Were a Shaklee distributor's commissions and member-ordering price differentials subject to New Mexico gross receipts tax even though Shaklee collected tax on the product sales?
Apply this to your situation
This page answers the general question as of 2009. Ezel answers yours, under current New Mexico tax law, with citations.
Plain-English summary
Maria and Robert Cloutier owed New Mexico gross receipts tax on the business income Maria Cloutier received as an independent Shaklee distributor. That included bonuses, fast-start bonuses, cash allowances, prizes and awards, and the disputed “member ordering price differential.”
Cloutier reported $59,985 of Schedule C business income for 2005 and $65,122 for 2006. She had reported and paid gross receipts tax on only part of that income.
The product sale and Cloutier's sales service were separate transactions
For internet orders, Shaklee invoiced the customer, processed and shipped the order, and collected gross receipts tax on the product sale. Cloutier nevertheless received a “member ordering price differential”—$12,099.85 in 2005 and $14,298.78 in 2006.
The decision treated these as two transactions:
- Shaklee sold its product to the customer.
- Cloutier received compensation for providing the customer and assisting with the sale.
Regulation 3.2.1.18(HH)(1) NMAC made the second transaction taxable to the independent contractor whether or not the product owner paid gross receipts tax on the product sale. The price differentials were therefore taxable gross receipts from Cloutier's sales service.
The Department's out-of-state percentage stood
The Department reviewed about 100 receipts supplied for 2005 and 2006 and determined that 22.5% of sales were out of state. It applied that percentage to the total Schedule C business income after subtracting reported receipts and gross receipts tax paid.
The taxpayers offered no evidence that the 22.5% rate was wrong. Because an assessment and its audit method were presumed correct, the hearing officer left that calculation in place.
The decision also identified unexplained differences between Schedule C income and the 1099s: $12,788 for 2005 and $17,033 for 2006. With no explanation for those amounts, the assessment remained presumed correct.
Penalty applied, but only up to the former 10% cap
The taxpayers' mistaken belief that commissions were not taxable met the regulation's definition of negligence. Cloutier had not researched the issue through the Department's website or seminars, consulted Department employees before the audit, or shown that she discussed gross receipts tax with the accountant who prepared the income tax returns.
The Department had imposed a 20% penalty, but the tax was due before the 2007 amendment increasing the maximum from 10% to 20% took effect on January 1, 2008. The former maximum had already been reached, and the amendment had no retroactivity provision. The hearing officer reduced the penalty to 10%.
Interest remained mandatory until the principal tax was paid.
Result: protest GRANTED IN PART AND DENIED IN PART. The tax and interest stood, but the Department was ordered to abate penalty above 10% for both years unless it had already done so.
What this means for you
Independent distributors and sales representatives
Tax collected on the underlying product sale does not necessarily cover your separate commission or other compensation for helping make the sale. The decision treated the owner's product receipt and the representative's sales-service receipt as distinct.
Businesses with in-state and out-of-state customers
Keep records that support where sales or services occurred. If the Department estimates an out-of-state percentage from the records you provide, contrary evidence is needed to overcome the assessment and audit method.
Taxpayers relying on an income-tax preparer
Having an accountant prepare a federal income tax return did not establish reasonable reliance about New Mexico gross receipts tax where there was no evidence that the taxpayers asked the accountant about that tax.
Common questions
Q: Why was the member ordering price differential taxable if Shaklee charged tax to the customer?
A: Shaklee's product sale and Cloutier's compensated sales service were separate transactions. The regulation taxed her commission or other remuneration independently.
Q: Did the ruling treat all of the Schedule C income as subject to gross receipts tax?
A: Yes. The conclusions state that the taxpayers failed to prove that the reported 2005 and 2006 Schedule C income was not subject to the tax.
Q: Why did the 22.5% out-of-state allowance remain in place?
A: The Department derived it from receipts the taxpayers supplied, and they presented no evidence showing that the percentage was incorrect.
