Could Red Mesa Construction avoid gross receipts tax penalty and interest by saying its accounting service omitted about $55,000 of receipts and the Department responded slowly to a misaddressed protest?

Plain-English summary

Red Mesa Construction remained liable for negligence penalty and statutory interest after about $55,000 of 1999 construction receipts reported on federal Schedule C were missing from its New Mexico gross receipts tax returns. The owner did not prove active, informed reliance on a qualified tax professional, and the Department did not unduly delay responding to the protest.

The Department initially assessed $3,295.88 tax, $329.60 penalty, and $1,132.96 interest. Owner Kevin Van Slooten paid $3,080.13 of undisputed tax and protested $215.75 of principal plus all penalty and interest.

Immediately before the hearing, he produced documents supporting an adjustment to tax principal, which the Department agreed to make. The remaining decision focused on penalty and interest.

Passive reliance on a preparer was insufficient

Regulation 3.1.11.11 recognized nonnegligence when failure to pay resulted from reasonable reliance on competent tax counsel or an accountant after full disclosure of all relevant facts.

Van Slooten did not know the accounting-service owner's education or qualifications and could not remember what information he supplied. He did not know why the receipts were omitted, and there was no evidence of a legal analysis concluding they were nontaxable.

He described the omission as an oversight or possible mathematical error.

Informed consultation was required

The decision held that professional reliance must be active and informed, not passive and unaware. A taxpayer cannot delegate responsibility and then forget it.

There was no proof that Red Mesa consulted the preparer about the specific gross receipts liability or made a diligent decision based on advice. The omission therefore fell within negligence under Section 7-1-69 and Regulation 3.1.11.10.

Interest was mandatory

Section 7-1-67 required interest from the day after tax was due until payment. Interest compensated the state for the period it lacked funds and did not depend on whether the underpayment was intentional.

No statutory exception applied.

The protest response was not unduly delayed

The assessment instructions directed protests to P.O. Box 1671. Red Mesa mailed its January 2, 2002 protest to the Revenue Processing Division at P.O. Box 25128.

Its April copy went to another address that the Postal Service found undeliverable. The Protest Office finally received the letter on May 6, 2002 and acknowledged it on June 3, less than 30 days later.

Those mailing errors caused the earlier delay. The decision also noted that even agency tardiness generally would not justify abating tax additions owed to protect public revenue.

Result: protest DENIED as to penalty and interest. The Department's separate principal adjustment did not establish nonnegligence or eliminate statutory interest.

This January 29, 2003 decision expressly withdrew and replaced an earlier decision issued December 5, 2002.

What this means for you

Businesses using tax preparation services

Verify the preparer's qualifications, disclose all relevant facts, ask about the specific tax treatment, and retain the advice. Merely hiring a preparer is not a defense.

Contractors reconciling federal and state receipts

Compare Schedule C revenue with gross receipts returns before filing. Large mismatches can trigger information-match audits.

Taxpayers mailing a protest

Use the exact address in the assessment's remedies notice and retain tracking. Sending a letter elsewhere can delay assignment even if the protest is ultimately treated as timely.

Taxpayers producing records late

Late documentation may reduce tax principal, but penalty and interest require separate analysis.

Common questions

Q: What mismatch did the Department identify?
A: Approximately $55,000 between Schedule C business income and New Mexico reported gross receipts.

Q: How much tax did Red Mesa immediately pay?
A: $3,080.13 of the undisputed principal.

Q: Why did accountant reliance fail?
A: The owner could not establish qualifications, full disclosure, or informed advice about the omitted receipts.

Q: How quickly did the Protest Office respond after actual receipt?
A: In less than 30 days, from May 6 to June 3, 2002.

Q: Did the Department agree to any adjustment?
A: Yes, to tax principal based on documents produced immediately before the hearing; the decision did not state the adjusted amount.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-1-3 and 7-1-17 — tax definition and assessment presumption
• NMSA 1978, § 7-1-69 — negligence penalty
• NMSA 1978, § 7-1-67 — mandatory interest on late-paid tax
• Regulations 3.1.11.10 and 3.1.11.11 NMAC — negligence and informed reliance on professional advice

Cases cited:

• El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989)
• C&D Trailer Sales v. Taxation and Revenue Department, 93 N.M. 697, 604 P.2d 835 (Ct. App. 1979)
• Phillips Mercantile v. New Mexico Taxation and Revenue Department, 109 N.M. 487, 786 P.2d 1221 (Ct. App. 1990)
• State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977)
• In re Ranchers-Tufco Limestone Project Joint Venture, 100 N.M. 632, 674 P.2d 522 (Ct. App. 1983)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Red Mesa Construction
• Decision PDF: D&O 03-03

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
RED MESA CONSTRUCTION No. 03-03
ID No. 02-173903-00 0
ASSESSMENT NO. 2727667

DECISION AND ORDER

The Decision and Order originally issued in this matter on December 5, 2002, is withdrawn

and the following Decision and Order is substituted therefor.

