Did a prior no-exception audit and alleged oral advice excuse a cigar retailer from tobacco products tax on purchases from unregistered out-of-state vendors?

Plain-English summary

Santa Fe Cigar Co. owed tobacco products tax as the first New Mexico purchaser of cigars and other tobacco products acquired from unregistered out-of-state vendors. A prior audit finding the company “in compliance” did not say the tax was inapplicable, and alleged oral advice could not override the audit's contrary written explanation.

The Department assessed $136,587.61 of tobacco products tax for May 2006 through December 2009. By the hearing, interest had grown to $38,605.71, producing a $175,193.36 outstanding balance.

No penalty was assessed because the Department recognized confusion stemming from an earlier audit.

The retailer was the first purchaser

Under the law applied in the decision, New Mexico imposed tobacco products tax at 25 percent of value on the first purchaser. A first purchaser included a New Mexico business receiving tobacco products from an out-of-state person for distribution in New Mexico.

Santa Fe Cigar purchased from vendors that were not registered New Mexico distributors and had not already paid the tax. The retailer therefore became the first purchaser and owed the tax.

“In compliance” did not mean exempt

A 2006 audit reviewed tobacco products tax and cigarette excise tax and found no exceptions. Santa Fe Cigar interpreted that result—and conversations with auditors—to mean it could drop its tobacco-products registration and stop filing and paying.

But the audit narrative said the opposite. It explained that registered vendor Phillips & King was the first purchaser for its products, while Santa Fe Cigar was the first purchaser responsible for tax on General Cigar and Altadis USA purchases. The company was “in compliance” because it had paid the tax correctly, not because the tax did not apply.

The business made no substantial change to its practices after the audit, so continued purchases from unregistered vendors remained taxable.

Alleged oral advice did not create estoppel

Santa Fe Cigar said auditors verbally told its owner to stop reporting and paying. The precise statements were unclear and conflicted with the written audit narrative.

Section 7-1-60's statutory estoppel required conduct in accordance with a regulation or a written ruling personally addressed by the Secretary. The audit narrative did not support nonpayment.

Equitable estoppel was also unavailable in the administrative forum and, in any event, required reasonable reliance. It was not reasonable to rely on alleged oral statements that directly contradicted the written audit explanation. The company had a duty to seek clarification before ending its registration and filings.

The earlier refund claim could not offset this audit

After the 2006 audit, Santa Fe Cigar filed a refund claim for tax paid during that earlier period. The Department did not act, and the company did not protest the inaction or file a civil action.

Section 7-1-26(F) allowed an overpayment to offset an underpayment within one multi-period audit. It did not authorize offsets between two separate audits covering different periods.

The refund limitations period had also expired, leaving the Department without authority to consider or apply that claim.

Result: protest DENIED. Santa Fe Cigar owed $136,587.61 tax and $38,605.71 interest, totaling $175,193.36, with interest continuing until the principal was paid. No penalty applied.

What this means for you

Tobacco retailers

Confirm whether each supplier is registered and has already borne the New Mexico tax. A retailer receiving products from an unregistered out-of-state vendor may become the first purchaser.

Businesses relying on audit results

Read the narrative, not only the “no exceptions” conclusion. Compliance can mean that the business paid correctly; it does not necessarily mean the tax is inapplicable.

Taxpayers with unresolved refund claims

Act on Department inaction before the limitations period expires. A dormant refund claim from one audit may not offset a later assessment from another audit.

Common questions

Q: Why was Santa Fe Cigar taxed but one supplier was not?
A: Phillips & King was registered and was treated as the first purchaser. For unregistered out-of-state vendors, Santa Fe Cigar became the first purchaser.

Q: Did the 2006 audit say the company could stop filing?
A: No. Its written narrative expressly said the company was responsible for tax on purchases from unregistered vendors.

Q: Why was there no penalty?
A: The later auditor recommended none because the earlier audit and alleged conversations had created confusion while the company continued using some of the same suppliers.

