Could a New Mexico contractor avoid gross receipts tax penalty and interest because its customer said a direct-pay certificate made the customer responsible for the tax?

Plain-English summary

Apple Electrical Contractors could not avoid gross receipts tax penalty and interest by relying on a customer's unsupported claim that the customer would pay New Mexico tax directly. The AHO found that the contractor acted in good faith but without the ordinary business care required to establish non-negligence.

Apple Electrical provided contracting services to businesses involved in natural-resource extraction. One of its largest customers operated in Texas and held a Texas “Direct Pay Certificate.” When that customer expanded into New Mexico, Apple followed it and registered to do business in the state.

Apple initially added New Mexico gross receipts tax to its invoices. The customer refused to pay the tax portion and told Apple's chief financial officer that it had a New Mexico direct-pay certificate and would accrue and pay all applicable tax itself.

Apple repeatedly asked for a copy. Customer representatives repeatedly promised one, but no certificate ever arrived. Apple nevertheless stopped billing the tax and relied on the customer's statements without obtaining independent advice about its New Mexico obligations.

The Department later assessed periods from January 2010 through August 2017:

• $453,297.57 gross receipts tax;
• $90,317.60 penalty; and
• $74,571.41 interest as originally assessed.

Apple did not dispute the tax principal and paid it in full using cash reserves and loan proceeds. The protest sought only abatement of penalty and interest, which had grown to $168,539.83 by the hearing.

The contractor—not its customer—owed the GRT

Section 7-9-4 imposed gross receipts tax on the person engaging in business in New Mexico. Regulation 3.2.4.9 said that person was solely liable for the tax and was not merely collecting it for the state.

A business may pass the economic cost to a customer by adding tax to an invoice, but its legal obligation to report and pay does not depend on whether the customer reimburses it. Apple's customer could refuse the tax line on the invoice without shifting Apple's own statutory liability.

The record also showed that the “direct pay certificate” concept came from Texas. The ruling stated that New Mexico did not use that type of certificate. Apple produced no New Mexico certificate, nontaxable transaction certificate, or other document supporting a deduction or a transfer of its filing duty.

Good faith did not make the mistake reasonable

The Hearing Officer found Apple's owner and chief financial officer highly credible and did not find bad faith or an intent to evade tax. But Section 7-1-69 and Regulation 3.1.11.10 treated failure to exercise ordinary business care, required inaction, erroneous belief, and inattention as negligence.

Apple never received the promised certificate and could not recall asking its CPA about the supposed arrangement. Its understanding depended principally on the customer's assurances, even though the customer had different financial interests and was not shown to be in the business of giving tax advice.

The good-faith mistake-of-law exception required reasonable grounds. Reliance on the unsupported statement of a customer did not meet that standard. The regulatory indicator for reliance on competent tax counsel or an accountant also did not apply.

Interest could not be waived for hardship or fairness

Apple argued that paying the tax from reserves and borrowed funds harmed its profitability, and that its customer may have received a refund of tax it had paid on the same transactions. But the alleged refund was unsupported, including its amount and basis.

More importantly, Section 7-1-67 made interest mandatory from the original tax due date until payment. Neither the Department nor the Hearing Officer had discretion to waive it because the taxpayer acted sincerely, faced hardship, or believed someone else had paid.

Result: protest DENIED. Apple remained liable for $168,539.83 of assessed penalty and interest as of the hearing date.

What this means for you

New Mexico service providers and contractors

Your business is liable for its own GRT. A customer's refusal to reimburse the tax or claim that it will pay directly does not by itself change your reporting obligation.

Businesses receiving exemption or direct-pay claims

Obtain the exact New Mexico document supporting the claimed treatment before changing invoices or returns. A certificate used in another state does not establish New Mexico treatment.

Companies relying on customer tax departments

A customer is not a substitute for independent tax advice. The non-negligence rule cited in the decision required reasonable reliance on competent tax counsel or an accountant after full disclosure of the facts.

Taxpayers seeking penalty relief

Good intentions are not enough. Preserve evidence of the legal research, professional advice, certificates, and compliance steps that made a mistake reasonable.

