Did Paragon's earlier gross-receipts-tax refund prevent the Department from assessing its later zero-liability returns?

Plain-English summary

Paragon Acquisition, Inc. owed $158,298.78 of gross receipts tax and $56,946.13 of interest for reporting zero liability on taxable New Mexico services. An earlier refund and accompanying notice were not a binding Department ruling and did not estop the Department from making the later assessment.

Paragon did business in New Mexico from January 2004 through October 2009. It filed gross receipts returns but either reported and deducted all receipts or reported zero receipts, producing zero tax liability. The Department found that this understated tax by more than 25% and assessed $158,298.78 of principal and $56,946.13 of interest, with no penalty.

Paragon paid the assessment in full before the hearing but continued its protest. It did not appear at the hearing after its request to participate by telephone was denied.

The six-year assessment period applied

Services performed in New Mexico were subject to gross receipts tax, and Paragon did not dispute that it provided taxable services. Section 7-1-18(D) gave the Department six years after the end of the year in which tax was due when a taxpayer understated liability by more than 25%.

Because Paragon's returns showed zero liability, the understatement exceeded 25%. The June 2010 assessment covering January 2004 through October 2009 was timely.

Interest was mandatory under Section 7-1-67(A) because the tax had not been paid when due. The decision treated interest as compensation for the time value of unpaid revenue, not a discretionary punishment.

The 2005 refund notice was not a ruling

Paragon had filed a refund application for December 2003 and January 2004. After requests for amended returns, NTTCs, and an explanation of how its services were resold, the Department issued a refund in June 2005 with a notice enclosing the warrant.

Paragon argued that this refund amounted to a ruling on which it relied for later returns. Statutory estoppel under Section 7-1-60 required action taken in accordance with a ruling addressed personally and in writing by the Secretary. Section 9-11-6.2 further required a ruling to interpret the relevant statutes and to show review by the Attorney General or Department legal counsel.

The refund notice did none of those things. It only informed Paragon that the refund had been issued, contained no statutory interpretation, and showed no required legal review. It therefore was not a ruling.

The timeline independently defeated reliance: Paragon had already used the same zero-liability reporting method for more than a year before the refund was issued. Equitable estoppel was also unavailable because an administrative hearing officer lacked authority to grant that judicial remedy.

Nonappearance did not automatically decide the case

The Department asked to exclude Paragon's evidence because the company did not appear. The decision found that the delinquency provision for nonappearance did not apply because Paragon had paid the assessment in full.

Documents mailed before the hearing were treated as timely based on their postmark. The Department received copies and an opportunity to respond, so its fair-hearing rights were protected. Paragon could not submit new material after the record closed, but its timely mailed exhibits and summary-judgment motion were considered.

Result: the protest and summary-judgment motion were denied; the tax and interest assessment was upheld.

What this means for you

Service businesses claiming deductions

Reporting and deducting every receipt can extend the Department's assessment window when the resulting understatement exceeds 25%. Keep transaction-specific support for any claimed deduction.

Taxpayers who previously received a refund

A refund check or routine processing notice is not necessarily a binding interpretation of tax law. Statutory estoppel required a personally addressed written ruling that met the formal statutory requirements.

Taxpayers claiming reliance on agency action

The taxpayer's conduct must actually follow the agency action. Paragon could not show reliance when it had adopted the reporting position long before receiving the refund.

Protestants unable to attend a hearing

Do not assume that written submissions replace an appearance. Although Paragon's pre-hearing materials were considered here, its later evidence and arguments were barred after it failed to appear and the record closed.

Common questions

Q: Why could the Department assess periods beginning in 2004?
A: Paragon understated liability by more than 25%, triggering the six-year assessment period.

Q: Did Paragon dispute that its services were taxable?
A: No. The dispute focused on assessment timing, interest, and estoppel.

Q: Why was the refund notice not a ruling?
A: It did not interpret a statute or show the legal review required for an effective Department ruling.

Q: Did Paragon rely on the 2005 refund?
A: The decision said no: Paragon had been filing the same way for more than a year before the refund.

