Was New Mexico's 2007 gross receipts tax assessment against Computer Square timely, and could the hearing officer remove interest because of an erroneous refund and a nearly five-year protest delay?

Plain-English summary

Computer Square won abatement of $9,523.80 in gross receipts tax and the related interest for periods from October 2001 through September 2002 because the Department assessed those periods too late. The company still owed $12,232.53 plus interest for later periods ending in March 2003, September 2003, and June 2004.

Computer Square sold software licenses and services in New Mexico. It originally filed returns and paid tax for July 2001 through September 2002, then filed amended zero-liability returns and obtained a refund after relying on its accountant and a Department ruling issued to a different taxpayer. A later audit concluded that the ruling did not apply and that the refund had been issued in error. In May 2007, the Department assessed $21,756.33 in tax and $14,491.98 in interest for periods extending through September 2006.

The company withdrew its challenge to whether gross receipts tax was substantively due. The remaining questions were whether the assessment was timely, whether the Department's delay in bringing the protest to hearing required relief, and whether interest was proper.

The older periods fell outside the three-year limit

New Mexico generally had three years after the end of the calendar year in which tax was due to assess it. A six-year period applied when a taxpayer underreported liability by more than 25%.

Computer Square overcame the assessment's presumption of correctness for October 2001 through September 2002. Its original returns reported more tax than the audit later determined was due, and the Department had received both those returns and the related payments. The zero-liability amended returns and refund did not turn the original reporting into an underreporting of more than 25%.

The three-year period therefore controlled. The final assessment deadlines for those periods expired at the ends of 2004 and 2005, before the May 2007 assessment. The decision abated $9,523.80 of tax and all interest assessed on it.

The later tax remained timely

Computer Square presented no evidence rebutting the assessment for periods ending in March 2003, September 2003, and June 2004.

The June 2004 tax was assessed within the ordinary three-year period. For the two 2003 periods, the unrebutted audit determination that liability had been underreported by more than 25% supported the six-year period. The decision therefore upheld $12,232.53 of tax for those three periods.

An unreasonable hearing delay did not authorize dismissal

The Department acknowledged Computer Square's protest in July 2007 but did not contact the company about it again until February 2012 and requested a hearing in March 2012. The hearing officer called the nearly five-year referral delay unreasonable and unjustified and rejected the Department's argument that Computer Square shared responsibility for failing to follow up.

Section 7-1-24(D) put the duty to promptly set a hearing on the Department. Even so, the decision found no strict statutory hearing deadline, no statute or regulation authorizing dismissal for the delay, and no administrative authority to grant an equitable remedy.

Interest was mandatory on the remaining tax

The erroneous refund and the company's reliance on its accountant did not permit the hearing officer to remove interest. Section 7-1-67 required interest on tax unpaid by its due date, and the decision described interest as compensation for the time value of unpaid revenue rather than punishment.

Interest on the surviving liabilities began the day after each due date: April 26, 2003, on $11,407.29; October 26, 2003, on $587.14; and July 26, 2004, on $238.10. It continued while the principal remained unpaid.

Result: protest granted in part and denied in part.

What this means for you

Businesses reviewing an old assessment

The applicable assessment period can depend on what was actually reported. Here, proof that the original returns reported more tax than the audit calculation defeated the Department's attempt to use the six-year period for the older quarters.

Taxpayers who received a mistaken refund

An agency's erroneous refund did not eliminate the underlying liability for periods still open to assessment. It also did not stop mandatory interest on tax that remained unpaid after its original due date.

Tax professionals handling a delayed protest

The decision treated the Department—not the taxpayer—as responsible for promptly scheduling the hearing. But an unreasonable administrative delay alone did not supply a dismissal remedy when no statute or regulation authorized one.

Common questions

Q: Why was part of the assessment time-barred?
A: Computer Square proved that it had originally filed returns showing tax liability and made payments for October 2001 through September 2002. Because it had not underreported those periods by more than 25%, the ordinary three-year limit applied, and the 2007 assessment was late.

Q: Why did $12,232.53 remain due?
A: The company did not rebut the assessment for the March 2003, September 2003, and June 2004 periods. The 2004 period was within three years, and the unrebutted greater-than-25% underreporting determination supported six years for the 2003 periods.

