Could a Greyhound agent deduct ticket, freight, and vending commissions or defeat the assessments because the Department waited seven years to request a hearing?

Plain-English summary

Russell Farrell's Greyhound commissions remained subject to gross receipts tax because he could not prove the amount of any deduction. A seven-year delay before the Department requested a hearing did not invalidate the assessments or stop penalty and interest.

Farrell managed Greyhound operations in Gallup as a nonemployee agent. He sold interstate and intrastate passenger tickets, sometimes handled freight sales, and received small vending-machine commissions. Greyhound paid him roughly 10% commissions and reported the total on Forms 1099.

Farrell did not know the commissions were gross receipts, filed no gross receipts returns, claimed no deductions, and paid no tax for 2005 or 2006. The Department assessed the Farrells in June 2009. Anne Farrell was included because the couple filed jointly.

As of the 2017 hearing, the combined balance was:

• $6,537.92 gross receipts tax;
• $1,307.59 penalty; and
• $3,903.73 interest.

The total was $11,749.24.

The seven-year hearing delay did not bar collection

The Farrells timely protested in July 2009, but the Department did not request a hearing until January 2017. During the inactivity, Farrell assumed the matter had ended or would expire and discarded his 2005-2006 records.

The AHO held that:

• because Farrell had not filed required returns, Section 7-1-18(C) allowed assessment within seven years after the year the tax was due;
• the June 2009 assessments were timely;
• Section 7-1-19 allowed collection for ten years after assessment, and that period had not expired; and
• public-officer tardiness did not defeat the state's enforcement of its public tax interest.

The AHO found no compelling prejudice from the delay. Taxpayers had to preserve records while the protest remained unresolved unless the Department stated in writing that the records were no longer needed. Farrell had received no such statement.

A possible travel-agent deduction could not be quantified

Section 7-9-76 allowed a deduction for travel-agent commissions paid by interstate passenger bus companies for booking, referral, reservation, or ticket services.

The AHO did not decide whether Farrell qualified as a “travel agent.” Even if he did, he had no records establishing the amount of passenger-ticket commissions.

His Forms 1099 combined multiple sources: passenger tickets, freight transportation, vending machines, and possibly other receipts. Freight and vending commissions were not covered by Section 7-9-76, and Farrell could not allocate the total.

Other transportation and commission deductions did not apply

Section 7-9-56 covered receipts from actual transportation and specified accessorial services in interstate commerce. Farrell sold tickets; Greyhound transported the passengers and freight.

The regulation expressly said New Mexico commissions for originating interstate passenger transportation were fees for services performed in New Mexico and were not deductible.

Section 7-9-66 addressed commissions on sales of tangible personal property or sales through dealer stores. Farrell's ticket, freight, and vending-related services did not fit those provisions. Another regulation specifically treated commissions paid to nonemployee agents of bus and freight companies as taxable.

Penalty and interest continued during the protest

Farrell had not consulted a tax professional and simply did not realize the commissions created gross receipts obligations. The AHO treated that unintentional failure as negligence based on inaction, inattention, and erroneous belief.

The filed protest did not pause penalty or interest. The assessments warned that both would continue to accrue if unpaid, and the Farrells remained silent during the long delay.

Result: protest DENIED. The full $11,749.24 balance remained due as of the hearing.

What this means for you

Ticket agents and transportation-company contractors

Nonemployee commissions are generally gross receipts unless a specific deduction is established. Do not assume interstate travel automatically makes the agent's local service commission deductible.

Businesses with mixed commission income

Track each commission source separately. A potentially deductible category cannot be quantified when passenger, freight, vending, and other commissions are combined without supporting records.

Taxpayers with a long-pending protest

Do not assume silence ends the case or stops accruals. Preserve records until the matter is formally closed and monitor the protest while tax, penalty, and interest remain outstanding.

Common questions

Q: Did the AHO decide whether Farrell was a travel agent?
A: No. It denied the deduction because he could not prove how much of his commission came from qualifying ticket services.

Q: Were freight commissions covered by the travel-agent deduction?
A: No. Section 7-9-76 addressed specified passenger-travel services, not freight commissions.

