If New Mexico abates the penalty on a business's unpaid gross receipts tax, does that mean the interest must be abated too — and can confusion over an audit refund excuse the interest?

Plain-English summary

Hammond Floors still owed interest on the gross receipts tax it collected from customers but never paid to the state — even though the Department had abated the penalty — because interest and penalty are different, and the owner's claim that the Department told him to stop paying was not believable. Protest DENIED.

Hammond Floors, a sole-proprietor flooring business owned by Robert Duran, reported and paid its monthly CRS taxes through employees and a payroll company. Facing cash-flow problems from 1996 to 1999, the owner failed to file or pay gross receipts tax, leading to an audit. The audit found some periods underpaid and others overpaid, netting a $68,348.14 liability against a $28,631.57 overpayment credit — which the Department applied as an offset, leaving about $40,000 due. The owner misread the workpapers, believing the $28,631.57 was a cash refund coming to him, and in May 2000 he stopped filing and paying current gross receipts taxes (his payroll company kept paying withholding tax on time). Even after the auditor explained the offset in November 2000 and again warned him in April 2001 to bring filings current, he kept not filing. He later filed back returns for May 2000–July 2001 showing $16,461.22 due, with no payment. The Department abated the penalty (crediting his initial confusion), and the owner protested the interest; he did not dispute the tax itself.

Abating the penalty does not abate the interest

The owner argued that because the Department abated the penalty, it should abate the interest on the same grounds. The hearing officer explained that interest and penalty are not the same. A Section 7-1-69 penalty punishes negligence or disregard of the rules; Section 7-1-67 interest is not a punishment at all but compensation to the state for the time value of unpaid revenue. Whether the taxpayer was negligent is irrelevant to interest. So the penalty abatement gave no basis to abate interest, which Section 7-1-67 makes mandatory ("shall be paid").

The estoppel argument was not credible

The owner claimed he was misled — that the Department's audit supervisor told him to stop paying until the refund arrived. His testimony did not hold up. He stopped filing in May 2000, months before he received the confusing audit workpapers in September 2000, so that confusion could not explain the earlier non-filing. He did not resume filing after the auditor explained in November 2000 that the credit had already been applied, nor after a second warning in April 2001. When pressed, he changed his account several times. The hearing officer found his failure to file was due to cash-flow problems — worsened by a store relocation in late 2000 and early 2001 — not to any Department advice. Having collected gross receipts tax from customers and kept it, he had the use of the state's money and could not invoke estoppel.

Result: protest DENIED. Interest was properly assessed and will keep accruing until the $15,447.60 of unpaid tax principal is paid in full.

What this means for you

A penalty abatement is not an interest abatement

In New Mexico, interest and penalty are governed by different statutes and different purposes. Even if the Department forgives a penalty, interest under Section 7-1-67 still runs — because it compensates the state, not punishes you.

Tax you collect from customers is the state's money

Gross receipts tax you charge customers must be remitted. Keeping it during a cash-flow crunch does not stop interest; you had the use of funds that belong to the state, and interest keeps accruing until you pay.

An audit credit is usually an offset, not a refund check

An overpayment found in an audit is typically applied against what you owe, not paid to you in cash. Read audit workpapers carefully, and if a supervisor's note says "overpayment/offset to audit," expect it to reduce your bill, not generate a refund.

"The Department told me to stop paying" needs proof and must fit the timeline

An estoppel defense fails if it is not credible. Here the claimed advice came after the non-filing had already started and was contradicted by repeated warnings to file. Keep contemporaneous records, and do not stop filing based on an assumption.

Common questions

Q: What tax was at issue?
A: Gross receipts tax the business failed to pay for reporting periods May 2000 through July 2001 — interest only; the owner did not dispute the tax principal, and the penalty had already been abated.

Q: If the penalty was abated, why wasn't the interest?
A: Interest and penalty serve different purposes. Penalty (Section 7-1-69) addresses negligence; interest (Section 7-1-67) compensates the state for the time value of money and is mandatory regardless of fault.