Q: Could the old refund claim reduce the assessment?
A: No. It involved a different audit period, was not timely pursued, and its limitations period had expired.

Citations and references

Statutes:

• NMSA 1978, §§ 7-12A-2(D), 7-12A-3(A), (C), and 7-12A-7 — first purchaser, tobacco products tax, and registration
• NMSA 1978, § 7-1-60 — statutory estoppel based on a written ruling
• NMSA 1978, § 7-1-26(F) — offsetting overpayments and underpayments within an audit
• NMSA 1978, §§ 7-1-17 and 7-1-3 — assessment presumption and definition of tax

Cases cited:

• Kilmer v. Goodwin, 2004-NMCA-122 — oral statements, estoppel, and untimely refund relief
• AA Oilfield Service v. New Mexico State Corporation Commission, 1994-NMSC-085 — administrative agencies lack equitable-remedy authority
• Tiffany Construction Co. v. Bureau of Revenue, 1976-NMCA-127 — duty to determine tax consequences

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Santa Fe Cigar Co.
• Decision PDF: D&O 14-28

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
SANTA FE CIGAR CO. No. 14-28
TO ASSESSMENT ISSUED UNDER LETTER
ID NO. L0092660288

DECISION AND ORDER

A protest hearing occurred on the above captioned matter on June 9, 2014, before Brian

VanDenzen, Esq., Hearing Officer, in Santa Fe. Mr. James Day, former owner of Santa Fe Cigar,

Co. (“Taxpayer”) appeared pro se, although Attorney Ralph Scheuer did not file a withdrawal of

representation listing a new contact address for Taxpayer and therefore remained attorney of

record. Staff Attorney Elena Romero Morgan appeared representing the State of New Mexico,

Taxation and Revenue Department (“Department”). Protest Auditor Andrick Tsabetsaye and

Auditor Steve Duran appeared as witnesses for the Department. Department Exhibits A-C were

admitted into the record, as described more thoroughly in the Administrative Protest Hearing

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

ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. On November 30, 2010, the Department assessed Taxpayer for $136,587.61 in

tobacco products tax, $0.00 in penalty, and $23,367.78 in interest for a then total assessment of

$159,955.39 for the reporting periods between May 31, 2006, and December 31, 2009. [Letter id.

no. L0092660288].

2. On December 29, 2010, Taxpayer requested an extension of time in which to file

a protest.

3. On January 10, 2011, the Department granted Taxpayer an extension in which to

file a protest, until February 28, 2011.

4. On February 28, 2011, Taxpayer protested the Department’s assessment.

5. On March 11, 2011, the Department acknowledged receipt of Taxpayer’s protest.

6. On January 3, 2014, the Department requested a hearing in this matter with the

Hearings Bureau.

7. On January 6, 2014, the Hearings Bureau sent Notice of Administrative Hearing,

scheduling this matter for a hearing on June 9, 2014.

8. On November 14, 2005, the Department selected Taxpayer for an audit. That

audit encompassed the period of January 1, 2003 through April 30, 2006. This audit was

completed on July 14, 2006 (hereinafter referred to as the July 14, 2006 audit). [Department Ex.

A].

9. In the July 14, 2006, audit, the auditors looked both at Taxpayer’s compliance

under the Tobacco Products Tax and under the Cigarette Excise Tax. [Department Ex. A].

10. For Tobacco Products Tax, in the July 14, 2006 audit, the auditors concluded that

Taxpayer was in compliance with its Tobacco Products Tax obligations.[Department Ex. A].

11. Despite being in compliance with its Tobacco Products Tax obligations in the July

14, 2006 audit, the auditors noted that since one of the three vendors they reviewed, Phillips &

King, was registered with the Department, Phillips & King was the first purchaser and liable for

the Tobacco Products Tax, not Taxpayer. The auditors noted that Taxpayer was paying the

appropriate tax on purchases from General Cigar and Altadis USA. [Department Ex. A].