Q: Did the interstate-transportation deduction apply?
A: No. Farrell originated sales; Greyhound performed the actual transportation.

Q: Why did the seven-year delay not cancel the assessments?
A: The assessments and collection were still within their statutory periods, and agency tardiness did not defeat enforcement of the tax claim.

Q: Why did discarded records not establish prejudice?
A: The protest was never formally closed, and the record-retention rule required preservation absent written Department permission to discard them.

Q: How much remained due?
A: $11,749.24 as of the March 2017 hearing.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-9-3.5 and 7-9-4 — gross receipts and gross receipts tax
• NMSA 1978, §§ 7-9-56, 7-9-66, and 7-9-76 — transportation, commission, and travel-agent deductions
• NMSA 1978, §§ 7-1-18(C) and 7-1-19 — assessment and collection periods
• NMSA 1978, § 7-1-10 and Regulation 3.1.5.15(I) NMAC — record retention
• NMSA 1978, §§ 7-1-67 and 7-1-69 — interest and negligence penalty
• Regulations 3.2.214.9(A) and 3.2.225.9(A) NMAC — transportation-agent commissions

Cases cited:

• Spillers v. Commissioner of Revenue, 1970-NMCA-097 — interstate carrier agent's commission was not an actual-transportation receipt
• McKinley Ambulance Service v. Bureau of Revenue, 92 N.M. 599 (Ct. App. 1979) — requirements for the interstate-transportation deduction
• Kmart Properties, Inc. v. Taxation & Revenue Department, 2006-NMCA-026 — public-officer tardiness did not defeat enforcement of public rights
• In re Ranchers-Tufco Limestone Project Joint Venture, 1983-NMCA-126 — administrative delay and prejudice

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Russell and Anne Farrell
• Decision PDF: D&O 17-21

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
RUSSELL AND ANNE FARRELL No. 17-21
TO ASSESSMENTS
ISSUED UNDER LETTER
ID NOs. L0853448064 and L2023538048

DECISION AND ORDER

A protest hearing occurred in the above captioned matter on March 24, 2017 at 11:00

a.m. before Chris Romero, Esq., Hearing Officer, in Santa Fe, New Mexico. Russell and Anne

Farrell, appeared representing themselves pro se (“Taxpayers”). Staff Attorney, Peter Breen,

appeared representing the Taxation and Revenue Department of the State of New Mexico

(“Department”). Protest Auditor, Thomas Dillon, appeared as a witness for the Department.

Department Exhibit A was admitted into the record without objection and is described in the

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

AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. On June 23, 2009, the Department assessed Taxpayers for the amounts of

$3,178.44 in gross receipts tax, $635.68 in penalty, and $819.83 in interest for a total amount due

of $4,633.95 under Letter ID No. L2023538048 for the reporting period ending December 31,

2006.

2. On June 23, 2009, the Department assessed Taxpayers for the amounts of

$3,359.48 in gross receipts tax, $671.90 in penalty, and $1,369.28 in interest for a total amount
due of $5,400.66 under Letter ID No. L0853448064 for the reporting period ending December

31, 2005.

3. On July 16, 2009, Taxpayers executed a Formal Protest which was received by

the Department’s Protest Office on July 17, 2009.

4. On July 21, 2009, the Department acknowledged the receipt of the Taxpayers’

protest.

5. There was no apparent activity in the matter between 2009 and 2016 leading

Taxpayers to presume that the matters subject of the protest had been concluded and that further

collection activity was precluded by the applicable statute of limitations. [Testimony of Mr.

Farrell].

6. On January 23, 2017, the Department requested a hearing in the matter subject of

the Taxpayers’ protest. The Department’s request brought Taxpayers’ protest to the attention of

the Administrative Hearings Office for the first time. Before that date, the Administrative

Hearings Office had no knowledge of the protest and no statutory obligation to set a hearing.

7. On January 25, 2017, the Administrative Hearings Office issued a Notice of

Administrative Hearing setting a hearing on the merits of Taxpayers’ protest for February 16,

2017.

8. On February 1, 2017, Taxpayers requested a continuance of the hearing on the

merits scheduled for February 16, 2017. The Department did not oppose the request.

