Could a commission-paid nail technician avoid gross receipts tax as an employee or claim a resale deduction using NTTCs issued after the audit deadline?

Plain-English summary

Kevin Pham owed gross receipts tax on commission income from manicure services because he did not prove he was a salon employee and his resale certificates were late. The AHO upheld $5,584.28 of tax, penalty, and interest outstanding at the hearing.

Pham operated as Pro Nails and performed manicures for two separate businesses, Professional Nails and Fantacy Nails Salon, from 2008 through 2011. The salons paid him by weekly commission checks and issued Forms 1099. Pham reported the income on federal Schedule C but did not report or pay corresponding New Mexico gross receipts tax.

The evidence did not establish employee status

Section 7-9-17 exempted employee wages from gross receipts tax. Regulation 3.2.105.7 required the Department to examine wage or salary payment, withholding, FICA, workers' compensation, unemployment contributions, the payer's classification, and control over the work.

The decision found that none of those indicators supported Pham's claim. He received commissions rather than wages or salary, the salons withheld no tax, provided no workers' compensation or unemployment coverage, and issued Forms 1099. Pham set his own hours, and there was no evidence that either salon considered him an employee.

He therefore remained a person engaged in business whose service receipts were presumed taxable.

Resold services still required timely NTTCs

The AHO accepted that Pham performed manicure services for the salons to resell. But Section 7-9-48 conditioned the service-for-resale deduction on the buyer delivering a nontaxable transaction certificate.

The Department's February 21, 2014 audit notice gave Pham until April 22 to produce the certificates. Professional Nails executed a Type 5 NTTC on May 10—18 days late. Fantacy Nails did not execute its Type 5 NTTC until October 28, after both the deadline and the assessments.

Section 7-9-43 made the 60-day audit deadline mandatory. The AHO held that neither the Department nor the hearing officer had authority to grant the “third extension” Pham requested. Because both certificates were untimely, the deduction was disallowed.

Statements that the salons paid tax were not enough

Pham testified that both salon owners told him they had already paid gross receipts tax on his services. The owners did not testify, and he supplied no statements, returns, or other evidence showing payment.

Equitable recoupment also required inconsistent tax theories and a strict identity of interest. Pham established neither element. His hearsay testimony alone did not overcome the assessment.

Return-preparer involvement did not remove penalty

Pham used Bella Candelaria to prepare his personal income tax returns and believed she was a CPA, although the licensing record was inconclusive. He never discussed gross receipts tax with her and prepared his own CRS returns without professional advice.

The reasonable-accountant-reliance rule therefore did not apply. The AHO found civil negligence in his failure to obtain timely NTTCs or determine his reporting obligations. Interest was mandatory until the tax principal was paid.

Result: protest DENIED. At the hearing, Pham owed:

• 2008: $772.99 tax, $155.62 penalty, and $162.03 interest, totaling $1,090.64;
• 2009: $829.14 tax, $165.83 penalty, and $134.77 interest, totaling $1,129.74;
• 2010: $1,194.29 tax, $238.86 penalty, and $146.63 interest, totaling $1,579.78; and
• 2011: $1,386.46 tax, $277.30 penalty, and $120.36 interest, totaling $1,784.12.

The total outstanding liability was $5,584.28.

What this means for you

Nail technicians and salon professionals

Commission pay and working inside another business do not automatically make you an employee. Forms 1099, control over your own hours, lack of withholding, and absence of employment coverage can support independent-contractor treatment and gross receipts tax liability.

Service providers claiming resale deductions

Obtain the correct NTTC when the transaction occurs. If an audit gives you a 60-day second chance, a certificate executed after the deadline cannot support the deduction under the rule applied here.

Taxpayers relying on return preparers

Penalty relief requires advice on the specific tax issue after full disclosure. Having someone prepare personal income tax returns does not establish reliance for CRS or gross receipts tax matters that were never discussed.

Common questions

Q: Were Pham's manicure services actually resold by the salons?
A: Yes. The decision accepted that they were performed for resale, but the deduction still required timely NTTCs.

Q: How late was the Professional Nails certificate?
A: It was executed May 10, 2014, 18 days after the April 22 deadline.

