Could a small roadside seller avoid penalty and interest because she did not know her firewood, produce, crafts, and babysitting receipts were taxable?

Plain-English summary

Pauline Gee owed gross receipts tax, penalty, and interest on her small self-employed business receipts. Not knowing about the tax did not excuse years of nonregistration and nonpayment, and her protest did not stop interest from accruing.

In 2008 and 2009, Gee sold firewood, fruit, vegetables, and arts and crafts at roadside locations in Rio Arriba County. She also occasionally babysat.

The Department's IRS tape-match program found Schedule C income with no corresponding New Mexico gross receipts reporting. Gee had no CRS identification number, filed no CRS returns, and paid no gross receipts tax.

At the hearing, she conceded the tax principal and disputed only penalty and interest.

Lack of knowledge was negligence

Gee had not consulted the Department, a tax professional, or anyone else about the business receipts during the two tax years. She began discussing the issue with her brother, a construction contractor, only after assessment.

New Mexico's negligence rule included inattention, indifference, and erroneous belief. The decision found that operating without researching the tax consequences fit that definition, even without intentional evasion.

She did not prove a good-faith mistake of law on reasonable grounds or another recognized nonnegligence factor.

A protest did not pause interest

Gee believed interest stopped while her protest was pending. Section 7-1-67 did not provide that general tolling rule.

The Department's protest acknowledgement had told her that interest and penalty would continue and that paying the principal could stop further accrual while she pursued a refund if successful. Because principal remained unpaid, interest kept running from the original due dates.

Hardship affected collection, not liability

Gee also described the burden on her small business. The decision said Regulation 3.1.6.14 did not allow the Department to abate a legally required assessment based on inability to pay, though she could seek a payment plan.

Result: protest denied. As of the hearing, Gee owed $1,532.95 in tax, $306.59 in penalty, and $222.48 in interest, totaling $2,062.15.

What this means for you

Informal and roadside sellers

Small scale does not by itself remove gross receipts tax obligations. Sales of property and services were both included here.

New sole proprietors

Register and research state filing duties when starting. Federal Schedule C income can be matched against New Mexico reporting.

Taxpayers filing a protest

Do not assume the dispute freezes interest. Review whether paying principal and pursuing refund procedures is appropriate for your circumstances.

Common questions

Q: What activities generated the taxable receipts?
A: Roadside sales of firewood, produce, arts and crafts, plus occasional babysitting services.

Q: Did Gee dispute the tax itself?
A: No. She conceded the 2008 and 2009 principal at the hearing.

Q: Why was the penalty upheld?
A: She made no effort during the relevant years to investigate or obtain advice about gross receipts tax.

Q: Did the protest stop interest?
A: No. Interest continued because the principal remained unpaid.

Q: Could hardship reduce the assessment?
A: No. The decision distinguished legal liability from possible payment-plan arrangements.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-1-17(C) and 7-1-3(X) and Regulation 3.1.6.13 NMAC — assessment presumption
• NMSA 1978, §§ 7-9-3.3, 7-9-3.5, 7-9-4, and 7-9-5 — taxable business receipts
• NMSA 1978, § 7-1-67 — mandatory interest during protest
• NMSA 1978, § 7-1-69 and Regulations 3.1.11.10-.11 NMAC — negligence penalty
• Regulation 3.1.6.14 NMAC — inability to pay

Cases cited:

• Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16 (Ct. App. 1976)
• El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795 (Ct. App. 1989)
• Chevron U.S.A., Inc. v. State ex rel. Department of Taxation & Revenue, 2006-NMCA-050

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Pauline Gee
• Decision PDF: D&O 13-09

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
PAULINE GEE No. 13-9
TO ASSESSMENT ISSUED UNDER LETTER
ID NO.s L1121969472 & L0585098560

DECISION AND ORDER

A protest hearing occurred on the above captioned matter on April 4, 2013 before Brian

