I paid income tax on my contractor income but didn't know New Mexico gross receipts tax applied — can I get back the penalty and interest?

Plain-English summary

A postal delivery contractor who did not know gross receipts tax applied — and paid the assessment by mortgaging his house — could not get back the penalty and interest. Lack of knowledge is negligence, accountant reliance did not excuse it, and interest is mandatory. Protest (a refund claim) DENIED.

Johnny Griego worked for 18 years as an independent contractor delivering bulk mail for the United States Post Office. Each year he reported and paid income tax on his business income, but he did not know New Mexico also imposes gross receipts tax on receipts from services, and he never paid it. After the Department received IRS information in 1997, it found him unregistered and assessed gross receipts tax, penalty, and interest for January 1993 through May 1998. Griego paid the whole assessment with money borrowed by mortgaging his house, then filed a claim for refund of the $17,376.95 of penalty and interest. He did not dispute the tax principal — only the penalty and interest — arguing it was unfair that no one (the Post Office, the Department, or his accountant) had warned him, and that New Mexico's tax burden was too heavy.

The penalty: lack of knowledge is negligence

The negligence penalty under Section 7-1-69(A) applies when a failure to pay is due to negligence, which Regulation 3 NMAC 1.11.10 defines to include inaction where action is required and an erroneous belief that no tax is due. New Mexico is a self-reporting system: taxpayers must determine and report their own liabilities (Section 7-1-13(B)), and a taxpayer's lack of knowledge or mistaken belief that no tax is owed is itself negligence (Tiffany Construction). The Post Office and the Department were not obligated to notify him.

Accountant reliance did not excuse the penalty

Griego argued he was not negligent because his accountant never told him about the gross receipts tax. Regulation 3 NMAC 1.11.11 recognizes "reasonable reliance on the advice of competent tax counsel or accountant... after full disclosure of all relevant facts" as a sign of non-negligence — but Griego only had the accountant prepare his income tax returns and never asked whether other taxes might apply. Because he neither requested nor received advice about the gross receipts tax, there was no informed reliance to protect him.

Interest is mandatory

Section 7-1-67 says interest "shall" be paid on any tax not paid when due, and the word "shall" makes it mandatory with no exceptions (State v. Lujan). Interest compensates the state for the time value of unpaid revenue; the reason for late payment is irrelevant, and even taxpayers who get a formal extension still owe interest from the original due date (Section 7-1-13(E)). The hearing officer found Griego honest and well-intentioned, but the interest was still owed. Arguments that the interest rate is high or the tax burden too heavy are for the Legislature — the Department cannot substitute its own judgment or excuse the amounts.

Result: refund claim DENIED — the penalty and interest were properly imposed, so there was no basis to refund them.

What this means for you

Independent contractors owe gross receipts tax on top of income tax

Paying income tax on your 1099 income does not cover the gross receipts tax New Mexico imposes on service receipts. Contractors — including those working for the Post Office or other government entities — must register and file. No one is required to warn you.

Not knowing the tax exists counts as negligence

Under New Mexico's self-reporting system, a genuine but mistaken belief that no tax is due is negligence and supports the penalty. The duty to learn your tax obligations rests with you.

A preparer only shields you if you disclose and ask

Reliance on an accountant defeats the penalty only when you fully disclose the facts and actually get advice on the specific tax. Having someone prepare your income tax return, without ever asking about other taxes, is not the informed reliance the rule protects.

Interest cannot be waived — paying under hardship doesn't change that

Interest is mandatory and compensates the state, so it applies regardless of intent, hardship, or even a payment extension. Complaints about the rate or the overall tax burden must go to the Legislature, not the Department.

Common questions

Q: I paid income tax on my contractor income. Why do I owe gross receipts tax too, plus penalty and interest?
A: Gross receipts tax is separate from income tax and applies to your service receipts. Not paying it on time draws a negligence penalty and mandatory interest, even if you already paid income tax on the same income.

Q: Can I get the penalty and interest back because no one told me the tax applied?
A: No. New Mexico is self-reporting, so lack of notice is not a defense. Lack of knowledge is negligence (supporting the penalty), and interest is mandatory regardless of the reason for late payment.

Q: My accountant never mentioned gross receipts tax. Doesn't that excuse me?
A: Only if you fully disclosed the issue and got advice about that tax. Because the contractor never asked his accountant about other taxes, there was no informed reliance to excuse the penalty.