Q: Why was the penalty reduced?
A: The Department used a 20% cap, but the governing pre-amendment statute capped the penalty at 10%, and the later increase was not retroactive on these facts.
Q: Was interest waived because the taxpayers made an honest mistake?
A: No. The decision described interest as mandatory whenever tax is not timely paid, regardless of the reason.
Citations and references
Statutes and regulations:
- NMSA 1978, § 7-1-17(C) (2007) — presumption that an assessment is correct
- NMSA 1978, § 7-9-5 (2002) — presumption that receipts are subject to gross receipts tax
- NMSA 1978, § 7-9-4 (1990) — imposition of gross receipts tax
- NMSA 1978, § 7-9-3.3 (2003) — engaging in business
- NMSA 1978, § 7-9-3.5(A)(2)(b) — commissions and fees included in gross receipts
- NMSA 1978, § 7-1-69(A)(1) (2003) — negligence penalty and former 10% maximum
- NMSA 1978, § 7-1-67 (2007) — mandatory interest
- Regulation 3.2.1.18(HH)(1) and (3) NMAC — independent-contractor sales commissions
- Regulation 3.1.11.10 NMAC — definition of negligence
Cases cited:
- MPC Ltd. v. New Mexico Taxation & Revenue Department, 2003-NMCA-021, 133 N.M. 217, 62 P.3d 308
- Grogan v. New Mexico Taxation and Revenue Department, 2003-NMCA-033, 133 N.M. 354, 62 P.3d 1236
- Torridge Corp. v. Commissioner of Revenue, 84 N.M. 610, 506 P.2d 354 (Ct. App. 1972)
- Phelps Dodge Corp. v. Revenue Division of the Department of Taxation and Revenue, 103 N.M. 20, 702 P.2d 10 (Ct. App. 1985)
Source
- Listing: New Mexico Decisions & Orders
- Decision post: Maria and Robert Cloutier
- Decision PDF: D&O 09-05
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 No. 09-05
MARIA AND ROBERT CLOUTIER
TO ASSESSMENT ISSUED UNDER LETTER
ID NOs. L1384953216 and L1162331520
DECISION AND ORDER
A formal hearing on the above-referenced protest was held on July 21, 2009, before
Monica Ontiveros, Hearing Officer. The Taxation and Revenue Department (“Department”)
was represented by Peter Breen, Special Assistant Attorney General. Maria and Robert Cloutier
represented themselves. Robert Cloutier was not present at the hearing. Based on the
evidence and arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:
FINDINGS OF FACT
- Maria and Robert Cloutier (“Taxpayers”) were residents of New Mexico
during the 2005 and 2006 tax years.
-
Maria G. Cloutier (“Cloutier”) has been a resident of New Mexico for 18 years.
-
The Department conducted a limited scope audit of Taxpayers’ gross receipts
taxes for tax years 2005 and 2006.
- Taxpayers were assessed by the Department on November 3, 2008, in gross
receipts tax in the amount of $2,801.42 in principal, $560.28 in penalty and $1,052.40 in
interest for a total of $4,414.10 for tax year 2005.
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- Taxpayers were assessed by the Department on November 3, 2008 in gross
receipts tax in the amount of $2,582.46 in principal, $516.50 in penalty and $970.15 in
interest for a total of $4,069.11 for tax year 2006.
- Taxpayers have made a number of payments towards their tax liability:
November 2008 - $500.00; January 2009 - $800.00; March 2009 - $400.00; and June 2009 -
$400.00. All these payments were applied to the principal tax owed.
- On November 10, 2008, Cloutier protested the two assessments for tax years
2005 and 2006. The protest letter was addressed to the Department at P.O. Box 25128, Santa
Fe, NM.
- On January 21, 2009, Cloutier sent another protest letter to the Department at
P.O. 8575, Santa Fe, NM.
- In response to the January 21, 2009 protest letter, the Department granted
Taxpayers a retroactive extension and acknowledged receipt of the January 21, 2009 protest.
