If a tax preparer never warned me about New Mexico gross receipts tax, am I excused from the penalty and interest for not paying it?

Plain-English summary

A consultant who never realized New Mexico gross receipts tax applied to his consulting income still owed the negligence penalty and interest, and being helped with his income taxes by H&R Block did not excuse him. Protest DENIED.

Randall Summers is a race-track consultant. In the spring of 1996, Pojoaque Tribal Enterprises hired him to advise on the operation of its newly acquired racetrack, the Downs of Santa Fe, during the summer racing season; he worked three days a week from May 1 through Labor Day and went home to Tucson in between. He was paid $24,925 as an independent contractor (reported on a Form 1099) before later becoming a PTE employee. Summers was unaware of the New Mexico gross receipts tax, so he never registered and never reported or paid it on his consulting fees.

When he had his 1996 income taxes done at H&R Block, the $24,925 was reported to the IRS on a federal Schedule C. H&R Block never told him about his gross receipts tax obligation. In 2000 the Department ran a limited-scope audit comparing his Schedule C receipts against his (nonexistent) gross receipts filings and assessed $1,466.18 in tax, plus penalty and interest. Summers paid the tax and protested only the penalty and interest.

Not knowing about the tax is negligence in a self-reporting system

The negligence penalty under Section 7-1-69(A) applies to a failure to pay or file due to negligence, without any intent to defraud. New Mexico relies on taxpayers to report their own liabilities, so every person is charged with a reasonable duty to find out the possible tax consequences of their actions; failing to do so is negligence for penalty purposes (Tiffany Construction). Summers's honest ignorance of the gross receipts tax was exactly that kind of negligence.

"My tax preparer never told me" did not work

A regulation (3 NMAC 3.1.11.11) can excuse a taxpayer who reasonably relied on the advice of competent tax counsel or an accountant about their liability after fully disclosing the relevant facts. That did not help Summers. Even though he gave H&R Block the information it would have needed, he could not prove he ever received any advice about gross receipts tax — he went there for income-tax preparation and that is what he got. Without proof that a professional actually advised him he owed no gross receipts tax, there was no reliance to excuse the penalty.

Interest is mandatory, and the assessment was timely

Interest under Section 7-1-67(A) uses the word "shall," which makes it mandatory rather than discretionary (State v. Lujan). It runs on any unpaid tax from the day after it was due until paid, no matter why the tax was late — so the Department's delay in issuing the assessment did not excuse the interest. And because Summers had reported none of these gross receipts (a 100% underreporting), the six-year limitations period in Section 7-1-18(D) applied and the assessment was in time.

Result: protest DENIED; penalty and interest upheld.

What this means for you

Independent-contractor and consulting fees are subject to New Mexico gross receipts tax

If you perform services in New Mexico as an independent contractor, your fees are generally gross receipts subject to the tax, and you must register, report, and pay — even if the client issues you a 1099 and even if you live in another state. Summers's Tucson residence did not matter; the work was done in New Mexico.

New Mexico is a self-reporting state — ignorance is treated as negligence

The tax system depends on you finding out and reporting your own liabilities. Not knowing a tax exists does not avoid the negligence penalty; the duty to learn the tax consequences of your business is on you.

To lean on "my preparer didn't warn me," you need proof of actual advice

Simply hiring someone to do your income taxes is not enough. The reliance exception requires that you fully disclosed the facts and actually received advice about the specific tax at issue. If you want a preparer to cover gross receipts tax, ask about it and keep a record of the advice.

Interest generally cannot be waived, even for the Department's delay

Interest on unpaid tax is mandatory and keeps running until you pay. A long gap before the Department issues an assessment does not reduce it, so paying promptly once you learn of a liability limits the interest.

Common questions

Q: I paid the tax as soon as I found out — why the penalty?
A: The penalty is for negligence, not fraud. Failing to learn that your consulting income was subject to gross receipts tax is treated as negligence in New Mexico's self-reporting system, so paying later did not erase it.

Q: H&R Block prepared my return and never mentioned this tax. Isn't that their fault?
A: To be excused you must prove you received advice about gross receipts tax after full disclosure. Summers got income-tax preparation only, with no proof of advice that he owed no gross receipts tax, so the reliance exception did not apply.

Q: The Department took years to bill me. Doesn't that cancel the interest?
A: No. Interest is mandatory and runs the whole time the tax is unpaid, regardless of the Department's delay. The assessment was also within the six-year limit because he had underreported by more than 25%.

