I had enough investment credit to cover the tax I owed — do I still owe penalty and interest for paying the compensating tax late?

Plain-English summary

Jezlaine, Ltd. is an Albuquerque jewelry manufacturer (an S corporation). Starting in 1993 it bought manufacturing equipment from out of state. That triggers New Mexico's compensating tax (the state's use tax) on the value of the equipment — but Jezlaine didn't know about the tax and reported and paid nothing on its monthly returns from January 1993 through August 1994.

In 1994 a new CFO discovered the problem. He began reporting compensating tax going forward, and also learned about the manufacturing investment credit, which can be applied against compensating tax on qualified equipment. He applied for the credit on November 15, 1994, and in December 1994 filed amended returns for the back periods — reporting the overdue compensating tax and offsetting it with the investment credit, so no additional cash was paid. The Department allowed the credit but deducted penalty and interest for the late compensating tax: for 1993, $1,190.73 interest and $580.70 penalty; for 1994, $332.32 interest (no penalty, because filing an amended return with payment before Department action avoids the penalty under Regulation TA 69:4).

Jezlaine's core argument was that since its available investment credit always exceeded the compensating tax, there was never any unpaid tax to bear penalty and interest. Hearing Officer Gerald B. Richardson denied the protest:

• A tax isn't "paid" just because a credit could have covered it. Compensating tax was due by the 25th of the month after each purchase (§ 7-9-7; § 7-9-11), and stays due until paid (§ 7-1-13(A)). Jezlaine didn't report the tax, apply for the credit, or claim it until months later — 3 to 23 months after the due dates. The Department couldn't know a "payment" had been made when no return even reported the tax was due.
• Credits must be applied for and claimed — that's how self-reporting works. Under § 7-9A-8, a taxpayer must apply for an investment credit and, once approved, act to claim it against tax due. A credit can't retroactively "pay" a liability before it was applied for and approved.
• The statutory definition of "tax" doesn't help. Section 7-1-3(U) includes credits within "tax" only where they were paid or credited by the Department contrary to law — not the case here, and in any event these credits weren't credited until after they were applied for and approved.
• Interest and penalty run from the due date until actual payment. Because Jezlaine didn't pay the compensating tax until it filed the amended returns and applied the approved credit, § 7-1-67(A) interest and § 7-1-69(A) penalty were properly charged for the intervening period.
• Controlling authority. Amoco Production Co. v. New Mexico Taxation & Revenue Department squarely rejected the same "the State had my money" theory: a tax is not paid simply by money sitting with the State; it's paid when the taxpayer files a return identifying the taxpayer, the tax program, and the period the payment applies to.

What this means for you

Buying equipment out of state usually triggers compensating (use) tax — on time

New Mexico's compensating tax applies to property you buy out of state and use here, and it's due by the 25th of the month after the purchase (§ 7-9-7; § 7-9-11). Not knowing about it doesn't stop interest and penalty from accruing. If you buy equipment or supplies from out-of-state vendors who don't charge New Mexico tax, self-assess and report the compensating tax each month.

An available credit doesn't "pay" a tax until you apply for and claim it

Having enough investment (or other) credit to cover a liability is not the same as paying it. Until you report the tax and formally apply the approved credit on a return, the tax is unpaid and interest runs. Don't assume a credit sitting in the wings stops the clock — file and claim it promptly.

Money or credit "sitting with the state" is not payment

Amoco makes the rule general: a tax is paid only when a return tells the state whose money it is, which tax it's for, and which period it covers. This defeats attempts to net an unreported overpayment or unclaimed credit against a separate underpayment to dodge interest. Report each period correctly rather than relying on offsets you never filed.

Filing an amended return with payment before the Department acts can save the penalty

Jezlaine owed no penalty for 1994 because it filed amended returns reporting the tax and paying it (via credit) before any Department action (Regulation TA 69:4). If you discover an unreported tax, self-correcting promptly can eliminate the penalty — though interest still applies for the period the tax was late.

Common questions

Q: I have enough tax credit to cover what I owe. Do I still owe interest for paying late?
A: Yes. An available credit doesn't count as payment until you report the tax and apply the approved credit on a return. Compensating tax was due monthly, and interest ran from each due date until Jezlaine actually claimed the credit against the liability.

Q: I didn't know I owed compensating tax on out-of-state equipment. Does that excuse the interest?
A: No. Compensating tax is due by the 25th of the month after the purchase regardless of whether you knew about it, and interest is mandatory on tax paid late. Report and self-assess compensating tax on out-of-state purchases.