VanDenzen, Esq., Tax Hearing Officer, in Santa Fe. Ms. Pauline Gee (“Taxpayer”) appeared pro

se. Staff Attorney Ida Luján appeared representing the Taxation and Revenue Department of the

State of New Mexico (“Department”). Protest Auditor Andrick Tsabetsaye appeared as a witness

for the Department. Department Exhibits A-I were admitted into the record. Taxpayer did not

tender any exhibits. All exhibits are more thoroughly described in the Administrative Exhibit

Log. Based on the evidence and arguments presented, IT IS DECIDED AND ORDERED AS

FOLLOWS:

FINDINGS OF FACT

1. Through the Department’s CSPAN Tape Match program with the Internal

Revenue Service, the Department detected that Taxpayer reported Schedule C business income

in 2008 and 2009 that Taxpayer did not report to the Department as gross receipts.

2. On October 1, 2012, the Department sent Taxpayer a Notice of Limited Scope

Audit Commencement. [Department Ex. A].

3. On October 12, 2012, under letter identification number L1121969472, the

Department assessed Taxpayer $851.22 in gross receipts tax, $170.24 in penalty, and $128.24 in

interest for the CRS reporting period ending December 31, 2008. [Department Ex. B].

4. On October 12, 2012, under letter identification number L0585098560, the

Department assessed Taxpayer $681.73 in gross receipts tax, $136.35 in penalty, and $71.59 in

interest for the CRS reporting period ending December 31, 2009. [Department Ex. C].

5. On October 28, 2012, Taxpayer protested the Department’s assessments.

[Department Ex. D].

6. On November 6, 2012, the Department acknowledged receipt of Taxpayer’s

protest. [Department Ex. E].

7. In 2008 and 2009, Taxpayer was self employed. Taxpayer sold firewood, fruit,

vegetables, and arts/crafts at roadside locations throughout Rio Arriba County, New Mexico.

During that period, Taxpayer also performed occasional baby-sitting services.

8. Taxpayer was unaware of her gross receipts tax obligations in 2008 and 2009.

9. In 2008 and 2009, Taxpayer did not consult with the Department, any tax

professional, or any other person about her potential gross receipts tax obligations on her self-

employed business receipts.

10. In 2008 and 2009, Taxpayer was not registered as a business with the Department,

did not have a CRS identification number, and did not prepare CRS returns or pay gross receipts

taxes.

11. At the protest hearing, Taxpayer acknowledged she was liable for the assessed

gross receipts tax in 2008 and 2009. In light of this concession, the protest was limited to the

penalty and interest portions of the assessments.

In the Matter of the Protest of Pauline Gee, page 2 of 9

12. In not submitting gross receipts tax in 2008 and 2009, Taxpayer was negligent

through her inattention and indifference.

13. Taxpayer did not demonstrate that her failure to pay gross receipts resulted from a

mistake of law made in good faith and on reasonable grounds or any of the nonnegligence factors

that would allow for the abatement of penalty.

14. Since receiving the assessments, Taxpayer has consulted with her brother, whom

also operates a small business as a construction contractor, about her gross receipts tax

obligations.

15. As of the date of hearing, Taxpayer owed $851.22 in 2008 gross receipts tax,

$170.24 in penalty, and $140.82 in interest for a total of $1,162.35. For tax year 2009, Taxpayer

owed $681.73 in gross receipts tax, $136.35 in penalty, and $81.66 in interest for a total of

$899.80. Taxpayer’s total outstanding liability as of the date of hearing was $2,062.15.

[Department Ex. H].

DISCUSSION

Taxpayer conceded at the hearing that she was liable for the assessed gross receipts taxes

for the 2008 and 2009 assessments. Taxpayer argued that the assessed penalty and interest be

abated because she was unaware at the time of her gross receipts tax obligations and because of

financial hardships that the penalty and interest imposed on her small business.