Q: What happened because Paragon missed the hearing?
A: It was not deemed delinquent because it had paid in full, and its timely mailed exhibits were admitted, but no later evidence or argument was considered after the record closed.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-1-17 and 7-1-13 — assessment presumption and taxpayer reporting responsibility
• NMSA 1978, § 7-1-18(D) — six-year assessment period for an understatement over 25%
• Regulation 3.2.1.18(A) NMAC (2003) — New Mexico services subject to gross receipts tax
• NMSA 1978, § 7-1-67(A) — mandatory interest
• NMSA 1978, § 7-1-60 (1993) and § 9-11-6.2(B)-(C) (1995) — statutory estoppel and ruling requirements
• NMSA 1978, §§ 7-1-16(C), 7-1-24 and Regulations 3.1.8.8-.16 NMAC — hearing procedure and failure to appear

Cases cited:

• AA Oilfield Service v. New Mexico State Corporation Commission, 118 N.M. 273, 881 P.2d 18 (1994)
• 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)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Paragon Acquisition, Inc.
• Decision PDF: D&O 11-15

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
PARAGON ACQUISITION, INC., No. 11-15
TO ASSESSMENTS ISSUED UNDER
ID NO. L0509436992

DECISION AND ORDER

A formal hearing on the above-referenced protest was held June 16, 2011, before Dee

Dee Hoxie, Hearing Officer. The Taxation and Revenue Department (Department) was

represented by Ms. Tonya Noonan Herring, Staff Attorney. Mr. Andrick Tsabetsaye, Auditor, also

appeared on behalf of the Department. Paragon Acquisition, Inc. (Taxpayer) failed to appear for

the hearing. The Taxpayer filed motions and arguments prior to the hearing. The Taxpayer filed

exhibits by mail prior to the hearing. The exhibits were received after the hearing. The

Department was granted until July 8, 2011 to respond to the exhibits that were received after the

hearing. The Department responded timely with written arguments, motions, and objections. All

exhibits from both parties are admitted for purposes of the record. 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 for the tax periods from January

2004 through October 2009.

2. The Taxpayer failed to pay gross receipts tax to the Department from January 2004

through October 2009. The Taxpayer filed gross receipts tax returns for the tax periods,

but the Taxpayer either reported and deducted the entire amount of gross receipts or filed
zero gross receipts for the applicable tax periods. Both methods of reporting resulted in

claims of zero gross receipts tax liability.

3. The Department determined that the Taxpayer had understated its gross receipts tax

liability by more than 25% for the applicable tax periods.

4. On June 1, 2010, the Department assessed the Taxpayer for gross receipts tax and interest

for the tax period from January 31, 2004 through October 31, 2009. The assessment was

for $158,298.78 in tax principal, and $56,946.13 in interest. No penalty was assessed.

5. On June 14, 2010, the Taxpayer filed a formal protest by letter.

6. On March 14, 2011, the Department filed a Request for Hearing asking that the

Taxpayer’s protest be scheduled for a formal administrative hearing.

7. On March 23, 2011, a notice of hearing was issued for a hearing date on April 14, 2011.

8. On March 23, 2011, the Department emailed the Hearing Bureau and requested a

continuance of the April 14, 2011 setting.

9. The request was denied by email on March 23, 2011.

10. On March 30, 2011, the Taxpayer filed a Request to Continue the April 14, 2011 setting

and Request to Appear by Telephone. The Taxpayer requested that the hearing be reset

for June 16, 2011.

11. On March 30, 2011, the Department filed its Response opposing the Taxpayer’s Request

for Continuance and to Appear by Telephone.

12. On April 4, 2011, the Request for Continuance was granted, and the hearing was reset for

June 16, 2011 as the Taxpayer had requested. The Request to Appear by Telephone was

denied.

