A commissioned salesperson who works only for one company — is he an 'employee' whose commissions are exempt from gross receipts tax, or an independent contractor who owes the tax?
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This page answers the general question as of 1999. Ezel answers yours, under current New Mexico tax law, with citations.
Subject
Melvin L. & Dolores M. Jenkins (D&O 99-01)
Plain-English summary
Melvin Jenkins was a traveling salesman who sold automotive and industrial products (fasteners, hoses, cutting tools, chemicals) for Lawson Products, Inc., an Illinois company with no New Mexico location. He worked a ten-county territory on straight commission (about 20% of sales). After an IRS Schedule C income match, the Department found he had never paid gross receipts tax on those commissions and assessed $1,744.04 tax, $174.40 penalty, and $872.02 interest for 1993.
Jenkins argued his commissions were exempt under Section 7-9-17, which exempts "the receipts of employees from wages, salaries, commissions" — i.e., he claimed he was Lawson's employee. Hearing Officer Gerald B. Richardson denied the protest, finding Jenkins was an independent contractor, not an employee.
The Gross Receipts and Compensating Tax Act doesn't define "employee," so the Hearing Officer used the common-law "right to control" test (Buruss v. B.M.C. Logging; Harger v. Structural Services, adopting Restatement (Second) of Agency § 220). The key question: does the worker surrender control over the manner of doing the work (employee), or keep control and answer only for results (independent contractor)? Requiring daily activity logs and a $120,000 annual sales minimum showed Lawson controlled results, not the means — Jenkins decided where he went, whom he called on, and whether he worked at all on a given day, reporting only after the fact.
Almost every other factor pointed the same way: no wage or salary (pure commission), a 1099 reporting "nonemployee compensation," no income-tax withholding or FICA, no vacation or sick leave, no workers' compensation, and no office provided. Lawson's own literature called its salespeople "independent sales agents," and Jenkins himself reported the income as a sole proprietorship, deducted business expenses (auto, home office, meals), and paid self-employment tax. A few facts cut the other way (Lawson supplied most forms and some sample inventory free), but they were only some of many factors. On the totality of the circumstances, Jenkins retained control over how he did his job, so he was an independent contractor and his commissions were taxable gross receipts.
What this means for you
- Working on commission for a single company does not make you an "employee" for gross receipts tax. The wage/salary/commission exemption in Section 7-9-17 is for genuine employees. A commissioned salesperson who controls how and when they work is an independent contractor whose commissions are taxable.
- The decisive question is control over the means, not the results. A sales quota, required activity reports, and the risk of termination all go to results and are consistent with an independent-contractor relationship. What matters is whether the company directs the day-to-day details of how you do the work.
- How you and the company treat the relationship matters. A 1099 (not a W-2), no tax withholding or FICA, no benefits, and your own deduction of business expenses and payment of self-employment tax all weigh heavily toward independent-contractor status.
- No single factor decides it. Even employee-like facts — like the company giving you free supplies or forms — are just part of a totality-of-the-circumstances test; they won't outweigh a consistent pattern of independence.
- If you're an independent salesperson selling in New Mexico, plan for gross receipts tax on your commissions. Register and report, or you may face tax, penalty, and interest years later when the state matches your federal Schedule C.
Key questions answered
Why did his commissions get taxed when employees' commissions are exempt?
Because he was not an employee. Section 7-9-17 exempts employees' wages, salaries, and commissions, but Jenkins was an independent contractor, so his commissions were taxable gross receipts.
What test decided employee vs. independent contractor?
The common-law "right to control" test: an employee surrenders control over the manner of doing the work; an independent contractor keeps that control and is answerable only for results. New Mexico follows the Restatement (Second) of Agency § 220 (Harger v. Structural Services), weighing the totality of the circumstances.
Didn't the sales quota and required reports make him an employee?
No. A $120,000 sales minimum and daily activity logs show the company cared about results, not the day-to-day means. Jenkins decided where, when, and whom to call, and simply reported afterward — control over results, which is consistent with independent-contractor status. (The Hearing Officer also noted that a relationship being terminable does not prove either status.)
Which facts most strongly showed independence?
No wage or salary (pure commission), 1099 "nonemployee compensation," no withholding or FICA, no vacation/sick leave, no workers' comp, no office provided, and Jenkins's own treatment of the income as a sole proprietorship — deducting business expenses and paying self-employment tax.