Businesses evaluating interest exposure

Interest follows the unpaid tax from its original due date until payment. Resolve the principal quickly even when a penalty protest will continue.

Common questions

Q: Did Apple dispute the $453,297.57 of gross receipts tax?
A: No. It accepted the tax principal and paid it in full. The protest concerned only penalty and interest.

Q: Did the customer ever provide the promised New Mexico direct-pay certificate?
A: No. Apple made several requests and received repeated promises, but never received a certificate.

Q: Does New Mexico use the same direct-pay certificate described by the Texas customer?
A: The ruling said that direct-pay certificates of that type were not used in New Mexico. No New Mexico certificate or nontaxable transaction certificate was produced.

Q: Why was the penalty upheld if Apple acted honestly?
A: Civil negligence did not require bad faith. Apple stopped reporting and paying without documentary support or independent advice, which the AHO found unreasonable even though its witnesses were sincere and credible.

Q: Could reliance on an adviser have supported penalty relief?
A: Potentially, if Apple had reasonably relied on competent tax counsel or an accountant after fully disclosing the relevant facts. The record did not show that kind of advice.

Q: Why couldn't the AHO waive interest?
A: Section 7-1-67 used mandatory language requiring interest from the due date until the tax was paid. The taxpayer's reason for late payment did not create discretion to abate it.

Q: What did Apple owe after paying the tax principal?
A: Penalty and interest totaling $168,539.83 remained outstanding as of the hearing.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-9-4 (2017) — GRT imposed on persons engaging in business in New Mexico
• NMSA 1978, § 7-1-67 (2007) — mandatory interest from the tax due date until payment
• NMSA 1978, § 7-1-69(A) and (B) (2007) — negligence penalty and reasonable good-faith mistake-of-law exception
• NMSA 1978, §§ 7-1-17(C) and 7-1-3(X) — assessment presumption and tax definition covering penalty and interest
• NMSA 1978, § 7-9-43 — nontaxable transaction certificates
• Regulation 3.2.4.9 NMAC — seller's GRT liability
• Regulations 3.1.11.10 and 3.1.11.11 NMAC — negligence and indicators of non-negligence
• Regulation 3.1.6.13 NMAC — assessment presumption for penalty and interest

Cases cited:

• Tiffany Construction Co. v. Bureau of Revenue, 1976-NMCA-127 — duty to ascertain tax consequences in New Mexico's self-reporting system
• Marbob Energy Corp. v. New Mexico Oil Conservation Commission, 2009-NMSC-013 — mandatory effect of “shall”
• El Centro Villa Nursing Center v. Taxation and Revenue Department, 1989-NMCA-070 — civil negligence penalty despite lack of bad faith
• New Mexico Taxation & Revenue Department v. Casias Trucking, 2014-NMCA-099 — assessment stands absent a showing of incorrectness

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Apple Electrical Contractors Inc
• Decision PDF: D&O 19-07

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
APPLE ELECTRICAL CONTRACTORS INC.
TO ASSESSMENT ISSUED UNDER
LETTER ID NO. L0090651440

D&O No. 19-07
v. AHO No. 18.08-209A

NEW MEXICO TAXATION AND REVENUE DEPARTMENT

DECISION AND ORDER

A hearing occurred in the above-captioned protest on January 28, 2019 at 2:00 p.m. before

Chris Romero, Esq., Hearing Officer, in Santa Fe, New Mexico. Mr. Brian Mackay, Esq. (Atkins,

Hollmann, Jones, Peacock, Lewis & Lyon, P.C.) appeared representing Apple Electrical

Contractors, Inc. (“Taxpayer”) and was accompanied by owner, Mr. Eddy Shelton, and Taxpayer’s

Chief Financial Officer, Mr. Dan Rankin, who both testified as witnesses. Mr. Shelton’s spouse,

Ms. Teresa Shelton, and daughter, Ms. Abby Venci, were also present to observe with Mr.

Shelton’s approval.

Staff Attorney, Mr. Peter Breen, Esq., appeared representing the Taxation and Revenue

Department of the State of New Mexico (“Department”) and was accompanied by protest auditor,

Ms. Amanda Carlisle, who testified as the Department’s only witness.