9. On February 13, 2017, the Administrative Hearings Office issued an Amended

Notice of Administrative Hearing setting a hearing on the merits of Taxpayers’ protest for March

24, 2017.

In the Matter of the Protest of
Russell and Anne Farrell
Page 2 of 19

10. On March 9, 2017, the Administrative Hearings Office issued a Notice of

Reassignment of Hearing Officer for Administrative Hearing assigning the undersigned Hearing

Officer to preside in this protest.

11. For a period of 12 years ending in 2010, Mr. Farrell was an agent for Greyhound.

At all relevant times, Greyhound was a bus transportation entity engaged in the business of

interstate and intrastate transportation of passengers and freight. [Testimony of Mr. Farrell].

12. In the stated capacity, Mr. Farrell managed Greyhound operations in Gallup, New

Mexico which included selling tickets for interstate and intrastate passenger bus travel and

occasional freight transportation. [Testimony of Mr. Farrell].

13. Greyhound compensated Mr. Farrell exclusively in the form of commissions. Mr.

Farrell was not employed by Greyhound nor was he compensated in wages. [Testimony of Mr.

Farrell].

14. Commissions paid to Mr. Farrell consisted of a percentage of sales from

passenger bus travel, freight transportation, and vending machines. [Testimony of Mr. Farrell].

15. The amount of the commissions Greyhound paid to Mr. Farrell was

approximately 10 percent per sale. [Testimony of Mr. Farrell].

16. Greyhound paid Mr. Farrell commissions on an almost-daily basis. [Testimony of

Mr. Farrell].

17. Mr. Farrell did not know about the obligation to report and pay gross receipts

taxes for compensation he received from Greyhound in the form of commissions. Consequently,

Mr. Farrell did not report his commissions as gross receipts, assert any claims to deductions, or

pay gross receipts tax. [Testimony of Mr. Farrell].

In the Matter of the Protest of
Russell and Anne Farrell
Page 3 of 19

18. Greyhound reported the total sum of commissions paid to Mr. Farrell in 2005 and

2006 on Forms 1099. [Testimony of Mr. Farrell].

19. Mr. Farrell was not able to produce any documents to illustrate what he received

in commissions for the years in protest, nor was he able to produce documents that could allocate

the sources of the commissions, such as whether they arose from the sale of tickets for interstate

or intrastate passenger travel, interstate or intrastate freight transportation, sales from vending

machines, or other sources. [Testimony of Mr. Farrell].

20. Mr. Farrell discarded all records he retained for 2005 and 2006 after he believed

their retention was no longer necessary as a result of the passage of time. Mr. Farrell

unsuccessfully attempted to obtain records from the U.S. Internal Revenue Service and

Greyhound. Mr. Farrell was informed that neither entity possessed records relevant to his

requests. [Testimony of Mr. Farrell].

21. Mr. Farrell did not rely on the advice of a tax professional regarding the

nonpayment of gross receipts taxes on the commissions he received from Greyhound during the

relevant periods of time. [Testimony of Mr. Farrell].

22. Mrs. Farrell was included in the assessment and protest because she filed her

taxes jointly with Mr. Farrell. [Testimony of Mrs. Farrell].

23. As of the date of hearing, Taxpayers’ combined liability for the periods ending

December 31, 2005 and 2006 was $6,537.92 in gross receipts tax, $1,307.59 in penalty, and

$3,903.73, for a total amount of $11,749.24. [Testimony of Mr. Dillon; Dept. Ex. A].

In the Matter of the Protest of
Russell and Anne Farrell
Page 4 of 19
DISCUSSION

Based on the evidence presented and the arguments of the parties, the issues under

consideration may be best summarized as follows: 1) whether the Taxpayers are entitled to relief

under the applicable statute of limitations; 2) whether the Taxpayers are entitled to relief as a

result of perceived prejudice from a seven-year delay between filing their formal protest and a

hearing on the merits; 3) whether the Taxpayers have established entitlement to an applicable

deduction from gross receipts; and 4) whether they are grounds to abate penalty or interest in this

matter.