Q: Did the nearly five-year protest delay invalidate the assessment?
A: No. The hearing officer found the delay unreasonable and unjustified but found no statutory deadline or administrative remedy allowing dismissal.

Q: Could reliance on an accountant or the erroneous refund eliminate interest?
A: No. Those circumstances could not overcome the statute making interest mandatory on tax unpaid when due.

Q: What happened to interest tied to the barred periods?
A: It was abated along with the $9,523.80 tax assessment for those periods.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-1-17 — presumption that Department assessments are correct
• NMSA 1978, § 7-1-18(A) and (D) — three-year general assessment period and six-year period for underreporting exceeding 25%
• NMSA 1978, § 7-1-24(D) — Department responsibility to promptly set a protest hearing
• NMSA 1978, § 7-1-67(A) — mandatory interest from the day after tax is due
• NMSA 1978, § 7-9-11 — gross receipts tax due dates
• 3.1.8.8 and 3.1.8.9 NMAC — protest-hearing procedures cited in the decision

Cases:

• El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989)
• AA Oilfield Service v. New Mexico State Corp. Comm’n, 118 N.M. 273, 881 P.2d 18 (1994)
• Wisznia v. State, Human Servs. Dep't, 1998-NMSC-011, 125 N.M. 140, 958 P.2d 98
• In re Protest of Kilmer, 2004-NMCA-122, 136 N.M. 440, 99 P.3d 690
• C&D Trailer Sales v. Taxation and Revenue Dept., 93 N.M. 697, 604 P.2d 835 (Ct. App. 1979)
• State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Computer Square, Inc.
• Decision PDF: D&O 12-22

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
COMPUTER SQUARE, INC. No. 12-22
d/b/a CSI TECHNOLOGY GROUP,
TO THE ASSESSMENT ISSUED UNDER
ID NO. L0228075136

DECISION AND ORDER

A formal hearing on the above-referenced protest was held September 20, 2012, before

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

represented by Ms. Ida Lujan, Staff Attorney. Mr. Tom Dillon, Auditor, and Ms. Lizzy

Vedamanikam, Protest Office Manager, also appeared on behalf of the Department. Computer

Square, Inc. (“Taxpayer”) appeared for the hearing through its employee and Director, Mr.

Joseph Britt, and represented itself. Mr. Britt and Ms. Vedamanikam testified at the hearing.

The Hearing Officer took notice of all documents in the administrative file. 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 selling software licenses and

services in 2001 through 2006.

2. The Taxpayer filed gross receipts tax returns with the Department for the tax periods

from July 1, 2001 through September 30, 2002. The returns were filed in March 2003

and again in October 2003.

3. In March 2003, the Taxpayer paid the tax principal when its returns were filed. In April

2003, the Taxpayer paid applicable penalty and interest on the returns.

4. In June 2003, the Taxpayer filed amended returns, claiming zero gross receipts tax

liability and requested a refund for amounts paid on July 2001 through September 2002

gross receipts tax. The Taxpayer was acting on advice from its accountant and believed

that its gross receipts were exempt from New Mexico tax based on a ruling the

Department had issued on a different taxpayer.

5. In November 2003, the Department requested additional information from the Taxpayer

regarding its claim for refund.

6. In November 2003, the Taxpayer responded to the request and provided more

information to the Department.

7. In March 2004, the Department issued a refund to the Taxpayer.

8. The Department began an audit on the Taxpayer in November 2006 and issued an audit

report in April 2007. The Department determined that the Taxpayer had underreported

its gross receipts tax by more than 25% for the tax periods from June 30, 2001 through

September 30, 2006.

9. The Department determined that the ruling relied upon by the Taxpayer did not apply to

the Taxpayer and that the 2004 refund was issued in error.

10. On May 15, 2007, the Department assessed the Taxpayer for gross receipts tax and

interest for the tax periods from June 30, 2001 through September 30, 2006. The

assessment was for $21,756.33 tax and $14,491.98 interest.

11. On June 13, 2007, the Taxpayer filed a formal protest letter.

12. On July 3, 2007, the Department sent a letter acknowledging receipt of the Taxpayer’s

protest.