Q: The state had access to my credit the whole time. Isn't that "payment"?
A: No. Under Amoco, a tax is paid only when you file a return identifying the taxpayer, the tax program, and the period. A credit you hadn't yet applied for or claimed can't retroactively pay the tax.

Q: How did the jeweler avoid a penalty for 1994 but not 1993?
A: Regulation TA 69:4 waives the penalty when a taxpayer files an amended return with payment before the Department acts. That covered 1994. Interest, however, still applied to both years because the tax was paid late.

Citations and references

Statutes and regulations:

• § 7-9-7 NMSA 1978 — compensating tax on the value of property acquired out of state for use in New Mexico; § 7-9-11 — tax is due by the 25th of the month following the month of the taxable event
• § 7-1-13(A) NMSA 1978 — taxes are due on and after the date payment is required until payment is made
• § 7-1-67(A) NMSA 1978 — interest is imposed on tax not paid when due, running until it is paid; § 7-1-69(A) — negligence penalty (2% per month, up to 10%) for late payment
• § 7-9A-8 NMSA 1978 — a taxpayer must apply for an investment credit and, once approved, claim it against tax due
• § 7-1-3(U) NMSA 1978 — definition of "tax," which includes credits only where paid or credited by the Department contrary to law
• Regulation TA 69:4 (3 NMAC 1.11.11) — no penalty where a taxpayer, without Department action, files an amended return reflecting additional tax due accompanied by payment

Cases cited:

• Amoco Production Co. v. New Mexico Taxation & Revenue Department, 118 N.M. 72, 878 P.2d 1021 (Ct. App. 1994) — a tax is not "paid" simply because money is on deposit with the State; payment occurs when the taxpayer files a return identifying the taxpayer, the tax program, and the reporting period

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Jezlaine, Ltd.
• Decision PDF: D&O 96-20

Original ruling text

BEFORE THE HEARING OFFICER
OF THE TAXATION AND REVENUE DEPARTMENT
OF THE STATE OF NEW MEXICO

IN THE MATTER OF THE PROTEST OF
JEZLAINE, LTD., I.D. NO. 02-066559-00 8,
PROTEST TO PARTIAL DENIAL OF CLAIM FOR
INVESTMENT CREDIT AND TO APPLICATION
OF INVESTMENT CREDIT. No. 96-20

DECISION AND ORDER

This matter came on for formal hearing on July 9, 1996 before Gerald B. Richardson,

Hearing Officer. Jezlaine, Ltd. (hereinafter "Taxpayer") was represented by Mr. Robb Haltom, its

Chief Financial Officer. The Taxation and Revenue Department (hereinafter "Department") was

represented by Margaret B. Alcock, Special Assistant Attorney General.

Based upon the evidence and the arguments presented, IT IS DECIDED AND

ORDERED as follows:

FINDINGS OF FACT

1. The Taxpayer is an S corporation in the business of manufacturing jewelry which

was established in Albuquerque, New Mexico in 1986.

2. Commencing in 1993, the Taxpayer started to purchase equipment used in its

manufacturing processes from out of state.

3. Although compensating tax was due on the value of equipment purchased by the

Taxpayer out of state, no compensating tax was reported or paid to the Department on the

Taxpayer's original monthly tax returns for the reporting periods of January, 1993 through August

of 1994 because the Taxpayer was not aware of the compensating tax and of its responsibility to

report and pay such tax on the value of equipment purchased out of state.

4. In 1994, Mr. Haltom was hired as the Chief Financial Officer for the Taxpayer.

Mr. Haltom was aware of New Mexico's compensating tax and began filing and reporting such tax
for future periods. Mr. Haltom also learned about the Investment Credit which can be applied

against compensating tax payable on the value of qualified equipment used in a taxpayer's

manufacturing business.

5. On November 15, 1994, the Taxpayer filed an application for investment credit

with the Department for the period of January 1, 1994 through December 31, 1994 in the amount

of $9,815.24.

6. On November 15, 1994, the Taxpayer filed an application for investment credit

with the Department for the period of January 1, 1993 through december 31, 1993 in the amount

of $15,276.14.

7. On December 5, 1994, the Department partially allowed and partially denied the

Taxpayer's claim for investment credit for 1994, and it allowed a credit in the amount of $4,291.61.

8. On December 5, 1994, the Department partially allowed and partially denied the

Taxpayer's claim for investment credit for 1993, and it allowed a credit in the amount of

$12,016.68.

9. On December 14, 1994, the Taxpayer filed a written protest with the Department to

the partial denial of its 1993 and 1994 claims for investment credit.

10. On December 13, 1994, the Taxpayer filed amended monthly returns for the

periods of January, 1993 through August, 1994 reporting compensating tax due for those reporting

periods and claiming an offsetting investment credit for the amount of compensating tax reported to

be due, resulting in the payment of no additional taxes to the Department.