In the Matter of the Protest of Santa Fe Cigar Co., page 2 of 11

12. In the July 14, 2006, audit, the auditors concluded the section on the Tobacco

Products Tax in bold print, stating that “[s]ince General Tobacco and Altadis USA are not

registered distributors, [Taxpayer] is considered the ‘first purchaser’ and, therefore, responsible

for the tobacco tax.” [Department Ex. A].

13. For Cigarette Excise Tax, in the July 14, 2006, audit, the auditors concluded that

Taxpayer was in compliance and no exceptions were found.[Department Ex. A].

14. In speaking with the Department’s auditors and as a result of seeing no exceptions

noted in the July 16, 2006, audit narrative, Mr. Day concluded that Taxpayer no longer needed to

file or pay Tobacco Products Tax.

15. Taxpayer dropped its Tobacco Products Tax registration with the Department and

did not report or pay Tobacco Products Tax beginning in the May 1, 2006, reporting period.

[Department Ex. B].

16. After the July 16, 2006 audit, Taxpayer claimed a refund for the payment of

Tobacco Products Tax during the audit period.

17. The Department took no action on Taxpayer’s claim for refund and Taxpayer

neither filed a protest or commenced a civil action against the Department for that inaction.

18. Taxpayer made no substantial changes to its business practices after completion

of the Department’s July 14, 2006 audit.

19. On February 24, 2010, the Department selected Taxpayer for an audit from May

1, 2006 through December 31, 2009. Department auditor Steve Duran conducted this audit. The

Department completed the audit on August 4, 2010 (hereinafter referred to August 4, 2010

audit). [Department Ex. B].

In the Matter of the Protest of Santa Fe Cigar Co., page 3 of 11

20. The August 4, 2010 audit determined that Taxpayer was purchasing tobacco

products from purchasers not registered with the Department, and therefore Taxpayer was the

first purchaser of the tobacco products in New Mexico and liable for payment of Tobacco

Products Tax. [Department Ex. B].

21. Steve Duran recommended that no penalty be imposed against Taxpayer because

Taxpayer showed during the audit that it was purchasing tobacco products from some of the

same suppliers during the August 4, 2010 audit period as during the previous July 16, 2006 audit

where the Department found no exceptions. [Department Ex. B].

22. As a result of the August 4, 2010 audit, the Department issued its November 30,

2010 assessment to Taxpayer without imposing a penalty.

23. As of the date of hearing, Taxpayer owed $136,587.61 in Tobacco Products Tax

and $38, 605.71 in interest for a total outstanding liability of $175,193.36. [Department Ex. C].

DISCUSSION

There are three main issues at protest in this matter. The first issue is whether Taxpayer

was liable for the assessed Tobacco Products Tax. The second issue is whether Taxpayer is

entitled to the abatement of the assessment either because of the written information contained in

the Department’s July 14, 2006 audit narrative or because of alleged verbal assurances of the

Department auditors that Taxpayer was no longer required to pay and file Tobacco Products Tax

returns. The final issue is whether Taxpayer may apply its previously claimed refund against the

assessed tax liability.

Presumption of Correctness.

Under NMSA 1978, Section 7-1-17(C) (2007), the assessment of tax issued in this case is

presumed correct. Unless otherwise specified, for the purposes of the Tax Administration Act,

In the Matter of the Protest of Santa Fe Cigar Co., page 4 of 11
“tax” is defined to include interest and civil penalty. See NMSA 1978, §7-1-3 (X) (2013).Under

Regulation 3.1.6.13 NMAC, the presumption of correctness under Section 7-1-17 (C) extends to

the Department’s assessment of penalty and interest. See Chevron U.S.A., Inc. v. State ex rel. Dep't

of Taxation & Revenue, 2006-NMCA-50, ¶16, 139 N.M. 498, 503 (agency regulations interpreting

a statute are presumed proper and are to be given substantial weight). Taxpayer has the burden to

overcome the assessment. See Archuleta v. O'Cheskey, 1972-NMCA-165, ¶11, 84 N.M. 428, 431.