Q: Didn't the Department tell him to stop paying until the refund came?
A: The hearing officer found that claim not credible. He stopped filing before the audit workpapers he blamed, and kept not filing despite repeated warnings; the real cause was cash flow.

Q: Was there really a refund coming?
A: No. The $28,631.57 overpayment credit was applied as an offset against his audit liability, not paid out as cash — as the auditor explained to him.

Q: When does the interest stop?
A: When the tax principal is paid in full. As of the hearing, $15,447.60 of tax principal remained unpaid and interest continued to accrue.

Citations and references

Statutes:

• NMSA 1978, § 7-1-67 — interest on late-paid taxes ("shall be paid"); mandatory, compensates the state
• NMSA 1978, § 7-1-69 — negligence penalty (punishes negligence or disregard of rules)
• NMSA 1978, § 7-1-13(E) — interest runs from the original due date even with an extension
• NMSA 1978, § 7-1-17 — a Department assessment is presumed correct; taxpayer bears the burden
• NMSA 1978, § 7-1-3 — "tax" includes related interest and civil penalty

Cases cited:

• State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977)
• El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Hammond Floors
• Decision PDF: D&O 02-17

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
HAMMOND FLOORS No. 02-17
ID NO. 02-132542-00-1
ASSESSMENT NOS. 2699226 through
269238, 2699654 and 2701216

DECISION AND ORDER

A formal hearing on the above-referenced protest was held July 29, 2002, before Margaret B.

Alcock, Hearing Officer. Hammond Floors, a sole proprietorship, was represented by its owner,

Robert Duran (“Taxpayer”). The Taxation and Revenue Department ("Department") was represented

by Bruce J. Fort, Special Assistant Attorney General. Based on the evidence and arguments

presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer is engaged in business in New Mexico and is registered with the

Department for payment of gross receipts, compensating and withholding taxes, which are required

to be paid monthly under the Department’s combined reporting system (“CRS”).

2. The Taxpayer’s monthly withholding taxes are reported and paid by a payroll

company.

3. The Taxpayer’s monthly gross receipts taxes are reported and paid by an employee

hired to run the store and manage the office while the Taxpayer is out in the field.

4. Beginning in 1996 and continuing through 1999, the Taxpayer was having cash flow

problems and failed to file his monthly gross receipts tax returns or to pay the taxes due.

5. As a result of these nonfiled periods, the Department selected the Taxpayer for audit

in October 1999.

6. After receiving the Department’s audit notice, The Taxpayer filed his back tax

returns for periods through the end of 1998 and entered into an installment agreement to pay the

taxes due. The Taxpayer’s returns were filed during the 1999 tax amnesty program, which

authorized the state to waive penalty and interest on payments made during the three-month amnesty

period.

7. Because the returns indicated there might be problems with the Taxpayer’s reporting

method and his allocation of income to the correct reporting period, the Department decided to

proceed with its audit of tax reporting periods January 1996 through June 1999.

8. In May 2000, while the audit was still ongoing, the Taxpayer stopped filing his

current gross receipts tax returns or paying the taxes due. The payroll company retained by the

Taxpayer continued to report and pay his withholding taxes in a timely manner.

9. In September 2000, the Department completed its audit, which concluded that the

Taxpayer underpaid gross receipts taxes for certain months of the audit period and overpaid taxes for

other periods. With penalty and interest, the Taxpayer had an outstanding tax liability of $68,348.14

and a credit for overpaid taxes of $28,631.57.

10. In late September 2000, the Department sent its audit workpapers to the Taxpayer for

his review. On the workpaper showing the credit for overpaid taxes, the Department’s audit

supervisor wrote “Overpayment/offset to audit”, indicating that the $28,631.57 credit would be

applied against the Taxpayer’s $68,348.14 liability. The supervisor’s cover letter explained that the

Taxpayer would have to file a claim for refund to receive credit for the taxes the Taxpayer had

overpaid during the audit period and enclosed a refund application.

11. The Taxpayer and his office manager did not understand the audit workpapers and

incorrectly believed that the $28,631.57 credit was the amount that would be left over after the audit

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liability was paid in full. The Taxpayer returned the refund application to the Department, expecting

to receive a cash refund of $28,631.57.

