Did reliance on an out-of-state CPA, clerical errors, and inadequate tax software excuse a hardware store's New Mexico CRS penalties and interest?

Plain-English summary

Alamo True Value Home Center remained liable for interest and negligence penalties arising from gross receipts, compensating, and withholding tax errors found in a 2000–2005 audit. Reliance on an out-of-state CPA and limitations in the company's software did not prove nonnegligence.

Alamo operated a retail hardware store and built homes. The Department's statistical audit found several problems:

• Gross-receipts deductions lacked required nontaxable transaction certificates or had no statutory basis.
• Some home sales were reported late because they were reported in the wrong county.
• Purchases from out-of-state vendors not registered in New Mexico were not reported for compensating tax.
• Items were withdrawn from inventory for use without tax having been paid when purchased.

The March 2007 assessment listed $51,181.04 in gross receipts tax, $9,396.99 in compensating tax, and $7 in withholding tax, for $60,585.03 of principal. The Department credited $41,473.03 against the assessment. Alamo did not dispute the principal tax; it protested penalty and interest.

The CPA and software explanations did not prove nonnegligence

Alamo said its El Paso CPA did not fully understand New Mexico compensating tax and made accounting errors. It also said its software could not reliably distinguish taxable from nontaxable transactions.

The decision held that New Mexico's penalty statute specifically reached unintentional failures to pay. To establish reasonable professional reliance, the taxpayer needed evidence about the advice received, why the accountant believed it was correct, and the relevant facts disclosed.

Alamo presented no evidence from the accountant on those points. Simply appointing an accountant could not transfer away the taxpayer's responsibility. The software limitation likewise described inadvertent error rather than an exception to negligence; the Department's auditor testified that suitable software was available.

Interest was mandatory and the penalty cap was 10%

Section 7-1-67 required interest at the then-stated annual rate of 15%, computed daily, on tax not paid when due.

The Department initially updated the case using a 20% penalty cap but later abated the additional 10%. Because the underlying tax was due before the January 1, 2008 effective date of the amendment, the decision applied the former 10% maximum.

Result: protest DENIED. Interest and penalty were upheld, subject to the 10% cap.

Source-text notes

• The official post URL is dated April 29, 2009 and the decision number is 09-02, but the signed text says “DATED May 24, 2011.” The issued_date above follows the signed decision.
• Conclusion 1 calls the matter a protest of a “denial of refund claim,” while the caption and findings describe a protest of an assessment of penalty.
• Finding 8 says the audit found no withholding-tax exceptions, while findings 9 and 12 list $7 of withholding tax and a $0.70 withholding penalty.
• The discussion says Section 7-1-69(B) “does obviate” penalty immediately after finding no allegation or proof of a qualifying good-faith mistake of law. The surrounding analysis and final order uphold the penalty; this summary preserves that stated result without correcting the source wording.

What this means for you

Retailers and contractors using one accounting system

Confirm that the system can distinguish deductible sales, taxable sales, out-of-state purchases subject to compensating tax, and withdrawals from resale inventory. Software limitations did not excuse the reporting failures here.

Businesses relying on an accountant

Keep evidence of the specific advice, facts disclosed, and grounds for the advice. General testimony that an accountant made errors was not enough to rebut the penalty assessment.

Taxpayers reviewing pre-2008 penalties

The decision used the date the tax was due—not the later assessment date—to choose the applicable cap. Tax due before January 1, 2008 remained under the former 10% maximum.

Common questions

Q: Did Alamo dispute the underlying tax?
A: No. The decision says it did not dispute the assessed principal.

Q: Why didn't reliance on the El Paso CPA remove the penalty?
A: Alamo did not present evidence of the advice given, the accountant's reasoning, or the facts disclosed for the specific liabilities.

Q: Did inadequate software excuse the errors?
A: No. The decision treated the errors as negligent and noted testimony that software capable of distinguishing taxable and nontaxable sales was available.

Q: Did the 20% penalty cap apply?
A: No. The tax was due before January 1, 2008, so the former 10% cap applied and the Department abated the additional 10%.