Taxpayer did not proffer any exhibits. Department Exhibit A, consisting of Taxpayer’s

Statement of Account (Letter ID No. L0940533936) was admitted without objection. Taxpayer

did not dispute the propriety of the underlying tax principal, which Taxpayer paid in full, but

sought relief from the assessment of associated penalty and interest. For the reasons that follow,

Taxpayer failed to establish that it was entitled to an abatement of penalty or interest.
Based on the evidence and arguments presented, IT IS DECIDED AND ORDERED AS

FOLLOWS:

FINDINGS OF FACT

1. On April 6, 2018, the Department assessed Taxpayer the amounts of $453,297.57

in gross receipts tax, $90,317.60 in gross receipts tax penalty, and $74,571.41 in gross receipts tax

interest for a total assessment and amount due of $618,186.58 under Letter ID No. L0090651440

for the reporting periods from January 31, 2010 to August 31, 2017. [See Administrative File].

2. On or about July 2, 2018, Taxpayer executed and timely submitted a Formal Protest

of the assessment which was received in the Department’s Protest Office on July 5, 2018. [See

Administrative File].

3. The Department acknowledged Taxpayer’s Formal Protest on July 16, 2018 under

Letter ID No. L1991958320. [See Administrative File].

4. On August 30, 2018, the Department filed a Hearing Request with the

Administrative Hearings Office which requested a scheduling hearing. [See Administrative File].

5. The Administrative Hearings Office entered and served a Notice of Telephonic

Scheduling Hearing on August 30, 2018 setting a scheduling hearing to occur on September 28,

2018. [See Administrative File].

2019. A telephonic scheduling hearing occurred on September 28, 2018 in which neither

party objected that the hearing would satisfy the 90-day hearing requirement established at NMSA

1978, Section 7-1B-8 (A). [See Administrative File; Record of Hearing 9/28/2018].

7. Since the parties agreed on September 28, 2018 that they might benefit from

additional time to confer regarding their respective positions in the protest, a Notice of Second

In the Matter of the Protest of
Apple Electrical Contractors, Inc.
Page 2 of 18
Telephonic Scheduling Conference was entered on October 3, 2018 which set a second scheduling

hearing to occur on October 23, 2018. [See Administrative File; Record of Hearing 9/28/2018].

8. A second telephonic scheduling hearing occurred on October 23, 2018 in which the

parties agreed that the protest was ready for a definite setting. [See Record of Hearing 10/23/2018].

9. On October 23, 2018, the Administrative Hearings Office entered a Scheduling

Order and Notice of Administrative Hearing which in addition to establishing various prehearing

deadlines, set a hearing on the merits of Taxpayer’s protest to occur on January 28, 2019. [See

Administrative File; Record of Hearing 10/23/2018].

10. On January 24, 2019, the parties filed their individual prehearing statements. [See

Administrative File (Department’s Pre-Hearing Statement and correspondence from Taxpayer’s

counsel dated January 24, 2019 signed by Ms. Lori M. Ruiz 1].

11. Taxpayer is a contractor engaged in the business of providing services for various

entities involved in the extraction of natural resources in New Mexico and other states. [Direct

Examination of Mr. Rankin and Mr. Shelton].

12. Taxpayer utilizes the services of a certified public accountant for some tax matters,

but Mr. Rankin is primarily responsible for local taxation issues, including payment of “sales tax.”

[Cross Examination of Mr. Rankin].

13. Mr. Rankin has a degree in economics from Texas Tech University and has been

employed by Taxpayer for more than twenty years. [Direct Examination of Mr. Rankin].

1
The Hearing Officer noted that Ms. Ruiz is not licensed to practice law in New Mexico. Mr. Mackay is licensed in
New Mexico according to his firm letterhead and the 2018-2019 Bench & Bar Directory of the State Bar of New
Mexico.

In the Matter of the Protest of
Apple Electrical Contractors, Inc.
Page 3 of 18

14. One of Taxpayer’s largest customers will be referred to as “Oil Company 2.” It

operated solely in Texas where Taxpayer also provided most of its services. Oil Company had a

“Direct Pay Certificate” in Texas. [Direct Examination of Mr. Rankin and Mr. Shelton].

