A dentist worked out of another dentist's professional corporation, which paid him on a 1099 and claimed it already paid gross receipts tax on all the patient money. Does the dentist still owe gross receipts tax on what the corporation paid him?

Subject

M. Kory & Lucia Rowberry (D&O 98-59)

Plain-English summary

Dr. M. Kory Rowberry was a licensed dentist who, in 1994, saw patients out of the offices of Nick DeSantis, DDS, PC (a professional corporation) in Gallup, New Mexico. The corporation billed and collected from the patients, then paid Rowberry his share and reported it on a federal 1099 as nonemployee compensation — $139,095.10 for 1994. Rowberry reported that money on Schedule C and deducted business expenses. After matching his federal return against its own records, the Department found he had never paid gross receipts tax on those receipts and assessed $8,105.04 in gross receipts tax, $4,508.43 interest, and $810.48 penalty (about $13,423.95 total) for 1994.

Rowberry's defense was that the corporation had already paid gross receipts tax on all patient money, so taxing him too would be double taxation. He pointed to a 1987 TS-22, "Agreement to Collect and Pay Over Taxes," in which Nick DeSantis, DDS, PC purportedly agreed to report Rowberry's receipts under the corporation's tax ID, plus a side letter saying the corporation would pay the tax on Rowberry's receipts. Hearing Officer Margaret B. Alcock denied the protest on two independent grounds.

The TS-22 was never signed by the Department, so it created no agency. A TS-22 is an agreement "with the Secretary of Taxation and Revenue"; the form has signature lines for both the agent and the Department. Only Nick DeSantis had signed — there was no Department signature and no evidence the form was ever even submitted. Without both signatures, no agreement was formed, so the corporation was not Rowberry's authorized agent for paying his gross receipts tax. Under Section 7-1-17(C), a Department assessment is presumed correct, and an unsigned TS-22 was not enough to overcome that presumption.

There were two separate taxable transactions, and both are taxable. Even assuming the corporation paid tax on its patient receipts, that is a different transaction from the corporation's payments to Rowberry. The Hearing Officer relied on House of Carpets, Inc. v. Bureau of Revenue, where a carpet seller hired a second company to install carpet: the installer's payment of tax on its receipts did not relieve the seller of tax on the full amount it collected from customers, because there were two sales — installer-to-seller and seller-to-customer. Here likewise: (1) Rowberry sold dental services to the corporation, and (2) the corporation sold dental services to patients. Rowberry never showed the corporation paid tax on the money it paid him (as opposed to the money it collected from patients), so he remained liable. Gross receipts tax reaches everyone "engaging in business," large or small (Sections 7-9-4, 7-9-3). Rowberry also hurt his own case procedurally: after four continuances he chose to submit on stipulated facts with no witness testimony, leaving key assertions (such as what "net amount" meant, and whether the corporation's returns actually included his work) uncorroborated. Protest DENIED.

What this means for you

• When you work through another business's entity, its tax payments don't automatically cover you. If a corporation, clinic, or shop bills the customers and then pays you a share on a 1099, you generally have your own gross receipts to report — the entity paying tax on its receipts doesn't discharge the tax on the money it pays you.
• New Mexico taxes each link in the chain (pyramiding). As House of Carpets holds, two back-to-back sales of the same service are two taxable transactions. The way to avoid stacking is a properly executed nontaxable transaction certificate for a sale of services for resale — not simply relying on the other party's tax payment.
• A TS-22 "agent to pay" arrangement only works if the Department signs it. An agreement to have someone else report and pay your gross receipts tax is a contract with the Secretary of Taxation and Revenue. If the Department hasn't signed and accepted it, it's not effective, and you remain personally responsible.
• The Department's assessment starts out presumed correct. Under Section 7-1-17(C), the burden is on you to prove an assessment wrong. Vague or unsigned paperwork won't shift that burden — you need concrete evidence that the tax was actually paid.
• Stipulated facts can't substitute for the proof you need. Rowberry's decision to skip live testimony left his core factual claims unsupported. If a key fact (like "the corporation already paid tax on my receipts") is essential, put in evidence that actually establishes it.

