Could new real estate appraiser Ricardo Romero avoid penalty because he did not know he had to file CRS returns and pay gross receipts tax?

Plain-English summary

Ricardo Romero's lack of knowledge about New Mexico CRS filing and gross receipts tax did not remove penalty. The AHO upheld $719.94 of tax, $143.98 of penalty, and $65.34 of interest, totaling $929.26 at the hearing.

Romero started a sole-proprietor real estate appraisal business in 2012. He had no CRS or gross-receipts experience, did not consult a tax professional or Department employee beyond obtaining an identification number, and did not file CRS returns or pay tax for that year.

He learned of the requirements in 2013 and began complying. The AHO accepted that his 2012 failure was not intentional or willful.

Lack of intent did not eliminate civil negligence

Section 7-1-69 applied when tax went unpaid because of negligence even without intent to evade. Regulation 3.1.11.10 included failure to act, inadvertence, erroneous belief, and inattention.

Romero's failure to investigate, file, and pay met those definitions. In New Mexico's self-reporting system, a business owner had a duty to determine possible tax consequences.

The mistake-of-law exception required informed grounds

The good-faith mistake-of-law exception required an informed judgment based on reasonable grounds. Romero and the person preparing his personal returns were simply unaware of gross receipts tax; there was no informed consultation or legal analysis supporting nonpayment.

No other regulatory indicator of nonnegligence applied. Interest also remained mandatory on the unpaid principal.

Duplicate assessments were removed from the dispute

The Department had issued two additional assessments splitting the same 2012 periods. It conceded those were erroneous duplicates whose combined amount equaled the main assessment, so the AHO did not address them further.

Result: protest DENIED. Only the main $929.26 hearing-date liability remained at issue and was upheld.

Finding 7 says a February 23, 2016 hearing occurred, while the decision's opening identifies the hearing as February 3, 2016. This page follows the opening date and preserves the original wording below.

What this means for you

New sole proprietors

Starting a service business can create CRS registration, return, and gross receipts tax duties even when no customer collects or explains the tax for you.

Taxpayers claiming mistake of law

Document the competent advice, facts disclosed, and legal basis you relied on. Mere unawareness or assumption is not the informed, reasonable judgment required by this decision.

Taxpayers receiving overlapping assessments

Compare periods and amounts across every letter ID. Duplicate assessments should be identified separately from the merits of the valid liability.

Common questions

Q: What service did Romero provide?
A: Real estate appraisal services in New Mexico.

Q: Did he intentionally evade tax?
A: No. The AHO found the failure was unintentional.

Q: Why was penalty still due?
A: Inadvertence and failure to investigate or act met the regulatory negligence definitions.

Q: Did later compliance erase the 2012 penalty?
A: No. He began complying in 2013, but the earlier liability remained.

Q: What happened to the other two assessments?
A: The Department conceded they duplicated the main 2012 assessment, so they were not considered further.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-9-3.3, 7-9-3.5, 7-9-4, and 7-9-5 — taxable New Mexico business and service receipts
• NMSA 1978, §§ 7-1-17, 7-1-67, and 7-1-69 — assessment presumption, mandatory interest, and negligence penalty
• Regulations 3.1.11.10 and 3.1.11.11 NMAC — negligence definitions and nonnegligence indicators

Cases cited:

• Tiffany Construction Co. v. Bureau of Revenue, 1976-NMCA-127 — duty to ascertain possible tax consequences
• El Centro Villa Nursing Center v. Taxation and Revenue Department, 1989-NMCA-070 — inadvertent error as civil negligence
• C & D Trailer Sales v. Taxation and Revenue Department, 1979-NMCA-151 — informed consultation and reasonable mistake of law
• Marbob Energy Corp. v. New Mexico Oil Conservation Commission, 2009-NMSC-013 — mandatory statutory language

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Ricardo D. Romero
• Decision PDF: D&O 16-06

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
RICARDO D. ROMERO No. 16-06
TO ASSESSMENTS ISSUED UNDER LETTERS
ID NOs. L1853810736, L0561809456 and L1635551280

DECISION AND ORDER

A protest hearing occurred on the above captioned matter on February 3, 2016 before

Brian VanDenzen, Esq., Chief Hearing Officer, in Santa Fe. At the hearing, Ricardo D. Romero

(“Taxpayer”) appeared along with witness Caroline Romero. Staff Attorney Peter Breen

appeared representing the State of New Mexico Taxation and Revenue Department

(“Department”). Protest Auditor Milagros Bernardo appeared as a witness for the Department.

