A New Mexico Hearing Officer found that Gross Receipts Tax does not apply to a taxpayer’s markup for services performed outside New Mexico, but the taxpayer’s reimbursements for payroll to New Mexico employees are taxable New Mexico receipts. In Protest of Talbridge, the taxpayer was a Texas employment agency with no offices in New Mexico that was the legal employer of individuals providing services to a client in New Mexico. The client recruited and interviewed candidates and, if hired, provided the employee a list from which to select their desired payroll provider. If the employee chose the taxpayer, the taxpayer charged the client the payroll expense plus a percentage (“markup”) as compensation for its services.
The Hearing Officer first addressed whether the Gross Receipts Tax’s disclosed agency exclusion applied to the amounts taxpayer charged the client for the employees’ payroll expense. The disclosed agency exclusion requires that the taxpayer prove that it is an agent of its client and discloses the agency to a third party receiving amounts through the taxpayer. To qualify as an agent of the client, the taxpayer must be able to bind the client to obligations to the third party. The Hearing Officer found that the taxpayer had not proven it was an agent of its client because taxpayer’s Professional Services Agreement disavowed taxpayer’s ability to bind the client to obligations to the employees.
The Hearing Officer next addressed whether the taxpayer’s markup constituted receipts for services performed outside New Mexico, which would be exempt under the Gross Receipts Tax’s out-of-state services exemption. The Hearing Officer found that the taxpayer earned its markup outside New Mexico because the taxpayer did not have a New Mexico office and performed its business activities at its office in Houston, TX. The Hearing Officer acknowledged that a taxpayer generally conducts its activities at its employees’ locations and that the taxpayer was the legal employer of employees in New Mexico. However, the Hearing Officer found that the taxpayer did not conduct its employment agency services in New Mexico because the taxpayer did not control the employees’ day-to-day activities in New Mexico. In the Matter of Protest of Talbridge Corporate to Assessment Issued Under Letter Id. No. L0479267504 v. New Mexico Taxation and Revenue Department, No. 20.09-113A, AHO D&O No. 22-20, (N.M. Sept. 19, 2022) (link here).