Verbatim citations
The exemption Jenkins invoked (Section 7-9-17):
exempted from the gross receipts tax are the receipts of employees from wages, salaries, commissions or from any other form of remuneration for personal services.
The control test (quoting Restatement (Second) of Agency § 220, via Harger):
The important distinction is between service in which the actor's physical activities and his time are surrendered to the control of the master, as service under an agreement to accomplish results or to use care and skill in accomplishing results. Those rendering service but retaining control over the manner of doing it are not servants.
Commissioned salespeople specifically (Regulation 3 NMAC 2.17.10):
a salesperson who sells for a company on a commission basis is not an employee of the company where the company exercises no direct control over the details of performance of the salesperson's duties beyond general statements about the scope and nature of the salesperson's obligations.... Therefore, receipts from commissions paid to such salesperson for selling property in New Mexico are subject to the gross receipts tax.
The holding:
The evidence establishes that it is Mr. Jenkins, who, although he reports his activities to Lawson, maintains control over the manner in which he performs his activities as a sales agent for Lawson. As such, he is an independent contractor rather than an employee of Lawson, and gross receipts taxes were properly assessed upon his commission receipts.
Source
- Listing: New Mexico Decisions & Orders
- Decision post: Melvin L. & Dolores M. Jenkins
- Decision PDF: D&O 99-01
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
MELVIN L. & DOLORES M. JENKINS, NO. 99-01
ID. NO. 02-26769-00 0, PROTEST TO
ASSESSMENT NO. 2109470
DECISION AND ORDER
This matter came on for formal hearing on December 1, 1998 before Gerald B.
Richardson, Hearing Officer. Mr. and Mrs. Jenkins represented themselves at the hearing. The
Taxation and Revenue Department, hereinafter, “Department”, was represented by Bridget A.
Jacober, Special Assistant Attorney General. At the close of the hearing, the matter was held
open to allow Mr. and Mrs. Jenkins to determine if they wished to call an additional witness. On
December 3, 1998, Mr. and Mrs. Jenkins informed the department that the would not be calling
an additional witness and the matter was considered submitted for determination at that time.
Based upon the evidence and the arguments presented, IT IS DECIDED AND ORDERED AS
FOLLOWS:
FINDINGS OF FACT
- On February 17, 1997, the Department issued Assessment No. 2109470 to Mr.
and Mrs. Jenkins, assessing $1,744.04 in gross receipts tax, $174.40 in penalty and $872.02 in
interest for the January 1993 through December 1993 reporting period.
- On February 21, 1997, Mr. and Mrs. Jenkins filed a written protest to Assessment
No. 2109470.
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- The Department’s assessment was issued based upon information that the
Department received from the Internal Revenue Service pursuant to an information sharing
agreement between the Department and the Internal Revenue Service. That information revealed
that in 1993, Mr. and Mrs. Jenkins reported income from a business or profession on their
Federal Schedule C when reporting their income taxes for that year. When the Department’s
records did not reveal that Mr. and Mrs. Jenkins were reporting gross receipts taxes to the
Department for that same period upon their gross receipts from engaging in business, the
Department assessed gross receipts tax on the receipts reported by Mr. and Mrs. Jenkins on their
Federal Schedule C.
- The receipts reported by Mr. and Mrs. Jenkins on their Federal Schedule C were
amounts which Mr. Jenkins received as commissions for selling merchandise for Lawson
Products, Inc., hereinafter, “Lawson”, during calendar year 1993.
-
Since 1988, Mr. Lawson has been a commissioned salesperson for Lawson.
-
Lawson sells automotive and industrial products, such as fasteners, hydraulic
hoses and fittings, shop supplies, chemicals, cutting tools and cleaning supplies.
- Lawson is headquartered in Des Plaines, Illinois and has no business location in
New Mexico. It sells its products in New Mexico through commissioned sales people, such as
Mr. Jenkins.
- Mr. Jenkins is the exclusive Lawson salesperson for San Juan, Rio Arriba, Santa
Fe, Sandoval, McKinley, Valencia, Bernalillo, Torrance, Catron and Socorro Counties, in New
Mexico.