Q: Could the Department grant another extension?
A: No. The AHO held that there was no statutory or regulatory authority for a third extension beyond the 60-day period.

Q: Did the salon owners' statements prove they paid the tax?
A: No. They did not testify, and Pham supplied no records confirming payment or the other equitable-recoupment elements.

Q: Why didn't his tax preparer excuse the penalty?
A: She prepared personal income tax returns, but Pham did not discuss gross receipts tax with her and prepared his CRS returns himself.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-9-3.3, 7-9-3.5, 7-9-4, and 7-9-5 — engaging in business, services, and gross receipts tax
• NMSA 1978, § 7-9-17 — employee wage exemption
• NMSA 1978, §§ 7-9-48 and 7-9-43 — service-for-resale deduction and NTTC deadline
• NMSA 1978, § 7-1-28(F) — equitable recoupment
• NMSA 1978, §§ 7-1-67 and 7-1-69 — interest and civil-negligence penalty
• Regulations 3.2.105.7(A)-(B) and 3.2.201.12(C) NMAC — employee factors and untimely NTTCs
• Regulations 3.1.11.10 and 3.1.11.11(D) NMAC — negligence and accountant-reliance relief

Cases cited:

• Proficient Food Co. v. New Mexico Taxation & Revenue Department, 1988-NMCA-042 — untimely NTTC as a valid basis to deny a deduction
• Teco Investments v. Taxation & Revenue Department, 1998-NMCA-055 — equitable-recoupment elements
• Tiffany Construction Co. v. Bureau of Revenue, 1976-NMCA-127 — duty to determine tax consequences
• El Centro Villa Nursing Center v. Taxation & Revenue Department, 1989-NMCA-070 — inadvertent error as negligence

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Kevin H. Pham dba Pro Nails
• Decision PDF: D&O 14-42

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
KEVIN H. PHAM d/b/a PRO NAILS No. 14-42
TO ASSESSMENT ISSUED UNDER LETTER
ID NO. L0486794192, L1560536016, L1023665104 and L2097406928

DECISION AND ORDER

A protest hearing occurred on the above captioned matter on November 17, 2014 before

Chief Hearing Officer Brian VanDenzen, Esq., in Santa Fe. Kevin Pham (“Taxpayer”) appeared

pro se. Staff Attorney Elena Morgan appeared representing the State of New Mexico, Taxation

and Revenue Department (“Department”). Protest Auditor Sonya Varela appeared as a witness

for the Department. Taxpayer Exhibits #1-2 and and Department Exhibits A-B were admitted

into the record, as described more thoroughly in the Administrative Protest Hearing Exhibit Log.

At direction of the undersigned hearing officer, on November 18, 2014 and after the conclusion

of the hearing, the Department submitted a spreadsheet of liabilities as of the date of hearing to

the Hearings Bureau and Taxpayer. Taxpayer did not object to the admission of this document,

which is admitted into the record as Department Exhibit C. Based on the evidence and arguments

presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. On June 6, 2014, the Department assessed Taxpayer for $778.11 in gross receipts

tax, $155.62 in penalty, and $155.99 in interest for a total assessment of $1,084.60 for the

combined reporting period ending on December 31, 2008. [Letter id. no. L0486794192].

2. On June 6, 2014, the Department assessed Taxpayer for $829.14 in gross receipts

tax, $165.83 in penalty, and $128.30 in interest for a total assessment of $1,123.27 for the

combined reporting period ending on December 31, 2009. [Letter id. no. L1560536016].

3. On June 6, 2014, the Department assessed Taxpayer for $1,194.29 in gross

receipts tax, $238.86 in penalty, and $137.30 in interest for a total assessment of $1,570.45 for

the combined reporting period ending on December 31, 2010. [Letter id. no. L1023665104].

4. On June 6, 2014, the Department assessed Taxpayer for $1,386.46 in gross

receipts tax, $277.30 in penalty, and $109.53 in interest for a total assessment of $1,773.29 for

the combined reporting period ending on December 31, 2011. [Letter id. no. L2097406928].