A formal hearing on the above-referenced protest was held January 27, 2003, before

Margaret B. Alcock, Hearing Officer. Red Mesa Construction was represented by its owner, Kevin

Van Slooten (“Taxpayer”). 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. During the period January through December 1999, the Taxpayer owned a

construction business that was registered with the Department for payment of gross receipts tax.

2. For tax year 1999, the Taxpayer reported the income from his construction business

on Schedule C, Profit or Loss from Business, to his federal income tax return.

3. As part of an information-sharing program with the Internal Revenue Service, the

Department was notified of the business income reported on Schedule C to the Taxpayer’s 1999

federal income tax return. When the Department compared this income to the amount of gross

receipts reported to New Mexico for purposes of the gross receipts tax, it found a discrepancy of

approximately $55,000.

4. On December 16, 2001, the Department issued Assessment No. 2727667 to the

Taxpayer, assessing him for $3,295.88 gross receipts tax, $329.60 penalty and $1,132.96 interest for

reporting periods January through December 1999.

5. The “Taxpayer Remedies” included with the assessment informed the Taxpayer that

he could dispute his liability for the assessed tax by mailing a written protest to P. O. Box 1671,

Santa Fe, New Mexico, within 30 days of the date of the assessment.

6. On January 2, 2002, the Taxpayer mailed a written protest to $215.75 of the tax

principal and all of the penalty and interest assessed to P. O. Box 25128, Santa Fe, New Mexico, the

address of the Department’s Revenue Processing Division. The Taxpayer included a check for

$3,080.13 to cover the undisputed portion of the assessment.

7. The Taxpayer subsequently learned that the Department’s Protest Office had not

received his protest.

8. On April 16, 2002, the Taxpayer sent a second copy of his protest letter to the

Department, but mailed it to an address that the United States Postal Service found to be

undeliverable. The Department finally received the Taxpayer’s protest letter on May 6, 2002.

9. On June 3, 2002, the Protest Office sent the Taxpayer a letter acknowledging receipt

of his protest and providing him with the name, address, and telephone number of the auditor

assigned to review the case. The Department’s letter advised the Taxpayer to contact the auditor if

he had any questions concerning the status of his protest.

10. Immediately prior to the January 27, 2003 hearing, the Taxpayer produced

documentation to support his protest to the tax principal assessed, and the Department agreed to

adjust the assessment to reflect this new information.

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DISCUSSION

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

on his late payment of gross receipts tax for reporting periods January through December 1999. The

Taxpayer raises two arguments in support of his protest: (1) he was not negligent in failing to pay

the tax due because he reasonably relied on a tax accounting service to prepare his returns; and (2)

the Department waited an unreasonable period of time to respond to his protest.

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

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

showing he is entitled to an abatement of these amounts.

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

Subsection A imposes a penalty of two percent per month or any fraction of a month, up to a

maximum of ten percent, that a taxpayer fails “due to negligence or disregard of rules and

regulations” to pay taxes or file required tax reports in a timely manner. Negligence for purposes of

assessing penalty is defined in Regulation 3.1.11.10 NMAC as:

A. failure to exercise that degree of ordinary business care and prudence which
reasonable taxpayers would exercise under like circumstances;

B. inaction by taxpayers where action is required;

C. inadvertence, indifference, thoughtlessness, carelessness, erroneous
belief or inattention.

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Regulation 3.1.11.11 NMAC sets out several situations that may indicate a taxpayer has not been

negligent, including instances where the taxpayer proves that the failure to pay tax “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.”