Statute of Limitations and/or Unreasonable Delay

By the time the Administrative Hearings Office initially acquired knowledge of this

protest, upon the Department filing its Hearing Request on January 23, 2017, Taxpayers’ protest

had been pending more than seven years. A Notice of Administrative Hearing was entered and

served on the parties on January 25, 2017 with a hearing on the merits scheduled to occur on

February 16, 2017. The hearing on the merits was thereafter continued to March 24, 2017 upon

the request of the Taxpayers.

Mr. Farrell testified that because of the lack of apparent activity from 2009 to 2016, he

developed an assumption that the statute of limitations would preclude further efforts by the

Department to collect the assessed principal, penalty, and interest subject of this protest, or in the

alternative, that the matter had been resolved. Based on his assumptions, Mr. Farrell said he

discarded records that may have potentially been relevant to overcoming the Department’s

presumption of correctness. Although Mr. Farrell did not cite any legal authority in support of

his assumption, the Hearing Officer will briefly address Mr. Farrell’s claim.

In the Matter of the Protest of
Russell and Anne Farrell
Page 5 of 19
NMSA 1978, Section 7-1-18 (C) provides “[i]n case of the failure by a taxpayer to

complete and file any required return, the tax relating to the period for which the return was

required may be assessed at any time within seven years from the end of the calendar year in

which the tax was due, and no proceeding in court for the collection of such tax without the prior

assessment thereof shall be begun after the expiration of such period.” In this case, Mr. Farrell

admitted that he failed to file a required return which in turn provided the Department with seven

years to assess Taxpayers from the end of the calendar year in which the tax was due. The years

at issue in this protest were 2005 and 2006. The assessments, both dated June 23, 2009, were

timely and within the period required by Section 7-1-18 (C).

NMSA 1978, Section 7-1-19 then provides that “[n]o action or proceeding shall be

brought to collect taxes administered under the provisions of the Tax Administration Act and due

under an assessment or notice of the assessment of taxes after the later of either ten years from

the date of such assessment or notice or, with respect to undischarged amounts in a bankruptcy

proceeding, one year after the later of the issuance of the final order or the date of the last

scheduled payment.” In the present matter, the Department remains within the ten-year period

provided by Section 7-1-19 because the assessments were issued within the last 10 years.

Although somewhat disconcerting, the delay from 2009 to 2016 does not bar the

Department’s efforts to collect an outstanding liability in this case. Although the reason for the

Department’s delay in requesting a hearing in this matter is unclear, New Mexico courts have

applied the general rule of tardiness in administrative hearings under the Tax Administration Act:

the “tardiness of public officers in the performance of statutory duties is not a defense to an action

by the state to enforce a public right or to protect public interests.” See Kmart Props., Inc. v.

Taxation & Revenue Dep't, 2006-NMCA-026, 139 N.M. 177, 131 P.3d 27 (Ct. App. 2001); See

In the Matter of the Protest of
Russell and Anne Farrell
Page 6 of 19
also Matter of Ranchers-Tufco Limestone Project, 1983-NMCA-126, 100 N.M. 632, 674 P.2d 522

(Ct. App. 1983). Collection of taxes is the enforcement of public right/interest, and therefore,

despite the tardiness of its actions, the Department still had an obligation to enforce a public right

or protect a public interest under the rationale of Kmart Props., Inc.

Moreover, there is no compelling evidence that Taxpayers suffered any prejudice to the

presentation of its protest as a result of the delay. See In re Ranchers-Tufco Limestone Project Joint

Venture. Taxpayers were obligated to retain records under NMSA 1978, Section 7-1-10. Absent

some affirmative declaration from the Department that there was no further need to retain the

records, it was unreasonable for Taxpayers to discard documents with knowledge that their

protest had not been formally concluded. See Regulation 3.1.5.15 (I) NMAC (requiring that all

records maintained under Section 7-1-10 continue to be preserved unless the Department has

provided in writing that the records are no longer required.).

Contrary to the Taxpayers contentions, the Department is within the statute of limitations

and authorized to pursue collection of the taxes, under the facts of this case, despite the

inexplicable delay.

