Could nonprofit ARCA avoid $769.46 of penalty and interest when its bookkeeper went on leave, no backup was assigned, and one CRS payment was 22 days late after 17 years of good compliance?

Plain-English summary

ARCA remained liable for $498.68 of penalty and $270.78 of interest because it made no arrangement to cover CRS filing and payment duties while its bookkeeper was on leave. Its nonprofit status and exemplary history did not create an exception to the late-payment statutes.

ARCA provided services to developmentally disabled individuals, mostly for the State of New Mexico. It had operated for more than 17 years with an otherwise exemplary tax-reporting record.

Its October 2001 CRS taxes were due November 25, 2001. The accounts-payable bookkeeper was away during November, and no other employee was assigned her work. ARCA did not report and pay until December 17, 2001.

Interest was mandatory

Section 7-1-67 required interest when tax was not paid by the due date and contained no exception for an extension, installment agreement, nonprofit status, or good prior history.

The decision explained that interest was compensatory rather than punitive. It paid the state for losing use of revenue during the late-payment period.

The Department therefore properly assessed $270.78 of interest.

Missing backup coverage was negligence

Section 7-1-69 imposed penalty when negligence or disregard of rules caused late filing or payment. Regulation 3.1.11.10 defined negligence to include failure to exercise ordinary business care, inaction when action was required, and inadvertence or carelessness.

ARCA knew the bookkeeper responsible for monthly CRS taxes would be absent but did not assign anyone else. That failure qualified as negligence even though the missed payment was unintentional.

The assessed penalty was $498.68.

Nonprofit status and prior compliance did not authorize waiver

ARCA asked the hearing officer to consider that it could use the money for its charitable work and that all other CRS payments over 17 years had been timely.

Sections 7-1-67 and 7-1-69 did not exempt nonprofits or authorize waiver for a strong compliance history. An administrative officer could not add exceptions the Legislature had not enacted.

Result: protest DENIED. The full $769.46 of penalty and interest remained due.

What this means for you

Nonprofits filing New Mexico CRS returns

Nonprofit status does not automatically remove filing, payment, penalty, or interest obligations for taxes the organization is registered to report.

Organizations with one tax preparer

Assign a trained backup before leave, illness, or turnover. Recurring statutory deadlines should not depend on one person's availability.

Taxpayers with a strong compliance history

Past timeliness is helpful operational context but did not authorize legal waiver of a current negligent late payment.

Businesses distinguishing penalty from interest

Interest compensated for delayed payment and was mandatory; penalty followed from the failure to exercise ordinary care in arranging coverage.

Common questions

Q: When was the October 2001 CRS payment due?
A: November 25, 2001.

Q: When did ARCA pay?
A: December 17, 2001.

Q: How much penalty was assessed?
A: $498.68.

Q: How much interest was assessed?
A: $270.78.

Q: Did ARCA's 17-year compliance history change the result?
A: No. The statutes provided no waiver on that basis.

Citations and references

Statutes and regulation:

• NMSA 1978, §§ 7-1-3 and 7-1-17 — tax definition and assessment presumption
• NMSA 1978, § 7-1-67 — mandatory interest on late-paid tax
• NMSA 1978, § 7-1-69 — negligence penalty
• Regulation 3.1.11.10 NMAC — taxpayer negligence definition

Cases cited:

• El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989)
• State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977)
• Arco Materials, Inc. v. Taxation & Revenue Department, 118 N.M. 12, 878 P.2d 330 (Ct. App. 1994)
• State ex rel. Taylor v. Johnson, 1998-NMSC-015, 961 P.2d 768

Source

• Listing: New Mexico Decisions & Orders
• Decision post: ARCA
• Decision PDF: D&O 03-06

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
ARCA No. 03-06
ID NO. 01-504153-00 0
ASSESSMENT NO. 2735423

DECISION AND ORDER

A formal hearing on the above-referenced protest was held May 13, 2003, before Margaret

B. Alcock, Hearing Officer. The Taxation and Revenue Department ("Department") was represented

by Javier Lopez, Special Assistant Attorney General. ARCA (“Taxpayer”) was represented by Darrell

Rasband, its in-house accountant. Based on the evidence and arguments presented, IT IS DECIDED

AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer is a nonprofit organization engaged in the business of providing

services to developmentally disabled individuals. Most of the Taxpayer’s services are performed for

the State of New Mexico.