However, once a taxpayer rebuts the presumption of correctness, the burden shifts to the

Department to show the correctness of the assessed tax. See MPC Ltd. v. N.M. Taxation & Revenue

Dep't, 2003 NMCA 21, ¶13, 133 N.M. 217.

Tobacco Products Tax

Under the Tobacco Products Tax, New Mexico imposes an excise tax of 25% of the value of

tobacco products on tobacco products manufactured or acquired in New Mexico. See NMSA 1978,

§ 7-12A-3 (A) (2009). The Tobacco Products Tax is imposed upon the first purchaser of the tobacco

product. See § 7-12A-3 (C). For the purposes of the Tobacco Products Tax Act, the first purchaser

is “a person engaging in business in New Mexico who manufactures tobacco products or who

purchases or receives on consignment tobacco products from any person outside of New Mexico,

which tobacco products are to be distributed in New Mexico in the ordinary course of business.”

NMSA 1978, § 7-12A-2 (D) (2009). Under NMSA 1978, Section 7-12A-7 (1986), sellers of

tobacco products in New Mexico are required to register with the Department.

In this case, Taxpayer purchased and sold tobacco products in New Mexico. Taxpayer

bought tobacco products from out-of-state vendors not registered in New Mexico, vendors that had

not previously paid the Tobacco Products Tax for the purchased tobacco products. Consequently,

Taxpayer was the first purchaser and subject to Tobacco Products Tax under Section 7-12A-3.

In the Matter of the Protest of Santa Fe Cigar Co., page 5 of 11
Taxpayer found it unfair that he could be found liable for Tobacco Products Tax in the

August 4, 2010 audit since his business practices did not change from the July 16, 2006 audit to the

August 4, 2010 audit (an argument that will be addressed in greater detail below). While Taxpayer

believed the July 16, 2006 audit had established he was not liable for Tobacco Products Tax, that

July 16, 2006 audit narrative clearly articulated that he was in fact liable for Tobacco Products Tax

from two of the three vendors mentioned in the audit, General Cigar and Altadis USA. Taxpayer

further over read the auditors’ conclusion in the audit narrative that Taxpayer was in compliance

with its Tobacco Products Tax obligations. What that means is that the auditors did not find any

additional outstanding tax liability beyond what Taxpayer had already paid, which included

payment of Tobacco Products Tax. Being in compliance with one’s tax obligations is far different

than stating that the tax is inapplicable. It follows then that even if Taxpayer’s business practice

remained identical, that Taxpayer would continue to be liable for the Tobacco Products Tax for

tobacco products purchased from General Cigar and Altadis USA, both of which were noted as

taxable in the July 16, 2006 audit narrative.

Taxpayer’s Fairness Argument.

Taxpayer argued that the assessment of Tobacco Products Tax in this matter should be

abated because its business practices remained the same as found in the July 16, 2006 audit.

Taxpayer argued that it only stopped reporting and paying Tobacco Products Tax after the

Department’s July 16, 2006 audit indicated that Taxpayer had no taxable exceptions and after

Department employees directed Taxpayer to stop reporting and paying Tobacco Products Tax.

Taxpayer’s argument essentially constitutes an argument for estoppel and equitable relief.