Under NMSA 1978, Section 7-1-17(C) (2007), the assessments of taxes issued in this

case are presumed to be correct. By definition, under NMSA 1978, Section 7-1-3(X) (2009),

“tax” includes the amount of interest and penalty relating to the imposed tax. Consequently, the

presumption of correctness includes the assessment of penalty and interest. See Regulation

3.1.6.13 NMAC (01/15/01); See also, Tiffany Constr. Co. v. Bureau of Revenue, 90 N.M. 16, 17,

In the Matter of the Protest of Pauline Gee, page 3 of 9
558 P.2d 1155, 1156 (N.M. Ct. App. 1976) (finding that the presumption of correctness attached to

the assessment of civil negligence penalty). Accordingly, it is Taxpayer’s burden to present

evidence and legal argument to show that Taxpayer is entitled to abatement, in full or in part, of

the assessments issued against her. See TPL, Inc. v. Taxation and Revenue Dep’t, 2000-NMCA-

083, ¶8, 129 N.M. 539, 542, 10 P.3d 863, 866, cert. granted, 129 N.M. 519, 10 P.3d 843, rev’d

on other grounds, 2003-NMSC-7, 133 N.M. 447, 64 P.3d, 474. Taxpayer has the burden to

overcome the assessments. See Archuleta v. O'Cheskey, 84 N.M. 428, 431, 504 P.2d 638, 641 (NM

Ct. App. 1972). When a taxpayer presents sufficient evidence to rebut the presumption, the

burden shifts to the Department to show that the assessments are correct. See MPC Ltd. v. N.M.

Taxation and Revenue Dep’t., 2003-NMCA-021, ¶ 13, 133 N.M. 217, 219-220, 62 P.3d 308,

310-311; Grogan v. New Mexico Taxation and Revenue Dep’t, 133 N.M. 354, 357-58, 62 P.3d

1236, 1239-40 (2002).

Although Taxpayer conceded the gross receipts tax issue, a brief discussion of the Gross

Receipts and Compensating Tax Act (NMSA 1978, Section 7-9-1 et seq.) is warranted given some

of Taxpayer’s later questioning of the Department’s witness, Protest Auditor Andrick Tsabetsaye.

For the privilege in engaging in business, New Mexico imposes a gross receipts tax on the receipts

of any person engaged in business. See NMSA 1978, Section 7-9-4 (2002). NMSA 1978, Section

7-9-3.3 (2003) defines “engaging in business” as “carrying on or causing to be carried on any

activity with the purpose of direct or indirect benefit.” Absent a specific exemption or deduction,

gross receipts tax is imposed both the on the proceeds of the selling of tangible personal property

and from selling a service. See NMSA 1978, Section 7-9-3.5 (2007). Under the Gross Receipts

and Compensating Tax Act, there is a statutory presumption that all receipts of a person engaged in

business are taxable. See NMSA 1978, Section 7-9-5 (2002).

In the Matter of the Protest of Pauline Gee, page 4 of 9
In this case, Taxpayer was engaged in the business of selling tangible personal property in

the form of firewood, fruit, and miscellaneous arts and crafts in 2008 and 2009. Taxpayer also

performed babysitting services during that period. Taxpayer derived a direct benefit from the sale of

products and babysitting services. Under the Gross Receipts and Compensating Tax, as discussed

above, all of Taxpayer’s receipts from these sales and services in 2008 and 2009 were subject to

gross receipts tax. Therefore, even if she was unaware of her gross receipts tax liabilities at the time,

Taxpayer properly conceded that she was liable for the assessed gross receipts tax in 2008 and 2009.