2. The Taxpayer is registered with the Taxation and Revenue 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”).

3. The Taxpayer was required to report and pay CRS taxes due for the October 2001

reporting period on or before November 25, 2001.

4. The accounts payable bookkeeper responsible for reporting and paying the

Taxpayer’s monthly CRS taxes was on leave during November 2001, and no arrangements were

made to have another employee cover her duties.

5. As a result of the bookkeeper’s absence, the Taxpayer’s October 2001 CRS taxes

were not reported and paid until December 17, 2001.

6. With the exception of the October 2001 reporting period, the Taxpayer, which has

been operating for more than 17 years, has an exemplary tax reporting history.

7. On January 17, 2002, the Department issued Assessment No. 2735423 to the

Taxpayer in the total amount of $769.46, representing $498.68 penalty and $270.78 interest on the

late payment of the Taxpayer’s October 2001 CRS taxes.

8. On January 23, 2002, the Taxpayer filed a written protest to the Department’s

assessment.

DISCUSSION

The issue to be decided is whether the Taxpayer is liable for the $769.46 of interest and

penalty assessed on the Taxpayer’s late payment of CRS taxes due for the October 2001 reporting

period. 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 assessment issued to the

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

argument showing that it is entitled to an abatement.

Assessment of Interest. Section 7-1-67 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....

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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. In this case, the Taxpayer’s late

payment of CRS taxes denied the State the use of funds to which it was legally entitled. Pursuant to

Section 7-1-67 NMSA 1978, interest was properly assessed for the period between the statutory due

date for those taxes and the date payment was received.

Assessment of 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. Taxpayer 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.

New Mexico case law confirms that penalties may properly be assessed even when a taxpayer’s late

payment is based on inadvertent error or unintentional failure to pay the tax due. Arco Materials,

Inc. v. Taxation & Revenue Department, 118 N.M. 12, 16, 878 P.2d 330, 334 (Ct. App. 1994) rev'd

on other grounds by Blaze Construction Co. v. Taxation & Revenue Department, 118 N.M. 647, 884

P.2d 803 (1994); El Centro Villa Nursing Center v. Taxation & Revenue Department, 108 N.M. 795,

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797-798, 779 P.2d 982, 984-985 (Ct. App. 1989). In this case, the Taxpayer’s late payment was due

to its failure to make arrangements for another employee to cover the duties of its accounts payable

bookkeeper when she was on leave. This qualifies as negligence under the definitions set out in the

Department’s regulation and New Mexico case law.

Waiver. While not disputing that its tax payment was late, the Taxpayer asks the hearing

officer to waive the Department’s assessment of interest and penalty because: (1) it is a nonprofit

corporation and could use the funds for a better purpose; and (2) for over 17 years, the Taxpayer has

made all other CRS payments in a timely manner. These are not factors the hearing officer can

consider. In State ex rel. Taylor v. Johnson, 1998-NMSC-015 ¶ 022, 961 P.2d 768, 774-775, the

New Mexico Supreme Court made the following observations concerning the power of

administrative agencies:

Generally, the Legislature, not the administrative agency, declares the policy
and establishes primary standards to which the agency must conform. See
State ex rel. State Park & Recreation Comm'n v. New Mexico State Authority,
76 N.M. 1, 13, 411 P.2d 984, 993 (1966). The administrative agency's
discretion may not justify altering, modifying or extending the reach of a law
created by the Legislature....

Sections 7-1-67 and 7-1-69 NMSA 1978 govern the imposition of interest and penalty. These

statutes do not exempt nonprofit organizations, nor do they give the Department or its hearing officer

authority to waive interest or penalty based on a taxpayer’s past reporting history. In this case, there

is simply no legal basis for abating the assessment issued against the Taxpayer.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment No. 2735423, and

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

2. The Taxpayer was late paying CRS taxes due to the state, and interest and penalty was

properly assessed pursuant to Sections 7-1-67 and 7-1-69 NMSA 1978.

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

DATED May 13, 2003.

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