- When the Department investigated Taxpayers’ returns, Taxpayers had not
reported or paid gross receipts tax on most of the business income reported on their federal
income tax returns, Schedules C.
- Taxpayers reported $59,985.00 on their federal income tax return, Schedule C
for tax year 2005. Department Exhibit A.
- Taxpayers reported $2,640.00 in gross receipts tax and paid $178.00 in gross
receipts taxes to the State of New Mexico for tax year 2005. Department Exhibit A.
- Taxpayers reported $65,122.00 on their federal income tax return, Schedule C
for tax year 2006. Department Exhibit A.
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- Taxpayers reported $11,631.00 in gross receipts tax and paid $791.00 in gross
receipts taxes to the State of New Mexico for tax year 2006. Department Exhibit A.
- For 26 years Cloutier has been a Shaklee representative or distributor.
Cloutier bought Shaklee products from Shaklee U.S., Inc., and resold the products from her
home.
- Some of Cloutier’s customers purchased Shaklee products on the internet and
Cloutier received consideration or business income from Shaklee U.S., Inc. from the internet
sales. Shaklee invoiced the sale, processed the sale and shipped the product to Cloutier’s
customers. Shaklee charged and collected gross receipts tax on the product it sold to the
customers.
- Cloutier received business income from the internet sales and, on the 1099s,
this business income was called “member ordering price differential.”
- Cloutier testified that she believed the business income from the internet sales
represented the difference between what the Shaklee products cost Shaklee U.S., Inc. and the
price charged to the internet customer.
- Cloutier earned commissions from the volume of Shaklee products she sold.
The commissions were based on a point system based on the volume of sales during the
month.
- Some of Cloutier’s customers were located in state and some of the customers
were located out of state.
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- Based on the volume of sales, Shaklee U.S., Inc. paid Taxpayers different types
of business income called “bonus,” “fast start bonus” and “prizes and awards.” These
amounts were commissions paid to Taxpayers.
- Cloutier testified that she was unsure why she received business income from
the “cash allowance program.”
- In 2005, Shaklee U.S., Inc. provided Taxpayers with a 1099 which listed
$28,444.80 as a bonus, $240.00 as a fast start bonus, $12,099.85 as a member ordering price
differential, and $1,125.00 as a cash allowance program.
- The total amount of nonemployee income to Taxpayers for 2005 from Shaklee
U.S., Inc. was $41,909.65.
- Cloutier received a 1099 from R. Norman Dominguez for tax year 2005 for
performing networking services in New Mexico. The business income earned from
performing these services was $5,288.28. Cloutier does not dispute that this amount is
taxable as gross receipts.
- In 2006, Shaklee U.S., Inc. provided Taxpayers with a 1099 which listed
$33,550.36 as a bonus, $100.00 as a fast start bonus, $14,298.78 as a member ordering price
differential, and $140.41 as a prizes and awards.
- The total amount of nonemployee income to Taxpayers for 2006 from Shaklee
U.S., Inc. was $48,089.55.
- Taxpayers were not employees of Shaklee U.S., Inc.
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- For both 2005 and 2006 tax years, in determining the gross receipts tax due,
the Department, through the Compliance Bureau credited or subtracted the out of state sales at
a rate of 22.5%. Department Exhibit A.
- Cloutier provided a Department employee with around 100 receipts of sales for
one month for both 2005 and 2006. The Department employee determined that based on the
receipts 22.5% of sales were out of state sales.
- The Department credited or subtracted the out of state receipts based on the
total receipts reported on the Schedule C, less the gross receipts reported and less the gross
receipts tax paid. Department Exhibit A.
- For tax year 2005, the difference in amount between what was reported on
Schedule C and the amounts listed on the 1099s is $12,788.00. Department Exhibit A.
- For tax year 2006, the difference in amount between what was reported on
Schedule C and the amounts listed on the 1099 is $17,033.00. Department Exhibit A.