5. On or about July 29, 2014 (Taxpayer did not date the protest letter), Taxpayer

protested the Department’s assessments, asking for a third extension of time in which to obtain a

nontaxable transaction certificate (“NTTC”).

6. On August 19, 2014, the Department acknowledged receipt of Taxpayer’s protest.

7. The Hearings Bureau first learned of this matter when the Department requested a

hearing on October 2, 2014.

8. On October 6, 2014, within 90-days of the protest, the Hearings Bureau set this

matter for a hearing on November 17, 2014 and sent Notice of Administrative Hearing

accordingly.

9. During the relevant period, Taxpayer was a sole proprietorship doing business as

Pro Nails.

10. Taxpayer is a nail tech providing manicure services.

11. In 2008 through 2011, Taxpayer performed manicure services for Professional

Nails (which is a distinct entity from Taxpayer’s Pro Nails) and Fantacy Nails Salon for resale.

In the Matter of the Protest of Kevin Pham d/b/a Pro Nails, page 2 of 15

12. Taxpayer was paid commissions by both companies in the form of weekly checks.

13. Professional Nails and Fantacy Nails Salon did not withhold any taxes from

Taxpayer’s commission checks.

14. Taxpayer set his own hours with Professional Nails and Fantacy Nails.

15. Taxpayer was not covered by worker’s compensation insurance for the services

he provided to Professional Nails and Fantacy Nails.

16. Professional Nails and Fantacy Nails did not make contributions on Taxpayer’s

behalf to unemployment insurance.

17. Professional Nails and Fantacy Nails provided Taxpayer with Form 1099 for the

income he received from performing services during the relevant years.

18. The Department detected that Taxpayer had reported Schedule C income on his

federal returns but had not reported or paid corresponding gross receipts tax.

19. On February 2, 2014, because of the Schedule C income and gross receipts

discrepancy, the Department sent Taxpayer Notice of Limited Scope Audit Commencement to

Taxpayer. [Department Ex. A-1].

20. On February 21, 2014, the Department sent Taxpayer Notice of Limited Scope

Audit Commencement. The Notice of Limited Scope Audit Commencement advised Taxpayer

that he had 60-days, until April 22, 2014, to produce any nontaxable transaction certificate

(“NTTC or NTTCs”) necessary to support a claimed deduction. [Department Ex. B-1].

21. Taxpayer did not provide the Department with any NTTCs executed by the 60-

day deadline, April 22, 2014.

22. On May 10, 2014, Professional Nails executed a Type 5 NTTC to Taxpayer, 18-

days after the April 22, 2014 60-day NTTC deadline. [Taxpayer Ex. #1].

In the Matter of the Protest of Kevin Pham d/b/a Pro Nails, page 3 of 15

23. In the absence of supporting NTTCs or other documentation, the Department

issued its assessments referenced in findings #1-4 to Taxpayer on June 6, 2014.

24. On October 28, 2014, Fantacy Nail Salon executed a Type 5 NTTC to Taxpayer,

well after the April 22, 2014 60-day NTTC deadline and after the Department’s assessments.

[Taxpayer Ex. #1].

25. The Type 5 NTTCs that Taxpayer produced were not timely.

26. Taxpayer indicated that the owners of both Professional Nails and Fantacy Nails

informed him that they paid gross receipts taxes on the transactions for which Taxpayer provided

his services.

27. Taxpayer used a Bella Candelaria to prepare his personal income taxes. Taxpayer

believed that Ms. Candelaria was a CPA. However, a review of the New Mexico Regulation and

Licensing Department license records is inconclusive.1

28. Taxpayer did not discuss gross receipts tax with Ms. Candelaria.

29. Taxpayer prepared his own CRS returns without consulting Ms. Candelaria or any

other tax professional.