13. On April 15, 2011, the Taxpayer filed a letter expanding the scope of its protest.

In the Matter of Paragon Acquisition, Inc., page 2 of 12

14. On June 14, 2011, the Taxpayer filed a letter that said it did not intend to appear for the

hearing, a Motion for Summary Judgment, a Stipulation of Facts with a list of exhibits,

and a written argument. The Taxpayer represented that the exhibits were attached, but

none were actually attached.

15. The Taxpayer had paid the assessment in full prior to June 14, 2011.

16. On June 16, 2011, the hearing was held and the Taxpayer failed to appear. The

Department advised that they had not received the documents submitted by the Taxpayer

on June 14, 2011. Copies were provided to the Department at that time. The Department

was given the opportunity to respond to the Taxpayer’s motion and to present evidence.

17. It was ordered at the hearing that the Taxpayer would not be able to present further

evidence or argument since the Taxpayer had failed to appear for the hearing.

18. On June 21, 2011, a package was received by the Hearings Bureau from the Taxpayer.

The package was postmarked June 14, 2011. The package contained duplicates of the

documents that had been submitted on June 14, 2011. The package also contained the

exhibits which were referred to in the June 14, 2011 documents. A copy of the

documents was sent to the Department’s attorney.

19. On June 22, 2011, an Order was issued allowing the Department additional time to

respond to the Taxpayer’s exhibits and to submit additional evidence and argument. A

deadline of July 8, 2011 was given for submission of final arguments and evidence from

the Department.

20. On July 1, 2011, the Taxpayer filed a letter apologizing for its failure to send copies to the

Department’s attorney, but asserting that Ms. Herring already had copies of the

documents from pre-hearing discovery and communications. The Taxpayer also

In the Matter of Paragon Acquisition, Inc., page 3 of 12
requested copies of the exhibits submitted by the Department at the hearing. The letter

was forwarded to the Department’s attorney on that date.

21. On July 6, 2011, the Department filed a Motion to Reconsider and in Response to the

Taxpayer’s exhibits.

22. Both parties filed additional documents after July 8, 2011. An Order was issued on July

14, 2011 reminding the parties that the record had been closed to the Taxpayer on June

16, 2011 and to the Department on July 8, 2011 and that no further documents would be

considered in rendering the decision in this matter.

DISCUSSION

The issue to be decided is whether the Taxpayer is liable for gross receipts tax and

interest for the tax periods from January 31, 2004 through October 31, 2009 due to its

understating of its gross receipts tax liability by more than 25% and whether estoppel applies.

Burden of Proof.

Assessments by the Department are presumed to be correct. See NMSA 1978, § 7-1-17.

Tax includes, by definition, the amount of tax principal imposed and, unless the context

otherwise requires, “the amount of any interest or civil penalty relating thereto.” NMSA 1978, §

7-1-3. See also, El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M.

795, 779 P.2d 982 (Ct. App. 1989). Therefore, the assessment issued to the Taxpayer is presumed

to be correct, and it is the Taxpayer’s burden to present evidence and legal argument to show that

it is not liable for the tax and is entitled to an abatement of the interest.

Failing to Appear for the Hearing.

The Department argued that the Taxpayer’s failure to appear for the hearing should

preclude the admission of the Taxpayer’s exhibits. There is no regulation that governs what

In the Matter of Paragon Acquisition, Inc., page 4 of 12
action should be taken if a taxpayer fails to appear for a hearing. See 3.1.8.8 through 3.1.8.16

NMAC. The statute that governs tax hearings is also silent on this issue. See NMSA 1978, § 7-

1-24. A taxpayer may, nevertheless, be found to be delinquent for failing to appear at the hearing

“unless the taxpayer makes payment of the total amount of all taxes assessed”. NMSA 1978, §

7-1-16 (C). The Taxpayer made such a payment, and the Department confirmed at the hearing

that the assessment had been paid in full. Therefore, Section 7-1-16 (C) does not apply to the

Taxpayer, and the Taxpayer cannot be found to be delinquent for failing to appear for the hearing

because its assessment was already paid in full. The Department argued that failing to appear for

the hearing is fatal to the Taxpayer’s case based on a decision and order in another case. The

decision and order relied upon by the Department has different facts and it clearly cites Section

7-1-16 as part of the basis for that decision. Again, Section 7-1-16 is inapplicable in this case.

