Could Clean Rite avoid gross receipts tax penalties for janitorial work at a Navajo Nation facility because it relied on Raytheon's tax counsel and its own bookkeeper?

Plain-English summary

Clean Rite Janitorial Service could not avoid penalties by relying on tax advice from its customer's lawyer and its own bookkeeper. Its janitorial services at Raytheon's Navajo Nation facility were subject to New Mexico gross receipts tax because Raytheon was not an Indian tribe or tribal member.

The Department assessed $45,343.04 tax, $4,303.64 interest, and $9,051.82 penalty for January 2011 through June 2016.

Clean Rite conceded the tax and interest and protested only the penalty.

The services were taxable in New Mexico Indian country

Clean Rite provided janitorial services around northwestern New Mexico and had served Raytheon Missile Systems since 2008.

Raytheon's facility was located in New Mexico on the Navajo Nation. Raytheon was neither an Indian tribe nor a member of one.

Regulation 3.2.4.9(D)(3)(a) treated non-construction, non-telecommunications services performed in New Mexico Indian country and sold to a non-Indian customer as taxable gross receipts.

Clean Rite had paid both New Mexico gross receipts tax and Navajo sales tax on the Raytheon work through 2011.

Raytheon's lawyer advised that only Navajo tax applied

In 2011, Clean Rite received a letter from Raytheon's tax counsel stating that the janitorial company was exempt from New Mexico gross receipts tax and that Raytheon would pay only Navajo sales tax going forward.

Clean Rite no longer possessed the letter and did not produce it at the hearing.

The AHO also found that Raytheon's counsel represented Raytheon's interests, not Clean Rite's. It was therefore unreasonable for Clean Rite to rely on that advice for its own tax obligations.

The business did not prove its bookkeeper was a competent tax adviser

Clean Rite showed the letter to Kenneth Chipman of Chipman Accounting. Chipman agreed with Raytheon's position.

Chipman was an accountant but not a CPA, and Clean Rite described his firm as bookkeepers. He had suffered a stroke and could not testify.

The record contained no evidence of his credentials or experience with gross receipts tax generally or services in Indian country for a non-Indian customer specifically.

Regulation 3.1.11.11 allowed penalty relief for reasonable reliance on competent tax counsel or an accountant after full disclosure of relevant facts. Clean Rite did not prove that condition.

Weak accounting controls supported negligence

The business had no formal accounting system or internal controls. It used total monthly bank deposits as gross receipts for CRS reporting.

Although annual deposits generally agreed with reported sales, the lack of checks and balances meant there was no process to flag unusual tax issues for review.

The AHO held that Clean Rite did not exercise ordinary business care and could not transfer its duty to determine New Mexico tax obligations to an unproven adviser.

After the audit, Raytheon agreed to pay the tax and interest but refused to pay the penalty. At the hearing, $9,051.82 penalty and $762.05 interest remained outstanding.

Result: protest DENIED. Clean Rite was ordered to pay the remaining $9,813.87 of penalty and interest.

What this means for you

Service providers working in Indian country

Do not assume location alone creates a state-tax exemption. The identity of the customer and the type of service matter.

Vendors receiving tax instructions from customers

A customer's lawyer protects the customer's interests. Obtain independent advice about your own filing and payment duties.

Businesses relying on accountants or bookkeepers

Document the adviser's qualifications, the relevant facts disclosed, and the actual advice. Penalty relief requires reasonable reliance on a competent adviser, not merely an informal approval.

Small businesses without accounting controls

Create review steps for unusual customers and tax positions. Bank-deposit reporting alone did not establish ordinary business care here.

Common questions

Q: Where were the services performed?
A: At Raytheon's facility in New Mexico on the Navajo Nation.

Q: Why were the receipts subject to New Mexico tax?
A: The services were sold to Raytheon, which was neither an Indian tribe nor a tribal member.

Q: Did Clean Rite dispute the underlying tax?
A: No. It conceded tax and interest and challenged only the penalty.

Q: Why was reliance on Raytheon's lawyer unreasonable?
A: The lawyer represented Raytheon's interests, and Clean Rite did not produce the advice letter.

Q: Why was reliance on the bookkeeper insufficient?
A: Clean Rite did not establish his credentials or relevant experience with New Mexico gross receipts tax and Indian-country services.