In this case, the Taxpayer maintains that he comes within the above-referenced exception to the

definition of negligence because he relied on his accounting service to insure that his taxes were

properly paid. The Taxpayer concedes, however, that he has no knowledge concerning the education or

qualifications of the owner of the accounting service, but assumes the owner was competent in tax

matters because he held himself out as a tax preparer. The Taxpayer said he could not remember what

information he provided to his tax preparer during 1999. The Taxpayer also testified that he does not

know why a portion of his New Mexico construction receipts were omitted from his 1999 gross receipts

tax returns. There is nothing to indicate that the Taxpayer or his tax preparer made a conscious

decision to exclude those receipts based on an analysis of New Mexico law. Instead, the Taxpayer

characterized the omission as an oversight or, possibly, as a mathematical error.

A taxpayer’s reliance on a tax professional must be active and informed—not passive and

unaware—in order to support a finding that the taxpayer’s failure to pay tax was not negligent for

purposes of Section 7-1-69(A) NMSA 1978. A taxpayer’s responsibility for payment of taxes due to

the state cannot be delegated to a third party and then forgotten. As the Court of Appeals held in El

Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 799, 779 P.2d 982,

986 (Ct. App. 1989):

"[e]very person is charged with the reasonable duty to ascertain the possible tax
consequences of his action [or inaction]." Tiffany Constr. Co. v. Bureau of Revenue,
90 N.M. at 17, 558 P.2d at 1156. We are not inclined to hold that the taxpayer can
abdicate this responsibility merely by appointing an accountant as its agent in tax
matters.

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A finding of nonnegligence requires proof that the taxpayer engaged in “informed consultation”

concerning the specific liability at issue. See, e.g., C&D Trailer Sales v. Taxation and Revenue

Department, 93 N.M. 697, 700, 604 P.2d 835, 838 (Ct. App. 1979) (penalty upheld where there was no

evidence that the taxpayer “relied on any informed consultation” in deciding not to pay tax); Phillips

Mercantile v. New Mexico Taxation and Revenue Department, 109 N.M. 487, 491, 786 P.2d 1221,

1225 (Ct. App. 1990) (penalty upheld where there was no evidence that the failure to pay tax was the

result of diligent protest “based on informed consultation and advice”).

Here, as in the cases cited above, there is no evidence that the Taxpayer’s underpayment of

gross receipts tax was the result of informed consultation or reasonable reliance on the advice of a

qualified tax professional. Accordingly, the Taxpayer has failed to meet his burden of proving that he

is not liable for the negligence penalty assessed by the Department.

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. Section 7-1-67 NMSA 1978 requires

interest to be paid for any period of time during which the state is denied the use of the funds to which

it is legally entitled.

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Delay in Responding to Protest. At the administrative hearing, the Taxpayer argued that

the Department’s June 3, 2002 response to his January 2, 2002 protest letter was not timely and

should excuse him from payment of penalty and interest. The Taxpayer provided no authority for his

assertion. Cf., In re Ranchers-Tufco Limestone Project Joint Venture, 100 N.M. 632, 635, 674 P.2d

522, 525 (Ct. App.), cert. denied, 100 N.M. 505, 672 P.2d 1136 (1983) (the general rule is that

tardiness of public officers in the performance of statutory duties is not a defense to an action by the

state to enforce a public right or to protect public interests).

In addition to the absence of legal authority, there is no factual evidence to support the

Taxpayer’s argument. At the administrative hearing, the Taxpayer acknowledged that his January 2,

2002 protest was not sent to the address he was instructed to use in the “Taxpayer Remedies”

included with his assessment. The Department presented evidence that when the Taxpayer sent a

second copy of his protest letter to the Department in April 2002, he mailed it to an unknown address

and the United States Postal Service found the letter to be undeliverable. As a result of these errors,

the Department’s Protest Office did not receive the Taxpayer’s protest letter until May 6, 2002. The

Protest Office sent the Taxpayer an acknowledgement less than 30 days later and provided him with

the name, address and telephone number of the auditor assigned to his protest. Based on this

evidence, there was no undue delay in responding to the Taxpayer’s protest.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely written protest to Assessment No. 2727667, and

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

2. The Taxpayer was negligent in failing to pay gross receipts tax due for the period

January through December 1999, and penalty was properly imposed pursuant to Section 7-1-69 NMSA

1978.

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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. There was no undue delay in the Department’s response to the Taxpayer’s protest, nor

would such a delay justify abatement of the penalty and interest assessed.

For the foregoing reasons, The Taxpayer’s protest is DENIED.

DATED January 29, 2003.

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