Hearing officers are charged with conducting fair and impartial hearings and have the

power necessary to accomplish this duty. See 3.1.8.9 NMAC. Hearing officers have discretion

in fashioning remedies for parties’ failures to comply with orders, including the disallowance of

the presentation of evidence. See 3.1.8.14 NMAC. Because the Taxpayer failed to appear for the

hearing, it was ordered that any evidence, arguments, and objections filed by the Taxpayer after

the June 16, 2011 hearing would not be considered. However, the Taxpayer is entitled to receive

copies of the exhibits presented by the Department at the hearing. The Taxpayer requested

copies of those exhibits in its July 1, 2011 letter. The request for copies of the exhibits was

granted.

Due process.

The Department argued that it was denied its due process by the Taxpayer’s failure to

appear and by the Taxpayer’s failure to provide the Department with copies of the documents

In the Matter of Paragon Acquisition, Inc., page 5 of 12
filed on June 14, 2011. The Department also argued that the Motion for Summary Judgment was

improper because it did not follow the civil rules of procedure. The Department acknowledged

that the rules do not actually apply to the hearing, but argued that they should be used in this case

to effectuate due process and to prevent the Taxpayer from circumventing the denial of its

Motion to Appear by Telephone. The Department also argued that the documents received by

the Hearings Bureau on June 22, 2011 were precluded from admission by the order at the

hearing, which disallowed further evidence from the Taxpayer.

Because the package that contained the exhibits was postmarked on June 14, 2011, it is

deemed to have been submitted on that date. See generally NMSA 1978, § 7-1-9 (1997)

(indicating that mailings are timely when they are mailed on the due date). Therefore, the

exhibits were not precluded by the hearing order that prohibited the admission of further

evidence or argument from the Taxpayer. Due process requires an opportunity to be heard in a

meaningful time and meaningful manner. See Mathews v. Eldridge, 424 U.S. 319, 47 L.Ed.2d 18

(1976). See also State ex rel. Battershell v. City of Albuquerque, 108 N.M. 658, 777 P.2d 386 (Ct.

App. 1989) (holding that in an administrative hearing due process is flexible and should conform to

the demands of a particular situation). The Department, as an agency of the State of New Mexico,

does not have a constitutional right to due process. See City of Albuquerque v. Chavez, 1997-

NMCA-054, ¶12, 123 N.M. 428, 941 P.2d 509 (noting that the government does not have

constitutional rights to fair hearings). However, government entities are guaranteed fair hearings by

statute. See id. at ¶ 13. See also 3.1.8.9 NMAC. See also NMSA 1978, § 7-1-24. Rules of civil

procedure do not apply to the hearing, but hearings must be conducted so that both sides have

ample and fair opportunity to be heard. See NMSA 1978, § 7-1-24 (I). The government’s right

to a fair hearing is comparable to an individual’s constitutional right to due process. See U.S.

In the Matter of Paragon Acquisition, Inc., page 6 of 12
West Communications, Inc. v. NM State Corp. Comm’n., 1999-NMSC-016, ¶18, 127 N.M. 254,

980 P.2d 37. See also Las Cruces Prof’l Fire Fighters v. City of Las Cruces, 1997-NMCA-031,

fn. 3, 123 N.M. 239, 983 P.2d 1384.

The Taxpayer should have provided copies to the Department. Nonetheless, the

Department has been afforded a meaningful opportunity to be heard on the documents because

copies were provided to the Department by the Hearings Bureau, and the Department was given

an opportunity to respond to those documents. The Department availed itself of that opportunity,

and made objections and arguments about those documents at the hearing and in its Motion and

Response filed on July 6, 2011. Regardless of whether a motion would be entertained under the

civil rules, hearing officers are required to rule upon all motions submitted by either party. See

3.1.8.16 NMAC. Therefore, the objections are overruled. The Department was afforded ample

opportunity to be heard as required by statute, and the Department’s Motion for Reconsideration

is denied. The Taxpayer’s Motion for Summary Judgment will be considered.