Department Exhibit A was admitted into the record, a spreadsheet of liabilities as of the hearing

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

FOLLOWS:

FINDINGS OF FACT

1. On October 1, 2015, under letter id. no. L1853810736, the Department assessed

Taxpayer for $719.94 in gross receipts tax, $143.98 in penalty, and $63.37 in interest for the

CRS reporting periods between January 1, 2012 and December 31, 2012.

2. The Department issued two other assessments under letter id numbers

L0561809456 and L1635551280 for the CRS reporting periods from January 1, 2012 through

June 30, 2012 and July 1, 2012 through December 31, 2012 respectively. The Department stated

these assessments were made in error and were duplicative of the assessment identified in

finding of fact #1. The cumulative total of these two erroneous assessments equaled the
assessment issued on October 1, 2015. In light of that concession, assessments under letter id.

no.’s L0561809456 and L1635551280 will not be addressed further.

3. On November 16, 2015, Taxpayer protested the Department’s assessments.

4. On November 18, 2015, the Department’s protest office acknowledged receipt of

a valid protest.

5. On December 21, 2015, the Department filed a request for hearing in this matter

with the Administrative Hearings Office.

6. On December 29, 2015, the Administrative Hearings Office sent Notice of

Administrative Hearing, scheduling this matter for a merits hearing on February 3, 2016.

7. The February 23, 2016 hearing occurred within 90-days of the Department’s

acknowledgment of receipt of a valid protest.

8. Taxpayer began his sole proprietorship business as a real estate appraiser in 2012.

9. Taxpayer had no experience with CRS returns or gross receipts tax.

10. Taxpayer did not consult with a tax professional or with any Department

employee, other than to obtain an ID number.

11. Caroline Romero prepared Ricardo Romero’s personal income tax returns in

2012.

12. Because Taxpayer and Ms. Romero were unaware of the requirements of gross

receipts tax, Taxpayer did not file CRS returns or pay gross receipts tax in 2012.

13. Taxpayer did not intentionally or willfully fail to pay the gross receipts tax in

2012.

14. In 2013, Taxpayer learned of the requirements to file CRS returns and pay gross

receipts tax, and began doing so at that time.

In the Matter of the Protest of Ricardo D. Romero, page 2 of 7

15. As of the date of hearing, Taxpayer owed $719.94 gross receipts tax, $143.98 in

penalty and $65.34 in interest for a total outstanding liability of $929.26. [Dept. Ex. A].

DISCUSSION

Taxpayer agrees that it owed the assessed tax principal. The only issue is whether civil

negligence penalty under NMSA 1978, Section 7-1-69 (2007) may be abated based on

Taxpayer’s lack of knowledge of the requirement to file CRS returns and pay gross receipts tax

in 2012, and unintentional failure to do so.

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

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. 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).

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). Under NMSA

1978, Section 7-9-3.5 (A) (1) (2007), the term “gross receipts” includes the performance of a

service, like performing real estate appraisals. 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).

Under the Gross Receipts and Compensating Tax Act, there is a statutory presumption that

In the Matter of the Protest of Ricardo D. Romero, page 3 of 7
all receipts of a person engaged in business are taxable. See NMSA 1978, § 7-9-5 (2002). Taxpayer

was a New Mexico business engaged in performing real estate appraisal services. All of Taxpayer’s

receipts during the audit period are presumed subject to gross receipts tax. See § 7-9-3.3 and § 7-9-

5. Since Taxpayer presented no evidence it was entitled to an exemption or deduction, all of

Taxpayer’s receipts in 2012 are subject to gross receipt tax during the relevant period. However, as

Taxpayer acknowledged, Taxpayer did not understand this requirement in 2012 and thus through

lack of knowledge did not file CRS returns or pay gross receipts taxes that year.

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).

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.” See Marbob

Energy Corp. v. N.M. Oil Conservation Comm'n, 2009-NMSC-013, ¶22, 146 N.M. 24, 32 (use of

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

contrary).