Key questions answered

Why wasn't this double taxation?
Because there were two separate taxable transactions: Rowberry's sale of dental services to the corporation, and the corporation's sale of dental services to patients. Under House of Carpets, both are subject to gross receipts tax; one party's payment on its own receipts doesn't cover the other transaction.

Couldn't the corporation just pay the tax for him under the TS-22?
Not on these facts. A TS-22 is an agreement with the Secretary of Taxation and Revenue and needs the Department's signature to take effect. Only the corporation had signed; the Department never did, and there was no proof the form was even submitted. So no agency arrangement existed, and Rowberry remained liable.

What is the "presumption of correctness," and why did it matter?
Section 7-1-17(C) makes a Department tax assessment presumed correct, putting the burden on the taxpayer to prove it wrong. Rowberry's unsigned TS-22 and the corporation's returns did not establish that tax was paid on the payments to him, so he failed to overcome the presumption.

How could a taxpayer in this position have protected themselves?
By using a properly executed nontaxable transaction certificate for the sale of services for resale (Sections 7-9-43/7-9-48), by getting any TS-22 agent arrangement actually signed and accepted by the Department, and by presenting real evidence — not just an unsigned form and argument of counsel — that the tax had been paid.

Verbatim citations

The presumption of correctness (Section 7-1-17(C)), as applied:

Introduction of an unsigned TS-22 agreement does not overcome the presumption of correctness that attaches to the Department's assessment of gross receipts tax against Dr. Rowberry. The burden remains on Dr. Rowberry to establish that the assessment is incorrect.

Why the unsigned TS-22 formed no agreement:

There are two signature lines at the bottom of the form, one for the taxpayer's agent and one for the Department. No agreement can be formed without the signature of both parties. The TS-22 introduced as Stipulated Exhibit 1 shows the signature of Nick DeSantis, DDS, PC, but is not signed by the Department.

The two-taxable-transactions holding (following House of Carpets):

Under the facts presented, there are two taxable transactions: a sale of dental services by Dr. Rowberry to Nick DeSantis, DDS, PC, and a sale of dental services by Nick DeSantis, DDS, PC, to individual patients.... The court held that C2's payment of gross receipts tax did not relieve the taxpayer of liability for tax on the payments it received from its customers.

The conclusion:

Having failed to establish that gross receipts tax was paid on the compensation he received from Nick DeSantis, DDS, PC, and reported as business income on his 1994 federal income tax return, Dr. Rowberry remains liable for the Department's assessment of tax on those receipts.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: M. Kory & Lucia Rowberry
• Decision PDF: D&O 98-59

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 M. KORY AND LUCIA ROWBERRY 98-59
ID. NO. 02-375201-00 7
ASSESSMENT NO. 2235930

DECISION AND ORDER

A formal hearing on the above-referenced protest was held December 21, 1998, before

Margaret B. Alcock, Hearing Officer. M. Kory and Lucia Rowberry (referred to as "Dr. Rowberry"

or "the Taxpayer") were represented by their attorney, James Jay Mason, who appeared by telephone.

The New Mexico Taxation and Revenue Department ("Department") was represented by Bridget

Jacober, Special Assistant Attorney General. The facts and exhibits upon which this decision is based

were stipulated into evidence by the parties. Based on that stipulation and the legal arguments

presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. In 1994, Dr. Rowberry was a licensed dentist providing dental services in Gallup, New

Mexico, from the offices of Nick DeSantis, DDS, PC.

2. In 1987, Nick DeSantis, DDS, PC, signed a Taxation and Revenue Department form

TS-22, Agreement to Collect and Pay Over Taxes, as an agent for Dr. Rowberry.