Admission of Exhibits.

The Department objected to the admission of the Taxpayer’s exhibits. The Department

argued that the Taxpayer’s exhibits should not be admitted because they are irrelevant and

because the Taxpayer did not adequately explain what the purpose or significance of each exhibit

was. The Taxpayer referenced specific exhibits in its Stipulation of Facts, which was filed with

the Motion for Summary Judgment. I find that the exhibits are relevant and have been referenced

to specific points of the Taxpayer’s proposed facts and arguments.

The Department also argued that some of the exhibits should not be admitted because

they are redundant since they are the same as some of the exhibits submitted by the Department.

Hearing officers may exclude evidence if it is unduly repetitious. See 3.1.8.10 NMAC. I find

In the Matter of Paragon Acquisition, Inc., page 7 of 12
that the few exhibits submitted by both parties are not unduly repetitious, and those exhibits will

be admitted.

The Department also argued that the exhibits were unauthenticated because there was no

testimony and there were no affidavits submitted. The rules of evidence do not apply to the

hearing, but hearing officers may require reasonable substantiation of evidence when its accuracy

or truth is in reasonable doubt. See NMSA 1978, § 7-1-24 (H). The veracity of the exhibits did

not seem to be at issue. Rather, the issue was the way the Taxpayer interpreted the documents

and the legal meaning of the documents. Moreover, several of the Taxpayer’s exhibits were

copies of documents promulgated by the Department. Despite the Taxpayer’s failure to provide

testimony or affidavits, I find that the exhibits do not require any further substantiation for

purposes of this hearing. Therefore, the objections are overruled. The Taxpayer’s exhibits are

admitted.

Gross Receipts Tax.

Services performed within the State of New Mexico are subject to the gross receipts tax.

See 3.2.1.18 (A) NMAC (2003). It is the responsibility of taxpayers, who are in the position to

know the details of their business activities, to determine accurately and to report their tax

liabilities to the Department. See NMSA 1978, § 7-1-13. The Taxpayer did not dispute in its

protest that it was providing services and that the receipts from the services were taxable.

Assessment of Interest.

Interest “shall be paid” on taxes that are not paid on or before the date on which the tax is

due. NMSA 1978, § 7-1-67 (A). The word “shall” indicates that the assessment of interest is

mandatory, not discretionary. See 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

In the Matter of Paragon Acquisition, Inc., page 8 of 12
time value of unpaid revenues. Because the gross receipts tax was not paid when it was due,

interest was properly assessed.

Time Period of Assessment.

The Taxpayer argued that the assessment period should not have gone back to 2004. The

Department has six years from the end of the year in which the tax was due to make an

assessment when a taxpayer understates his/her tax liability by more than 25 percent. See NMSA

1978, § 7-1-18 (D). The Taxpayer was assessed in 2010 for the tax periods from January 2004

through October 2009. The Taxpayer filed returns for those tax periods indicating that it had

zero gross receipts tax liability. Therefore, the Taxpayer understated its tax liability by more than

25 percent. As a result, the assessment was timely. See id.

Estoppel.

The Taxpayer argued that it had contacted employees of the Department in 2004 and had

determined that its gross receipts were not taxable. On February 18, 2004, the Taxpayer filed an

application for refund for the December 2003 and January 2004 tax periods. On April 15, 2004,

the Department issued a letter to the Taxpayer requesting amended returns for the tax periods on

the refund claim. On June 17, 2004, the Department issued another letter to the Taxpayer again

requesting amended returns, a copy of non-taxable transaction certificates, and a detailed

explanation of how the Taxpayer’s services are re-sold. On July 14, 2004, the Taxpayer filed

amended returns for tax periods from November 2003 through May 2004. The amended returns

served to report and deduct its gross receipts, which left a zero tax liability. The Taxpayer was

issued a refund on June 10, 2005. The warrant was from the Department of Finance and

Administration and was dated June 8, 2005, but the check was dated June 10, 2005. A letter

In the Matter of Paragon Acquisition, Inc., page 9 of 12
from the Department was also issued and indicated that the refund warrant was enclosed pursuant

to the Taxpayer’s application for refund.