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Letter ID No. L0228075136
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13. On March 21, 2012, the Department filed a Request for Hearing asking that the

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

14. On March 27, 2012, a notice of hearing was issued for July 10, 2012.

15. On June 13, 2012, the Taxpayer filed a request for continuance of the hearing set for July

10, 2012.

16. On June 29, 2012, an order granting the request for continuance was issued.

17. On July 2, 2012, an amended notice of hearing was issued for September 20, 2012.

DISCUSSION

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

interest for the tax periods from June 30, 2001 through September 30, 2006, whether the

Department’s actions were timely, and whether interest was calculated correctly.

The parties presented evidence and made their arguments based solely on the tax period

from July 2001 through September 2002. However, the assessment included tax periods through

September 2006. All of the evidence relied upon regarding the assessment period from

September 2002 through September 2006 came solely from the documents submitted as exhibits

by the parties.

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

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Letter ID No. L0228075136
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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 interest.

Gross Receipts Tax.

The Taxpayer withdrew its protest as to whether it should have been paying gross

receipts tax. However, the Taxpayer challenged the Department’s timeliness in assessing the

Taxpayer and in setting the hearing.

Statute of Limitations.

The Taxpayer argued that the Department’s assessment was not timely because it

occurred in 2007 and was issued more than three years after the Department had issued a refund

on the tax from July 2001 through September 2002. The Department did not respond to this

argument at the hearing. However, the audit report was submitted as an exhibit by the Taxpayer,

and it indicates that the Department’s position was that the Taxpayer underreported its tax

liability by more than 25% from October 1, 2001 through September 30, 2006.

Generally, the Department may not assess more than three years after the end of the

calendar year in which the tax was due. See NMSA 1978, § 7-1-18 (A). However, the

Department may assess no more than six years after the end of the calendar year in which the tax

was due if the taxpayer underreported its tax liability by more than 25%. See NMSA 1978, § 7-

1-18 (D).

The Taxpayer was subject to quarterly reporting, and the tax for each quarter was due the

month following the end of the quarter. See generally NMSA 1978, § 7-9-11. The audit report

indicates that the Department determined that the Taxpayer reported its gross receipts tax for the

tax period ending on September 30, 2001 in excess of the amount of tax actually due and there

was no amount from that tax period included in the assessment. The audit report also indicates

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Letter ID No. L0228075136
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that the Department determined that the Taxpayer filed zero gross receipts tax reports for the tax

periods from October 1, 2001 through September 30, 2002. The audit report also indicates that

the Taxpayer filed zero gross receipts tax reports for the period ending in March 2003, the period

ending in September 2003, and the period ending in June 2004. Therefore, the Department

concluded that the Taxpayer had underreported its tax liability for all of those tax periods by

100%. Per the audit report, the Department’s determination of gross receipts tax owed for the

period ending in December 2001 was $2,380.95, for the period ending in March 2002 was

$4,285.71, for the period ending in June 2002 was $1,904.76, for the period ending in September

2002 was $952.38, for the period ending in March 2003 was $11,407.29, for the period ending in

September 2003 was $587.14, and for the period ending in June 2004 was $238.10. The

assessed amounts for all of these tax periods totals $21,756.33, which was the amount of gross

receipts tax indicated in the assessment issued in May 2007.

The Taxpayer did not present any evidence to rebut the presumption of correctness as to

the tax periods ending in March 2003, September 2003, and June 2004. The tax due from the

June 2004 period was due in 2004, and the Department’s assessment on it was within the three

years from the end of the year in which the tax was due. See NMSA 1978, § 7-1-18 (A).

Therefore, the assessment for the June 2004 tax period was within the general statute of

limitations. See id. The tax owed from March and September 2003 tax periods was due in 2003.

Because the Taxpayer failed to rebut the presumption of correctness as to the 2003 tax periods,

the Department’s determination that the taxes were underreported by more than 25% stands.

Therefore, the Department’s assessment as to the 2003 tax periods was timely because it

occurred within six years of the end of the year in which the tax was due. See NMSA 1978, § 7-

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Letter ID No. L0228075136
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1-18 (D). Consequently, the assessment of the total $12,232.53 of gross receipts tax for 2003

and 2004 was timely.

