Could an independent contractor avoid gross receipts tax penalty and interest because she did not know her services to a nonprofit were taxable?

Plain-English summary

Aida Luz Gonzales remained liable for interest and penalty after failing to report gross receipts tax on independent-contractor services she performed for the Boys and Girls Club in Santa Fe. Her lack of knowledge about the tax and her mistaken belief that services to a nonprofit were exempt did not excuse the late payments.

During 2001 through 2003, the club paid Gonzales as an independent contractor and issued her annual Forms 1099. She reported the payments as Schedule C business income on her federal returns but did not charge or pay New Mexico gross receipts tax.

Gonzales sometimes bought art supplies for the club using a Type 9 nontaxable transaction certificate. The Department's instructions stated that those certificates could not be used to purchase services. Gonzales had not read that instruction or the personal-income-tax notice warning self-employed people that they might need to register for gross receipts tax.

After receiving federal income information, the Department assessed $890.20 of gross receipts tax, plus interest, for the first period and later assessed tax, interest, and penalty for additional 2002 and 2003 periods. Gonzales paid the tax principal but protested the interest and penalty.

Interest ran from the original due dates

Section 7-1-67(A) used mandatory language: interest ran from the first day after tax became due until payment. It did not begin only when the Department notified Gonzales of the underpayment.

The hearing officer explained that Gonzales, rather than the state, had the use of the unreported tax between its due date and payment. Even a formal payment extension would not eliminate that interest.

Lack of knowledge counted as negligence

Section 7-1-69(A) imposed a penalty when an underpayment resulted from negligence or disregard of rules and regulations. Regulation 3.1.11.10 NMAC included inadvertence, erroneous belief, and inattention in its definition of negligence.

Gonzales failed to pay because she did not know New Mexico law and incorrectly believed her services to a nonprofit were not taxable. The decision held that this met the definition of negligence. The penalty therefore ran from the due date until reaching its then-applicable maximum of 10%.

New Mexico's system required self-reporting

The decision rejected Gonzales's argument that the Department had not given enough notice. New Mexico's self-reporting system placed the duty on taxpayers to determine and pay the taxes they owed, and the Gross Receipts and Compensating Tax Act supplied legal notice of her obligation.

Collection calls that stopped after Gonzales alerted a revenue agent to her protest, and a later account statement that omitted one assessed period, did not constitute abuse of process or provide a basis to abate penalty and interest.

Result: protest DENIED. The assessed interest and negligence penalty remained due.

What this means for you

Independent contractors serving nonprofits

Do not assume a nonprofit customer's status makes your services exempt. In this decision, the certificate used for qualifying tangible-property purchases did not cover the contractor's service receipts.

Taxpayers who discover an old filing obligation

Interest may run from the original statutory due date, not from the date the Department discovers the issue or sends an assessment.

Taxpayers seeking penalty relief

Not knowing the law or failing to read tax instructions can constitute negligence. The hearing officer treated an erroneous belief about the exemption as grounds for the statutory penalty.

Common questions

Q: Were Gonzales's services to the Boys and Girls Club exempt because it was a nonprofit?
A: No. The decision treated her independent-contractor service receipts as subject to gross receipts tax.

Q: What did the Type 9 certificate cover?
A: It allowed vendors to sell tangible personal property to certain nonprofit organizations without charging gross receipts tax. The Department's instructions said it could not be used to purchase services.

Q: Why did interest apply before Gonzales knew about the tax?
A: Section 7-1-67(A) required interest from the first day after the tax was due until it was paid.

Q: Why was the penalty upheld?
A: Her lack of knowledge and erroneous belief that the services were exempt fell within the regulation's definition of negligence.

Q: Did the Department's collection calls or incomplete account statement cancel the charges?
A: No. The hearing officer found neither circumstance was abuse of process or a basis to abate penalty and interest.

Citations and references

Statutes and regulation:

• NMSA 1978, § 7-1-13 — self-reporting tax system and interest despite an extension
• NMSA 1978, § 7-1-67(A) — mandatory interest on late-paid tax
• NMSA 1978, § 7-1-69(A) — negligence penalty
• NMSA 1978, § 12-2A-4(A) — "shall" and "must" express a duty or requirement
• Regulation 3.1.11.10 NMAC — definition of negligence

Cases cited:

• State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977)
• Vivigen, Inc. v. Minzner, 117 N.M. 224, 870 P.2d 1382 (Ct. App. 1994)
• Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976)
• State v. Tower, 133 N.M. 32, 59 P.3d 1264 (Ct. App. 2002)
• First Central Service Corp. v. Mountain Bell Telephone, 95 N.M. 509, 623 P.2d 1023 (Ct. App. 1981)
• DeVaney v. Thriftway Marketing Corp., 124 N.M. 512, 953 P.2d 277 (1997)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Aida Luz Gonzales
• Decision PDF: D&O 07-02

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
AIDA LUZ GONZALES, ID NO. 03-013580-00-0 07-02
TO ASSESSMENTS ISSUED UNDER LETTER
ID NOS. L0052677632, L0364806656, L0980713984,
L1593344512 and L1184530944

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on January 23, 2007, before

Margaret B. Alcock, Hearing Officer. The Taxation and Revenue Department (“Department”)

was represented by Susanne Farr, Special Assistant Attorney General. Aida Luz Gonzales

(“Taxpayer”) represented herself. Based on the evidence and arguments presented, IT IS

DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. During the years 2001, 2002, and 2003, the Taxpayer performed services as an

independent contractor for the Boys and Girls Club (“B&GC”) in Santa Fe, New Mexico.