15. Upon merging with a second entity, Oil Company expanded its business operations

into New Mexico. [Direct Examination of Mr. Rankin and Mr. Shelton].

16. Taxpayer correspondingly expanded its business into New Mexico in order to

continue providing services in the locations required by Oil Company. [Direct Examination of Mr.

Rankin and Mr. Shelton].

17. Taxpayer acquired all appropriate licenses for performing services in New Mexico,

and registered with the Department to engage in business. [Direct Examination of Mr. Rankin and

Mr. Shelton].

18. Taxpayer initially intended to pass along all gross receipts taxes for services

provided to Oil Company in New Mexico. However, Oil Company declined to pay amounts on

Taxpayer’s invoices that were attributed to gross receipts tax. [Direct Examination of Mr. Rankin

and Mr. Shelton].

19. Oil Company routinely paid Taxpayer for amounts billed for services, but deducted

its payment by those amounts attributable to taxes. [Direct Examination of Mr. Rankin and Mr.

Shelton].

20. Mr. Rankin contacted Oil Company at its Texas office, which informed him that

Oil Company had a “direct pay certificate” in New Mexico and that Oil Company accrued and

paid all applicable taxes in New Mexico. [Direct Examination of Mr. Rankin and Mr. Shelton].

2
The testimony on the record identifies the name of the company subject of discussion. However, it is unnecessary
for the purpose of this Decision and Order to address it by its name.

In the Matter of the Protest of
Apple Electrical Contractors, Inc.
Page 4 of 18

21. Mr. Rankin requested a copy of Oil Company’s “direct pay certificate” allegedly

issued by, or on file with the State of New Mexico. Mr. Rankin was directed to Oil Company’s

office in Denver, Colorado. [Direct Examination of Mr. Rankin].

22. After several unsuccessful attempts to reach someone in Oil Company’s Denver

office, Mr. Rankin succeeded in communicating with an individual who assured him that Oil

Company would provide a copy of its New Mexico “direct pay certificate,” but Taxpayer never

did receive it. [Direct Examination of Mr. Rankin].

23. Mr. Rankin’s efforts to follow up were frustrated by personnel changes within Oil

Company. He eventually communicated with another individual who once again stated that Oil

Company would provide Taxpayer with a copy of its New Mexico “direct pay certificate,” but

Taxpayer still never received it. [Direct Examination of Mr. Rankin].

24. Mr. Rankin followed up again with Oil Company’s representative in Texas, who

once again explained that it would provide Taxpayer with a copy of its New Mexico “direct pay

certificate.” The individual to whom Mr. Rankin spoke also explained that Oil Company’s standard

procedure was to accrue all taxes and submit payment directly to the taxing authority. [Direct

Testimony of Mr. Rankin].

25. Taxpayer ceased billing gross receipts tax to Oil Company based on Oil Company’s

explanations of its procedures for satisfying its New Mexico tax obligations. [Direct Examination

of Mr. Rankin].

26. Since Oil Company’s method of paying taxes in Texas never seemingly produced

problems for Taxpayer, it believed that a comparable process would equally suffice in New

Mexico. [Direct Examination of Mr. Rankin].

In the Matter of the Protest of
Apple Electrical Contractors, Inc.
Page 5 of 18

27. Mr. Rankin’s understanding of Taxpayer’s New Mexico gross receipts tax

obligations depended principally on the representations of Oil Company, indicating that

Taxpayer’s tax obligations would be satisfied by, or through, whatever arrangement Oil Company

had with the State of New Mexico. [Direct Examination of Mr. Rankin].

28. Mr. Rankin did not recall whether Taxpayer sought advice from its certified public

accountant regarding its tax reporting or payment obligations in light of any understanding it had

attained from communications with Oil Company. [Cross Examination of Mr. Rankin].

29. Upon receiving the assessment subject of the protest, Taxpayer attempted to make

all records of its transactions with Oil Company available to the Department. However, records

reflecting transactions in the years 2001, 2002, and 2003 were not available due to the passage of

time 3. [Direct Testimony of Mr. Rankin (00:15:00)].