NMSA 7-1-60 (1993) establishes statutory estoppel in certain circumstances. In pertinent

part, under Section 7-1-60, the Department is estopped from acting when a taxpayer’s actions

In the Matter of the Protest of Santa Fe Cigar Co., page 6 of 11
were “in accordance with any regulation effective during the time the asserted liability for tax

arose or in accordance with any ruling addressed to the party personally and in writing by the

secretary…”

Taxpayer’s argument also amounts to a claim for equitable estoppel. Equitable estoppel

does not appear to be a possible remedy in an administrative protest hearing before the

Department. See AA Oilfield Service v. New Mexico State Corporation Commission, 1994-

NMSC-085, ¶18, 118 N.M. 273 (equitable remedies are not part of the “quasi-judicial” powers of

administrative agencies). Even if it is available in this context, courts are reluctant to apply the

doctrine of equitable estoppel against the state in cases involving the assessment and collection of

taxes. See Taxation & Revenue Dep’t v. Bien Mur Indian Mkt. Ctr., Inc., 1989-NMSC-015, ¶9, 108

N.M. 22. In such cases, estoppel applies only pursuant to statute or when “right and justice demand

it.” Bien Mur Indian Market, ¶9. Oral statements not reduced to writing are generally not grounds

to grant equitable estoppel. See Kilmer v. Goodwin, 2004-NMCA-122, ¶28, 136 N.M. 440.

Estoppel cannot lie against the state when the act sought would be contrary to the requirements

expressed by statute. See Rainaldi v. Public Employees Retirement Board, 1993-NMSC-028,

¶18-19, 115 N.M. 650.

Under Kilmer, ¶26 (internal citations omitted), in order for a taxpayer to establish an

equitable estoppel claim against the Department, a taxpayer must show that

(1) the government knew the facts; (2) the government intended its
conduct to be acted upon or so acted that plaintiffs had the right to believe
it was so intended; (3) plaintiffs must have been ignorant of the true facts;
and (4) plaintiffs reasonably relied on the government's conduct to their
injury.

The claimant must also show “affirmative misconduct on the part of the government.” id., ¶27

(internal citations omitted).

In the Matter of the Protest of Santa Fe Cigar Co., page 7 of 11
Neither statutory estoppel under Section 7-1-60 or equitable estoppel under the case law

grant Taxpayer any relief in this circumstance. Taxpayer had a written document from the July 16,

2006 audit narrative that made clear in bold print that Taxpayer was the first purchaser subject to

New Mexico’s Tobacco Products Tax: “Since General Tobacco and Altadis USA are not registered

distributors, [Taxpayer] is considered the ‘first’ purchaser and, therefore, responsible for tobacco

tax.” It is difficult to read this clear statement in the audit narrative in a manner that would support

Taxpayer’s assertion that it was no longer required to file or pay Tobacco Products Tax after the

July 16, 2006 audit. Respectfully, the language of the audit narrative is opposite of Taxpayer’s

beliefs about the July 16, 2006 audit conclusion. As such, it was not reasonable for Taxpayer to rely

on the audit narrative to conclude that it could drop its registration with the Department and stop

reporting and paying Tobacco Products Tax. Since Taxpayer’s actions were not in reasonable

reliance of a written statement that Taxpayer was not liable for Tobacco Products Tax, statutory

estoppel under Section 7-1-60 and equitable estoppel under Kilmer, ¶26, do not apply.

Taxpayer argues that during and shortly after the audit, the Department auditors verbally

directed Mr. Day to stop reporting and paying Tobacco Products Tax. The evidence is unclear

exactly what the Department auditors told Mr. Day during the audit or shortly thereafter, especially

because the audit narrative itself written by the same auditors makes clear that Taxpayer was liable

for Tobacco Products Tax, contradicting the alleged oral statements. However, Mr. Day apparently

relied on the statements of the auditors to claim a refund, to drop Taxpayer’s state registration for

the sale of tobacco products, and to stop filing and paying of Tobacco Products Tax.