30. As of the date of hearing, for 2008 Taxpayer owed $772.99 in gross receipts tax,

$155.62 in penalty, and $162.03 in interest for a total 2008 liability of $1,090.64. In 2009,

Taxpayer owed $829.14 in gross receipts tax, $165.83 in penalty, and $134.77 in interest for a

total 2009 liability of $1,129.74. In 2010, Taxpayer owed $1,194.29 in gross receipts tax,

$238.86 in penalty, and $146.63 in interest for a total 2010 liability of $1,579.78. In 2011,

Taxpayer owed $1,386.46 in gross receipts tax, $277.30 in penalty, and $120.36 in interest for a

1
Neither party objected at hearing to the Hearing Officer taking administrative notice of the information provided
on the New Mexico Regulation and Licensing Division website. As of December 22, 2014, using the last name
“Candelaria, ”the RLD license look up website shows that an Annette Candelaria is a licensed CPA. However, there
is no listing for a Bella Candelaria or that Annette Candelaria goes by the name “Bella.” See
http://verification.rld.state.nm.us/SearchResults.aspx (Dec. 22, 2014 and printed in hearing file).

In the Matter of the Protest of Kevin Pham d/b/a Pro Nails, page 4 of 15
total 2011 liability of $1,784.12. As of the date of hearing, Taxpayer had a total outstanding

liability of $5,584.28. [Department Ex. C].

DISCUSSION

Considering the protest letter and Taxpayer’s argument at hearing, there are four issues in

this protest. The first issue is whether Taxpayer worked as an employee for Professional Nails

and Fantacy Nails and therefore was exempt from gross receipt tax in 2009, 2009, 2010, and

2011. The second issue is whether Taxpayer was entitled to deduction from gross receipts tax for

his sale of manicure services to Professional Nails and Fantacy Nails for resale when he did not

present timely executed NTTCs. The third issue at hearing is whether Taxpayer was entitled to

abatement of tax on equitable recoupment grounds. The final issue is whether Taxpayer’s

consultation with Ms. Candelaria serves as a basis to abate penalty.

Presumption of Correctness.

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

presumed correct. Consequently, Taxpayer has the burden to overcome the assessments. See

Archuleta v. O'Cheskey, 1972-NMCA-165, ¶11, 84 N.M. 428. Unless otherwise specified, for the

purposes of the Tax Administration Act, “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.

Moreover, “[w]here an exemption or deduction from tax is claimed, the statute must be

construed strictly in favor of the taxing authority, the right to the exemption or deduction must be

clearly and unambiguously expressed in the statute, and the right must be clearly established by the

taxpayer.” Wing Pawn Shop v. Taxation and Revenue Department, 1991-NMCA-024, ¶16, 111

In the Matter of the Protest of Kevin Pham d/b/a Pro Nails, page 5 of 15
N.M. 735 (internal citation omitted); See also TPL, Inc. v. N.M. Taxation & Revenue Dep't, 2003-

NMSC-7, ¶9, 133 N.M. 447. Because Taxpayer is claiming a deduction from gross receipts tax,

Taxpayer must establish his right to claim the deduction.

Gross Receipts Tax and the Employee Wages Exemption

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

receipts of any person engaged in business. See NMSA 1978, § 7-9-4 (2002). “Engaging in

business” is defined as “carrying on or causing to be carried on any activity with the purpose of

direct or indirect benefit.” NMSA 1978, § 7-9-3.3 (2003). Gross receipts applies to the

performance of a service in New Mexico. See NMSA 1978, § 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, § 7-9-5 (2002).

In this case, Taxpayer testified that he was an employee of Professional Nails and Fantacy

Nails or worked for those entities. Exempted from gross receipts taxes are the wages of employees.

See NMSA 1978, § 7-9-17. A person who is an employee is not required to register, file, or pay

gross receipts tax. See § 7-9-5 (A) and Regulation 3.2.100.8 NMAC. However, as referenced,

Taxpayer carries the burden of establishing he was entitled to the claimed exemption. See Wing

Pawn Shop, ¶16.

Regulation 3.2.105.7 (A) NMAC lists seven criteria for the Department to use in

determining whether a person is an employee for the purposes of the exemption under Section 7-9-

17:

A. In determining whether a person is an employee, the department will
consider the following indicia:
(1) is the person paid a wage or salary;
(2) is the "employer" required to withhold income tax from the person's
wage or salary;
(3) is F.I.C.A. tax required to be paid by the "employer";

In the Matter of the Protest of Kevin Pham d/b/a Pro Nails, page 6 of 15
(4) is the person covered by workmen's compensation insurance;
(5) is the "employer" required to make unemployment insurance
contributions on behalf of the person;
(6) does the person's "employer" consider the person to be an employee;
(7) does the person's "employer" have a right to exercise control over the
means of accomplishing a result or only over the result (control does not
mean "mere suggestion").

