An administrative law judge rejected a taxpayer’s argument that it was acting as a disclosed agent and that New Mexico gross receipts tax was not due on amounts the taxpayer collected from its franchisee’s customers. The taxpayer (“Taxpayer”) entered into a franchise agreement (“Agreement”) with a franchisee (“Franchisee”) in New Mexico to operate a franchise that sold temporary personnel services and products. Under the terms of the Agreement, the Franchisee was responsible for all daily operations of the business and management, such as hiring and firing. The Taxpayer, however, was the legal employer of the temporary employees. In addition, the Taxpayer approved potential client credit and client limits and billed the clients. When the Taxpayer received payments for the services, the money was deposited into a separate bank account. The Taxpayer deducted direct costs, including payroll costs for the temporary employees, and the Taxpayer’s share of the gross margin and franchise fees from the collections deposited into the account. The Taxpayer argued that it was acting as a “disclosed agent” when it collected payments for the Franchisee and that the amounts collected were not subject to New Mexico gross receipts tax.
New Mexico’s gross receipts tax allows an exclusion from the tax base for amounts received on behalf of another as a disclosed agent [NMSA 1978, Section 7-9-3.5(A) (3) (f)]. Further, New Mexico’s regulation NMAC 18.104.22.168(C)(1) provides that an “agency relationship exists if a person has the power to bind a principal in a contract with a third party so that the third party can enforce the contractual obligation against the principal.”
In MPC LTD v. New Mexico Taxation and Revenue Department, 2003-NMCA-021, the New Mexico Court of Appeals interpreted the state’s regulation on this exclusion to require 1) the agent have the authority to bind the principal to an obligation created by the agent, and 2) the beneficiary of that obligation must be informed by contract that he or she has a right to proceed against the principal to enforce the obligation. In this hearing, the Taxpayer failed to establish a “disclosed agent” relationship, as it provided no proof that the temporary employees or the Franchisee’s clients knew that they had a right to proceed against the Franchisee.