- Taxpayers’ federal income tax returns, Schedules C were not introduced into
the record.
- Taxpayers employed a certified public accountant, William Zeidenberg, from
the ILZ Group, LLC to prepare and file their income tax returns.
- Cloutier provided Mr. Zeidenberg with all of her sales information and she
filled out the questionnaire he provided to her regarding all of her income from all sources.
She also provided him with Taxpayers’ 1099s.
- Taxpayers prepared and filed their gross receipts tax returns.
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- Cloutier never researched whether her commissions were taxable either by
reviewing the information on the Department’s website or by attending any of the seminars
offered by the Department.
- Cloutier reported gross receipts on the sale of Shaklee products to her
customers for tax years 2005 and 2006.
- Taxpayers failed to report and pay gross receipts taxes on business income
called “bonus,” “fast start bonus,” “member ordering price differential,” “cash allowance
program,” and “prizes and awards” for tax years 2005 and 2006.
- Taxpayers failed to report and pay gross receipts taxes on business income
Cloutier received from R. Norman Dominguez for tax year 2005.
DISCUSSION
The issues to be decided are (1) whether all of Taxpayers’ business income is gross
receipts and (2) whether Taxpayers are liable for penalty and interest.
Burden of Proof. There is a statutory presumption that any assessment of tax made
by the Department is correct. NMSA 1978, §7-1-17(C) (2007); MPC Ltd. v. New Mexico
Taxation & Revenue Department, 2003-NMCA-21, ¶ 13, 133 N.M. 217, 62 P.3d 308. There
is also a presumption that all receipts of a person engaging in business in New Mexico are
subject to gross receipts tax. NMSA 1978, §7-9-5 (2002); Grogan v. New Mexico Taxation
and Revenue Department, 2003-NMCA-033, ¶ 11, 133 N.M. 354, 62 P.3d 1236, cert. denied,
133 N.M. 413, 63 P.3d 516 (2003). A statutory presumption exists that all of a person's
receipts are subject to the gross receipts tax. Accordingly, it is the Taxpayers’ burden to
present evidence and legal arguments to show that the Department’s assessment is incorrect.
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See, Proficient Food Co. v. New Mexico Taxation and Revenue Department, 107 N.M. 308,
393, 758 P.2d 806, 807, cert. denied, 107 N.M. 308, 756 P.2d 1203 (1988).
Taxpayers’ Business Income. NMSA 1978, Section 7-9-4 (1990) imposes an excise
tax on the gross receipts of any person engaging in business in New Mexico. The definition
of “engaging in business” is quite broad and includes “…carrying on or causing to be carried
on any activity with the purpose of direct or indirect benefit...” NMSA 1978, § 7-9-3.3
(2003). The term “gross receipts” encompasses receipts from performing services in New
Mexico and is specifically defined to include:
the total commissions or fees derived from the business of
…selling or promoting the …sale ...of any property, service,
stock, bond or security;
NMSA 1978, § 7-9-3.5(A)(2)(b). In addition, regulation 3.2.1.18(HH)(3) provides that:
the commissions received by the independent contractors
engaging in business in New Mexico with respect to
merchandise sold in new Mexico are gross receipts subject the
gross receipts tax.
Regulation 3.2.1.18(HH)(3) NMAC.
Cloutier does not dispute that the business income she identified as commissions were
gross receipts. She said that until she received a letter from the Department indicating that it
was conducting a limited scope audit, and she began investigating whether she owed any
money, she was unaware that the commissions she received from Shaklee U.S., Inc were
taxable. Audio Recorder 10:00-10:10; and protest letter. Cloutier acknowledged that the
receipts for the bonuses, the fast start bonuses, cash allowance program, prizes and awards are
commissions and therefore taxable as gross receipts. See Protest Letter. Cloutier does not
remember why the cash allowance was given to her but she does not dispute that it is a
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commission. Audio Recorder 15:20-15:41; Protest Letter. Cloutier also does not dispute that
the business income she received from R. Norman Dominguez is taxable as gross receipts.