12. On October 12, 2000, the Taxpayer’s office manager wrote a letter to the

Department’s audit supervisor confirming her understanding that the Taxpayer would not owe

additional taxes as a result of the audit and would receive a refund of $28,631.57. The letter further

stated: “As per your advice, we will not pay any further payment until we have received the refund.”

13. The audit supervisor did not respond to the office manager’s letter or correct the

Taxpayer’s misunderstanding concerning the results of the audit and the $28,631.57 credit.

14. The Department subsequently assessed the Taxpayer for approximately $40,000 of

gross receipts tax, penalty and interest for reporting periods January 1996 through June 1999. This

amount represented the tax liability of $68,348.14 found for the audit period, less the $28,631.57

credit.

15. The Taxpayer did not understand why he was being billed for $40,000 when he

thought he was entitled to a $28,631.57 refund. In November 2000, the Taxpayer and his office

manager met with the Department’s auditor, who went over the audit findings with them, explained

the basis for the assessment, and explained that the $28,631.57 credit for overpaid taxes had already

been applied to offset the tax liability found for the audit period.

16. From November 2000 through February 2001, the Taxpayer’s business was in the

process of moving its physical location and his business income was disrupted. During this period,

the Taxpayer continued to be delinquent in reporting and paying current gross receipts taxes to the

state.

17. In April 2001, the Department’s auditor, who had been promoted to the position of

collection supervisor, had another meeting with the Taxpayer to discuss the fact that the Taxpayer

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had not made any payments on the outstanding audit liability and had failed to report or pay gross

receipts taxes since May 2000.

18. During the April 2001 meeting, the Taxpayer argued that the audit findings were

wrong and that he had not received proper credit for payments he made under the 1999 tax amnesty

program. The Department agreed to reconsider its position that the Taxpayer’s misallocation of

receipts reported on the returns filed during the amnesty period precluded the waiver of penalty and

interest.

19. At the April meeting, the Department’s auditor warned the Taxpayer that he was

delinquent in filing current gross receipts tax returns and that he needed to bring those filings up-to-

date. The Taxpayer ignored the warning and continued his pattern of nonfiling.

20. In March or April 2001, the Taxpayer hired an attorney to review the audit and

represent him in negotiations for an adjustment of penalty and interest.

21. In July 2001, the Department and the Taxpayer’s attorney reached an agreement

concerning the Taxpayer’s amnesty payments. The principal balance of the audit assessment

remained the same, but the assessment of penalty and interest was reduced by approximately

$18,000.

22. In August 2001, the Taxpayer filed back gross receipts tax returns for the period May

2000 through July 2001. Although the returns showed taxes due in the amount of $16,461.22, no

payment accompanied the returns.

23. On September 11, 2001, the Department issued its own assessments for the amount

of tax principal shown on the taxpayer’s late-filed returns, plus penalty and interest.

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24. Because the Taxpayer maintained that he stopped filing returns based on his initial

misunderstanding of the audit findings and the audit supervisor’s failure to respond to the Taxpayer’s

October 12, 2000 letter, the Department agreed to abate the assessment of penalty.

25. On October 11, 2001, the Department received the Taxpayer’s written protest to the

assessment of interest on his nonpayment of gross receipts taxes for the period May 2000 through July

2001. The Taxpayer did not dispute the assessment of tax principal.

2002. As of the July 29, 2002 administrative hearing, the Taxpayer had made one payment on

the undisputed portion of the Department’s assessments, which covered tax due for the July 2001

reporting period. The Taxpayer still has not paid the $15,447.60 of tax principal due for reporting

periods May 2000 through June 2001.

DISCUSSION

The issue to be decided is whether the Taxpayer is liable for interest assessed on his failure

to pay gross receipts taxes due for reporting periods May 2000 through July 2001. The Taxpayer

argues that the Department’s decision to abate penalty establishes his right to an abatement of

interest. He also maintains that he should be excused from payment of interest because the

Department misled him to believe that he was entitled to a refund and did not need to report or pay

gross receipts taxes until the refund was received.