3. The TS-22 states, in pertinent part, that Nick DeSantis, DDS, PC, agrees with the

Secretary of Taxation and Revenue of the State of New Mexico that Nick DeSantis, DDS, PC, will

report the gross receipts of Kory Rowberry, together with the corporation's own gross receipts, under

the corporation's tax identification number.

4. Nick DeSantis' signature attests that he signed the TS-22 on behalf of his corporation

on January 7, 1987. The date and signature lines for approval by the Department are blank.

5. Attached to the TS-22 is the following typed statement:

1/1/87
Effective this date, my corporation known as Nick DeSantis DDS PC, will pay
over to Kory Rowberry on a monthly basis the net amount of his receipts for his
dental patients that he sees in my dental office.
The sales tax on those amounts will be paid by my corporation when I pay my
sales tax (monthly basis).

The statement is signed by Nick DeSantis and M. Kory Rowberry and is witnessed by Steve A.

Petranovich, CPA.

6. During 1994, Nick DeSantis, DDS, PC, reported and paid gross receipts tax to the

Department under CRS tax identification number 01-165069-009.

7. Nick DeSantis, DDS, PC, issued federal form 1099 to Kory Rowberry reporting that it

paid Dr. Rowberry nonemployee compensation of $139,095.10 during tax year 1994.

8. Dr. Rowberry reported $139,095.00 in gross receipts from the business of dentistry on

Schedule C, Profit or Loss from Business, to his 1994 federal income tax return. Dr. Rowberry

deducted business expenses which included advertising, depreciation, insurance, legal and professional

services, office expenses, and supplies.

9. The Department compared Dr. Rowberry's 1994 federal income tax return to the

Department's records of payment for gross receipts tax and determined that Dr. Rowberry had not

reported or paid gross receipts tax on receipts of $139,095.00.

10. The Department did not compare Dr. Rowberry's federal tax return to the federal tax

return of Nick DeSantis, DDS, PC.

11. On March 4, 1998, the Department issued CRS registration number 02-375201-00 7 to

M. Kory and Lucia Rowberry.

12. On March 25, 1996, the Department issued Assessment No. 2235930 to M. Kory and

Lucia Rowberry for tax periods January-December 1994 in the total amount of $13,423.95,

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representing $8,105.04 gross receipts tax, $4,508.43 interest, and $810.48 penalty due on receipts of

$139,095.00.

13. On April 17, 1998, Dr. Rowberry filed a written protest to the Department's assessment.

DISCUSSION

Dr. Rowberry maintains that Nick DeSantis, DDS, PC, paid gross receipts tax on all receipts

the corporation collected from patients for dental services performed by both Dr. Rowberry and Dr.

DeSantis and that no additional gross receipts tax is due. Dr. Rowberry argues that the TS-22 and

separate agreement signed by Drs. Rowberry and DeSantis, together with copies of the 1994 CRS-1

returns filed by Nick DeSantis, DDS, PC, are sufficient evidence to rebut the presumption of

correctness of the Department's assessment of gross receipts tax against Dr. Rowberry.

Presumption of Correctness. Section 7-1-17(C) NMSA 1978 states that any assessment of

tax issued by the Department is presumed to be correct. Dr. Rowberry contends that the TS-22

agreement and CRS-1 returns introduced as Stipulated Exhibits 1 and 2 are sufficient to overcome

this presumption and place the burden of coming forward with evidence of nonpayment of tax on the

Department. This argument would have merit if the TS-22 had been signed by the Department. In

those circumstances, the Department's acceptance of Nick DeSantis, DDS, PC, as agent for payment

of Dr. Rowberry's gross receipts taxes, together with evidence that the corporation did, in fact, pay

gross receipts tax to the state, would be sufficient to overcome the presumption of nonpayment of tax

created by the Department's assessment.