11. On April 20, 1995, the Department wrote the Taxpayer informing it that its claim

for investment credit for 1993 had been adjusted to allow a claim in the amount of $14,991.17 and

that it had been applied against the compensating tax due as reported on the Taxpayer's amended

returns for 1993, plus penalty and interest, in the amount of $7,578.38 and refunding the balance of

$7,412.79.

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12. On April 20, 1995, the Department wrote the Taxpayer informing it that its claim

for investment credit for 1994 had been adjusted to allow a claim in the amount of $9,815.24 and

that it had been applied against the compensating tax due as reported on the Taxpayer's amended

returns for 1994, plus penalty and interest, in the amount of $4,623.93 and that the remaining

balance of the Taxpayer's investment credit for 1994 was $5,047.27.

13. On April 27, 1995, the Taxpayer wrote the Department protesting the manner in

which the Department applied its investment credits for 1993 and 1994.

14. The Department and the Taxpayer have resolved all disputes concerning the

Taxpayer's protest to the partial denial of its applications for investment credit and to the way that

the Department applied the Taxpayer's allowable investment credit except that the Taxpayer

continues to dispute the deduction of penalty and interest attributable to the late payment of

compensating tax from its allowable investment credits for 1993 and 1994.

15. The amount of interest and penalty which the Department deducted from the

Taxpayer's allowable investment credit for 1993 is $1,190.73 in interest and $580.70 in penalty.

16. The amount of interest which the Department deducted from the Taxpayer's

allowable investment credit for 1994 is $332.32. No penalty was assessed because Regulation TA

69:41 recognizes that when a Taxpayer, without action by the Department, files an amended return

reflecting additional tax due and payment accompanies the amended return, that this is grounds for

not imposing penalty.

17. With respect to the interest deducted from the Taxpayer's allowable investment

credit, interest was imposed from the date that compensating taxes would have been due with

respect to each month's return until December of 1994 when the Taxpayer filed its amended

returns and satisfied the compensating tax liability by applying a portion of its allowable investment

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Now found at 3 NMAC 1.11.11

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credit to the satisfaction of the liability for compensating taxes.

DISCUSSION
This issue to be determined herein is whether the Department properly deducted penalty

and interest from the investment credit it allowed the Taxpayer for 1993 and 1994.

The Taxpayer argues that in this case, since the amount of the allowable investment credit

was at all times more than sufficient to pay all of the compensating tax for which the Taxpayer was

liable upon the value of the equipment the Taxpayer purchased out of state, that there was never

any unpaid compensating tax to which penalty and interest should be applied. In making this

argument, the Taxpayer also relies upon the definition of "tax" found a Section 7-1-2(U) NMSA

1978, which includes the credits in the definition.

The Taxpayer's arguments are not supported either by the language of the various statutory

provisions applicable to this matter nor by interpretations of these provisions by the courts of this

state. The Taxpayer has admitted that it did not pay and report compensating tax in 1993 and

much of 1994 at the time its monthly returns for such tax were due. The compensating tax was

imposed upon the value of the property as of the time of its acquisition or introduction into New

Mexico. See, Section 7-9-7 NMSA 1978. The taxes imposed by the Gross Receipts and
Compensating Tax Act are to be paid on or before the twenty-fifth day of the month following the

month in which the taxable event occurs. See, Section 7-9-11 NMSA 1978. Thus, the

compensating taxes were due by the twenty-fifth day of the month following the month in which the

Taxpayer acquired the property from out of state. See, also, Section 7-1-13(A), ". . . Taxes are due

on and after the date on which their payment is required until payment is made."

The Taxpayer argues that since the state had the use of the money for which the Taxpayer

could have claimed an investment credit, that this constitutes a "payment" of tax. This argument

ignores the fact that no application for the investment credit was made by the Taxpayer until

November 15, 1994, and the Taxpayer did not seek to apply that credit until it filed its amended

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returns which reported compensating tax due for prior periods and applied the investment credit to

those liabilities. These amended returns were not filed until December of 1994, which was

anywhere from three to twenty-three months after the compensating tax was due. How could the

Department know that a "payment" of compensating tax had been made when there had been no

return from the Taxpayer reporting that compensating tax was even due? Additionally, Section

7-9A-8 requires that taxpayers apply to the Department for an investment credit and that once the

Department approves the credit, that taxpayers act to claim the credit against taxes due the state of

New Mexico. How could the Department know that the Taxpayer's unknown compensating tax

liability had been paid by an investment credit where there had been no application for or approval

of such an investment credit nor had there been a claim made by the Taxpayer to apply the credit

against the unknown compensating tax liability? The Taxpayer's argument ignores the fact that

New Mexico has a self-reporting tax scheme which places the responsibility upon taxpayers to

timely report and pay their taxes and also requires taxpayers to apply for any credits they wish to

receive.