Under Regulation 3.2.105.7 (B) NMAC, “[i]f all of the indicia mentioned Subsection A of Section

3.2.105.7 NMAC are present, the department will presume that the person is an employee.

However, a person may be an employee even if one or more of the indicia are not present.”

Applying the criteria under Regulation 3.2.105.7 (B) NMAC to the facts of this case,

Taxpayer did not establish that he was an employee of Professional Nails and/or Fantacy Nails

during the relevant period. Taxpayer received commission checks from Professional Nails and

Fantacy Nails rather than wages or a salary. Professional Nails and Fantacy Nails did not withhold

any taxes from Taxpayer’s checks, did not pay worker’s compensation insurance, and did not make

unemployment insurance payments on behalf of Taxpayer. Taxpayer set his own hours for work at

Professional Nails and Fantacy Nails. There is no evidence that Professional Nails and/or Fantacy

Nails considered Taxpayer to be an employee. Since none of the criteria support Taxpayer’s claim,

Taxpayer did not meet his burden of establishing he was entitled to the exemption from gross

receipts tax on wages of an employee under Section 7-9-17. See Wing Pawn Shop, ¶16. Taxpayer

was a person engaged in business and all of his receipts in 2008 through 2011 are presumed subject

to gross receipts tax. See § 7-9-3.3 and § 7-9-5.

Sale for Resale Deduction and the Requirement of a Timely Executed NTTC

The New Mexico Gross Receipts and Compensating Tax Act provides numerous deductions

of gross receipts tax. One particular deduction is at issue in this protest: the sale of a service for

resale deductable under NMSA 1978, Section 7-9-48 (2000).

In the Matter of the Protest of Kevin Pham d/b/a Pro Nails, page 7 of 15
Section 7-9-48 states that:

Receipts from selling a service for resale may be deducted from
gross receipts or governmental gross receipts if the sale is made to a
person who delivers a nontaxable transaction certificate to the seller.
The buyer delivering the nontaxable transaction certificate must
resell the service in the ordinary court of business and the resale must
be subject to the gross receipts tax....

Simply performing a service for resale, as the Taxpayer did in this instance, is not enough to satisfy

the requirements of the deduction under Section 7-9-48. The statute clearly and unambiguously

conditions the deduction on a sale made to a person/entity who delivers a NTTC.

NMSA 1978, Section 7-9-43 (2011) articulates the requirements for obtaining NTTCs:

All nontaxable transaction certificates...should be in the possession
of the seller or lessor for nontaxable transactions at the time the
return is due for receipts from the transactions. If the seller or lessor
is not in possession of the required nontaxable transaction certificates
within sixty days from the date that the notice requiring possession of
these nontaxable transaction certificates is given the seller or lessor
by the department, deductions claimed by the seller or lessor that
require delivery of these nontaxable transaction certificates shall be
disallowed.

Under Section 7-9-43, Taxpayer had a statutory obligation to possess a NTTC at the time when the

gross receipts tax was initially due for his 2008, 2009, 2010, and 2011 performance of manicure

services for Professional Nails and Fantacy Nails. There is no evidence that Taxpayer possessed a

NTTC at that time.

While taxpayers “should” have possession of required NTTCs at the time the return is due

from the receipts at issue, Section 7-9-43 gives taxpayers audited by the Department a second

chance to obtain these NTTCs: within 60-days of when the Department gives notice, taxpayers must

possess a NTTC in order to claim a deduction. Taxpayers who rely on this second chance provision

run the risk of having their deductions disallowed if they are unable to meet the 60-day deadline set

by the Legislature. The reason why a taxpayer cannot obtain a NTTC is irrelevant. The language of

In the Matter of the Protest of Kevin Pham d/b/a Pro Nails, page 8 of 15
Section 7-9-43 is mandatory: if a seller is not in possession of required NTTCs within 60 days from

the date of the Department's notice, "deductions claimed by the seller ... that require delivery of

these nontaxable transaction certificates shall be disallowed." (emphasis added). See Marbob

Energy Corp. v. N.M. Oil Conservation Comm'n, 2009-NMSC-013, ¶22, 146 N.M. 24 (use of the

word “shall” in a statute indicates provision is mandatory absent clear indication to the contrary).