In this case, however, the TS-22 relied on by Dr. Rowberry was never signed by the

Department and is ineffective to establish Nick DeSantis, DDS, PC, as Dr. Rowberry's agent for

payment of gross receipts tax. The second paragraph of the TS-22 states: "I agree with the Secretary

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of Taxation and Revenue of the State of New Mexico...." There are two signature lines at the bottom

of the form, one for the taxpayer's agent and one for the Department. No agreement can be formed

without the signature of both parties. The TS-22 introduced as Stipulated Exhibit 1 shows the

signature of Nick DeSantis, DDS, PC, but is not signed by the Department. There is no evidence the

form was even tendered to the Department. In the absence of testimony from either Dr. Rowberry or

Dr. DeSantis, the unsigned form could be seen as evidence that the parties decided not to pursue this

course of action and therefore never submitted the TS-22 for Department approval.

Introduction of an unsigned TS-22 agreement does not overcome the presumption of

correctness that attaches to the Department's assessment of gross receipts tax against Dr. Rowberry.

The burden remains on Dr. Rowberry to establish that the assessment is incorrect.

Payment of Tax by Nick DeSantis, DDS, PC. Dr. Rowberry contends that Nick DeSantis,

DDS, PC, paid gross receipts tax on all receipts the corporation collected from patients for dental

services performed by both Dr. Rowberry and Dr. DeSantis. The Department responds that Dr.

Rowberry has not produced any evidence to establish the source of the receipts reported by Nick

DeSantis, DDS, PC. The Department also points out that the January 1, 1987 statement attached to

Stipulated Exhibit 1 states that Nick DeSantis, DDS, PC, will pay tax on the "net amount" of Dr.

Rowberry's receipts, while the statutes require payment of tax on "gross receipts". See Section 7-9-4

NMSA 1978.

The Department's evaluation of the evidence is correct. The CRS-1 reports introduced as

Stipulated Exhibit 2 establish that Nick DeSantis, DDS, PC, paid tax on some of its receipts during

1994. The reports do not provide any information as to whether the reported receipts include patient

payments for work performed by Dr. Rowberry, nor do they indicate whether tax was paid on gross

receipts or net receipts. With regard to the latter point, Dr. Rowberry's attorney argues that the term

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"net amount" in Stipulated Exhibit 1 means net of tax, not net of expenses. There is nothing in the

record to corroborate this argument. Although testimony from Dr. DeSantis or someone from his office

could have clarified the corporation's tax reporting, no such testimony was offered.1

Even if the Taxpayer's assertions concerning payment of gross receipts tax by the corporation

were accepted as true, this does not resolve the issue of Dr. Rowberry's liability for the Department's

assessment. Under the facts presented, there are two taxable transactions: a sale of dental services by

Dr. Rowberry to Nick DeSantis, DDS, PC, and a sale of dental services by Nick DeSantis, DDS, PC, to

individual patients. There is no assessment against Nick DeSantis, DDS, PC, and the corporation's

liability for payment of gross receipts tax on its receipts from patients is not currently in dispute. The

only matter in dispute is whether Dr. Rowberry paid gross receipts tax on the payments he received

from the corporation.

Dr. Rowberry argues there is only one sale at issue—the sale of dental services to individual

patients. The evidence does not support his position. The parties stipulated that the assessment against

Dr. Rowberry was based on $139,095.00 of gross receipts reported on Schedule C to his 1994 federal

income tax return. These receipts correspond to the nonemployee compensation reported on the 1994

federal form 1099 issued to Dr. Rowberry by Nick DeSantis, DDS, PC. There is no evidence that Dr.

Rowberry sold his services directly to individual patients or that he billed or received payment from

those patients. The Taxpayer's attorney confirmed during argument that all dental services provided in

the offices of Nick DeSantis, DDS, PC, were billed by and paid to the corporation. While the

arguments of counsel are not evidence, this position is nonetheless consistent with the corporation's

issuance of the 1099 to Dr. Rowberry.