Q: Was interest discretionary?
A: No. The cited statute required interest on late-paid tax.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-1-67 — interest on late tax payments
• NMSA 1978, § 7-1-69(A) and (B) — negligence penalty and qualifying good-faith mistake of law
• NMSA 1978, § 7-1-17 — presumption that an assessment is correct
• Regulation 3.1.11.8 NMAC — taxpayer's burden to establish nonnegligence
• Regulation 3.1.11.10 NMAC — definition of negligence
• Regulation 3.1.11.11(D) NMAC — reasonable reliance on tax counsel or an accountant

Case cited:

• 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: Alamo True Value Home Center
• Decision PDF: D&O 09-02

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
ALAMO TRUE VALUE HOME CENTER
TO ASSESSMENT ISSUED UNDER LETTER
ID NO. L1733458560 No. 09-02

DECISION AND ORDER

A formal hearing on the above-referenced protest was held November 19, 2008, before Brian

VanDenzen, Hearing Officer. Alamo True Value Home Center (“Taxpayer”) was represented by Mr.

Doug Nelson, partner. The Taxation and Revenue Department ("Department") was represented by Peter

Breen, Special Assistant Attorney General. Based on the evidence and arguments presented, IT IS

DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer was engaged in business in New Mexico operating a retail hardware store

in Alamogordo and also as a construction contractor building homes in the Alamogordo and Las Cruces.

2. The Taxpayer was 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”).

3. The Department performed an audit for a period beginning January 1, 2000 through

December 31, 2005, using an accepted thirty-day statistical technique.

4. The audit is admitted into the record by stipulation as Department A.

5. Regarding the Gross Receipts Tax, the audit revealed that the Taxpayer did not have all

the necessary non taxable transaction certificates for deductions and that deductions were made for sales

to customers where no statutory permissible deduction was allowed.

6. Regarding the Gross Receipts Tax, the audit also revealed that the Taxpayer did not

report some home sales in a timely fashion because the sales were reported in the wrong county.

7. Regarding the Compensating Tax, the audit revealed that the Taxpayer did not report

purchases of out-of-state venders not registered with New Mexico and purchased items from inventory

for use without paying tax when purchased.

8. The audit found that there were no exceptions to the Withholding Tax or the Corporate

Income Tax during the period.

9. Based on it findings during the audit, on March 26, 2007 the Department assessed the

Taxpayer for $51,181.04 in Gross Receipts Tax, $9,396.99 in Compensating Tax, and $7.00 in

Withholding Tax, for a total of $60,585.03 in tax principle.

10. At the time of the audit, the Department also assessed the Taxpayer a gross receipts tax

negligence penalty of $5181.34, which is 10% of the total unpaid gross receipts tax.

11. At the time of the audit, the Department also assessed the Taxpayer a compensating tax

negligence penalty of $939.88, which is 10% of the total unpaid gross receipts tax.

12. At the time of the audit, the Department also assessed the Taxpayer a witholding tax

negligence penalty of $0.70, which is 10% of the total unpaid gross receipts tax.

13. At the time of the audit, the Department also assessed interest on the Taxpayer for

outstanding tax payment.

14. At the time of the audit, the Department gave the Taxpayer a credit of $41,473.03 against

the outstanding assessment.

15. On April 12, 2007 the Taxpayer filed a written protest to the assessment of penalty.

16. On August 8, 2008, the parties filed a Request for Hearing with the Hearing Bureau.

17. On August 13, 2008, the Hearing Bureau sent Notice of Administrative Hearing to the

parties.

18. At the hearing, Mr. Doug Nelson testified.

19. The Taxpayer used a C.P.A. out of El Paso, TX who did not fully understand

compensating tax issues in New Mexico.
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20. The Taxpayer relied on the C.P.A. to provide accurate information about the

compensating tax.

21. The Taxpayer’s El Paso C.P.A. made accounting errors.

22. The Taxpayer subsequently switched to an Alamogordo C.P.A.

23. The Taxpayer’s software system was not sophisticated enough to distinguish between

non-taxable transactions and taxable sales.

24. The Taxpayer suggested that an error rate of 1.6 to 1.9 is small considering nearly 10-

million in sales.

