Can New Mexico forgive or reduce a valid gross receipts tax assessment because the taxpayer genuinely cannot afford to pay it?

Plain-English summary

A musician who genuinely could not afford to pay his gross receipts tax assessment still owed it — inability to pay is not a defense, and neither the Department nor a hearing officer can forgive a valid tax debt. Protest DENIED.

James Stadler earned income performing in a band at New Mexico nightclubs and other venues. He did not know that gross receipts tax applied to his performance receipts, so he never reported or paid it, though he did report the income on his federal Schedule C. In 1996 the Department compared his federal income to its records and issued an assessment of $4,532.28 in gross receipts tax, $453.22 in penalty, and $1,163.70 in interest. Since then, Stadler has stayed current on his gross receipts tax. His only argument against the old assessment was that, given his small musician's earnings and uninsured medical expenses, he simply could not afford to pay it.

There is no "can't afford it" exception

The hearing officer, though sympathetic, explained that inability to pay gives the Department no power to abate an assessment. Section 7-1-20 sets out the only compromise authority: the Secretary may compromise an assessed tax only when there is a good-faith doubt about the taxpayer's liability for it. Regulation 3.1.6.14 confirms the Secretary "may not abate an assessment based on the taxpayer's inability to pay the tax." Here there was no good-faith doubt — Stadler admitted the tax was legally owed and did not dispute the amount — so no compromise was available. On top of that, Article IV, Section 32 of the New Mexico Constitution prohibits releasing any debt owed to the state except by payment or a proper court proceeding. However genuine his hardship, there was no legal basis to forgive or reduce the assessment.

A note on the collection deadline

The decision added, in a footnote, that while a tax debt cannot be forgiven, the Department's collection powers are time-limited: Section 7-1-19 bars the Department from taking action to collect taxes due under an assessment more than ten years after the date of the assessment.

Result: protest DENIED. The assessment stood, regardless of Stadler's ability to pay.

What this means for you

Hardship does not erase a valid tax bill

Neither the Department nor a hearing officer can waive or reduce a correct assessment because you cannot afford it. The only ground for compromise is a genuine doubt about whether you actually owe the tax. If you admit the tax is due, hardship alone will not help.

Performers and gig workers owe gross receipts tax

Income from performing as a musician (or providing other services) in New Mexico is subject to gross receipts tax, even if it is reported on a federal Schedule C. Not knowing about the tax does not prevent an assessment — register and pay on your performance receipts.

The real relief for hardship is a payment plan, not abatement

Because the debt cannot be forgiven, the practical path for a taxpayer who cannot pay in full is a payment arrangement with the Department, not a request to erase the assessment.

Old assessments have a collection time limit

Under Section 7-1-19, the Department cannot pursue collection more than ten years after the date of an assessment. That does not forgive the debt, but it does bound how long the Department can actively collect on it.

Common questions

Q: What tax was assessed?
A: New Mexico gross receipts tax on Stadler's band performance income — $4,532.28 in tax, plus $453.22 penalty and $1,163.70 interest, from a 1996 assessment.

Q: Why couldn't the Department forgive it given his finances?
A: Section 7-1-20 allows a compromise only where there is a good-faith doubt about liability, and Regulation 3.1.6.14 bars abating an assessment for inability to pay. Stadler admitted he owed the tax, so no compromise was possible.

Q: Does the New Mexico Constitution really forbid forgiving the debt?
A: Yes. Article IV, Section 32 prohibits releasing any debt owed to the state except by payment or a proper court proceeding, so a hearing officer cannot simply forgive it.

Q: Do musicians really owe gross receipts tax?
A: Yes. Receipts from performing services in New Mexico are subject to gross receipts tax, even when reported federally on Schedule C.

Q: Is there any time limit that helps him?
A: The debt itself is not forgiven, but under Section 7-1-19 the Department cannot take collection action more than ten years after the date of the assessment.