There is no statutory or regulatory provision that would allow the Department to extend the 60-day

deadline for a “third time,” as Taxpayer asked for in his protest letter.

Consistent with the statutory language, under Regulation 3.2.201.12 (C), a taxpayer “is not

entitled to the deduction” when the NTTC is untimely. See Chevron U.S.A., Inc. v. State ex rel.

Dep't of Taxation & Revenue, 2006-NMCA-50, ¶16, 139 N.M. 498 (agency regulations interpreting

a statute are presumed proper and are to be given substantial weight). The New Mexico Court of

Appeals has held that despite its general reluctance to place “form over substance,” the failure to

timely and properly present a requisite NTTC is a “valid basis” for the Department to deny a

claimed deduction. Proficient Food Co. v. New Mexico Taxation & Revenue Dep't, 1988-NMCA-

042, ¶22, 107 N.M. 392.

In this case, the Department issued two Notices of Limited Scope Audits: one on February

2, 2014 and another February 21, 2014. The Department had not explanation as to why it sent out

two Notices of Limited Scope Audit. However, giving Taxpayer every benefit2, the Department

calculated the 60-day deadline from the latter date. The February 21, 2014 Notice of Limited Scope

Audit provided Taxpayer with notice that he had 60-days, until April 22, 2014, to produce any

requisite NTTCs to support a claimed deduction.

2
This was the proper determination in light of the intent of the statutory estoppel provisions of NMSA 1978, Section
7-1-60 (1993).

In the Matter of the Protest of Kevin Pham d/b/a Pro Nails, page 9 of 15
Taxpayer was unable to produce any NTTCs executed by the April 22, 2014, 60-day

deadline. Both NTTCs that Taxpayer eventually presented were untimely executed after Section 7-

9-43’s strict 60-day second chance provision. The reasons for Taxpayer’s non-compliance with the

60-day statutory deadline are not material to the analysis under Section 7-9-43. Under Section 7-9-

43 and Regulation 3.2.201.12 (C), the Department has no authority to allow a deduction after the

expiration of the second chance, 60-day deadline, even if a taxpayer has a reasonable explanation

for the delay.

By not presenting the NTTCs in a timely manner, as required by Section 7-9-43 and

Regulation 3.2.201.12 (C), Taxpayer waived his right to the claimed deduction. See Proficient Food

Co., ¶22 (internal citations omitted) (“Where a party claiming a right to an exemption or deduction

fails to follow the method prescribed by statute or regulation, he waives his right thereto.”).

Therefore, Taxpayer was not entitled to the sale of a service for resale deduction under Section 7-9-

48 and the Department’s assessments of gross receipts tax in 2008, 2009, 2010, and 2011 were

proper.

Equitable Recoupment.

Taxpayer’s protest letter indicated that the gross receipts tax “have been paid for by the

employer.” While Taxpayer did not expressly use the phrase “equitable recoupment” or cite NMSA

1978, Section 7-1-28 (F) (2013), a reasonable reading of that paragraph places the parties on notice

that Taxpayer believed he should not be liable for taxes already paid by the salon owners on his

services, a sentiment that fairly encompasses the legal concept of equitable recoupment. At the

hearing, Taxpayer testified that both owners of Professional Nails and Fantacy Nails told Taxpayer

that they had already paid the gross receipts tax on Taxpayer’s services.

In the Matter of the Protest of Kevin Pham d/b/a Pro Nails, page 10 of 15
Under Section 7-1-28 (F), an assessment can be abated by the “amount of tax previously

paid by another person on behalf of the taxpayer on the same transaction; provided that the

requirements of equitable recoupment are met.” Equitable recoupment in tax matters is a doctrine

developed largely by federal courts and is given a limited application in tax litigation. See

Vivigen, Inc. v. Minzner, 1994-NMCA-027, ¶20, 117 N.M. 224. New Mexico has adopted

equitable recoupment with the same limitations set forth by federal courts. See Vivigen, Inc., ¶23.

