gross receipts tax.

Section 7-9-4, NMSA 1978, imposes an excise tax on the gross receipts of any person

engaging in business in New Mexico. The definition of “engaging in business” is quite broad and

includes “carrying on or causing to be carried on any activity with the purpose of direct or indirect

benefit.” (emphasis added). Section 7-9-3(E), NMSA 1978. The statute makes no distinction

between activities engaged in by large corporations and activities engaged in by small “mom and

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pop” operations or by individuals acting as independent contractors. In this case, Ms. Tillman

entered into contracts to stock shelves in order to obtain the benefit of earning money. Because

stocking shelves comes within the broad classification of “any activity”, her work meets the statutory

definition of engaging in business.

New Mexico’s gross receipts tax is imposed on the seller of goods and services, not on the

buyer. As a practical matter, the tax is simply part of the seller’s cost of doing business. Although it

is a common practice for sellers to pass the cost of the gross receipts tax on to the buyer, the seller’s

ability to separately charge or obtain reimbursement of the tax does not affect the seller’s legal

obligation to pay tax to the state. In the absence of a specific statutory exemption or deduction, Ms.

Tillman is liable for gross receipts tax on receipts from her activities as an independent contractor.

Deduction Provided in Section 7-9-66, NMSA 1978.

The Taxpayers maintain that Ms. Tillman is not subject to gross receipts tax because she is

entitled to claim the deduction provided in Section 7-9-66, NMSA 1978, which states:

Receipts derived from commissions on sales of tangible personal
property which are not subject to the gross receipts tax may be
deducted from gross receipts.

Regulation 3 NMAC 2.66.1.12 provides that when receipts from selling tangible personal property are

either exempted from gross receipts tax or deductible from gross receipts, commissions paid on those

sales are entitled to the deduction provided in Section 7-9-66.

Ms. Tillman testified she was told that the two companies for which she worked did not pay

gross receipts tax on their sale of food products to the commissary. This information is consistent with

the deduction provided in Section 7-9-54(A), NMSA 1978, for receipts from selling tangible personal

property to the United States or any governmental unit, subdivision, agency, department or

instrumentality thereof. This information does not, however, support the conclusion that Ms. Tillman is

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entitled to deduct her receipts as being derived from commissions on the sale of food products to the

government.

Ms. Tillman does not take title to or have any ownership interest in the products she stocks, nor

does she participate in soliciting or negotiating the contract under which the commissary purchases

those products. Ms. Tillman is paid 25 cents for each case of food products she stocks on the shelves of

the commissary. Her compensation is not contingent on the price or the sale of the products. Whether

the commissary sells all of the products at a premium price, half of the products at a sale price, or none

of the products, Ms. Tillman is paid exactly the same amount for her services in stocking those products

on the shelves. These facts do not support the Taxpayers’ position that Ms. Tillman’s receipts are

derived from commissions on the sale of food products to the federal government or that she is entitled

to the deduction provided in Section 7-9-66.

Assessment of Penalty.

The Taxpayers object to the imposition of penalty because their failure to pay gross receipts tax

on Ms. Tillman’s income was due to a lack of knowledge and not to bad faith or an intent to defraud the

state. Section 7-1-69, NMSA 1978 (1995 Repl.Pamp. and 1996 Supp.) governs the imposition of

penalty during the periods at issue in this protest. Subsection A imposes a penalty of two percent per

month, up to a maximum of ten percent:

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...

The statute imposes penalty based upon negligence (as opposed to fraud) for failure to timely pay tax.

There is no contention on the part of the Department that the Taxpayers’ failure to report and pay gross

receipts tax was the result of bad faith or fraud. What remains to be determined is whether the

Taxpayers were negligent in failing to report their taxes properly.

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Taxpayer "negligence" for purposes of assessing penalty is defined in Regulation 3 NMAC

1.11.10 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 Taxpayers' failure to report and pay gross receipts tax was based on their lack of

knowledge of New Mexico’s tax laws. New Mexico has a self-reporting tax system that relies upon

taxpayers, who have the most accurate and direct knowledge of their activities, to determine their tax

liabilities and accurately report those liabilities to the state. There are insufficient government

resources to audit every taxpayer periodically to assure tax compliance. Every person is therefore

charged with the reasonable duty to ascertain the possible tax consequences of his or her actions, and

the failure to do so constitutes negligence for purposes of Section 7-1-69(A). 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).

Although the Taxpayers used an accountant to file their federal income tax returns, they did not

make any inquiry as to whether there might be other taxes due in connection with the income reported

as business income on Schedule C of their Federal Forms 1040. Thus, although reliance on the advice

of a competent tax advisor can be a defense to the imposition of penalty under Regulation 3 NMAC

1.11.11(4), there is no evidence in this case that the Tillmans sought or received any advice with regard

to their gross receipts tax liability for the years in question. Although the Taxpayers acted in good faith,

with no intention to avoid the payment of taxes, they were negligent in failing to take such action as

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was required to determine their tax liability to the state. For this reason, penalty was properly imposed

under Section 7-1-69(A).

CONCLUSIONS OF LAW

1. The Taxpayers filed timely, written protests to Assessment Nos. 2136423 and 2143093

pursuant to Section 7-1-24, NMSA 1978, and jurisdiction lies over the parties and the subject matter of

this protest.

2. Ms. Tillman was engaging in business in New Mexico as defined in Section 7-9-3(E),

NMSA 1978, and was subject to gross receipts tax on her receipts from acting as an independent

contractor during the years at issue.

3. Ms. Tillman’s receipts were not derived from commissions on the sale of food products

to the United States government and Ms. Tillman was not entitled to the deduction provided in Section

7-9-66, NMSA 1978.

4. The Taxpayers were negligent in failing to report gross receipts tax on business income

earned during tax years 1994, 1995 and 1996 and penalty was properly imposed pursuant to Section 7-

9-69(A).

For the foregoing reasons, the Taxpayers’ protest IS HEREBY DENIED.

DONE, this 26th day of January 1998.

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