2. At the end of each year, the B&GC issued a Form 1099 to the Taxpayer listing the

income she was paid during the previous year.

3. The Taxpayer reported this income as business income on Schedule C of her

federal income tax returns for the 2001, 2002 and 2003 tax years.

4. On occasion, the Taxpayer purchased art supplies on behalf of the B&GC. On

those occasions, she used a Type 9 nontaxable transaction certificate (“NTTC”), which allows

vendors to sell tangible personal property to certain nonprofit organizations without having to

charge the organization for gross receipts tax.

5. The Taxpayer did not read the Department’s instructions concerning the use of

Type 9 NTTCs, which state: “These certificates may not be used for the purchase of services.”

Nor did the Taxpayer read the notice that appears in the Department’s personal income tax

instructions, which reads, in part:

NOTE: IF YOU ARE SELF-EMPLOYED, RUN A BUSINESS OUT OF YOUR
HOME, OR WORK FOR SOMEONE ELSE BUT DO NOT HAVE WAGE
TAXES WITHHELD, you may be required to register with the Department for
gross receipts tax.

As a result, the Taxpayer did not charge or pay gross receipts tax on her receipts from selling

services to the B&GC.

6. In 2004, the Department received information from the Internal Revenue Service

concerning the business income reported on the Taxpayer’s 2001 federal income tax return.

7. On June 8, 2004, after determining that the Taxpayer had not reported this income

for gross receipts tax purposes, the Department assessed the Taxpayer for $890.20 of gross

receipts tax, plus interest, for the six-month reporting period ending on December 31, 2001.

8. On June 12, 2004, the Taxpayer filed a written protest to the assessment. She

subsequently paid the full amount of tax principal due, but continued to dispute her liability for

the assessment of interest.

9. On September 27, 2004, the Department assessed the Taxpayer for additional

gross receipts taxes due for the 2002 and 2003 reporting periods, plus interest and penalty.

10. The Taxpayer paid the tax principal assessed and filed timely protests to the

assessment of interest and penalty.

11. In early 2005, the Taxpayer received some collection calls at the B&GC.

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12. On April 7, 2005, the Taxpayer met with one of the Department’s revenue agents

and told him that she had protested the Department’s assessments of penalty and interest. The

revenue agent entered this information into the Department’s computers, after which all

collection calls stopped.

13. Following the April 2005 meeting, the revenue agent mailed the Taxpayer an

updated Statement of Account that listed the reporting periods ending on June 30, 2002,

December 31, 2002, June 30, 2003, and December 31, 2003 and showed that $607.47 of interest

and penalty was due for these reporting periods. The Statement of Account did not list the

amount of interest due on the Department’s first assessment for the reporting period ending June

30, 2001.

14. In September 2006, an auditor in the Department’s protest office faxed the

Taxpayer a statement that included all reporting periods under protest, including the amount due

for the 2002 and 2003 reporting periods and an additional $358.03 of interest due for the

reporting period ending June 30, 2001.

DISCUSSION

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

assessed on her late payment of 2001, 2002, and 2003 gross receipts taxes. The Taxpayer

maintains that interest and penalty should not be imposed because the Department failed to give

her adequate notice concerning the gross receipts tax and she did not learn of her liability for

additional tax until 2004. She further argues that she should be excused from payment because

the Department made erroneous collection calls and sent her a statement of account that did not

list one of the five reporting periods for which she was assessed.

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Assessment of Interest. NMSA 1978, § 7-1-67 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....

The Legislature’s use of the word "shall" indicates that the provisions of the statute are

mandatory rather than discretionary. State v. Lujan, 90 N.M. 103, 105, 560 P.2d 167, 169

(1977). See also, NMSA 1978, § 12-2A-4(A) of the Uniform Statute and Rule Construction Act

(the words “shall” and “must” express a duty, obligation, requirement or condition precedent).

When a taxpayer fails to make timely payment of taxes due to the state, NMSA 1978, § 7-1-

67(A) imposes interest “from the first day following the day on which the tax becomes due...until it

is paid.” The language of the statute makes it clear that interest on an underpayment of tax begins

to run from the original due date of the tax—not the date that the Department notifies the taxpayer

of the underpayment. The assessment of interest is designed to compensate the state for the time

value of unpaid revenues. 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, NMSA

1978, § 7-1-13(E). In this case, the Taxpayer—rather than the state—had the use of her

unreported gross receipts taxes for the period between the original due date of those taxes and the

date when the taxes were paid. For this reason, interest was properly assessed.