25. The Taxpayer argues that imposition of penalty in this situation is unduly harsh.

26. Sylvia Sena testified as a witness on behalf of the Department.

27. Ms. Sena is a Senior Tax Auditor for the Taxation and Revenue Department.

28. Ms. Sena, in addition to 13-years of experience with Taxation and Revenue Department,

has a masters degree in business and a bachelor’s of science in accounting.

29. Ms. Sena reviewed the audit in this case, relying on her professional training and

experience.

30. Ms. Sena highlighted the essential findings of the audit, including explaining the

sampling technique.

31. Ms. Sena indicated that there is in fact software available that can distinguish between

distinguish between non-taxable transactions and taxable sales.

32. Ms. Sena provided a more update summary of the taxes due, penalty, and interest due at

the time of the hearing.

33. Ms. Sena included a maximum of 20% penalty in her update.

34. The Department of Taxation and Revenue argued at the end of the hearing that the correct

amount of the negligence penalty to be applied to the underpayment of tax was 20% percent, pursuant to

NMSA 1978, Section 7-1-69 (2008).
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35. In 2007 the legislature changed the maximum negligence penalty amount under NMSA

1978, Section 7-1-69 to a cap of no more than 20%. The effective date of this statutory change to the

negligence penalty amount was January 1, 2008.

36. Prior to this change on January 1, 2008, the maximum negligence penalty that could be

applied pursuant to Section 7-1-69 was capped at 10%.

37. On January 21, the hearing officer requested that both parties submit further analysis on

whether the application of a 20% negligence penalty in this matter was an impermissible retroactive

application of NMSA 1978, Sec. 7-1-69.

38. The Department responded to the Hearing Officer’s request on Friday, February 13,

39. That letter is admitted into the record as Department C.

40. Department C states in pertinent part that “[t]he Department has abated the additional

10% penalty assessment that was made in this case pursuant to 2007 N.M. Laws (R.S.) ch. 45 §4.”

40. The Taxpayer did not respond directly to the Hearing Officer’s request, but did send a

letter to the Department arguing that the penalty amount was inaccurate. This analysis should have

occurred during the hearing while cross-examining Ms. Sena.

DISCUSSION

There are two issues to be decided in this matter. First, whether the Taxpayer is liable for the

interest and penalty assessed on the Taxpayer for errors and late payments of Gross Receipts,

Compensating, and Witholding Tax; and second, whether the amended penalty statute applies to the

Taxpayer, and thereby raise the maximum cap on the penalty from 10% to 20%.

I. The Taxpayer is Liable for Penalty and Interest for errors and late Payments of Gross Receipts,

Compensating, and Withholding Tax.

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The Taxpayer does not dispute that there were errors and late payments of Gross Receipts,

Compensating, and Withholding Tax. The Taxpayer does not dispute the assessed tax principle.

However, the Taxpayer argues that it should be excused from payment of penalty because: (1) the majority

of the penalty applies to a misfiling rather than non-payment of the tax principle; (2) the accounting firm

employed by the Taxpayer made a clerical error by filing the gross receipts tax in the wrong jurisdiction.

The accounting firm employed by the Taxpayer also failed to advise the Taxpayer on reporting

compensating tax for equipment purchased outside of New Mexico. Consequently, errors in reporting gross

receipts tax and errors in compensating tax made in this instance were a result of the Taxpayer’s reliance on

the professional advice of the Taxpayer’s accounting firm; (3) because the Taxpayer lacked software

sophisticated enough to properly distinguish between taxable and non-taxable transactions, the Taxpayer did

not collect gross receipt taxes on certain transactions that normally the Taxpayer would have passed on to

the customer. The Taxpayer believes that paying penalty and interest on a tax principle that would typically

be passed on directly to the customer is too harsh.

Section 7-1-67 NMSA 1978 governs the imposition of interest on late payments of tax. During the

period at issue, this statute provided, 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, ....

B. Interest due to the state under Subsection A or D of this section shall
be at the rate of fifteen percent a year, computed on a daily basis; ....

Subsection A determines the period for which interest is due, and Subsection B directs that the interest be

calculated at a rate of 15% per year, computed on a daily basis.