Recently, the New Mexico Court of Appeals rejected a very similar argument that an

overpayment of tax for one reporting period, which had not been reported as an overpayment and

for which no refund claim had been filed by the taxpayer, amounted to a "payment" of taxes which

had been underreported by a taxpayer for other reporting periods. In that case the taxpayer had

sought to offset unreported overpayments of tax for some reporting periods against underpaid taxes

for other reporting periods, in order to reduce the amount of interest payable the Department. In

response to this argument the court stated:
Taxpayer contends that, because the State had Taxpayer's money on deposit, the tax was
paid. We disagree. The entire statutory scheme indicates that a tax is not paid
simply when monies are deposited with the State. Rather, the applicable statutes
and Department instructions enacted pursuant to them indicate that, in most
instances when taxes are paid, a taxpayer is required to provide the following
information to the State: the taxpayer's identity, the tax period to which the monies
are to be applied and the tax program to which the monies are to be applied.

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(citations omitted)

Amoco Production Company v. New Mexico Taxation and Revenue Department 118 N.M. 72,
75-76, 878 P.2d 1021 (Ct. App. 1994). Thus, this decision establishes that taxes are not "paid" until

the taxpayer files a return which identifies which taxes are being reported and paid and which

reporting period the payment applies to. As in the Amoco case, until the Taxpayer filed returns

showing that compensating tax was due for prior periods and had applied for the investment credit

and requested that it be applied to its declared liability for compensating taxes, the compensating

taxes were not paid.

Section 7-1-67(A) governs the imposition of interest. In pertinent part, it provides:
If any tax imposed is not paid on or before the day on which it becomes due, interest shall
be paid to the state on such amount from the first day following the day on which
the tax becomes due, . . . until it is paid. . . .

Section 7-1-69(A) governs the imposition of penalty. In pertinent part, it provides:
In the case of failure, due to negligence or disregard of rules and regulations, but without
intent to defraud, to pay when due any amount of tax required to be paid . . . there
shall be added to the amount as penalty 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 ten percent of the
tax due but not paid; . . . .

Both of these provisions impose interest and penalty from the date the tax was due, until the tax is

paid. Since the Taxpayer did not pay the compensating tax until it filed its amended returns and

applied its allowable investment credit to payment of the tax, the interest and penalty was properly

charged by the Department and deducted from the Taxpayer's allowable credit.

The Taxpayer also argued that because the definition of "tax" found at Section 7-1-3(U)

NMSA also refers to credits, that this supports their argument that the available investment

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credits amounted to a payment of tax. The statutory definition of tax does not support this

argument. Section 7-1-3(U) provides as follows:
"tax" means the total amount of each tax imposed and required to be paid, withheld and
paid or collected and paid under provision of any law made subject to
administration and enforcement according to the provisions of the Tax
Administration Act, and, unless the context otherwise requires, includes the amount
of any interest or civil penalty relating thereto; "tax" also means any amount of any
credit, rebate or refund paid or credited by the department under any law subject to
administration and enforcement under the provisions of the Tax Administration Act
to any person contrary to law and includes, unless the context requires otherwise,
the amount of any interest or civil penalty relating thereto; (emphasis added).

As can be seen from the above definition, the credits referred to are those which (1) have been paid

or credited by the Department and (2) were paid or credited contrary to law. In this case, the

credits were not paid or credited by the Department until after they were applied for by the

Taxpayer and approved by the Department so they cannot act as a payment of tax prior to the time

such credits were approved. Additionally, nobody has argued that the Taxpayer was granted these

credits contrary to law. Thus, these credits do not qualify as a "tax" under this definition.

CONCLUSIONS OF LAW

1. The Taxpayer filed timely, written protest to both the Department's partial denial of

its applications for investment credits and to the Department's deduction of penalty and interest

from the Taxpayer's allowable investment credits and jurisdiction lies over the subject matter and
the parties to this protest.

2. The Taxpayer did not pay the compensating taxes due upon the introduction into
   the state of property until it filed returns reporting such compensating tax liability and applying its

investment credits to the payment of its compensating tax liability.

3. Interest and penalty were properly imposed by the Department for late payment of

compensating taxes by the Department and were properly deducted from the Taxpayer's

investment credits.

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For the foregoing reasons, the Taxpayer's protests ARE HEREBY DENIED.

DONE, this 7th day of August, 1996.

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