Potentially Applicable Deductions from Gross Receipts

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

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

“tax” is defined to include interest and civil penalty. See NMSA 1978, Section 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). Taxpayers have

In the Matter of the Protest of
Russell and Anne Farrell
Page 7 of 19
the burden to overcome the assessments. See Archuleta v. O'Cheskey, 1972-NMCA-165, ¶11, 84

N.M. 428, 431.

Anyone engaging in business in New Mexico is subject to the gross receipts tax. See

NMSA 1978, Section 7-9-4. Gross receipts tax applies to the total amount of money received

from selling property or services in New Mexico. See NMSA 1978, Section 7-9-3.5. For the

purpose of the Gross Receipts and Compensating Tax Act, “gross receipts” includes the total

commissions or fees derived from selling services. See NMSA 1978, Section 7-9-3.5 (A) (2) (b).

If a taxpayer asserts entitlement to an exemption or deduction from gross receipts, then

the burden is on the taxpayer to prove the entitlement to the asserted exemption or deduction.

See Public Service Co. v. N.M. Taxation and Revenue Dep’t., 2007-NMCA-050, ¶ 32, 141 N.M.

520. See also Till v. Jones, 1972-NMCA-046, 83 N.M. 743. “Where 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.” Sec. Escrow Corp. v. State Taxation

and Revenue Dep’t., 1988-NMCA-068, ¶ 8, 107 N.M. 540. See also Wing Pawn Shop v.

Taxation and Revenue Dep’t., 1991-NMCA-024, ¶ 16, 111 N.M. 735. See also Chavez v.

Commissioner of Revenue, 1970-NMCA-116, ¶ 7, 82 N.M. 97.

In this protest, Mr. Farrell was engaged in selling services as an agent for Greyhound.

Mr. Farrell was an independent contractor and compensated solely in the form of commissions.

Greyhound reported the compensation paid to Mr. Farrell on Forms 1099. Mr. Farrell candidly

acknowledged that he did not know that gross receipts taxes could be owed on commissions

from Greyhound and admitted that he never filed any returns reporting his commissions as gross

receipts.

In the Matter of the Protest of
Russell and Anne Farrell
Page 8 of 19
Despite the foregoing admissions, Mr. Farrell’s testimony and arguments were construed

as asserting the right to the following-discussed deductions.

(1) Deductions for commissions paid to travel agents.

Mr. Farrell asserted the potential application of the deduction for commissions of travel

agents at NMSA 1978, Section 7-9-76 which provides:

7-9-76. Deduction; gross receipts tax; travel agents'
commissions paid by certain entities.

Receipts of travel agents derived from commissions paid by
maritime transportation companies and interstate airlines, railroads
and passenger buses for booking, referral, reservation or ticket
services may be deducted from gross receipts.

The evidence in this case established that Mr. Farrell derived commissions paid by an

interstate passenger bus company for booking, reservation, or ticket services. However, the

Department argued that Mr. Farrell was not a “travel agent” because he acted on behalf of

Greyhound. The Department claimed that although “travel agent” is not defined in the statute or

by our courts, the term should be construed as requiring a fiduciary relationship between the

travel agent and the consumer. Because such a relationship did not exist under the facts of this

protest, the Department asserted that Mr. Farrell was not eligible for the deduction for

commissions paid to a travel agent. Although the Department indicated it would supplement its

argument with citations to supporting authority, no authority was cited.

However, the Hearing Officer declined to make a finding on the question of whether Mr.

Farrell qualified as a “travel agent” under the circumstances of this case. Whether or not Mr.

Farrell qualified for the deduction as a “travel agent,” there remained a lack of evidence to

clearly establish the amount of the deduction to which Mr. Farrell could be entitled.

In the Matter of the Protest of
Russell and Anne Farrell
Page 9 of 19
As previously discussed, Mr. Farrell candidly admitted that he did not possess records

that would establish the nature or amount of the asserted deduction. His efforts to obtain records

from third parties were unsuccessful. Mr. Farrell suggested that he previously possessed records

that might establish his right to claim the deduction and the amount of such claim, but he

discarded them under the impression that the issue subject of this protest had resolved itself. Mr.

Farrell credibly testified to the best of his ability, but presented no reliable evidence that could

establish the amount of any deduction to which he could have been entitled under Section 7-9-

76.