Q: The interest rate and tax burden seem too high. Can the Department reduce them?
A: No. The Department must apply the statutes as written and cannot lower a mandatory interest charge or excuse tax based on the burden. Those arguments belong before the Legislature.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-1-69(A) — negligence penalty (2% per month, up to 10%) for failing to pay on time due to negligence
• NMSA 1978, § 7-1-67 — interest "shall" be paid on any tax not paid when due; mandatory and compensatory
• NMSA 1978, § 7-1-17(C) — an assessment of tax is presumed correct
• NMSA 1978, § 7-1-3(U) — "tax" includes related interest and civil penalty
• NMSA 1978, § 7-1-13(B) — New Mexico's self-reporting system; taxpayers must determine and report their own liabilities
• NMSA 1978, § 7-1-13(E) — interest runs from the original due date even when an extension of time to pay is granted
• Regulation 3 NMAC 1.11.10 — defines negligence (failure of ordinary business care, inaction where action is required, erroneous belief)
• Regulation 3 NMAC 1.11.11 — situations indicating non-negligence, including reasonable reliance on competent tax counsel or an accountant after full disclosure

Cases 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 individual has a duty to ascertain the tax consequences of an income-producing activity; lack of knowledge is negligence
• El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989) — the presumption of correctness extends to penalty and interest
• State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977) — the word "shall" makes the assessment of interest mandatory

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Johnny Griego
• Decision PDF: D&O 00-16

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 JOHNNY GRIEGO No. 00-16
ID # 02-317419-00 6
DENIAL OF CLAIM FOR REFUND

DECISION AND ORDER

A formal hearing on the above-referenced protest was held June 5, 2000, before Margaret B.

Alcock, Hearing Officer. Johnny Greigo (“Taxpayer”) represented himself. The Taxation and

Revenue Department ("Department") was represented by Bridget A. Jacober, Special Assistant

Attorney General. Based on the evidence and arguments presented, IT IS DECIDED AND

ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. For the last 18 years, the Taxpayer has worked as an independent contractor

providing bulk mail delivery services to the United States Post Office.

2. Each year, the Taxpayer reported and paid federal and state income tax on his

business income.

3. The Taxpayer was not aware that New Mexico law required him to report and pay

gross receipts tax on his receipts from selling services to the Post Office.

4. The Taxpayer never asked the accountant who prepared the Taxpayer’s annual

income tax returns whether he owed any other type of tax on his business income, nor did the

accountant volunteer any information concerning the New Mexico gross receipts tax.

5. In 1997, the Department received information from the Internal Revenue Service

concerning the business income reported on the Taxpayer’s federal income tax returns. When the

Department investigated, it found the Taxpayer was not registered with the Department and had

never paid gross receipts tax on this income.

6. The Department subsequently assessed the Taxpayer for gross receipts tax, penalty

and interest on his receipts from performing services for the Post Office during tax periods January

1993 through May 1998.

7. The Taxpayer paid the assessments in full with money he borrowed by mortgaging

his house.

8. In October 1998, the Taxpayer filed a claim for refund of the $17,376.95 of penalty

and interest he had paid on the assessments.

9. On October 15, 1998, the Department denied the claim for refund.

10. On November 2, 1998, the Taxpayer filed a written protest to the Department’s

denial of his claim for refund of penalty and interest.

DISCUSSION

The issue to be decided is whether the Taxpayer is liable for the penalty and interest he paid

on the Department’s assessment of tax on his receipts from performing services for the Post Office.

The Taxpayer does not dispute his liability for the tax principal, but maintains it is unfair to assess

him penalty and interest because the Department, the Post Office and his accountant all failed to notify

him of his liability for the tax. The Taxpayer also believes the state’s tax burden is too heavy and it is

unfair to assess him penalty and interest on his unpaid gross receipts tax when he has already paid

income tax on the same receipts and has been charged gross receipts tax on his purchase of supplies

for the truck used in his business.

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Section 7-1-17(C) NMSA 1978 provides that any assessment of tax by the Department is

presumed to be correct. Section 7-1-3(U) NMSA 1978 defines tax to include not only the amount of

tax principal imposed but also, unless the context otherwise requires, “the amount of any interest or

civil penalty relating thereto." See also, El Centro Villa Nursing Center v. Taxation and Revenue

Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989). Accordingly, the assessment of penalty

and interest paid by the Taxpayer is presumed to be correct, and it is the Taxpayer’s burden to

present evidence showing he is entitled to a refund of these amounts.