Assessment of Penalty. NMSA 1978, § 7-1-69(A) provides that when a taxpayer fails to

pay taxes due to the state as a result of negligence or disregard of rules and regulations, a penalty

“shall be added” to the amount of the underpayment, calculated as follows:

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two percent per month or any fraction of a month from the date the tax was
due multiplied by the amount of tax due but not paid, not to exceed ten
percent of the tax due but not paid.

As with interest, the amount of penalty is calculated “from the date the tax was due,” not the date

that the taxpayer is notified of the underpayment.

The term “negligence” as used in § 7-1-69(A) is defined in Regulation 3.1.11.10 NMAC to

include “inadvertence...erroneous belief or inattention.” In this case, the Taxpayer’s failure to pay

gross receipts tax was due to her lack of knowledge of New Mexico law and her erroneous belief

that services performed for a nonprofit organization are not taxable. This meets the definition of

negligence set out in Department regulations and in New Mexico case law. See, Vivigen, Inc. v.

Minzner, 117 N.M. 224, 231, 870 P.2d 1382, 1389 (Ct. App. 1994) (penalty was properly

imposed when taxpayer’s CFO acknowledged that the failure to pay the tax resulted from her

lack of knowledge of state tax law). Accordingly, penalty was properly assessed.

Self-Reporting Tax System. The Taxpayer argues that she should be excused from

payment of penalty and interest because the Department failed to provide her with sufficient

notice that she was liable for the gross receipts tax. This argument misunderstands the nature of

New Mexico’s self-reporting tax system, which places the duty on taxpayers to accurately

determine and pay taxes due to the state. NMSA 1978, § 7-1-13; See also, Tiffany Construction

Co. v. Bureau of Revenue, 90 N.M. 16, 17, 558 P.2d 1155, 1156 (Ct. App. 1976), cert. denied, 90

N.M. 255, 561 P.2d 1348 (1977). In Vivigen, supra, 117 N.M. at 228, 870 P.2d at 1386, the court

rejected an argument very similar to the argument raised by the Taxpayer here, noting that:

Vivigen seems to be complaining that the Department did not definitively tell it
that it needed to pay compensating taxes on out-of-state purchases so that it could
have avoided taxes, interest, and penalties for compensating taxes accrued from

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and after February 1989. Any necessary notice, however, was provided by New
Mexico statutes.

Every person is presumed to know the law, State v. Tower, 133 N.M. 32, 34, 59 P.3d 1264, 1266

(Ct. App. 2002), and ignorance of the law is not an excuse, First Central Service Corp. v.

Mountain Bell Telephone, 95 N.M. 509, 512, 623 P.2d 1023, 1026 (Ct. App. 1981). In this case,

New Mexico’s Gross Receipts and Compensating Tax Act provided the Taxpayer with legal

notice of her obligation to report and pay gross receipts taxes to the state. While it is unfortunate

that the Taxpayer was not aware of the law and did not see the Department’s various instructions

concerning the gross receipts tax, this does not excuse her from timely payment of the tax. Nor

does it excuse her from the penalty and interest that accrued on her late payment.

Abuse of Process. The Taxpayer also argues that she should be excused from payment of

penalty and interest because the Department engaged in an “abuse of process.” The fact that the

Department made a few collection calls—which stopped as soon as the Taxpayer alerted one of

the Department’s revenue agents to her protest—and provided the Taxpayer with a statement of

account that did not include one of the five reporting periods for which she had been assessed,

does not constitute an abuse of process. See, DeVaney v. Thriftway Marketing Corp., 124 N.M.

512, 518, 953 P.2d 277, 283 (1997), cert. denied, 524 U.S. 915 (1998) (discussing elements of

the tort of malicious abuse of process). Nor do these actions form a basis for abating the penalty

and interest assessed on the Taxpayer’s late payment of gross receipts taxes.

CONCLUSIONS OF LAW

A. The Taxpayer filed timely, written protests to the assessment of interest and penalty

issued under Letter ID Nos. L0052677632, L0364806656, L0980713984, L1593344512 and

L1184530944, and jurisdiction lies over the parties and the subject matter of this protest.

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B. Pursuant to NMSA 1978, § 7-1-67(A), the Taxpayer was liable for payment of the

interest that accrued from the first day following the day on which her gross receipts taxes became

due until the date the taxes were paid.

C. Pursuant to NMSA 1978, § 7-1-69(A), the Taxpayer was negligent in failing to

report and pay her gross receipts taxes in a timely manner, and penalty was properly assessed from

the date the tax was due until the penalty reached it maximum of ten percent.

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

DATED February 7, 2007.

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