Again, oral statements not reduced to writing are generally not grounds to grant equitable

estoppel. See Kilmer, ¶2. This seems particularly true in an instance where the Department

auditors directed a written statement to Taxpayer that contradicts their apparent oral statements

In the Matter of the Protest of Santa Fe Cigar Co., page 8 of 11
to Taxpayer. At the very least, given the conflicting written statement and oral directions from

the Department auditors, Taxpayer could not reasonably rely on the Department’s auditors oral

statements under the last prong of the equitable estoppel analysis in Kilmer, ¶26. 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. Tiffany Construction Co. v. Bureau of

Revenue, 1976-NMCA-127, ¶5, 90 N.M. 16. In light of this contradiction between the auditors’

written audit narrative and the same auditors’ apparent oral statements, Taxpayer had an

obligation to independently verify whether it was appropriate to drop its registration with the

Department, stop reporting, and stop paying Tobacco Products Tax. There is no evidence that

Taxpayer took any action to consult with a tax professional to clarify Taxpayer’s Tobacco

Products Tax obligations. There are no estoppel grounds to abate the assessment based on the

Department auditors’ oral statements to Taxpayer.

However, in recognition of the confusion that stemmed from the July 16, 2006 audit, the

Department did not assess Taxpayer a 20% civil negligence penalty.

Claim for Refund.

In Taxpayer’s protest letter, Taxpayer asked that its outstanding claim for refund stemming

from the July 16, 2006 audit offset any liability under the assessment. However, at the hearing,

Taxpayer presented little evidence related to the claim for refund other than that after the July 16,

2006 audit, Taxpayer claimed a refund, never received a refund from the Department, and never

filed a protest or civil action to contest the Department’s inaction on the claim for refund. There is

no evidence establishing a timeline on the claim for refund or the Department’s failure to act to

grant or deny the claim.

In the Matter of the Protest of Santa Fe Cigar Co., page 9 of 11
NMSA 1978, Section 7-1-26 (F) (2013) establishes that a taxpayer under an audit for

multiple periods may offset the overpayment of one period against the underpayment of tax in

another period of the audit. However, Section 7-1-26 (F) is addressing multiple reporting periods

within one audit, not multiple audits that covered different reporting periods. Since Taxpayer’s

assessed tax liability came from a different audit with a different audit period than the July 16,

2006 audit covered, Taxpayer’s claim related to the July 16, 2006 audit has no ability under

Section 7-1-26 (F) to offset the assessed liability. Moreover, since Taxpayer took no action to

protest or file a civil action against the Department’s inaction on the claim for refund, and the

statute of limitations on a claim for refund related to the July 16, 2006 audit has long since

expired, the Department also has no ability to consider Taxpayer’s refund claim or apply it to the

assessed outstanding tax liability. See Kilmer, ¶19-24.

CONCLUSIONS OF LAW

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

parties and the subject matter of this protest.

B. As the first purchaser of tobacco products in New Mexico, Taxpayer was liable for

the payment of Tobacco Products Tax under Section 7-12A-3.

C. Taxpayer is not entitled to statutory estoppel under Section 7-1-60 because the

written audit narrative addressed to Taxpayer indicated that Taxpayer was subject to Tobacco

Products Tax.

D. Taxpayer is not entitled to equitable estoppel under Kilmer v. Goodwin, 2004-

NMCA-122, ¶26, 136 N.M. 440 because it was not reasonable to rely on the alleged oral

statements of the Department auditors given that the written audit narrative prepared by those

auditors and addressed to Taxpayer indicated that Taxpayer was subject to Tobacco Products Tax.

In the Matter of the Protest of Santa Fe Cigar Co., page 10 of 11
E. Since the two separate audits encompassed two separate reporting periods, since

Taxpayer did not establish it timely confronted the Department’s inaction on Taxpayer’s claim for

refund, and since the statute of limitations on Taxpayer’s claim for refund has long since expired,

the Department is without authority under Section 7-1-26 to consider Taxpayer’s claim for refund.

For the foregoing reasons, Taxpayer’ protest IS DENIED. As of the date of hearing,

Taxpayer owed $136,587.61 in Tobacco Products Tax and $38,605.71 in interest for a total

outstanding liability of $175,193.36. Interest continues to accrue until the tax principal is satisfied.

DATED: July 7, 2014.

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

In the Matter of the Protest of Santa Fe Cigar Co., page 11 of 11