Penalty. Section 7-1-69 NMSA 1978 governs the imposition of penalty. Subsection A

imposes a penalty of two percent per month, up to a maximum of ten percent, when a taxpayer fails

“due to negligence or disregard of rules and regulations” to pay taxes in a timely manner. 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.

Here, the Taxpayer's failure to pay gross receipts tax on his receipts from the Post Office was due to his

lack of knowledge of New Mexico law. The Taxpayer's argument that the Post Office or the

Department should have notified him of his liability for gross receipts tax misapprehends the nature of

New Mexico’s self-reporting tax system. It is the obligation of taxpayers, who have the most direct

knowledge of their business activities, to determine their tax liabilities and accurately report those

liabilities to the state. See, Section 7-1-13(B) NMSA 1978; 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

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(1977). A taxpayer’s lack of knowledge or erroneous belief that he does not owe taxes has been held to

constitute negligence for purposes of Section 7-1-69 NMSA 1978. Id.

The Taxpayer’s argument that he was not negligent because his accountant failed to advise him

of his gross receipts tax liability raises a more difficult issue. Regulation 3 NMAC 1.11.11 sets out

several situations that may indicate a taxpayer has not been negligent, including “reasonable reliance on

the advice of competent tax counsel or accountant as to the taxpayer’s liability after full disclosure of

all relevant facts....” Although the Taxpayer relied on his accountant to prepare his federal income tax

returns for the years 1993-1998, he never asked the accountant whether there might be other taxes due

in connection with the business income reported on his federal return. Given these facts, the Taxpayer

cannot claim that his failure to file gross receipts tax returns was an informed decision based on his

accountant’s advice. The Taxpayer neither requested nor received advice from his accountant

concerning the gross receipts tax, and there is no basis to excuse the Taxpayer from payment of penalty

under Regulation 3 NMAC 1.11.11.

Interest. Section 7-1-67 NMSA 1978 governs the imposition of interest on late payments of

tax and provides, in pertinent part:

A. If any tax imposed is not paid on or before the day on which it
becomes due, interest shall be paid to the state on such amount from
the first day following the day on which the tax becomes due, without
regard to any extension of time or installment agreement, until it is
paid... (emphasis added).

The legislature’s use of the word “shall” indicates that the assessment of interest is mandatory rather

than discretionary. State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977). The legislature has directed the

Department to assess interest whenever taxes are not timely paid and has provided no exceptions to the

mandate of the statute. The assessment of interest is not designed to punish taxpayers, but to

compensate the state for the time value of unpaid revenues. The reason for a late payment of tax is

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irrelevant to the imposition of interest. Even taxpayers who obtain a formal extension of time to pay

tax are liable for interest from the original due date of the tax to the date payment is made. Section

7-1-13(E) NMSA 1978.

In this case, the Taxpayer failed to pay gross receipts taxes in a timely manner. Although it

is clear the Taxpayer is an honest person who had no intent to cheat the state, it is also clear the taxes

were due and owing. Under the provisions of Section 7-1-67 NMSA 1978, imposition of interest is

mandatory. While the rate of interest imposed on late payments may be high when compared to current

market rates, the Department does not have authority to substitute its own judgment for that of the

legislature. Similarly, the Department does not have authority to excuse the Taxpayer from payment of

interest or penalty based on the Taxpayer’s belief that New Mexico imposes too heavy a tax burden on

its citizens. The Taxpayer must address these arguments to the legislature.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to the Department’s denial of his claim for

refund and jurisdiction lies over both the parties and the subject matter of this protest.

2. The Taxpayer was negligent in failing to determine the tax consequences of engaging in

business as an independent contractor for the Post Office, and penalty was properly assessed pursuant

to Section 7-1-69 NMS 1978.

3. The Taxpayer was late in paying gross receipts taxes due to the state and interest was

properly assessed pursuant to Section 7-1-67 NMSA 1978.

4. Because penalty and interest were properly imposed against the Taxpayer, there is no

basis for granting the Taxpayer’s claim for refund of these amounts.

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

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DATED June 14, 2000.

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