For example, Mr. Farrell did not present evidence to establish how much compensation

Greyhound reported on Forms 1099 for the years in protest, nor did he establish the percentage

of those commissions that could be attributed to the receipts of a travel agent from commissions

paid by Greyhound for booking, reservation, or ticket services. Mr. Farrell said that the amounts

reported by Greyhound on his Forms 1099 were the total amounts of commissions paid by

Greyhound, but not all of the commissions arose from the sales of tickets for passenger bus

travel. Commissions also included sales on behalf of Greyhound for the transportation of freight

as well as nominal commissions from vending machine sales. Neither commissions for the

transportation of freight nor commissions from sales from vending machines are addressed by

Section 7-9-76.

(2) Deduction for intrastate transportation and services in interstate commerce.

The next deduction, although not expressly addressed at the hearing, was addressed in

Taxpayers’ formal written protest. NMSA 1978, Section 7-9-56, provides:

7-9-56. Deduction; gross receipts tax; intrastate transportation
and services in interstate commerce.

In the Matter of the Protest of
Russell and Anne Farrell
Page 10 of 19
A. Receipts from transporting persons or property from one point
to another in this state may be deducted from gross receipts when
such persons or property, including any special or extra service
reasonably necessary in connection therewith, is being transported
in interstate or foreign commerce under a single contract.

B. Receipts from handling, storage, drayage or packing of
property or any other accessorial services on property, which
property has moved or will move in interstate or foreign
commerce, when such services are performed by a local agent for a
carrier or by a carrier and when such services are performed under
a single contract in relation to transportation services, may be
deducted from gross receipts.

C. Receipts from providing telephone or telegraph services in this
state that will be used by other persons in providing telephone or
telegraph services to the final user may be deducted from gross
receipts.

Although Mr. Farrell did not contend that he was engaged in the actual transportation of

passengers or freight, the Hearing Officer considered whether Mr. Farrell was performing a

special or extra service reasonably necessary in connection with the transportation of persons and

property in interstate commerce under a single contract. The deduction provided in Section 7-9-

56 (A) has been construed as being limited to receipts from the actual transportation of persons

and property, activities in which Mr. Farrell did not engage. Rather, Mr. Farrell sold tickets and

received commissions on those sales. It was then Greyhound which engaged in the actual

transportation of persons or property.

In Spillers v. Commissioner of Revenue, 1970-NMCA-097, 82 N.M. 41, 475 P.2d 41,

cert. denied, 82 N.M. 81, 475 P.2d 778 (1970), Spillers Moving and Storage Company acted as a

resident agent for Bekins Van Lines, an interstate carrier of household goods. Spillers received

twenty percent of Bekins’ transportation proceeds for “booking” or initiating orders for Bekins.

The New Mexico Court of Appeals upheld the Department’s imposition of gross receipts tax on

Spillers’ commissions and rejected Spillers’ claim to the deduction provided in Section 7-9-56
In the Matter of the Protest of
Russell and Anne Farrell
Page 11 of 19
(A) (then codified at NMSA 1953, Section 72-16A-14 (I) (Supp. 1967)). The court

acknowledged that “the receipts in question are transactions related to interstate commerce.” Id.,

82 N.M. at 43, 475 P.2d at 43. The court nonetheless found that Spillers merely initiated the

order for interstate transportation while Bekins was the entity that actually transported the goods:

The Commissioner contends that the language of the statute is not broad
enough to permit deduction of receipts not resulting from act or acts of actual
transportation. We agree with this interpretation.

While Mr. Farrell’s services may have been necessary to Greyhound’s operations, just as

Spillers’ services were necessary to Bekins’ operations, those services do not come within the

deduction provided in Section 7-9-56(A) for “[r]eceipts from transporting persons or property

from one point to another in this state....” See also, McKinley Ambulance Service v. Bureau of

Revenue, 92 N.M. 599, 601, 592 P.2d 515, 517 (Ct. App. 1979) (to deduct receipts under Section

7-9-56(A), the receipts must be from transporting persons from one point to another in New

Mexico; the transportation must have been in interstate commerce; and the transportation must

have been under a single contract (emphasis added)).