The elements of equitable recoupment are: “1) a single taxable event, 2) taxes assessed on that

event on inconsistent theories, and 3) a strict identity of interest.” Teco Invs. v. Taxation &

Revenue Dep't, 1998-NMCA-55, ¶8, 125 N.M. 103. However, under the presumption of

correctness that attached to Department’s assessments pursuant to Section 7-1-17 (C), Taxpayer

has the burden of establishing that he is entitled to an abatement of assessed taxes under Section

7-1-28 (F)’s equitable recoupment basis.

In this case, the only evidence related to equitable recoupment is Taxpayer’s hearsay

testimony that the owners of Professional Nails and Fantacy Nails paid the gross receipts tax on the

services. The Professional Nails and Fantacy Nails owners did not appear to testify at the hearing.

Taxpayer had no other evidence that the Professional Nails and Fantacy Nails owners had paid

gross receipts tax, like a statement from the owners or the owners’ tax returns. While hearsay

evidence is admissible evidence in an administrative proceeding, without more in this case it is

of insufficient weight to find that the Professional Nails and Fantacy Nails owners had paid gross

receipts tax on the same taxable transaction for which the Department assessed Taxpayer.

Moreover, Taxpayer did not establish that the taxes were assessed on inconsistent theories or that

Taxpayer shared a strict identity of interest with the salon owners. Because Taxpayer did not

In the Matter of the Protest of Kevin Pham d/b/a Pro Nails, page 11 of 15
present sufficient evidence to establish the elements of equitable recoupment in this matter, Section

7-1-28 (F) does not provide grounds for the abatement of assessed taxes.

Penalty and Interest.

Taxpayer did not specifically address interest and penalty, but because Taxpayer asked for

abatement of all taxes interest and penalty are relevant in this decision. 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, §

7-1-67 (2007) (italics for emphasis). Under the statute, regardless of the reason for non-payment

of the tax, 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 Marbob Energy Corp., ¶22. The

language of Section 7-1-67 also makes it clear that interest begins to run from the original due date

of the tax until the tax principal is paid in full. The Department has no discretion under Section 7-1-

67 and must assess interest against Taxpayer from the time the 2008, 2009, 2010, and 2011 gross

receipts tax was due but not paid until Taxpayer satisfies the gross receipts tax principal.

Further, the Department has no basis to abate civil negligence penalty under NMSA 1978,

Section 7-1-69 (2007) in this case. 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, by its

use of the word “shall”, Section 7-1-69 requires that civil penalty be added to the assessment. 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.”

Regulation 3.1.11.10 NMAC 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)

In the Matter of the Protest of Kevin Pham d/b/a Pro Nails, page 12 of 15
“inadvertence, indifference, thoughtlessness, carelessness, erroneous belief or inattention.”

Erroneous belief and inadvertent error meets the legal definition of “negligence” under the penalty

statute. See El Centro Villa Nursing Center v. Taxation and Revenue Department, 1989-NMCA-

070, ¶10, 108 N.M. 795. Here, Taxpayer’s failure to timely obtain a supporting NTTC at the time

when the 2008, 2009, 2010, and 2011 gross receipts taxes were due, or upon 60-days of the

Department’s notice of audit, constituted negligence under Regulation 3.1.11.10 NMAC because

of Taxpayer’s inaction and inattention

In instances where a taxpayer might otherwise fall under the definition of civil negligence

generally subject to penalty, Section 7-1-69 (B) provides a limited exception: “[n]o penalty shall

be assessed against a taxpayer if the failure to pay an amount of tax when due results from a

mistake of law made in good faith and on reasonable grounds.” Further, in relevant part to this

protest, Regulation 3.1.11.11 (D) NMAC allows for abatement of penalty when a “taxpayer

proves that the failure to pay a tax… was caused by reasonable reliance on the advice of

competent tax counsel or accountant as to the taxpayer’s liability after full disclosure of all

relevant facts.” Black’s Law Dictionary, 22 (9th ed. 2009), defines “accountant” as “a person

authorized under applicable law to practice public accounting.”