Citations and references

Statutes, regulations, and constitutional provisions:

• NMSA 1978, § 7-1-20 — the Department may compromise an assessed tax only where the Secretary has a good-faith doubt as to the taxpayer's liability
• NMSA 1978, § 7-1-19 — the Department may not take action to collect taxes due under an assessment more than ten years after the date of assessment
• Regulation 3.1.6.14 NMAC — the Secretary may not abate an assessment because of the taxpayer's inability to pay
• N.M. Const. art. IV, § 32 — no debt owed to the state may be released except by payment or a proper court proceeding

Source

• Listing: New Mexico Decisions & Orders
• Decision post: James Stadler
• Decision PDF: D&O 01-21

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
JAMES STADLER NO. 01-21
ID. NO. 02-315889-00 1, PROTEST TO
ASSESSMENT NO. 2053562

DECISION AND ORDER

This matter came on for formal hearing on August 21, 2001 before Gerald B. Richardson,

Hearing Officer. James Stadler, hereinafter, “Taxpayer”, represented himself at the hearing. The

Taxation and Revenue Department, hereinafter, “Department”, was represented by Bridget A.

Jacober, Esq. Based upon the evidence and arguments presented, IT IS DECIDED AND

ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer is a musician who had gross receipts from performing in a band in

nightclubs and other venues in New Mexico.

2. The Taxpayer was not aware of the requirements to report and pay gross receipts tax

upon his receipts from providing services as a musician and consequently failed to report and

pay gross receipts taxes on those receipts.

3. The Taxpayer reported his income as a musician on Schedule C of his Federal income

tax returns.

4. As the result of a comparison by the Department of the Taxpayer’s receipts as

reported on Federal Schedule C and the Department’s records, on July 26, 1996, the Department

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issued Assessment No. 2053562 to the Taxpayer assessing $4,532.28 in gross receipts tax,

$453.22 in penalty and $1163.70 in interest

5. On August 22, 2001, the Taxpayer filed a written protest to Assessment No. 2053562.

6. Since the Department issued Assessment No. 2053562 the Taxpayer has reported and

paid gross receipts tax on his receipts from providing services as a musician

7. The Taxpayer is financially unable to pay Assessment No. 2053562.

DISCUSSION

The Taxpayer’s sole basis for contesting the assessment at issue is his inability to pay the

assessment. Since learning of his obligation to pay gross receipts tax on his receipts from

providing services as a musician, the Taxpayer has stayed current with his obligations to report

and pay gross receipts taxes. The small amounts the Taxpayer earns as a musician, and medical

expenses he has incurred and for which he has no insurance coverage, have prevented the

Taxpayer from being able to pay the assessment at issue. The Taxpayer has essentially asked

that the assessment be forgiven based upon his inability to pay.

The fact that a taxpayer does not have the financial ability to pay an assessment does not

provide the Department with a basis for abating the assessment. Section 7-1-20 NMSA 1978 is the

provision of the Tax Administration Act which sets out the Department’s authority to compromise

assessments of tax. It provides that the Secretary of the Department may compromise an assessed

tax when he has a good faith doubt as to the taxpayer's liability for payment of the tax. The

Secretary may not abate an assessment based on the taxpayer's inability to pay the tax. Regulation

NMAC 3.1.6.14.

In this case, there is no basis to find that there is a good faith doubt as to the Taxpayer’s

liability for the tax. The Taxpayer has admitted that there is a legal basis to assess the gross

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receipts tax, and has not challenged the amount assessed as being incorrect. Accordingly, the

Department has no legal authority under Section 7-1-20 to compromise the assessment.

Additionally, Article IV, § 32 of the New Mexico Constitution prohibits the release of any debt

owing to the state except by the payment of the debt or by a proper proceeding in court. Thus,

while I am empathetic with the Taxpayer’s financial circumstances and I appreciate his

forthrightness in presenting his protest, there is simply no basis to compromise or release the

assessment regardless of whether the Taxpayer is ever able to pay the assessment.1

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment No. 2053562 pursuant to §

7-1-24 NMSA 1978 and jurisdiction lies over both the parties and the subject matter of this

protest.

2. A taxpayer’s inability to pay an assessment of tax is not a defense to the assessment

of tax.

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

DONE, this 31st day of August, 2001.

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Although the Constitution prohibits the forgiveness of any debts owing the state, the Legislature has limited the
Department’s authority to take actions to enforce and collect tax debts. Section 7-1-19 NMSA 1978 prohibits the
Department from taking any action to collect taxes due under an assessment after ten years from the date of the
assessment.

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