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

presumed to be correct. Section 7-1-3 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 Department’s assessment

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of interest is presumed to be correct, and it is the Taxpayer’s burden to present evidence and legal

argument to show that he is entitled to an abatement.

Section 7-1-67(A) NMSA 1978 governs the imposition of interest on late payments of tax and

provides, in pertinent part:

A. If a tax imposed is not paid on or before the day on which it becomes due,
interest shall be paid to the state on that 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.

In this case, the Taxpayer argues that the Department’s abatement of penalty establishes his

right to an abatement of interest on the same grounds. Interest and penalty are not the same,

however, and the fact that the Department abated penalty does not justify the abatement of interest.

Section 7-1-69(A) NMSA 1978 imposes a penalty whenever a taxpayer’s failure to pay tax is due to

negligence or disregard of the Department’s rules and regulations. In contrast, the imposition of

interest pursuant to Section 7-1-67(A) NMSA 1978 is not a penalty designed to punish taxpayers, but

is a means of compensating the state for the time value of unpaid revenues. The issue of negligence

is not relevant to the taxpayer’s liability for 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. See, Section 7-1-13(E) NMSA 1978.

The Taxpayer has also raised the issue of estoppel, arguing that he was misled by the

Department. At the administrative hearing, the Taxpayer testified that he stopped reporting and

paying gross receipts taxes in May 2000 because the Department’s audit supervisor told him to do

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so. He then admitted that the audit supervisor actually spoke to the Taxpayer’s office manager, who

relayed the information to the Taxpayer. When asked when this advice was given to the office

manager, the Taxpayer said it was around the time the audit workpapers were sent to the Taxpayer in

September 2000. The Taxpayer did not explain how his failure to file gross receipts tax returns in

May, June, July and August 2000 was attributable to advice received in late September 2000. When

questioned on this point, the Taxpayer changed his testimony, insisting that the tax returns were filed

on a timely basis and only payment was withheld pending receipt of the refund the Taxpayer was

expecting. Finally, the Taxpayer said he thought the office manager was filing timely returns and

only discovered she was not after receiving the Department’s assessments.

The Taxpayer’s testimony on this issue is not credible. While it seems clear that the

Taxpayer was initially confused by the audit workpapers he received in September 2000, this could

not have been the reason he stopped filing gross receipts tax returns the previous May. Nor does it

explain why he did not start filing his returns again after he met with the Department’s auditor in

November 2000 and the auditor explained that the $28,631.57 credit had already been applied to the

Taxpayer’s audit liability and was not available to offset current taxes. In April 2001, the auditor

met with the Taxpayer a second time and advised him that he needed to bring his reporting current.

The Taxpayer took no action. Based on the evidence, it appears that the Taxpayer’s failure to file

gross receipts tax returns was due to cash flow problems and not to any advice he received from the

Department. This is especially likely given the Taxpayer’s testimony that he experienced some

financial difficulties during the period at issue and that the change of his store location in late 2000

and early 2001 was particularly disruptive to his business.

The Taxpayer has failed to meet his burden of showing that the Department’s assessment of

interest was not in accordance with New Mexico law or is barred by estoppel. Although the

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Taxpayer admits collecting gross receipts taxes from his customers, he failed to report or pay those

taxes to the Department. The Taxpayer had use of the state’s funds during the fifteen-month period

at issue and continues to retain use of those funds today. Accordingly, interest was properly assessed

pursuant to Section 7-1-67(A) NMSA 1978. Interest will continue to accrue until the tax principal is

paid in full.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment Nos. 2699226 through

269238, 2699654 and 2701216, and jurisdiction lies over the parties and the subject matter of this

protest.

2. The Taxpayer failed to pay gross receipts tax due for the periods May 2000 through

July 2001, and interest was properly assessed pursuant to Section 7-1-67(A) NMSA 1978.

3. The Department is not estopped from enforcing collection of the interest assessed

against the Taxpayer.

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

DATED July 31, 2002.

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