Neither of these exceptions apply to the facts of this case for two reasons. First, the

evidence is unclear whether Bella Candelaria was an accountant. Secondly, Taxpayer testified

that Ms. Candelaria only prepared his personal income taxes and played no role in Taxpayer’s

CRS returns. Since Ms. Candelaria only focused on personal income taxes while Taxpayer

prepared his own gross receipts tax on the CRS returns, Taxpayer could not have relied on her

for gross receipts tax advice. 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.

In the Matter of the Protest of Kevin Pham d/b/a Pro Nails, page 13 of 15
Tiffany Construction Co. v. Bureau of Revenue, 1976-NMCA-127, ¶5, 90 N.M. 16. By failing to

ascertain the requirements of timely obtaining NTTCs either at the time of the transaction or within

60-days of the Department’s notice, Taxpayer was negligent and liable for civil penalty under

Section 7-1-69. Taxpayer’s protest is denied.

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 did not overcome the presumption of correctness that attached to the

assessments under NMSA 1978, Section 7-1-17 (C) (2007) and Archuleta v. O'Cheskey, 1972-

NMCA-165, ¶11, 84 N.M. 428.

C. Taxpayer did not carry his burden to establish he was an employee subject to the

exemption under NMSA 1978, Section 7-9-17 because all of the seven criteria under Regulation

3.2.105.7 (A) NMAC were against Taxpayer

D. Because Taxpayer was a person engaged in business under NMSA 1978, Section 7-

9-4 (2002), all of Taxpayer’s receipts in 2008, 2009, 2010, and 2011 are presumed subject to gross

receipts tax under NMSA 1978, Section 7-9-5 (2002).

E. Taxpayer did not present timely executed NTTCs to support the claimed deduction

for the sale of a service for resale under NMSA 1978, Section 7-9-48 (2000). Under NMSA 1978,

Section 7-9-43 (2011) and Regulation 3.2.201.12 (C), without a timely executed NTTC at either the

time of the filing of returns or within 60-days of notice of audit, the Department is not allowed to

grant and Taxpayer is not entitled to the claimed deduction under Section 7-9-48. See Marbob

Energy Corp. v. N.M. Oil Conservation Comm'n, 2009-NMSC-013, ¶22, 146 N.M. 24 (use of the

word “shall” in a statute indicates provision is mandatory absent clear indication to the contrary).

In the Matter of the Protest of Kevin Pham d/b/a Pro Nails, page 14 of 15
See also Proficient Food Co. v. New Mexico Taxation & Revenue Dep't, 1988-NMCA-042, ¶22,

107 N.M. 392 (Court found it valid for the Department to deny a claimed deduction when taxpayer

did not timely present a requisite NTTC).

F. Taxpayer did not establish the elements of equitable recoupment and therefore was

not entitled to an abatement of tax under NMSA 1978, Section 7-1-28 (F).

G. Under NMSA 1978, Section 7-1-67 (2007), Taxpayer is liable for accrued interest

under the assessment. Interest continues to accrue until the tax principal is satisfied.

H. Under NMSA 1978, Section 7-1-69 (2007), Taxpayer is liable for civil negligence

penalty because Taxpayer’s inaction and inattention met the definition of civil negligence under

Regulation 3.1.11.10 NMAC.

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

2008 Taxpayer owed $772.99 in gross receipts tax, $155.62 in penalty, and $162.03 in interest

for a total 2008 liability of $1,090.64. In 2009, Taxpayer owed $829.14 in gross receipts tax,

$165.83 in penalty, and $134.77 in interest for a total 2009 liability of $1,129.74. In 2010,

Taxpayer owed $1,194.29 in gross receipts tax, $238.86 in penalty, and $146.63 in interest for a

total 2010 liability of $1,579.78. In 2011, Taxpayer owed $1,386.46 in gross receipts tax,

$277.30 in penalty, and $120.36 in interest for a total 2011 liability of $1,784.12. As of the date

of hearing, Taxpayer had a total outstanding liability of $5,584.28.

DATED: December 23, 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 Kevin Pham d/b/a Pro Nails, page 15 of 15