Audio Recorder 16:15-17:32; protest letter.
Cloutier’s main dispute with the Department is the characterization of the business
income received for “member ordering price deferential” in the amounts of $12,099.85 for tax
year 2005 and $14,298.78 for tax year 2006. Cloutier argues that these amounts are not gross
receipts and should not be included in the calculation of the amount of gross receipts tax
owed. Cloutier maintained that the business income was derived from internet sales which
represented the difference between what the Shaklee products cost Shaklee U.S., Inc. and the
price charged to the internet customer. Cloutier argued that Shaklee U.S., Inc. paid gross
receipts tax on these amounts and therefore these amounts should be excluded from the
calculation of how much she owes the Department. The Department took the position that all
the business income reported on the 1099s were commissions from sales and that it excluded
the out of state sales by applying a rate of 22.5% to all of the business income reported on the
Schedules C, less the gross receipts reported and less the gross receipts tax.
Cloutier’s argument fails because the transaction that is in dispute is the transaction
between Shaklee U.S., Inc. and Taxpayers, and not the transaction between Shaklee U.S., Inc.
and Cloutier’s internet customers. In addressing a transaction where there is a product sold by
an independent contractor and the independent contractor receives consideration or business
income from the product being sold, there are two separate transactions. The first transaction
is the sale of the product, for which Shaklee U.S., Inc. charged and collected gross receipts
tax. The second transaction is the consideration or business income received by the sales
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representative for providing the customer to Shaklee U.S., Inc. and assisting in the sale of the
product. It is the second transaction for which Taxpayers received business income. The first
transaction is the sale of the products to New Mexico customers. The second transaction is
the commission received on the sale of the product to the customer.
Regulation 3.2.1.18(HH)(1) NMAC specifically addresses these types of transactions.
It provides, in part, that:
(c)omissions and other consideration received by an independent contractor
from performing a sales service in New Mexico with respect to the tangible or
intangible personal property of other persons are gross receipts whether or not
the other person reports and pays gross receipts tax with respect to the receipts
from the sale of the property. The receipts from the sale of the property are
gross receipt of the person whose property was sold. Receipts, whether in the
form of commissions or other remuneration, of the person performing a sales
service in New Mexico are gross receipts of the person performing the sales
service.
Regulation 3.2.1.18(HH)(1) NMAC.
The consideration or business income from Shaklee U.S., Inc. for the “member
ordering price differential” are gross receipts. The business income from the internet sales
cannot possibly be the difference between what the Shaklee products cost Shaklee U.S., Inc.
and the price charged to the internet customer. If this characterization of the sale is correct,
then there is no profit to Shaklee U.S., Inc. to cover its costs related to the making, processing
or shipping of the product. While Cloutier testified that Shaklee U.S., Inc. processed these
internet sales on her behalf, Shaklee U.S., Inc. is an independent company and there was no
evidence presented that Shaklee U.S., Inc. was acting on her behalf or agreed to no profit to
cover its costs in processing the sale of the product. In addition, there was no evidence
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offered that Taxpayers purchased any of these products that were sold on the internet to
Cloutier’s customers.
There is a difference in the business income between the 1099s and the amount
reported on Schedule C of Taxpayers’ returns for tax years 2005 and 2006. For tax year 2005,
the difference in amount between what was reported on Schedule C and the 1099s is
$12,788.00. For tax year 2006, the difference in amount between what was reported on
Schedule C and the 1099 is $17,033.00. Taxpayer offered no explanation as to what these
amounts represented and therefore, the assessment is presumed to be correct as to these
amounts.