30. Communications with an unspecified Department employee suggested that the

Department had perceived similar issues arise for other similarly-situated taxpayers that had also

engaged in business with Oil Company. [Direct Examination of Mr. Rankin].

31. Taxpayer paid the principal amount of assessed tax from cash reserves and with the

proceeds of a loan. [Direct Examination of Mr. Rankin].

32. The payment of tax from its cash reserves, as well as the interest which it is required

to pay for borrowed funds devoted to the payment of tax have been, and continue to be unfavorable

to Taxpayer’s profitability. [Direct Examination of Mr. Rankin].

3
Although the Hearing Officer observes that Taxpayer’s ability to provide records might diminish with the passage
of time, the Department did not assess taxes for the years 2001, 2002, or 2003.

In the Matter of the Protest of
Apple Electrical Contractors, Inc.
Page 6 of 18

33. The interest rate at which Taxpayer borrowed a portion of the funds to pay the

assessed gross receipts tax is estimated to be between 7 and 8 percent. [Cross Examination of Mr.

Rankin].

34. Mr. Rankin has not had any communications with Oil Company in reference to

issues subject of the protest. [Cross Examination of Mr. Rankin].

35. Oil Company has been non-responsive to any efforts to communicate with

Taxpayer. [Direct Examination of Mr. Shelton].

36. Mr. Shelton established Taxpayer in 1994 with his spouse, Teresa. Oil Company

was Taxpayer’s a major customer and was integral to Taxpayer’s efforts to become established.

[Direct Examination of Mr. Shelton].

37. Mr. Shelton and Mr. Rankin understood that Oil Company paid all taxes due to the

State of New Mexico arising from its transactions with Taxpayer, and believed that there were no

issues of concern with its own tax obligations until Oil Company allegedly received a refund from

the State of New Mexico. [Direct Examination of Mr. Rankin and Mr. Shelton].

38. Taxpayer’s outstanding liability as of the date of hearing was $168,539.83 in

penalty and interest. [Direct Testimony of Ms. Carlisle; See Department Exhibit A].

DISCUSSION

Taxpayer did not dispute the principal amount of gross receipts tax due under the

assessment. By the time of the hearing, Taxpayer had paid that amount in full. Consequently,

Taxpayer’s effort in this protest is directed at obtaining relief from the penalty and interest that

were assessed in association with the uncontested tax principal. For this reason, the remainder of

this Decision and Order will concentrate solely on the imposition of penalty and interest.

In the Matter of the Protest of
Apple Electrical Contractors, Inc.
Page 7 of 18
Taxpayer’s burden of proof and persuasion are well-established under New Mexico law.

NMSA 1978, Section 7-1-17 (C) (2007), establishes a rebuttable presumption that an assessment

of tax is correct. For that reason, Taxpayer shoulders the burden of coming forward with

evidence to establish that the assessment is erroneous, thereby overcoming the presumption of

correctness. See Archuleta v. O’Cheskey, 1972-NMCA-165, ¶11, 84 N.M. 428. Taxpayer does not

dispute the correctness of the assessment as it concerns the principal amount of tax. However,

the presumption of correctness also extends to the imposition of associated interest and penalty

since those terms come within the statutory definition of “tax.” See NMSA 1978, Section 7-1-3

(X) (2013). Regulation 3.1.6.13 NMAC correspondingly reaffirms that the presumption of

correctness extends to the assessment of penalty and interest. See Chevron U.S.A., Inc. v. State ex

rel. Dep’t of Taxation & Revenue, 2006-NMCA-50, ¶16, 139 N.M. 498, 503 (agency regulations

interpreting a statute are presumed proper and are to be given substantial weight).

Taxpayer’s counsel urged the Hearing Officer to exercise discretion to waive penalty and

interest. However, the sort of discretion necessary to afford the requested relief is not within the

powers of this Hearing Officer or the Administrative Hearings Office. “Absent a showing of

incorrectness by taxpayers, the … assessment of taxes must stand.” See Taxation & Revenue Dep’t

v. Casias Trucking, 2014-NMCA-099, ¶8, 336 P.3d 436 (quoting Torridge Corp. v. Comm’r of

Revenue, 1972-NMCA-171, ¶15, 84 N.M. 610, 506 P.2d 354).