Q: How much remained due?
A: $9,051.82 penalty and $762.05 interest, totaling $9,813.87.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-9-3.5, 7-9-4, and 7-9-5(A) — gross receipts and presumption of taxability
• NMSA 1978, §§ 7-1-3(X) and 7-1-17(C) — tax definition and assessment presumption
• NMSA 1978, §§ 7-1-67, 7-1-69, and 7-1-13.1 — interest, negligence penalty, and payment responsibility
• Regulation 3.2.4.9(D)(3)(a) NMAC — services in Indian country sold to a non-Indian
• Regulations 3.1.6.13, 3.1.11.10, and 3.1.11.11 NMAC — presumption, negligence, and adviser-reliance relief

Cases cited:

• Tiffany Construction Co. v. Bureau of Revenue, 1976-NMCA-127 — taxpayer's duty to ascertain possible tax consequences
• El Centro Villa Nursing Center v. Taxation & Revenue Department, 1989-NMCA-070 — taxpayer cannot abdicate responsibility by appointing an accountant
• Marbob Energy Corp. v. New Mexico Oil Conservation Commission, 2009-NMSC-013 — statutory “shall” generally creates a mandatory duty
• Chevron U.S.A., Inc. v. State ex rel. Department of Taxation & Revenue, 2006-NMCA-050 — weight given to agency regulations

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Clean Rite Janitorial Service LLC
• Decision PDF: D&O 17-43

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
CLEAN RITE JANITORIAL SERVICE LLC No. 17-43
TO THE ASSESSMENT ISSUED UNDER
LETTER ID NO. L2090747184

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on September 8, 2017 before

Hearing Officer Irma Gonzalez. Mr. Kyle Stovell appeared pro se for Clean Rite Janitorial

(Taxpayer). The Taxation and Revenue Department (Department) was represented by Mr. Peter

Breen, Staff Attorney. Mr. Thomas Dillon, Auditor, appeared as a witness for the Department.

The Hearing Officer took notice of all documents in the administrative file. The Department’s

Exhibit A was stipulated to by Taxpayer. Based on the evidence and arguments presented, IT IS

DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. On March 31, 2017, the Department assessed Taxpayer for gross receipts tax, penalty,

and interest for the tax periods from January 31, 2011 through June 30, 2016. The

assessment was for $45,343.04 tax, $4,303.64 interest, and $9,051.82 penalty.

2. On May 18, 2017, Taxpayer timely filed a formal protest letter. Taxpayer conceded that it

owed tax and interest, but protested the penalty.

3. On June 27, 2017, the Department acknowledged receipt of the formal protest.

4. On August 7, 2017, the Department filed a Request for Hearing asking that the

Taxpayer’s protest be scheduled for a formal administrative hearing.

In the Matter of the Protest of Clean Rite Janitorial, page 1 of 10

5. On August 9, 2017, the Administrative Hearings Office issued the Notice of

Administrative Hearing scheduling this matter for September 8, 2017, within 90 days of

the Department’s receipt of the protest.

6. Mr. Kyle Stovell and his wife are the owners of Taxpayer.

7. Taxpayer does not have a formal system of accounting or internal controls. [Department

Ex. A-1].

8. Mr. Stovell does not have any background or knowledge of tax matters.

9. Taxpayer uses the total deposits each month per the bank statements as gross receipts

including tax for CRS reporting. [Department Ex. A-2].

10. The total annual bank deposits agreed with the gross sales reported on Taxpayer’s NM

corporate income tax returns and Taxpayer’s CRS-1 filings with minimal discrepancies.

[Department Ex. A-2].

11. Taxpayer provides janitorial services in the areas of Farmington, Bloomfield, Kirtland,

Aztec, and the Navajo Nation.

12. Taxpayer has been providing janitorial services for Raytheon Missile Systems (Raytheon)

since 2008. Raytheon’s facility is located in New Mexico on the Navajo Nation.

Raytheon is not an Indian tribe or a member thereof.

13. From 2008 to 2011, Taxpayer paid the New Mexico gross receipts tax and Navajo sales

tax for services provided to Raytheon.

14. In 2011, Taxpayer received a letter from Raytheon’s tax counsel indicating that it

reviewed the tax laws and found that Taxpayer was exempt from paying the New Mexico

gross receipts tax and that Raytheon would only pay the Navajo sales tax in the future.

In the Matter of the Protest of Clean Rite Janitorial, page 2 of 10

15. Taxpayer submitted Raytheon’s letter to Mr. Kenneth Chipman for review. Mr. Chipman

owned Chipman Accounting. Mr. Chipman is an accountant not a Certified Public

Accountant (CPA). Taxpayer described Chipman Accounting as bookkeepers.

16. Mr. Chipman agreed with Raytheon’s review of the law and approved Taxpayer’s plan to

claim an exemption for the New Mexico gross receipts, and to pay only the Navajo sales

tax.

17. Mr. Chipman has since had a stroke and was unable to testify at the hearing.

18. Taxpayer is no longer in possession of the letter from Raytheon.

19. After the audit, Raytheon agreed to pay the tax and interest owed. However, Raytheon

refused to pay the penalty.

20. Taxpayer argued that the penalty should be abated because he relied on the advice of Mr.

Chipman and Raytheon. Taxpayer argued further that he has is an honest business owner,

has always been tax compliant, and is not trying to evade paying taxes.