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The Taxpayer failed to present evidence on a number of issues raised in his original protest. After requesting four
continuances of the scheduled hearing, all of which were granted, Dr. Rowberry decided to present his case on the
basis of stipulated facts and exhibits rather than through the testimony of witnesses. Unfortunately, some of the legal

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The facts of this case are very similar to those in House of Carpets, Inc. v. Bureau of Revenue,

87 N.M. 747, 507 P.2d 1078 (Ct. App. 1973). There, the taxpayer was a corporation engaged in the

business of selling carpets on an installed basis. The taxpayer hired a second corporation ("C2") to go

into customers' homes and perform the installation service. C2 did not bill or receive payment from the

taxpayer's customers. Instead, the taxpayer billed and collected the entire amount due for the carpet-

installation package and then paid C2 for the installation services it provided to the taxpayer's

customers.

The issue before the court was whether the taxpayer was liable for gross receipts tax on the

installation portion of customers' payments when C2 had already paid gross receipts tax on its receipts

from performing the installation service. The court held that C2's payment of gross receipts tax did not

relieve the taxpayer of liability for tax on the payments it received from its customers. The court

rejected the taxpayer's claim of double taxation, finding there were two separate transactions involved:

a sale of installation services by C2 to the taxpayer, and a resale of those services by the taxpayer to its

customers. Both transactions were subject to gross receipts tax. See also, New Mexico Sheriffs &

Police Association v. Bureau of Revenue, 85 N.M. 565, 514 P.2d 616 (Ct. App. 1973).

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.” 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 pop” operations or by

individuals acting as independent contractors. "Gross receipts” means "the total amount of money or

arguments made at the hearing, including the argument concerning payment of tax by Nick DeSantis, DDS, PC, were
not supported by the factual record on which the Taxpayer chose to submit his protest.

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the value of other consideration received...from performing services in New Mexico." Section 7-9-3(F)

NMSA 1978.

During 1994, Dr. Rowberry and Nick DeSantis, DDS, PC, were separate taxpayers, each of

which was engaged in business and had receipts from performing services in New Mexico. Although

not established in the record, Dr. Rowberry contends that Nick DeSantis, DDS, PC, paid gross receipts

tax on all payments the corporation received from patients for dental services performed in the

corporation's offices. Dr. Rowberry does not contend that Nick DeSantis, DDS, PC, also paid gross

receipts tax on the payments the corporation subsequently made to Dr. Rowberry. Gross receipts tax

was due on both transactions.2 Having failed to establish that gross receipts tax was paid on the

compensation he received from Nick DeSantis, DDS, PC, and reported as business income on his 1994

federal income tax return, Dr. Rowberry remains liable for the Department's assessment of tax on those

receipts.

CONCLUSIONS OF LAW

1. Dr. Rowberry filed a timely written protest to Assessment No 235930 pursuant to

Section 7-1-24 NMSA 1978, and jurisdiction lies over the parties and the subject matter of this protest.

2. Dr. Rowberry is liable for gross receipts tax on the $139,095.10 of nonemployee

compensation he received from Nick DeSantis, DDS, PC, during 1994 for performing dental services in

the corporation's offices.

3. Dr. Rowberry failed to establish that his gross receipts tax liability on the $139,095.10

of payments he received from Nick DeSantis, DDS, PC, has been paid and has not overcome the

presumption of correctness that attaches to the Department's assessment.

2
Sections 7-9-43 and 7-9-48 NMSA 1978 provide a deduction for receipts from the sale of services for resale when the
buyer delivers a timely nontaxable transaction certificate ("NTTC") in the form prescribed by the Department. Although

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For the foregoing reasons, the Taxpayer's protest IS DENIED.

DONE, this 30th day of December 1998.

the Taxpayer's original protest raised the issue of whether Dr. Rowberry had timely possession of an NTTC from Nick
DeSantis, DDS, PC, there was no mention of an NTTC in the parties' stipulation of facts.

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