Therefore, the relief which Taxpayer seeks relies entirely on its ability to establish that the

Department’s assessment of penalty and interest was erroneous, or in the alternative, with respect to

the assessment of civil penalty only, that it was not negligent in its failure to pay the correct amount

of tax due within the period of time specified by law.

In the Matter of the Protest of
Apple Electrical Contractors, Inc.
Page 8 of 18
The evidence established that Taxpayer developed a belief that it could rely on Oil

Company’s “direct pay certificate” to satisfy its own New Mexico tax obligations. Taxpayer had

previously billed Oil Company for services performed in New Mexico, plus applicable gross

receipts tax. However, Oil Company declined to pay Taxpayer for gross receipts tax because it

purportedly had a “direct pay certificate” on file with the State of New Mexico, which supposedly

permitted it to accrue and pay all taxes directly to the state.

After several futile attempts to acquire a copy of the certificate from Oil Company,

Taxpayer acceded to the accuracy of Oil Company’s representations despite its failure to provide

the “direct pay certificate,” or some other document which might substantiate the information

provided.

Regrettably, there was no evidence to indicate that Taxpayer ever sought independent advice

from someone having knowledge of New Mexico tax law, which could have assisted Taxpayer with

better understanding its New Mexico tax obligations. For example, consultation may have revealed

that “direct pay certificates” are not used in New Mexico, despite their use in Texas4. That

information might have led a better understanding of Taxpayer’s New Mexico tax obligations,

which may have permitted it to implement an informed process to assure its compliance.

Consultation may have also revealed that New Mexico imposes a gross receipts tax for the

privilege of engaging in business in New Mexico, which is levied on the gross receipts of the person

engaged in business. See NMSA 1978, Section 7-9-4 (2017). With respect for the entity ultimately

obligated to pay the tax, Regulation 3.2.4.9 provides that “[t]he gross receipts tax is imposed on

4
A Texas Direct Pay Exemption Certificate may authorize its holder to accrue and pay tax directly to the Texas
Comptroller of Public Accounts. See e.g. https://comptroller.texas.gov/forms/01-919.pdf. If there are similarities
concerning Direct Pay Exemption Certificates in Texas, and the use of Non-Taxable Transaction Certificates in New
Mexico, Taxpayer neither discussed them, nor suggested whether Non-Taxable Transaction Certificates and their
associated deductions might have been potentially relevant to the issues presented in its protest.

In the Matter of the Protest of
Apple Electrical Contractors, Inc.
Page 9 of 18
persons engaging in business in New Mexico. Such persons are solely liable for payment of the tax;

they are not ‘collectors’ on behalf of the state.” In other words, the obligation to pay gross receipts

taxes rests squarely with the entity engaging in business in New Mexico. Although it may be

common practice for a business to pass on the gross receipts tax to its customer, as Taxpayer

initially attempted in its transactions with Oil Company, the obligation for making payment still

rests with the business. Therefore, Taxpayer was always obligated to pay gross receipts tax, whether

or not it was able to pass the cost of the tax on to its customer.

It is understandable that Mr. Shelton or Mr. Rankin might feel mislead by Oil Company.

However, the Hearing Officer is unable to infer any deceit in Oil Company’s communications with

Taxpayer. If any inference can be extracted from the evidence, it is only that Taxpayer may have

been ill-informed of its status or responsibilities under New Mexico law, and that it unreasonably

relied on assurances from Oil Company that a certificate, which is not actually utilized in New

Mexico, would satisfy its tax reporting and payment obligations. The also evidence suggests that Oil

Company may have also been misinformed of its obligations, particularly if Taxpayer’s evidence

accurately relayed Oil Company’s command of the law.

Nevertheless, Taxpayer takes issue with the possibility that Oil Company may have attained

some financial windfall in the form of a tax refund5, derived in part from taxes it paid on

transactions with Taxpayer, which Taxpayer is now obligated to pay. Although Taxpayer’s

frustrations may be justified, the harm befalling Taxpayer derived entirely from its passivity and a

lack of due diligence, not from reasonable reliance on Oil Company.