21. The evidence provided was not sufficient to find that Mr. Chipman is competent tax

counsel or accountant capable of giving advice.

22. The evidence provided was not sufficient to find that it was reasonable for Taxpayer to

rely on the advice of Raytheon’s tax counsel.

23. As of the date of the hearing, for the tax periods from January 31, 2011 through June 30,

2016, Taxpayer owed $9,051.82 in penalty and $762.05 in interest.

DISCUSSION

The issue to be decided is whether Taxpayer is liable for the assessment of penalty.

Taxpayer conceded that it owed tax and interest, but argued against the imposition of penalty.

In the Matter of the Protest of Clean Rite Janitorial, page 3 of 10
Taxpayer argued further that he is an honest business owner, has always been tax compliant, and

is not trying to evade paying taxes.

Burden of Proof

Assessments by the Department are presumed to be correct. See NMSA 1978, § 7-1-17

(C) (2007). Tax includes, by definition, the amount of tax principal imposed and, unless the

context otherwise requires, “the amount of any interest or civil penalty relating thereto.” 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). Therefore, the assessment issued to the Taxpayer is presumed to be correct,

and it is the Taxpayer’s burden to present evidence and legal argument to show that it is entitled

to an abatement.

Gross Receipts Tax

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

NMSA 1978, § 7-9-4 (2010). To prevent evasion of the gross receipts tax and to aid in its

administration, it is presumed that all receipts of a person engaging in business are subject to the

gross receipts tax. NMSA 1978 § 7-9-5 (A) 2002. Gross receipts tax applies to the total amount

of money received from selling property or services. See NMSA 1978, § 7-9-3.5 (2010). Under

Regulation 3.2.4.9(D) (3) (a), receipts from performing services, other than construction or

telecommunication services, in New Mexico in Indian country which are sold to a person who is

not an Indian tribe or member thereof are subject to the gross receipts tax.

In the Matter of the Protest of Clean Rite Janitorial, page 4 of 10
It was undisputed that Taxpayer was providing janitorial services to Raytheon in New

Mexico on the Navajo Nation. Furthermore, there was no evidence to suggest that Raytheon is an

Indian tribe or member thereof. Therefore, the services Taxpayer provided Raytheon in New

Mexico on the Navajo Nation were subject to the gross receipts tax.

Assessment of Penalty

Taxpayer conceded its failure to pay its gross receipts taxes. However, Taxpayer argued

that it has always been tax complaint and was not trying to evade paying taxes. Taxpayer

emphasized that he relied on Mr. Chipman’s approval of its tax plan to pay the Navajo sales tax,

but not the New Mexico gross receipts tax. Taxpayer argued that he also relied on the advice

from Raytheon’s tax counsel that it was not required to pay the New Mexico gross receipts tax.

Penalty “shall be added to the amount assessed” when a tax is not paid on time due to

negligence. See NMSA 1978, § 7-1-69 (2007) (emphasis added). The word “shall” indicates that

the assessment of penalty is mandatory, not discretionary. See Marbob Energy Corp. v. N.M. Oil

Conservation Comm’n., 2009-NMSC-013, ¶ 22, 146 N.M. 24. It is a taxpayer’s responsibility to

make payments, whether they are done electronically or in another fashion. See NMSA 1978, §

7-1-13.1 (2005). 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 the present case, Taxpayer did not have a formal system of accounting or internal

controls. Instead, Taxpayer used the total deposits each month per the bank statements as gross

receipts. Albeit the total annual bank deposits agreed with the Taxpayer’s tax returns, Taxpayer’s

lack of an accounting system or internal controls suggests that Taxpayer did not have any checks

In the Matter of the Protest of Clean Rite Janitorial, page 5 of 10
or balances to alert Taxpayer of any unusual items that needed to be examined for tax purposes.

Thus, the evidence was insufficient to establish that Taxpayer exercised a sufficient degree of

ordinary business care and prudence to establish nonnegligence under Regulation 3.1.11.10.

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.” The other grounds for abatement

of civil negligence penalty are found under Regulation 3.1.11.11 NMAC. Based on the argument

of Taxpayer and the evidence presented, only one factor under Regulation 3.1.11.11 NMAC

(emphasis added) is pertinent in this proceeding:

D. the taxpayer proves that the failure to pay tax or to file a return 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.

Taxpayer argued that it relied on the advice of Mr. Chipman and Raytheon that it was

exempt from the New Mexico gross receipts tax and only required to pay the Navajo sales tax.

Taxpayer claims that Raytheon’s tax counsel sent a letter, which stated that it reviewed the tax

laws, and found that Taxpayer was only required to pay the Navajo sales tax, but not the New

Mexico gross receipts tax. However, Taxpayer did not provide a copy of this letter at the hearing.