Method of Calculating Percentage of Taxable Receipts
For both 2005 and 2006 tax years, in determining the gross receipts tax due, the
Department, through the Compliance Bureau credited or subtracted the out of state sales at a
rate of 22.5% from the total amount of business income reported on Schedule C of Taxpayers’
federal returns, less the gross receipts reported and the gross receipts taxes paid. The
Department arrived at this rate by analyzing the information provided by Taxpayers. Cloutier
provided a Department employee, Libby Martinez, with around 100 receipts of sales for 2005
and for 2006. The Department employee determined that based on the receipts, 22.5% of
sales were out of state sales. It should be noted that this rate was applied to the receipts from
R. Norman Dominguez and was applied to the total receipts on Schedule C (less the gross
receipts reported and the gross receipts taxes paid). The rate was not just applied to the
receipts from Shaklee U.S., Inc. Taxpayers provided no evidence that this rate is incorrect,
and therefore have not rebutted the presumption. Section 7-1-17(C) states that any assessment
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of tax by the Department is presumed to be correct, and it is the burden of the taxpayer
protesting an assessment to overcome this presumption. Tipperary Corp. v. New Mexico
Bureau of Revenue, 93 N.M. 22, 24, 595 P.2d 1212, 1214 (Ct. App. 1979); Archuleta v.
O'Cheskey, 84 N.M. 428, 431, 504 P.2d 638, 641 (Ct. App. 1972). As illustrated by the
court’s decision in Torridge Corp. v. Commissioner of Revenue, 84 N.M. 610, 613, 506 P.2d
354, 357 (Ct. App. 1972), cert. denied, 84 N.M. 592, 506 P.2d 336 (1973), the presumption of
correctness encompasses the audit methods employed by the Department to determine the
amount of tax assessed.
Complexity of the Tax Laws.
Cloutier contends that the penalty and interest should be waived because she took
every precaution in filing her gross receipts tax returns and in addition, the tax laws are too
complex to understand.
Civil Penalty. NMSA 1978, Section 7-1-69 (2003, prior to amendments through 2007),
governs the imposition of penalty. Sub-sections A and A(1) of the statute imposes a civil penalty
of two percent per month, up to a maximum of ten percent, if a taxpayer fails due to negligence or
disregard of rules and regulations to pay taxes in a timely manner. The Department’s regulation
defining negligence for purposes of assessing penalty is Regulation 3.1.11.10 NMAC. It states as
follows:
1) failure to exercise that degree of ordinary business care
and prudence which reasonable taxpayers would exercise
under like circumstances;
2) inaction by taxpayers where action is required;
3) inadvertence, indifference, thoughtlessness, carelessness,
erroneous belief or inattention.
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Regulation 3.1.11.10 NMAC.
Whether a taxpayer has acted negligently for purposes of the civil penalty imposed by §7-1-
69 (2003, prior to amendments through 2007), is determined as of the date the taxes were due. At
the time the gross receipts taxes were due, Taxpayers had an erroneous belief that gross receipts
taxes were not due on commissions, only on the sale of Shaklee products sold from their house. This
falls within the definition of negligence.
Cloutier maintained that the tax laws were too complex for her to understand. There was no
evidence presented, however, to explain exactly what efforts Cloutier made in the 18 years she has
resided in New Mexico to determine the extent of her tax obligations. She did not avail herself of
the Department’s website or avail herself of the Department’s free seminars on gross receipts tax.
There is no evidence the Taxpayers had any discussions with Department employees prior to the
audit. Although Cloutier testified that her accountant, William Zeidenberg, from the ILZ Group,
LLC, prepared her income tax returns, there is no evidence the Taxpayers had any specific
discussions with their accountant concerning their gross receipts taxes. Mr. Zeidenberg only
prepared and filed Taxpayers’ income tax returns.