Turning to the assessment of interest, when a taxpayer fails to make timely payment of

taxes due to the state, “interest shall be paid to the state on that amount from the first day

following the day on which the tax becomes due...until it is paid.” NMSA 1978, Section 7-1-67

(2007) (italics for emphasis). Under the statute, the Department has no discretion in the

imposition of interest, as the statutory use of the word “shall” makes the imposition of interest

mandatory. See State v. Lujan, 90 N.M. 103, 105, 560 P.2d 167, 169 (1977) (finding that the

Legislature’s choice of the words “shall” or “must” in a statute makes application of that statute

mandatory rather than discretionary). The language of the statute also makes it clear that interest

begins to run from the original due date of the tax and continues until the tax principal is paid in full.

Regardless of the reason why Taxpayer did not pay her gross receipts taxes in 2008 and 2009, the

Department has no discretion under NMSA 1978, § 7-1-67 (2007) and must assess interest against

Taxpayer from the time the tax was due but not paid until such time as the tax is paid.

Taxpayer also indicated in testimony during the hearing that she believed filing a protest

stopped the accrual of interest pending the outcome of the protest. While NMSA 1978, § 7-1-67

(2007) does allow the tolling of interest in limited circumstances not applicable to this protest,

nothing in that statute allows for the tolling of accrual of interest pending a protest. In the

In the Matter of the Protest of Pauline Gee, page 5 of 9
Department’s November 6, 2012 acknowledgement of protest letter (admitted into the record as

Department Ex. E), the Department informed Taxpayer that both interest and penalty would

continue to accrue during the protest. The Department further informed Taxpayer that she could

stop the accrual of interest and penalty by paying the assessed tax principal and claiming a

refund for any amounts later resolved in her favor because of her protest. Because the tax

principal was not paid, interest continues to accrue under NMSA 1978, § 7-1-67 (2007)

throughout the protest process.

Taxpayer also argued for the abatement of penalty. When a taxpayer fails to pay taxes due

to the State because of negligence or disregard of rules and regulations, but without intent to

evade or defeat a tax, NMSA 1978 Section 7-1-69 (2007) requires that

there shall be added to the amount assessed a penalty in an amount equal
to the greater of: (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 twenty percent of the tax due but not paid. (italics
added for emphasis)

As discussed above, the statute’s use of the word “shall” makes the imposition of penalty

mandatory in all instances where a taxpayer’s actions or inactions meets the legal definition of

“negligence” even if a taxpayer’s actions or inactions were unintentional.

Regulation 3.1.11.10 NMAC (1/15/01) defines negligence in three separate ways: (A)

“failure to exercise that degree of ordinary business care and prudence which reasonable taxpayers

would exercise under like circumstances;” (B) “inaction by taxpayer where action is required”; or

(C) “inadvertence, indifference, thoughtlessness, carelessness, erroneous belief or inattention.”

See Chevron U.S.A., Inc. v. State ex rel. Dep't of Taxation & Revenue, 139 N.M. 498, 503, 2006

NMCA 50, 16, 134 P.3d 785, 790 (N.M. Ct. App. 2006) (Department regulations interpreting a

statute are presumed proper and are to be given substantial weight). Inadvertent error meets the legal

In the Matter of the Protest of Pauline Gee, page 6 of 9
definition of “negligence” under the penalty statute. See El Centro Villa Nursing Center v. Taxation

and Revenue Department, 108 N.M. 795, 799, 779 P.2d 982, 986 (Ct. App. 1989).

There is no evidence that Taxpayer made any effort in 2008 or 2009 to consult with the

Department, a tax professional, or any other source about her potential tax liabilities on her small

business income1. While Taxpayer may not have been aware of the gross receipts tax

requirements in 2008 and 2009, that lack of knowledge meets the definition of negligence under

Regulation 3.1.11.10 (C) NMAC (1/15/01) because it demonstrates “inattention” or “indifference.”

Moreover, under New Mexico's self-reporting tax system, every person is charged with the

reasonable duty to ascertain the possible tax consequences of his or her actions. See Tiffany

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

cert. denied, 90 N.M. 255, 561 P.2d 1348 (1977). Under Tiffany Construction Co., failure to do

reasonable research into what the tax law requires meets the definition of negligence. See id.