- Mr. Jenkins has no New Mexico license or permit to operate a business.
2
- Lawson requires its salespersons to prepare and send in forms which report their
daily sales activities, showing the number of calls and customers called upon, the sales made and
the amount of sales, by customer. Sales reports are submitted even for days in which no calls are
made, so that Lawson can keep track of the days a salesperson is working.
- Lawson issued Mr. Jenkins a federal form 1099 for tax year 1993, reporting the
commissions paid to Mr. Jenkins as “nonemployee compensation”.
- Mr. and Mrs. Jenkins reported Mr. Jenkins commissions as gross receipts on
Federal Schedule C, which is used to report profit or loss from a sole proprietorship. They also
claimed deductions from that income for expenses such as automobile expenses, depreciation,
home office expenses, travel, meals and entertainment expenses, and utilities. The net amount,
after deducting expenses, was reported as business income on their Federal Form 1040.
- Mr. and Mrs. Jenkins reported and paid self-employment tax on their income from
business as reported on their Federal Schedule C.
- Lawson reimburses Mr. Jenkins and other Lawson salespeople for their expenses,
such as travel, meals, parking, hotel room, mileage to airport, taxi fares, etc. which are incurred
to attend training seminars put on by Lawson and for attending trade shows and fairs which
Lawson authorizes their salespeople to attend. To obtain reimbursement, the salespeople must
submit expense itemizations with receipts.
- Lawson does not reimburse its salespeople for their expenses related to making
sales calls. Mr. Jenkins provides his own automobile and pays all expenses of maintenance,
insurance, gasoline, etc. related to the use of his automobile for making sales calls upon
customers or potential customers.
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- In its literature provided its salespeople, Lawson refers to its salespeople as
“independent sales agents”.
- On a quarterly basis, Lawson requires its salespeople to fill out, sign and return a
form which affirms that they did not devote 80% or more of their working time and attention to
the solicitation of orders for Lawson. If a salesperson does not return the completed form, he is
not paid his commissions until he does so, and he is subject to termination.
- Lawson terminates salespeople who do not generate at least $120,000 in sales,
annually.
- When Mr. Jenkins was first engaged by Lawson, he was provided several
thousand dollars worth of supplies and sales materials. At the time he was told that he would not
need to pay for those items. Later, Lawson tried to dock his commission pay for the cost of the
materials. Ultimately, after Mr. Jenkins threatened to quit working as a salesman over the issue,
Lawson agreed that Mr. Jenkins did not need to pay for the items.
- Lawson has a “security bonus program” under which it contributes 4% of a
salesperson’s net commissions to an account held in the name of the salesperson. To qualify for
participation, one must be a sales agent for three calendar years and a minimum sales revenue
amount must be met. These minimums must continue to be met for continued participation. The
money in the account becomes available upon the sales agent’s death, or upon reaching twenty
years of participation. No money is paid if a sales agent participates in the program less than five
years or is terminated for “conduct inimical to the best interest of the company”. If an agent
reaches age sixty five before twenty years of participation, a portion of the money may be drawn
out, using a 5% multiplier for each year of participation. Lawson characterized the security
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bonus program an a voluntary program on the part of the company which can be withdrawn or
modified in the discretion of the company, although agents would be entitled to payment under
the terms of the original agreement with respect to amounts accrued prior to modification or
termination.
- Mr. Jenkins’ commissions average approximately 20% of his sales revenues.
Sales agents are docked 30% of the sales revenues attributable to sales orders which are not paid
for by the customer.
-
Mr. Jenkins receives no hourly wage or salary from Lawson.
-
Lawson offers health, dental and disability insurance plans to its sales agents.
Those who participate, have the premiums withheld from their commissions.
- Lawson supplies all of the forms and most of the sales materials used by its
salespeople at no cost to the salesperson. It provides a portion of the cost of sales devices, such
as bins to hold sample merchandise. Sales agents pay for any merchandise they use as gifts or for
promotion for their customers.
- Lawson does not direct Mr. Jenkins in his daily sales activities. Mr. Jenkins
determines where he goes within his territory and which customers to call upon.
- Lawson regional managers monitor the sales activities of their sales agents
through monthly sales reports provided them by the Lawson home office. These monthly sales
reports are complied from the daily sales reports submitted by the sales agents.