Section 7-1-69(A) NMSA 1978 governs the imposition of civil penalty “in the case of failure (to

pay tax) due to negligence or disregard of department rules and regulations”. In such a circumstance, where

the Taxpayer fails to pay when due the amount of tax required to be paid, this statute provided, in pertinent

part:
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(1) 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;

(2) two percent per month or any fraction of a month from the date the return was
required to be filed multiplied by the tax liability established in the late return, not to exceed ten
percent of the tax liability established in the late return.

Under that same section, “no penalty shall be assessed against a Taxpayer if the failure to pay an amount

when due results from a mistake of law made in good faith and on reasonable grounds.” See Section 7-1-

69(B). Since there is no allegation or proof of a mistake of law in good faith and on reasonable grounds,

Section 7-1-69(B) does obviate the imposition of the civil penalty. Since any civil penalty assessed by the

Department is presumed to be correct under Section 7-1-17, the burden is on the Taxpayer to demonstrate

that failure to pay or report the tax when due did not result from the Taxpayer’s negligence. See §3.1.11.8

NMAC.

Regulation §3.1.11.10 NMAC defines negligence as a failure to exercise that degree of ordinary

business care and prudence which reasonable taxpayers would exercise under like circumstances; or

inaction by taxpayers where action is required; or inadvertence, indifference, thoughtlessness, carelessness,

erroneous belief or inattention.

In El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795 (Ct. App.

1989), the New Mexico Court of Appeals held that Section 7-1-69(A) is designed specifically to penalize a

taxpayer's unintentional failure to pay tax. The court noted that New Mexico's penalty statute is stricter than

the federal statute and found that federal law on tax penalties is not applicable in determining whether a

penalty is due under New Mexico law. While the taxpayer in this case presents numerous instances of

unintentional failure to pay the tax when due, the justifications provided by the Taxpayer are the exact

instances of unintentional failure to pay tax that is to be penalized under that statute.

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Regulation §3.1.11.11 NMAC identifies indicators of the Taxpayer’s nonnegligence. The only

potential indicator of nonnegiligence applicable to the evidence on this record is paragraph D, which reads

that:

the taxpayer proves that the failure to pay tax or file a return 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; failure to make a timely filing of a tax return, however, is not
excused by the taxpayer’s reliance on an agent.

Like in the present controversy, the Taxpayer in El Centro claimed their reliance on their accountant

provided a basis for their failure to pay the tax when due. In rejecting the taxpayer’s claim of

nonnegligence, the court held that the taxpayer's reliance on its accountant did not provide grounds for

abating penalty for failure to pay gross receipts tax, stating: “We are not inclined to hold that the taxpayer

can abdicate this responsibility merely by appointing an accountant as its agent in tax matters.” id. at 799.

In this case, the Taxpayer did not introduce any evidence from the Taxpayer’s out-of-state accountant, such

as the type of advice the accountant provided, the reason the accountant thought the advice was accurate,

and the relevant facts surrounding the Taxpayer’s reliance on the accountant’s advice. Since the assessment

is presumed correct, the Taxpayer had the burden of presenting such evidence to establish nonnegligence

under the Regulation. Like in El Centro, the Taxpayer’s reliance on an out of state accountant does not

abate the penalty for failure to pay.

II. The Taxpayer is only subject to a maximum penalty of 10%.

The rule on penalty, whether under the old or amended statute, is only applied at the time the tax is

due but not paid. According to the plain language of the §7-1-69 NMSA, it appears that it is not relevant

when the Taxpayer was assessed, but only when the tax was due and not paid. In the absence of clear

language in the statute specifying retroactivity (which does not exist in this instance), the pertinent inquiry

to determine the maximum percentage of penalty under either the old or amended version of NMSA 1978,
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Section 7-1-69 (2008) is not the date of assessment, but the date when the principle tax was due but not

paid. If that date was before January 1, 2008, then the Taxpayer is only subject to a maximum penalty up

10%, but if that date is on or after January 1, 2008 then the Taxpayer is subject to a maximum penalty up to

20%. In this case, the tax that the Taxpayer failed to timely pay was due before January 1, 2008.

Consequently, the old version of §7-1-69 NMSA applies in this case, thereby capping the total penalty at

10%.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to the Department’s denial of the Taxpayer’s

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

2. The Taxpayer was late in 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.

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

DATED May 24, 2011.

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