That being said, if Raytheon did in fact send a letter to Taxpayer, Taxpayer admitted the letter

was from Raytheon’s tax counsel. A reasonable inference can be made that Raytheon’s tax

counsel was protecting the interests of Raytheon rather than Taxpayer. Accordingly, it was not

reasonable for Taxpayer to rely on the advice of Raytheon’s tax counsel.

In the Matter of the Protest of Clean Rite Janitorial, page 6 of 10
With regard to Mr. Chipman, Taxpayer claims that he provided Raytheon’s letter to Mr.

Chipman for review. According to Taxpayer, Mr. Chipman agreed with Raytheon’s review of the

tax laws and that Taxpayer was exempt from paying the New Mexico gross receipts tax.

However, Taxpayer acknowledged that Mr. Chipman was an accountant not a CPA. In addition,

there was no evidence of Mr. Chipman’s credentials. In particular, there is no evidence of Mr.

Chipman’s experience in gross receipts tax in general or specifically for services provided on

Indian Country in New Mexico for a non-Indian. It also cannot be overlooked that Taxpayer

described Chipman Accounting as bookkeepers rather than accountants. The record is essentially

devoid of evidence to establish that Mr. Chipman is competent tax counsel or an accountant

capable of giving advice. Consequently, it was not reasonable for Taxpayer to rely on the advice

of Mr. Chipman.

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 gross receipts taxes need to be reported and paid. Given a taxpayer’s

duty under Tiffany Construction Co., 1976-NMCA-127, ¶5, to ascertain the tax consequences of its

actions, a taxpayer cannot “abdicate this responsibility [to learn of tax obligations] merely by

appointing an accountant as its agent in tax matters.” El Centro Villa Nursing Center v. Taxation

and Revenue Department, 1989-NMCA-070, ¶14, 108 N.M. 795.

Taxpayer did not have an accounting system. Taxpayer admitted it had no understanding of

the tax obligations of providing services to a non-Indian in New Mexico on Indian country. There

was no evidence that Taxpayer inquired with or sought the advice from the New Mexico taxing

authority or a tax professional to determine if Taxpayer was in compliance with New Mexico tax

In the Matter of the Protest of Clean Rite Janitorial, page 7 of 10
laws. There was no evidence to suggest that it was reasonable to rely on Mr. Chipman’s advice. In

sum, nothing in the record indicates that Taxpayer exercised ordinary business care and prudence

in determining its New Mexico tax obligations. Therefore, the Department’s imposition of penalty

was legally supported and properly assessed.

CONCLUSIONS OF LAW

A. Taxpayer filed a timely written protest to the assessment of penalty issued under

Letter ID number L2090747184, and jurisdiction lies over the parties and the subject matter of this

protest.

B. A hearing was held within 90 days of the protest. See NMSA 1978, § 7-1B-8 (A)

(2015).

C. Taxpayer conceded that it owed gross receipts tax. See NMSA 1978, § 7-9-4

(2010).

D. Taxpayer was properly assessed for penalty and interest. See NMSA 1978, § 7-1-

67 and § 7-1-69 (2007).

E. Taxpayer did not overcome the presumption of correctness, including the assessed

penalty, that attached to the assessment under NMSA 1978, § 7-1-17 (C) (2007).

F. Taxpayer was negligent in failing to report gross receipts tax during the period at

issue. See Regulation 3.1.11.10 NMAC.

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

that would allow for abatement of penalty under NMSA 1978, § 7-1-69 (2007).

H. Taxpayer did not establish that Mr. Chipman is competent tax counsel or accountant

capable of giving advice.

In the Matter of the Protest of Clean Rite Janitorial, page 8 of 10
I. Taxpayer did not establish that it was reasonable for Taxpayer to rely on the advice

of Raytheon’s tax counsel.

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

allow for abatement of penalty in this protest.

K. The assessment is still outstanding as to $762.05 interest and $9,051.82 penalty.

For the foregoing reasons, the Taxpayer's protest is DENIED. Taxpayer is ordered to pay

the assessment of $762.05 interest and $9,051.82 penalty.

DATED: October 11, 2017

Irma Gonzalez
Irma Gonzalez, Esq.
Hearing Officer
Administrative Hearings Office
Post Office Box 6400
Santa Fe, NM 87502

In the Matter of the Protest of Clean Rite Janitorial, page 9 of 10
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 timely 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 proper with the

Court of Appeals, which occurs within 14 days of the Administrative Hearings Office receipt of

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

CERTIFICATE OF SERVICE

I hereby certify that I mailed the foregoing Order to the parties listed below this 11th day of

October, 2017 in the following manner:

In the Matter of the Protest of Clean Rite Janitorial, page 10 of 10