Mr. Farrell also does not qualify for the deduction provided in Section 7-9-56 (B). That

deduction applies to receipts from “handling, storage, drayage or packing of property or any

other accessorial services on property” which moved or will move in interstate commerce. Mr.

Farrell said he was compensated solely for ticket sales for passengers, freight, and vending

machines. He did not derive receipts from handling, storage, drayage or packing of property or

any other accessorial services on property which moved in interstate commerce. Accordingly, the

deduction in Section 7-9-56 (B) is not applicable to Mr. Farrell’s receipts.

This analysis is consistent with Regulation 3.2.214.9 (A) NMAC, which the Department

promulgated to implement Section 7-9-56. That regulation provides that “[c]ommissions to a

In the Matter of the Protest of
Russell and Anne Farrell
Page 12 of 19
person in New Mexico for originating interstate transportation of persons are not deductible

pursuant to either Section 7-9-56 NMSA 1978 or Section 7-9-66 NMSA 1978. Such

commissions are a fee for service rendered in New Mexico.” This regulation clearly precludes

the deduction of the commissions paid by Greyhound under Section 7-9-56. See Chevron U.S.A.,

supra.

For the stated reasons, Mr. Farrell did not establish an entitlement to seek a deduction

from gross receipts from commissions paid by Greyhound under Section 7-9-56. To the extent a

colorable claim could have been asserted, Mr. Farrell, for the reasons previously discussed, was

unable to produce sufficient evidence to clearly establish the amount of the deduction to which

he could have been entitled.

(3) Deductions for receipts derived from commissions.

The Hearing Officer also considered application of NMSA 1978, Section 7-9-66, which is

also referenced in Regulation 3.2.214.9 (A) NMAC. Section 7-9-66 provides:

7-9-66. Deduction; gross receipts tax; commissions.

A. Receipts derived from commissions on sales of tangible
personal property which are not subject to the gross receipts tax
may be deducted from gross receipts.

B. Receipts of the owner of a dealer store derived from
commissions received for performing the service of selling from
the owner's dealer store a principal's tangible personal property
may be deducted from gross receipts.

C. As used in this section, "dealer store" means a merchandise
facility open to the public that is owned and operated by a person
who contracts with a principal to act as an agent for the sale from
that facility of merchandise owned by the principal.

In the Matter of the Protest of
Russell and Anne Farrell
Page 13 of 19
In this protest, Mr. Farrell was not deriving commissions on sales of tangible personal

property nor was deriving commissions received for performing the service of selling a

principal’s tangible personal property.

Regulation NMAC 3.2.225.9 (A) NMAC provides additional guidance. It states that

“[r]eceipts from commissions for services rendered in New Mexico paid to nonemployee agents

of freight companies, bus transportation firms and the like are subject to the gross receipts tax.”

This regulation clearly addresses Mr. Farrell’s relationship with Greyhound. See Chevron U.S.A.,

supra.

In conclusion, Mr. Farrell is not entitled to seek a deduction from gross receipts from

commissions paid by Greyhound under Section 7-9-66. Once again, to the extent a colorable

claim could have been asserted, Mr. Farrell was unable to produce sufficient evidence to clearly

establish the amount of the deduction to which he could have been entitled.

Interest and Penalty

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, 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. 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 the provision is mandatory

absent clear indication to the contrary). 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.

The Department has no discretion under Section 7-1-67 and must assess interest against Taxpayers

In the Matter of the Protest of
Russell and Anne Farrell
Page 14 of 19
from the time the tax was due but not paid until the tax principal liability is satisfied. Therefore, the

assessment of interest is mandatory and the Department is without legal authority to abate it.

With concern for 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 meet the legal definition of

“negligence” even if, like here, Mr. Farrell’s actions or inactions were unintentional.

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.” In this

case, Taxpayers were negligent under Regulation 3.1.11.10 (A), (B) & (C) NMAC because of

Taxpayers’ inaction in failing to pay gross receipts tax when due resulting from an erroneous belief

that the income derived from commissions did not give rise to gross receipts tax obligations.