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)

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

Although certainly Taxpayer did not intentionally fail to pay taxes in this case, Taxpayer was

In the Matter of the Protest of Ricardo D. Romero, page 4 of 7
nevertheless civilly negligent under Regulation 3.1.11.10 (B) & (C) NMAC because Taxpayer

failed to take action to report and pay the appropriate amount of CRS taxes when required through

inadvertence, indifference, thoughtlessness, carelessness, erroneous belief or 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.” Here, there is no evidence that

Taxpayer made an informed judgment or determination based on reasonable grounds when

Taxpayer failed to report and pay CRS taxes in 2012. See C & D Trailer Sales v. Taxation and

Revenue Dep’t, 1979-NMCA-151, ¶8-9, 93 N.M. 697 (penalty upheld where there was no

evidence that the taxpayer “relied on any informed consultation” in deciding not to pay tax).

Consequently, this mistake of law provision of Section 7-1-69 (B) does not mandate abatement

of penalty in this case.

Taxpayer’s main argument is that penalty should be abated because he and Ms. Romero

lacked knowledge about the requirement to pay gross receipts tax in 2012. 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. It is the duty of Taxpayer to determine what CRS taxes need to

be reported and paid. Taxpayer’s mistaken belief and inadvertent error in not filing 2012 CRS

returns and paying the gross receipt tax due at that time require imposition of civil negligence

penalty under Section 7-1-69. El Centro Villa Nursing Center v. Taxation and Revenue

Department, 1989-NMCA-070, ¶9-11, 108 N.M. 795 For the foregoing reasons, Taxpayer’s

protest IS DENIED.

In the Matter of the Protest of Ricardo D. Romero, page 5 of 7
CONCLUSIONS OF LAW

A. Taxpayer filed a timely, written protest to the Department’s assessments, and

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

B. The hearing was timely set and held within 90-days of protest under NMSA 1978,

Section 7-1B-8 (2015).

C. Taxpayer did not overcome the presumption of correctness on the assessed tax,

penalty, and interest under NMSA 1978, Section 7-1-17 (C) (2007), NMSA 1978, §7-1-3 (X)

(2013), Regulation 3.1.6.13 NMAC, and Archuleta v. O'Cheskey, 1972-NMCA-165, ¶11, 84 N.M.

428.

D. Under NMSA 1978, Section 7-1-67 (2007)’s mandatory “shall” language,

Taxpayer is liable for accrued interest under the assessment. See Marbob Energy Corp. v. N.M.

Oil Conservation Comm'n, 2009-NMSC-013, ¶22, 146 N.M. 24.

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

penalty because Taxpayer’s inaction and inadvertent error in not paying the assessed gross receipts

tax met the definition of civil negligence under Regulation 3.1.11.10 NMAC. See El Centro Villa

Nursing Center v. Taxation and Revenue Department, 1989-NMCA-070, 108 N.M. 795.

F. Taxpayer did not establish a good faith, mistake of law made on reasonable grounds

that would allow for abatement of penalty under Section 7-1-69 (2007).

G. None of the indicators of nonnegligence found under Regulation 3.1.11.11 NMAC

allow for abatement of penalty in this protest.

For the foregoing reasons, the Taxpayers’ protest IS DENIED. IT IS ORDERED that the

as of the date of hearing, Taxpayer was liable for $719.94 gross receipts tax, $143.98 in penalty

and $65.34 in interest for a total outstanding liability of $929.26.

In the Matter of the Protest of Ricardo D. Romero, page 6 of 7
DATED: February 18, 2016.

Brian VanDenzen
Chief Hearing Officer
Administrative Hearings Office
P.O. Box 6400
Santa Fe, NM 87502

NOTICE OF RIGHT TO APPEAL

Pursuant to NMSA 1978, Section 7-1-25 (1989), the parties have the right to appeal this

decision by filing a notice of appeal with the New Mexico Court of Appeals within 30 days of the

date shown above. See Rule 12-601 NMRA. If an appeal is not filed within 30 days, this

Decision and Order will become final. Either party filing an appeal shall file a courtesy copy of

the appeal with the Administrative Hearings Office contemporaneous with the Court of Appeals

filing so that the Administrative Hearings Office may being preparing the record proper.

In the Matter of the Protest of Ricardo D. Romero, page 7 of 7