Q: Does living out of state change anything?
A: No. Gross receipts tax follows where the services are performed. Summers performed the consulting in New Mexico, so his fees were taxable here even though he lived in Tucson.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-1-69(A) — negligence penalty (2% per month, up to 10%) for failing to timely pay tax or file a return, without intent to defraud
• NMSA 1978, § 7-1-67(A) — interest "shall" be paid on tax not paid when due, until it is paid
• NMSA 1978, § 7-1-18(D) — six-year period to assess when tax is underreported by 25% or more
• Regulation 3 NMAC 1.11.10 — defines taxpayer negligence (lack of ordinary business care, inaction where action is required, inadvertence/inattention)
• Regulation 3 NMAC 3.1.11.11 — a taxpayer may not be negligent where failure was caused by reasonable reliance on competent professional advice 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) — failure to ascertain one's tax consequences is negligence
• State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977) — "shall" in a statute is mandatory absent a clear contrary legislative intent

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Randall Summers
• Decision PDF: D&O 01-09

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
RANDALL SUMMERS NO. 01-09
ID NO. 02-432215-00 6, PROTEST TO
ASSESSMENT NO. 2540949

DECISION AND ORDER

This matter came on for formal hearing on May 17, 2001 before Gerald B. Richardson,

Hearing Officer. Mr. Randall Summers, hereinafter, “Taxpayer”, represented himself at the

hearing. The Taxation and Revenue Department, hereinafter, “Department”, was represented by

Bridget A. Jacober, Special Assistant Attorney General. Based upon the evidence and the

arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer is a race track consultant.

2. In the spring of 1996, the Taxpayer was engaged by Pojoaque Tribal Enterprises, Inc.

(“PTE”) to consult with them on the operation of their newly acquired racetrack, the Downs of

Santa Fe, during the summer racing season. The Taxpayer worked for PTE for three days a

week from May 1 through Labor Day weekend, returning to his home in Tucson for the periods

in between.

3. At the end of the summer racing season, PTE asked the Taxpayer to stay on, at which

time, the Taxpayer became an employee of PTE rather than an independent contractor.

4. PTE issued the Taxpayer a 1099 form for 1996, reflecting the $24,925 it had paid him

as a consultant. He was issued a W-2 form reflecting the wages he was paid by PTE.

1

5. The Taxpayer was not aware of the New Mexico gross receipts tax and he neither

registered with the Department to pay gross receipts taxes, nor did he report and pay gross

receipts taxes on the amounts he received from PTE for performing consulting services.

6. In April, 1997, the Taxpayer took his 1099 form and W-2 form to H&R Block in

Santa Fe to have his income taxes prepared for the 1996 tax year. H&R Block prepared the

Taxpayer’s federal and state income tax returns. The $24,925 that the Taxpayer received from

PTE as a consultant was reported to the Internal Revenue Service (“IRS”) on Federal Schedule C

as gross receipts from the Taxpayer’s consulting business.

7. H&R Block never informed the Taxpayer about his obligations under the New

Mexico Gross Receipts and Compensating Tax Act.

8. In the Spring of 2000, the Department provided the Taxpayer with a notice of a

limited scope audit under its C-Span program, asking the Taxpayer to justify the discrepancy

between his gross receipts reported on his 1996 Federal Schedule C and his failure to report

gross receipts to the Department.

9. On June 14, 2000, the Department issued Assessment No. 2540949 to the Taxpayer,

assessing $1,466.18 in gross receipts tax, $146.62 in penalty and $806.40 in interest for the

January through December reporting periods based upon his failure to report and pay tax on his

1996 receipts from performing consulting services in New Mexico.

10. On June 16, 2000, the Taxpayer filed a protest to Assessment No. 2540949.

11. Since the issuance of the Assessment, the Taxpayer has paid the tax principal portion

of the assessment and does not contest that portion of the Assessment.

2
DISCUSSION

The issues to be determined herein are whether the Taxpayer is liable for penalty and

interest on the Assessment at issue. The Taxpayer does not dispute that he had gross receipts

from performing consulting services in New Mexico which are subject to the gross receipts tax.

The imposition of penalty is governed by the provisions of NMSA 1978, Section 7-1-69(A),

which imposes a penalty of two percent per month, up to a maximum of ten percent:

In the case of failure, due to negligence or disregard of rules and regulations, but
without intent to defraud, to pay when due any amount of tax required to be paid or
to file by the date required a return regardless of whether any tax is due,....