While the civil penalty was correctly imposed on Taxpayers’ liability, the Department’s
calculation of the penalty is erroneous. The Department imposed a twenty percent (20%) civil
penalty on the principal of the gross receipts tax. See Assessment dated November 3, 2008. The
amount of negligence penalty added to the underlying principal tax liability by the Department is not
in accordance with the meaning of §7-1-69 (2003, prior to amendments through 2007). §7-1-
69(A)(1) provides that if the tax required to be paid when due is not paid, the Department may add
civil penalty in an amount “…not to exceed ten percent of the tax due but not paid.” (Emphasis
added). While the Legislature in 2007 amended §7-1-69(A)(1) to allow an amount “…not to exceed
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twenty percent of the tax due and not paid,” this amendment was not effective until January 1,
2008, well after the due date of gross receipts tax being due. There was no retroactivity provision
within this statute allowing for an additional civil penalty of ten percent (10%) to be applied to past
due principal tax balances due as of January 1, 2008 that had already exceeded the maximum rate
applied. In Phelps Dodge Corp. v. Revenue Division of the Dept. of Taxation and Revenue State
of New Mexico, 103 N.M. 20, 24, 702 P.2d 10, 14 (Ct. App. 1985), which following Worman v.
Echo Ridge Homes Cooperative, Inc. 98 N.M. 237, 647 P.2d 870 (1982) the court held that “new
legislation must not alter the clear language of a prior statute if it is to be applied retroactively.”
Additionally, in State v. Padilla, 78 N.M. 702,703, 437 P.2d 163, 164 (Ct. App. 1968), affirmed
in Psomas v. Psomas, 99 N.M. 606, 609, 661 P.2d 884, 887 (1982), the court stated, “it is
presumed that statutes will operate prospectively only, unless an intention on the part of the
legislature is clearly apparent to give them retroactive affect.” See also Karpa v. Commission of
Internal Revenue, 909 F.2d 784 (1990) and Bradbury Stamm Construction v. Bureau of Revenue,
70 N.M. 226, 373 P.2d (1962).
While Taxpayers owed principal tax on January 1, 2008, no additional civil penalty for
failure to pay tax or file a return could be added to the principal amount since the maximum amount
of the civil penalty had already been applied. Therefore the civil penalty added to Taxpayers’
principal tax can be no more than ten percent (10%). (This issue has been briefed by the
Department in prior tax cases before the Hearings Bureau.)
Interest. NMSA 1978, Section 7-1-67 (2007) governs the imposition of interest on late
payments of tax and provides, in pertinent part:
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
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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, 105, 560 P.2d 167, 169 (1977). The assessment
of interest is not designed to punish taxpayers, but to compensate the state for the time value of
unpaid revenues. 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 reason for a late
payment of tax does not mitigate the imposition of interest.
In this case, the Taxpayer failed to pay gross receipts taxes due on the commissions and
other sources of income reported on her Schedule C. Although it is clear that Cloutier did not
intend to make a mistake in not reporting her gross receipts, it is apparent that the taxes were due
and owing. Under the provisions of §7-1-67 (2007), imposition of interest is mandatory and cannot
be waived or abated.
CONCLUSIONS OF LAW
A. Maria and Robert Cloutier filed a timely protest to the assessments of gross
receipts tax issued under Letter ID Nos. L1162331520 and L1384953216, and jurisdiction lies
over the parties and the subject matter of this protest.
B. Maria and Robert Cloutier failed to meet their burden of proving that their
income reported as business income on Schedules C of their 2005 and 2006 federal income
tax returns is not subject to New Mexico gross receipts tax; accordingly, the amounts of
$59,985.00 and $65,122.00, respectively, are subject to New Mexico gross receipts tax.
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C. The amount of civil penalty added to the principal tax shall not exceed ten
percent (10%) as provided in §7-1-69(A)(1) (2003, prior to amendments through 2007) and any
amounts added or assessed in excess of the ten percent (10%) should be abated.
D. Interest was correctly added and assessed to the principal amount of tax, and
continues to be applied until the principal tax is paid in full.
For the foregoing reasons, the Taxpayers’ protest IS GRANTED IN PART AND
DENIED IN PART: the Department is ordered to abate ten percent (10%) of the penalty amount
for tax years 2005 and 2006 unless it has already done so.
Dated October 28, 2009.
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