The Taxpayer presented evidence sufficient to rebut the presumption of correctness as to

the October 2001 through September 2002 tax periods. The Taxpayer explained that there were

returns filed in March 2003 for those tax periods that showed tax liabilities, and that taxes were

paid at that time. The Taxpayer also made payments in April 2004 for the applicable penalty and

interest on those tax periods. The Taxpayer subsequently filed amended returns in June 2003

that claimed zero tax liabilities for those tax periods and requested a refund. The Taxpayer also

re-filed the original returns showing the tax liabilities in October 2003. Mr. Britt could not

explain exactly why the original returns were filed again in October 2003, and could only say

that the Taxpayer was following the advice of its accountant and was responding to requests

from the Department regarding its refund request. Again, the audit report acknowledged that a

return showing an excessive tax liability was filed with respect to the tax period ending in

September 2001. The Taxpayer’s testimony indicated that this return, which was acknowledged

as received by the Department, was filed at the same time as the other returns. The Department

also acknowledged, through the testimony of its witness, that payments were received in March

and April 2003 with respect to the tax periods from July 2001 through September 2002. The

payments for these tax periods were due in 2001 and in 2002. The returns filed by the Taxpayer

for each of these tax periods show a tax liability in excess of the amount determined to be owed

by the Department in its audit report. Therefore, the Taxpayer did not underreport its tax liability

for those tax periods, and the Department was required to assess within three years of the end of

the year in which the tax was due. See NMSA 1978, § 7-1-18 (A) and (D). The due dates were

in 2001 and 2002, so the final dates to assess were the end of the year in 2004 and 2005. The

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Letter ID No. L0228075136
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assessment occurred in 2007, and was, therefore, not timely. The assessment of the total of

$9,523.80 for tax periods from October 1, 2001 through September 30, 2002 was improper as it

was barred by the statute of limitations.

The Taxpayer also argues that the Department was negligent in bringing the protest to

hearing since the Department took no action on the Taxpayer’s case from July 2007 until

February 2012. The Department sent the protest acknowledgement letter in July 2007. The

Department again contacted the Taxpayer in reference to the protest in February 2012. The

Department then filed the Request for Hearing on March 21, 2012. The Taxpayer argues that the

delay of nearly five years from filing of protest to the Department’s request for hearing was an

unreasonable amount of time. The Department argues that there is not a statute of limitations for

conducting the hearing. The Department also argues that the Taxpayer was equally negligent

since it did not contact the Department and inquire about its hearing. The Department admitted

that the delay was unreasonable, but argued that the delay was not willful. The Department

argued that the delay was the result of the case slipping through the cracks or being overlooked

for some period of time.

The Department is incorrect in asserting that it was the Taxpayer’s responsibility to

follow up on having a hearing. The Taxpayer is not required to do anything other than file the

protest in a timely fashion. See NMSA 1978, § 7-1-24. In fact, it is the Department’s

responsibility to “promptly set a date for hearing”. NMSA 1978, § 7-1-24 (D) (emphasis added).

Moreover, the Department’s acknowledgement letter indicated that it would review the issues

and contact the Taxpayer for more information or to set a conference or hearing. The

Department’s delay in referring the Taxpayer’s protest for hearing for almost five years was

unreasonable and unjustified. However, there is not a strict statutory deadline or time frame

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Letter ID No. L0228075136
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within which a hearing must be held. See NMSA 1978, § 7-1-24. Additionally, there is no

statutory or regulatory authority for the Hearing Officer to dismiss a protest for unreasonable and

unjustified delays. See id. See also 3.1.8.8 and 3.1.8.9 NMAC. Hearing officers are also unable

to grant equitable remedies. 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). As there was not a statutory or

regulatory violation in failing to refer the Taxpayer’s protest for such extended period of time, there is

no administrative remedy that can be granted.

Assessment of Interest.

The Taxpayer argues that the Department should be precluded from collecting interest on

the gross receipts tax because the Department granted the refund in 2004, which caused the

Taxpayer to believe that it did not owe gross receipts tax in the subsequent years. This is

essentially an argument for equitable estoppel. Estoppel may be found against the state where there is

“a shocking degree of aggravated and overreaching conduct or where right and justice demand it."