5
Although Taxpayer’s witnesses stated that Oil Company received a tax refund for taxes that Oil Company
allegedly paid on its transactions with Taxpayer, these statements were unsupported by any foundation. Given the
strict constraints on taxpayer confidentiality which prohibit the Department from disclosing another taxpayer’s
return information, the burden rests with Taxpayer to present evidence of any refund, if relevant, consistent with the
law governing the confidentiality of taxpayer information. See NMSA 1978, Section 7-1-8; Section 7-1-8.4 F.

In the Matter of the Protest of
Apple Electrical Contractors, Inc.
Page 10 of 18
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. See Tiffany Construction Co.

v. Bureau of Revenue, 1976-NMCA-127, ¶5, 90 N.M. 16.

Interest

Despite counsel’s wish for discretion, the law governing the imposition of interest affords

no discretion whatsoever. When a taxpayer fails to make timely or accurate 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.” See NMSA 1978, Section 7-1-67 (2007) (italics

for emphasis). Regardless of the underlying reason for non-payment of tax, the Department simply

has no discretion in the imposition of interest, as the 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. Neither the Department nor the

Hearing Officer enjoy the discretion to abate interest Section 7-1-67 under any circumstances.

To the extent Taxpayer claims that it should be entitled to relief from interest, because the

State of New Mexico enjoyed the benefit of money paid by Oil Company before it was allegedly

refunded, Taxpayer’s position is unsupported by citation to any legal authority. See ITT Educ.

Servs., Inc. v. Taxation & Revenue Dep’t, 1998 NMCA 78, ¶10, 125 N.M. 244, 959 P.2d 969 (a

court will not consider propositions that are unsupported by citation to authority). Even if there

were legal support for the relief sought, the evidence failed establish the particulars of any

purported refund, including the amount refunded or the underlying basis for a refund.

In the Matter of the Protest of
Apple Electrical Contractors, Inc.
Page 11 of 18
Consequently, Taxpayer has failed to establish entitlement to an abatement of mandatory

interest.

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 explained earlier, the 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 Taxpayer’s actions or inactions were unintended.

Regulation 3.1.11.10 NMAC defines negligence as follows: (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, Taxpayer

was negligent under Regulation 3.1.11.10 (A), (B) & (C) NMAC because it failed to properly

investigate its obligations under the Tax Administration Act and the Gross Receipts and

Compensating Tax Act, resulting in a failure to timely report and pay gross receipts taxes on its

transactions with Oil Company.

Mr. Shelton and Mr. Rankin presented as individuals of the highest integrity. The Hearing

Officer found them to be extremely credible, and in no way doubted their sincerity. They clearly

In the Matter of the Protest of
Apple Electrical Contractors, Inc.
Page 12 of 18
regretted the circumstances that brought them before the tribunal, and the Hearing Officer could

empathize with any feelings of betrayal they may have harbored toward Oil Company. However,

Taxpayer’s conduct also clearly establishes negligence under the law which the Hearing Officer may

not disregard.

Nevertheless, on occasions where a taxpayer might otherwise fall under the definition of

civil negligence generally subject to penalty, as Taxpayer does in the present matter, 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 evidence revealed that Taxpayer’s mistake of law in this case, even if made in good

faith, was not based on reasonable grounds. Taxpayer seemingly relied entirely on Oil Company

for its comprehension of the law, notwithstanding the fact that Oil Company never produced

anything of a tangible nature that might conceivably corroborate the correctness of its assertions,

including a “direct pay certificate,” a non-taxable transaction certificate , or even a multistate

jurisdiction sales and use tax certificate. Although it is uncertain how these sorts of documents

could have influenced the outcome of this protest, their absence most certainly precluded any relief

that they could have afforded under the appropriate circumstances. 6 See e.g. NMSA 1978, Section

7-9-43.

6
As previously explained, Taxpayer did not contest the correctness of the tax, but only the assessment of
corresponding penalty and interest. However, even in the context of penalty, any one of the documents referenced
might be relevant to evaluating whether a mistake of law was based on reasonable grounds.