This statute imposes penalty based upon negligence (as opposed to a willful or fraudulent intent) for

failure to timely pay tax. Thus, there is no contention that the failure to report and pay taxes was

based upon any conscious attempt by the Taxpayer to underreport taxes. What remains to be

determined is whether the Taxpayer was negligent in failing to report his taxes properly. Taxpayer

"negligence" for purposes of assessing penalty is defined in Regulation 3 NMAC 1.11.10 (formerly

TA 69:3) 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.

In this case the Taxpayer's failure to report and pay taxes was based upon Mr. Summer's

lack of knowledge about New Mexico taxes. New Mexico has a self-reporting tax system which

requires that taxpayers voluntarily report and pay their tax liabilities to the state. Because of this,

the case law is well settled that every person is charged with the reasonable duty to ascertain the

possible tax consequences of his actions, and the failure to do so has been held to amount to

negligence for purposes of the imposition of penalty pursuant to Section 7-1-69 NMSA 1978.

3
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).

The Taxpayer argues that he should be excused from the imposition of penalty because he

went to H&R Block to have his income taxes prepared and they never informed him about his gross

receipts tax liability on his consulting income. Regulation 3 NMAC 3.1.11.11 provides for a

number of situations which are indications that a taxpayer was not negligent. One of them covers

situations where one has received professional tax advice. It provides that a taxpayer may not be

negligent where:

The taxpayer proves that failure to pay tax or to file a return was
caused by reasonable reliance on the advice of competent tax counsel
or accountant as to the taxpayer’s liability after full disclosure of all
relevant facts;….

This provision would not apply in this case. Although the Taxpayer provided full disclosure of all

relevant facts H&R Block would have needed to know that the Taxpayer had gross receipts received

as an independent contractor engaging in business in New Mexico, the Taxpayer has failed to prove

that he received any advice from H& R Block about gross receipts taxes. Admittedly, he went to

them for assistance with reporting his income taxes and that is the assistance he received. In the

absence of proof that they also advised him that he was not subject to gross receipts tax, the

Taxpayer has failed to prove that he relied upon such advice.

Although the imposition of penalty is intended to penalize taxpayers who fail to report and

pay taxes in a timely manner, there are sound policy reasons behind the imposition of penalty. A

self-reporting tax system relies upon taxpayers accurately reporting their tax liabilities to the

government. There are insufficient government resources to audit every taxpayer periodically to

otherwise assure tax compliance. The imposition of penalty provides taxpayers with an incentive to

understand the tax consequences of their actions and to accurately report their taxes. Otherwise, if

4
the only consequence of an audit and determination of underpayment of tax was the payment of the

tax which was owed, it would always advantage a taxpayer to simply underreport taxes and to pay

them if they were found out.

The Taxpayer also objects to the payment of interest because of the lengthy delay

between the time he reported the consulting income and the issuance of the assessment at issue.

Section 7-1-67(A) NMSA 1978 addresses the imposition of interest on tax deficiencies and provides

as follows:

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).

It is a well settled rule of statutory construction that the use of the word "shall" in a statute indicates

that the provisions are intended to be mandatory rather than discretionary, unless a contrary

legislative intent is clearly demonstrated. State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977).

Applying this rule to Section 7-1-67, the statute requires that interest be paid to the state on any

unpaid taxes and no exceptions to the imposition of interest are countenanced by the statute. Thus,

it does not matter why taxes were not paid in a timely manner. Interest is imposed any time that

taxes are not paid when they are due, and for the period of time that they are unpaid.

It should be further noted, that although there was a significant delay involved in the

issuance of the Department’s assessment, it was issued within the statute of limitations for assessing

tax. Section 7-1-18(D) provides for a six-year statute of limitations for the assessment of tax when

there has been an underreporting of tax by 25% or more. In this case, because the Taxpayer failed

to report tax on 100% of his gross receipts, the assessment was timely.

5
CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment No. 2540949 and jurisdiction

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

2. The Taxpayer was negligent in failing to report or pay gross receipts taxes on his gross

receipts from performing consulting services and the imposition of penalty was proper.

3. The Taxpayer failed to prove that he relied on the advice of a lawyer or accountant in

failing to report and pay gross receipts tax on his gross receipts from performing consulting

services.

4. The imposition of interest was proper.

For the foregoing reasons, the Taxpayer’s protest IS HEREBY DENIED.

DONE, this 15th day of June, 2001.

6