- Mr. Jenkins does not accrue annual (vacation) leave or sick leave from Lawson
with respect to his activities as a sales agent. When Mr. Jenkins wishes to take leave, he notifies
his regional manager of the time that he will take off.
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- Lawson does not provide worker’s compensation insurance coverage to Mr.
Jenkins.
DISCUSSION
Mr. Jenkins argues that he is not liable for gross receipts tax on his sales commissions
because he was an employee of Lawson and was therefore entitled to the exemption found at § 7-
9-17 NMSA 1978, which provides:
exempted from the gross receipts tax are the receipts of employees
from wages, salaries, commissions or from any other form of
remuneration for personal services.
An employee is not defined in the Gross Receipts and Compensating Tax Act, Chapter 7, Article
9 NMSA 1978, so we will look to the common law definition of employee. In determining
whether a person is an employee or an independent contractor, the rule in New Mexico and in
general is that the principal consideration is the right to control. Thus, the relationship of
employer and employee usually results where there is control over the manner and method of
performance of the work to be performed. Where there is only control over the results, however,
and not the details of the performance, the worker is usually considered to be an independent
contractor. Buruss v. B.M.C. Logging Co., 38 N.M. 254, 31 P.2d 263 (1934). The most recent
pronouncement of this rule can be found in Harger v. Structural Services, Inc., 121 N.M. 657,
663, 916 P.2d 1324, 1330 (1996). In that case the New Mexico Supreme Court adopted the
approach set out in the Restatement (Second) of Agency § 220(1) to determine a worker’s status
as an employee or an independent contractor:
The important distinction is between service in which the actor’s
physical activities and his time are surrendered to the control of the
master, as service under an agreement to accomplish results or to
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use care and skill in accomplishing results. Those rendering
service but retaining control over the manner of doing it are not
servants.
Among the factors to be considered are: whether the party employed engages in a distinct
occupation or business; whether the work is part of the employer’s regular business; the skill
required in the particular occupation; whether the employer supplies the instrumentalities, tools
or the place of work; the duration of a person’s employment and whether that person works full-
time or regular hours; whether the parties believe they have created the relationship of employer
and employee and the manner and method of payment. The totality of all of the circumstances
must be considered in determining whether the employer has the right to exercise that degree of
control over a worker so as to make the worker an employee.
The Department has adopted a regulation under Section 7-9-17 to provide criteria by
which the status of a worker may be determined. Regulation 3 NMAC 2.12.7. provides as
follows:
In determining whether a person is an employee, the department
will consider the following indicia:
- is the person paid a wage or salary;
- is the “employer” required to withhold income tax from the
person’s wage or salary; - is F.I.C.A. tax required to be paid by the “employer”;
- is the person covered by workmen’s compensation insurance;
- is the “employer” required to make unemployment insurance
contributions on behalf of the person; - does the person’s “employer” consider the person to be an
employee; - does the person’s “employer” have a right to exercise control
over the means of accomplishing a result or only over the
result (control does not mean “mere suggestion’).
If all of the indicia mentioned are present, the department will
presume that the person is an employee. However, a person may
be an employee even if one or more of the indicia are not present.
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Another regulation under § 7-9-17 deals specifically with commissioned salespeople.
Regulation 3 NMAC 2.17.10 states:
a salesperson who sells for a company on a commission basis is not
an employee of the company where the company exercises no
direct control over the details of performance of the salesperson’s
duties beyond general statements about the scope and nature of the
salesperson’s obligations under the contract between the
salesperson and the company. In addition, where commissions
paid to a salesperson are not subject to withholding taxes or social
security taxes, the salesperson is not considered an employee of the
company. Therefore, receipts from commissions paid to such
salesperson for selling property in New Mexico are subject to the
gross receipts tax.