In the Matter of the Protest of
Apple Electrical Contractors, Inc.
Page 13 of 18
Nonetheless, Regulation 3.1.11.11 NMAC, which implements Section 7-1-69 (B) goes on

to permit an abatement of penalty in specified circumstances bearing indications of non-

negligence.

Upon direct inquiry from the Hearing Officer, Taxpayer’s counsel admitted that the facts

of this protest did not come within any of the indicators, perhaps with the exception of a scenario

in which “taxpayer shows that physical damage to the taxpayer’s records or place of business

caused a delay in filing a return or making payment of tax.” See Regulation 3.1.11.11 C NMAC.

However, the evidence clearly established that any failure to report or pay taxes did not result from

physical damage to Taxpayer’s records or place of business, but resulted from what can best be

characterized as unfamiliarity with the law. Counsel agreed that none of the other indicators of

non-negligence would apply under the evidence on the record. See Record of Hearing at 00:37:45

– 00:40:30.

Nevertheless, the Hearing Officer considered whether Taxpayer’s reliance on Oil Company

might afford relief under Regulation 3.1.11.11 D NMAC which might apply if “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; failure to make a timely filing of a tax return, however, is not excused by the

taxpayer’s reliance on an agent[.]” Black’s Law Dictionary, 22 (9th ed. 2009), defines “accountant”

as “a person authorized under applicable law to practice public accounting.”

However, this indicator of non-negligence is also inapplicable. It was unreasonable for

Taxpayer to rely on the advice of Oil Company because its interests were not necessarily aligned

with Taxpayer and because Oil Company is not in the business of providing tax advice, meaning

In the Matter of the Protest of
Apple Electrical Contractors, Inc.
Page 14 of 18
that there is nothing in the record to establish that any reliance on Oil Company could be perceived

as reasonable.

The Department did not allege that Taxpayer’s inaction was with the intent to evade or defeat

a tax and the Hearing Officer was persuaded that Taxpayer’s conduct was not in bad faith or with

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

appropriate in these circumstances and Regulation 3.1.11.11 NMAC does not provide grounds for

abatement of penalty in this case.

Therefore, Taxpayer has not overcome the presumption of correctness and failed to

establish that it is entitled to an abatement of penalty and interest in this matter. For the foregoing

reasons, Taxpayer’s protest is DENIED.

CONCLUSIONS OF LAW

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

No. L0090651440 and jurisdiction lies over the parties and the subject matter of this protest.

B. A timely hearing was held within 90 days of Taxpayer’s protest in accordance with

NMSA 1978, Section 7-1B-8 (A) (2015).

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

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

argument to establish that it is entitled to an abatement.

D. Under Section 7-1-67, Taxpayer is liable for interest under the assessment.

E. Taxpayer was negligent in failing to timely report and accurately pay gross receipts

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

penalty was proper under NMSA 1978, Section 7-1-69.

In the Matter of the Protest of
Apple Electrical Contractors, Inc.
Page 15 of 18
F. Taxpayer failed to establish non-negligence under 3.1.11.11 NMAC and El Centro

Villa Nursing Center v. Taxation and Revenue Department, 1989-NMCA-070, ¶14, 108 N.M. 795;

therefore, penalty was properly assessed.

For the foregoing reasons, Taxpayer’s protest should be, and hereby is, DENIED.

IT IS ORDERED that Taxpayer be liable for the assessed penalty and interest which as of

the date of hearing was $168,539.83.

DATED: February 19, 2019

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

In the Matter of the Protest of
Apple Electrical Contractors, Inc.
Page 16 of 18
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 being 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.

In the Matter of the Protest of
Apple Electrical Contractors, Inc.
Page 17 of 18
CERTIFICATE OF SERVICE

On February 19, 2019, a copy of the foregoing Decision and Order was mailed to the parties

listed below in the following manner:

First Class Mail Interagency Mail

INTENTIONALLY BLANK

John D. Griego
Legal Assistant
Administrative Hearings Office
Post Office Box 6400
Santa Fe, NM 87502
PH: (505)827-0466
FX: (505)827-9732
[email protected]

In the Matter of the Protest of
Apple Electrical Contractors, Inc.
Page 18 of 18