Without making reasonable efforts to research the matter or consult with a tax professional,

Taxpayer cannot show that her failure to pay gross receipts resulted from a good faith mistake of

law on reasonable grounds. See NMSA 1978, § 7-1-69 (B) (2007) (allowing for abatement of

penalty only upon a showing of mistake of law made in good faith and on reasonable grounds).

Taxpayer also did not establish any of the non-negligence factors under Regulation 3.1.11.11

NMAC (01/15/01) that might allow the abatement of penalty. Consequently, because Taxpayer

was negligent in failing to pay gross receipts tax when due, the Department lacks authority to abate

penalty and instead must assess civil penalty under NMSA 1978, § 7-1-69 (2007).

In summary, the Department’s assessments of 2008 and 2009 gross receipts taxes, penalty,

and interest were legally required. Taxpayer’s financial hardships in paying the assessments is not

1
Since receiving the assessments, Taxpayer has consulted with her brother, whom is a construction contractor
operating his own small business. However, that consultation occurred three-years after the relevant period and
therefore is not relevant to the civil penalty analysis which focuses on a taxpayer’s failure to pay a tax when due.

In the Matter of the Protest of Pauline Gee, page 7 of 9
grounds for the Department to abate any portion of the assessments under Regulation 3.1.6.14

NMAC (01/15/01). As discussed extensively at the hearing, Taxpayer is always free to attempt to

arrange a payment plan for the assessed taxes, penalty, and interest. Indeed, Mr. Tsabetsaye

indicated at the hearing that he could assist Taxpayer in starting the process of setting up a

payment plan.

CONCLUSIONS OF LAW

A. Taxpayer filed a timely, written protest to the assessments. Jurisdiction lies over the

parties and the subject matter of this protest.

B. Taxpayer conceded liability for the assessed 2008 and 2009 gross receipts taxes. In

those years, Taxpayer was a person engaged in business under NMSA 1978, § 7-9-3.3 (2003) and

Taxpayer had gross receipts from her sale of tangible personal property and from her sale of

babysitting services presumed subject to gross receipts tax under NMSA 1978, Section 7-9-5

(2002).

C. Under NMSA 1978, § 7-1-67 (2007), Taxpayer is liable for accrued interest under

the assessments. Interest continues to accrue until the tax principal is satisfied.

D. Under Regulation 3.1.11.10 (C) NMAC (1/15/01), Taxpayer was negligent and

thus liable for civil penalty pursuant to NMSA 1978, § 7-1-69 (2007). See Tiffany Construction

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

E. Under Regulation 3.1.6.14 NMAC (01/15/01), entitled to substantial weight under

Chevron U.S.A., Inc. v. State ex rel. Dep't of Taxation & Revenue, 139 N.M. 498, 503, 2006 NMCA

50, 16, 134 P.3d 785, 790 (N.M. Ct. App. 2006), the Department may not abate otherwise legally

required assessments based on Taxpayer’s inability to pay.

In the Matter of the Protest of Pauline Gee, page 8 of 9
For the foregoing reasons, the Taxpayer's protest IS DENIED. For tax year 2008,

Taxpayer owes $851.22 in gross receipts tax, $170.24 in penalty, and $140.82 in interest (as

calculated as of the date of hearing). For tax year 2009, Taxpayer owes $681.73 in gross receipts

tax, $136.35 in penalty, and $81.66 in interest (as calculated as of the date of hearing). Pursuant

to NMSA 1978, Section 7-1-67 (2007), interest continues to accrue until tax principal is paid.

DATED: April 11, 2013.

Brian VanDenzen, Esq.
Tax Hearing Officer
Taxation & Revenue Department
Post Office Box 630
Santa Fe, NM 87504-0630

In the Matter of the Protest of Pauline Gee, page 9 of 9