The Taxpayer argued that the 2005 refund served as a ruling by the Department. The

Taxpayer argued that it relied upon the refund when filing its returns for the tax periods in

question. The Taxpayer argued that Section 7-1-60, therefore, estops the Department from

assessing the tax for the tax periods from January 2004 through October 2009. The Department

argued that the refund issued in 2005 did not constitute a ruling. The Department argued that it

was, therefore, not estopped from assessing the Taxpayer. The Department also argued that the

Taxpayer did not rely on the 2005 refund when it was incorrectly reporting its gross receipts tax

liability. To the extent that the Taxpayer’s arguments might encompass equitable estoppel, they are

overruled as hearing officers cannot grant equitable estoppel. See AA Oilfield Service v. New

Mexico State Corp. Comm’n, 118 N.M. 273, 881 P.2d 18 (1994) (holding that an administrative

agency cannot grant the equitable remedy of estoppel because that power is held exclusively by the

judiciary).

For statutory estoppel to apply, a taxpayer must establish that their actions were done “in

accordance with any ruling addressed to the party personally and in writing by the secretary”.

NMSA 1978, §7-1-60 (1993). Rulings must be written statements of the secretary that interpret the

statutes to which they relate. See NMSA 1978, § 9-11-6.2 (B) (1995). In order to be effective,

rulings must be reviewed by the attorney general or the Department’s legal counsel and the fact of

the review must be indicated on the ruling. See NMSA 1978, § 9-11-6.2 (C) (1995). The Taxpayer

argued that Section 9-11-6.2 does not apply because it is a regulation that improperly restricts the

“any ruling” language in Section 7-1-60. The Taxpayer argued that the refund notice from the

In the Matter of Paragon Acquisition, Inc., page 10 of 12
Department that accompanied the refund warrant was a ruling. The Department argued that

Section 9-11-6.2 does apply and that the refund notice was not a ruling under that section.

The Taxpayer is incorrect in characterizing Section 9-11-6.2 as a regulation. Section 9-

11-6.2 is a statute and it governs what constitutes a ruling by the Department. See NMSA 1978,

§ 9-11-6.2 (1995). See also State ex rel. Quintana v. Schnedar, 115 NM 573, 855 P.2d 562 (1993)

(noting that provisions of a statute must be read together with other statutes in material parts). See

also Gutierrez v. W. Las Vegas Sch. Dist., 2002-NMCA-068, ¶ 15, 132 N.M. 372, 48 P.3d 761

(noting there is a presumption that the Legislature knows and considers existing statutory law when

it enacts new statutes). The letter issued by the Department with the refund warrant merely

informed the Taxpayer that the refund had been issued. The letter did not constitute a ruling

because it did not interpret any statute and was not reviewed by legal counsel or the attorney

general. See NMSA 1978, § 9-11-6.2 (1995). Moreover, the Department makes a compelling and

persuasive argument that the Taxpayer did not rely on the 2005 refund as a ruling because the

Taxpayer was understating its gross receipts tax liability for more than a year before the refund was

issued. The Taxpayer did not base its gross receipts reporting on the 2005 refund because it was

reporting its gross receipts in the same manner prior to the 2005 refund, and the 2005 refund was

not a ruling under the statutes. Therefore, the Department is not estopped from making the

assessment. The Taxpayer’s Motion for Summary Judgment is denied.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely written protest to the Notice of Assessment for tax

periods from January 2004 through October 2009 issued under Letter ID number L0509436992,

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

In the Matter of Paragon Acquisition, Inc., page 11 of 12

2. The Taxpayer was properly assessed for gross receipts tax and interest for tax

periods from January 2004 through October 2009.

3. The Department was not statutorily estopped from making the assessment.

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

DATED: August 1, 2011.

In the Matter of Paragon Acquisition, Inc., page 12 of 12