Wisznia v. State, Human Servs. Dep't, 1998-NMSC-011, ¶ 17, 125 N.M. 140, 958 P.2d 98. In

addition, the party seeking estoppel must demonstrate “affirmative misconduct on the part of the

government.” See In re Protest of Kilmer, 2004-NMCA-122, ¶ 27, 136 N.M. 440, 99 P.3d 690.

Again, hearing officers have no authority to grant equitable remedies, such as estoppel. See AA

Oilfield Service, 118 N.M. 273. The Taxpayer was also relying on advice from its accountant. A

taxpayer’s mistaken belief that it did not owe tax, when the belief is based on the advice of a

competent accountant, is not negligent and application of penalty is inappropriate. See C&D

Trailer Sales v. Taxation and Revenue Dept., 93 N.M. 697, 604 P.2d 835 (Ct. App. 1979). See

also 3.1.11.11 (D) NMAC (2001). No penalty was assessed against the Taxpayer. However,

there is not a similar provision for the excusal of interest.
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Letter ID No. L0228075136
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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 time value of unpaid revenues. Because the gross receipts tax was not paid when it was due,

interest was properly assessed.

The Taxpayer also argued that if interest is owed, it should not be calculated to begin

until after the assessment date in 2007 or until the Department took some action on the protest in

2012. The Taxpayer also made arguments stemming from the refund of the 2001 and 2002 tax

periods and when interest should accrue on those assessments. The Department also indicated

that the Taxpayer might be entitled to some credit for interest already paid on those assessments

since the Taxpayer paid some interest in April 2003. As those assessments were barred by the

statute of limitations, the arguments are moot and the Taxpayer is not entitled to credit against

any interest still outstanding since it accrued against tax liabilities from subsequent months.

Interest accrues from “the first day following the day on which the tax becomes due” and

continues to accrues until the tax is paid. NMSA 1978, § 7-1-67. The tax was due on April 25,

2003 from the period ending in March 2003, was due on October 25, 2003 for the period ending

in September 2003, and was due on July 25, 2004 for the period ending in June 2004. See

NMSA 1978, § 7-9-11 (indicating the due dates for gross receipts tax). Therefore, interest began

to accrue on April 26, 2003 on the $11,407.29 owed, began to accrue on October 26, 2003 on the

$587.14 owed, and began to accrue on July 26, 2004 on the $238.10 owed. Taxpayer was

advised at the hearing that while the tax principal remains unpaid, the interest will continue to

accrue.

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Letter ID No. L0228075136
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CONCLUSIONS OF LAW

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

receipts taxes for tax periods from June 30, 2001 through September 30, 2006 issued under Letter

ID number L0228075136, and jurisdiction lies over the parties and the subject matter of this protest.

2. The Taxpayer presented sufficient evidence to overcome the presumption of

correctness on part of the assessment, and showed that it filed returns showing gross receipts tax

liability in excess of what was actually owed for the tax periods from July 1, 2001 through

September 30, 2002.

3. The Department failed to show the correctness of the assessment for tax periods

from July 1, 2001 through September 30, 2002 after the presumption was overcome, and failed to

assess Taxpayers within three years of the end of 2002. See NMSA 1978, § 7-1-18 (A).

Therefore, the assessment of gross receipts tax and interest for the tax periods from June 30,

2001 through September 30, 2002 is barred by the statute of limitations.

4. The assessment of gross receipts tax is ABATED by $9,523.80 for the tax periods

from October 1, 2001 through September 30, 2002. The interest assessed on the tax for those tax

periods is also ABATED.

5. The Taxpayer failed to overcome the presumption of correctness as to the

assessment of gross receipts tax in the amount of $12,232.53 for the tax periods ending in March

2003, September 2003, and June 2004.

6. Interest was properly assessed on the tax liabilities for the tax periods relating to

March 2003, September 2003, and June 2004. Interest began to accrue on the tax on the days

following their due dates, which were in April 2003, October 2003, and July 2004 respectively.

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Letter ID No. L0228075136
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For the foregoing reasons, the Taxpayer's protest is GRANTED IN PART AND DENIED

IN PART.

DATED: October 17, 2012.

DEE DEE HOXIE
Hearing Officer
Taxation & Revenue Department
Post Office Box 630
Santa Fe, NM 87504-0630

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Letter ID No. L0228075136
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