In instances where a taxpayer might 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, Regulation 3.1.11.11 NMAC

In the Matter of the Protest of
Russell and Anne Farrell
Page 15 of 19
establishes several examples of non-negligence in which penalty may be abated. Taxpayers did

not present any facts that would tend to establish a good-faith mistake of law or non-negligence

entitling them to an abatement of penalty.

Mr. Farrell admitted that he did not seek the assistance of a tax professional and simply

did not realize that he was obligated to report gross receipts from commissions. Mr. Farrell’s

candor was commendable.

The Department did not allege that the Taxpayers’ inaction was with the intent to evade or

defeat a tax. Rather, Taxpayers’ inaction was the result of inadvertence, erroneous belief, or

inattention. Nevertheless, El Centro Villa Nursing established that the civil negligence penalty is

appropriate for inadvertent error and Regulation 3.1.11.11 NMAC does not provide grounds for

abatement of the penalty in this case. Therefore, Taxpayers did not overcome the presumption of

correctness and failed to establish that they are entitled to an abatement of penalty in this matter.

Taxpayer expressed frustration with the fact that interest had been accruing from 2009 to

2016, a period during which there was minimal apparent activity in the matter. Although Taxpayers’

frustration with the delay is justifiable, both assessments at issue in this protest notified the

Taxpayers that “[i]f payment is made within 10 days from the date of this demand, no further

interest or penalty will accrue. If no payment is made within the 10 days, penalty and interest will

accrue from the date of the assessment.” (Emphasis added).

Although Taxpayers availed themselves of their right to file a protest, the mere filing of a

protest did not toll the accrual of interest or penalty. Instead, Taxpayers remained silent for more

than seven years with actual notice that interest and penalties were accruing. In this regard,

Taxpayers had to exercise some degree of diligence. Taxpayers could not sit on their rights hopeful

that the matter would eventually succumb to the statute of limitations.

In the Matter of the Protest of
Russell and Anne Farrell
Page 16 of 19
Based on the foregoing, the Taxpayers’ protest should be denied.

CONCLUSIONS OF LAW

A. Taxpayers filed a timely written protest to the assessments issued under Letter ID

Nos. L0853448064 and L2023538048 and jurisdiction lies over the parties and the subject matter

of this protest.

B. Pursuant to NMSA 1978, Section 7-1-17(C) (2007), the Department’s assessment

is presumed to be correct, and it is Taxpayers’ burden to come forward with evidence and legal

argument to establish that they were entitled to an abatement.

C. Under Section 7-1-67, Taxpayers are liable for interest under the assessments.

D. Taxpayers were negligent in failing to report gross receipts and pay gross receipts

taxes when due for the tax years covered by the assessments. Consequently, the assessment of

penalty was proper under Section 7-1-69.

E. Taxpayers did not establish what, if any, portion of reportable gross receipts were

deductible under NMSA 1978, Section 7-9-76, Section 7-9-56, or any other provision of law.

F. As of the date of hearing, the outstanding amounts in protest were $6,537.92 in

gross receipts tax, $1,307.59 in penalty, and $3,903.73 in interest, for a total amount of

$11,749.24.

For the foregoing reasons, Taxpayers’ protest IS DENIED.

In the Matter of the Protest of
Russell and Anne Farrell
Page 17 of 19
DATED: April 28, 2017

Chris Romero
Hearing Officer
Administrative Hearings Office
Post Office Box 6400
Santa Fe, NM 87502

NOTICE OF RIGHT TO APPEAL

Pursuant to NMSA 1978, Section 7-1-25 (2015), 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. If an appeal is not filed with the Court of Appeals within 30 days, this

Decision and Order will become final. Rule of Appellate Procedure 12-601 NMRA articulates

the requirements of perfecting an appeal of an administrative decision with the Court of Appeals.

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 begin preparing the record proper. The parties will each be provided with a

copy of the record proper at the time of the filing of the record with the Court of Appeals, which

occurs within 14 days of the Administrative Hearings Office’s receipt of the docketing statement

from the appealing party. See Rule 12-209 NMRA.

In the Matter of the Protest of
Russell and Anne Farrell
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In the Matter of the Protest of
Russell and Anne Farrell
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