As noted in the Harger decision, above, the primary consideration in determining
whether one is an employee (servant) or an independent contractor, is whether the individual
retains control over the means of accomplishing the result of the service, or whether the
individual surrenders control over the means of accomplishing the result to the employer
(master). Although Lawson requires Mr. Jenkins and its other sales agents to prepare and send in
daily activity logs which detail their sales activities, this does not demonstrate the level of control
required to establish an employer-employee relationship. Mr. Jenkins has not surrendered
control as to how he performs his sales agent duties. Mr. Jenkins determines where he goes on
any given day and who he calls upon. Indeed, it is Mr. Jenkins who determines whether he
makes any sales calls at all on any given day. He does not need to obtain Lawson’s approval
should he choose to not work that day. He simply informs Lawson of his activities after the fact
by submitting daily activity summaries. No doubt, Lawson would be concerned if a sales agent
did not put in much effort at making sales calls, but that would reflect not only in the daily
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activity summaries, but also in the sales dollars generated by a salesman. Lawson takes this into
account in determining whether it continues its relationship with its salespeople, expecting that
salespeople make at least $120,000 in sales per year.1 This is indicative that Lawson controls the
results rather than the means of accomplishing the job of selling its products.
There are a number of other facts which support the conclusion that Mr. Jenkins is not an
employee. He does not receive an hourly wage or salary, but operates strictly upon a commission
which is a percentage of sales. Lawson is consistent in its treatment of Mr. Jenkins as an
independent contractor. They report his commissions to the Internal Revenue Service on a Form
1099 as nonemployee compensation. Their literature refers to their salespeople as “ independent
sales people”. It does not reimburse Mr. Jenkins for his expenses related to his sales calls, such
as his automobile expenses, including fuel, maintenance, insurance, etc. It does not grant
vacation or sick leave. It does not provide worker’s compensation insurance. It does not
withhold F.I.C.A or withholding taxes from Mr. Jenkins’ compensation. It does not provide Mr.
Jenkins with an office or place of business.
Mr. Jenkins own treatment of his compensation for Lawson is also consistent with an
independent contractor status. He reported the income as income from a sole proprietorship, and
deducted from that income the expenses related to the business use of his automobile, business
meals and entertainment and maintaining a home office. He reported and paid self-employment
tax on his commission income.
1
Mr. Jenkins argued that the fact that he could be terminated for failing to generate the minimum amount of sales or
for failing to return the quarterly payroll form was evidence of an employer-employee relationship because only
employees could be terminated. Contractual relationships may be terminated just as employer-employee
relationships. Thus, the mere fact that a relationship is subject to termination is not evidence of either an
independent contractor or employer-employee relationship.
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Mr. Jenkins relies upon the fact that he was not required to reimburse Lawson for the cost
of the supplies, samples, forms, etc. which he was provided when he was initially engaged to sell
for Lawson as indicative of his employee status. While this factor and the fact that they continue
to provide sales forms, labels and some sample inventory is somewhat indicative of an
employment relationship, it is only one of many factors to be considered.2
Other facts are not particularly probative of either an employee-employer relationship or
an independent contractor status. There is a group insurance plan, but the salesagents pay their
own premiums. The “security bonus program” looks somewhat like a retirement plan, but it is
characterized as a “voluntary program on the part of the company” which can be modified or
terminated at the sole discretion of Lawson, with agents being entitled to payment according to
the terms of the original agreement for amounts accrued prior to termination or modification.
Thus, it can just as easily be characterized as part of the contractual agreement between parties as
an “employee” benefit.
As noted above, the principal consideration in determining whether an employee-
employer relationship exists is whether the employee’s activity and time are surrendered to the
control of the master. The evidence establishes that it is Mr. Jenkins, who, although he reports
his activities to Lawson, maintains control over the manner in which he performs his activities as
a sales agent for Lawson. As such, he is an independent contractor rather than an employee of
Lawson, and gross receipts taxes were properly assessed upon his commission receipts.
2
There is also evidence that Mr. Jenkins also bears some of the costs for his sales materials. Clearly, Lawson
provides most of them, but Mr. Jenkins indicated that he purchases some sales samples which Lawson does not
provide and he pays some of the cost for fixtures, such as bins to hold various types of fasteners.
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CONCLUSIONS OF LAW
- Mr. and Mrs. Jenkins filed a timely, written protest to Assessment No. 2109470
and jurisdiction lies over both the parties and the subject matter of this protest.
- Mr. Jenkins was not an employee of Lawson Products, Inc. and is not entitled to
claim the exemption from gross receipts tax provided at Section 7-9-17 NMSA 1978.
For the foregoing reasons, the Taxpayers’ protest IS HEREBY DENIED.
DONE, this 4th day of January, 1999.
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