I run a cleaning business and never knew about New Mexico's gross receipts tax — can I get the penalty and interest refunded?

Plain-English summary

Elke Foster started a residential cleaning service as a sole proprietorship in 1991 and, by all accounts, was a "scrupulously honest" taxpayer who kept careful records. She knew she'd owe income tax on her earnings — but she didn't know New Mexico imposes a gross receipts tax on the receipts of anyone performing services in the state.

After her first year, she gave her records to a bookkeeper to prepare her state and federal income tax returns, which included a federal Schedule C reporting the cleaning-business income. She asked whether there was "anything else" she needed to do; the bookkeeper said no, and never raised gross receipts tax. Years later, an IRS information-sharing match flagged that she'd reported business income federally but had never reported gross receipts tax to the Department. In May 1995 the Department contacted her, she promptly cooperated, and it assessed gross receipts tax, penalty, and interest for 1991. She paid it, then filed a claim for a $453.92 refund of the penalty and interest, which the Department denied.

Hearing Officer Gerald B. Richardson denied the protest:

• Not knowing about the tax is negligence. New Mexico's system is self-reporting: "every person is charged with the reasonable duty to ascertain the possible tax consequences of his actions," and failing to do so is negligence supporting the § 7-1-69(A) penalty (Tiffany Construction). Negligence (Regulation TA 69:3) includes "inaction where action is required" and "erroneous belief or inattention" — so good faith doesn't matter; the question is only whether she should have found out.
• The time to ask was when the business started. She never asked the Department up front what taxes applied to her business, and only consulted an advisor after year-end — for income taxes. Had she asked sooner, the tax would still have been late but the penalty and interest would have been smaller.
• The bookkeeper's role doesn't excuse it. The bookkeeper understood the engagement as income-tax preparation only. Though the Hearing Officer said the bookkeeper "should have asked" about gross receipts tax given Ms. Foster's naiveté and records that showed no such tax, that didn't make her failure non-negligent.
• Interest is mandatory. Section 7-1-67(A) says interest "shall" be paid on unpaid tax, with no exceptions (State v. Lujan). It isn't a punishment — it compensates the state for the lost time-value of the money — so it applies no matter why the tax was late, and the rate is set by the Legislature, not the Department.

What this means for you

Figuring out which taxes apply is your job — and the time to do it is at startup

New Mexico won't tell you which taxes you owe. In a self-reporting system, "no one told me" is treated as negligence, not an excuse. When you start a business, ask the Department directly what taxes apply before receipts start coming in — that's the point at which you can still build the tax into your prices and file on time.

Gross receipts tax is separate from income tax, and services are covered

Ms. Foster paid her income taxes correctly; the gap was gross receipts tax on her cleaning services. Many small operators think only about income tax and get caught the same way. If you sell goods or services in New Mexico, assume gross receipts tax may apply and confirm it.

Hiring someone for income taxes isn't advice about every tax

Engaging a bookkeeper or preparer for your income return doesn't give you a defense on gross receipts tax you never asked about. The reliance-on-a-professional defense protects you only where you actually received advice on the specific tax at issue. Make sure your advisor is engaged on your business taxes, and confirm gross receipts tax specifically.

Interest is not a penalty — and it isn't waivable

Even a sympathetic, honest taxpayer pays interest in full. Because interest compensates the state for money it should have had, it's mandatory and rate-set by statute. Plan on paying it whenever tax is paid late, separate from any argument about the penalty.

Common questions

Q: I didn't know New Mexico had a gross receipts tax. Doesn't that excuse the penalty?
A: No. In a self-reporting state, not knowing about a tax that applies to your business is treated as negligence, and good faith doesn't change that. The penalty encourages taxpayers to learn and report their obligations.

Q: I used a bookkeeper for my taxes. Doesn't that protect me from the penalty?
A: Only if you actually got advice about the tax in question. Here the bookkeeper handled income taxes only and gave no advice about gross receipts tax, so there was nothing to rely on.

Q: Can I get the interest refunded because the situation was unfair?
A: No. Interest under § 7-1-67(A) is mandatory and set by statute. It compensates the state for the delayed payment and cannot be waived, regardless of your good intentions.

Q: When should I have found out about the tax?
A: When you started the business. Asking the Department up front which taxes apply lets you charge and remit correctly from the beginning and avoids years of accruing penalty and interest.

Citations and references

Statutes and regulations:

• § 7-1-69(A) NMSA 1978 — negligence penalty of 2% per month, up to 10%, for failure to pay tax due to negligence or disregard of rules, without intent to defraud
• Regulation TA 69:3 — defines taxpayer negligence, including failure to exercise ordinary business care, inaction where action is required, and inadvertence, erroneous belief, or inattention
• § 7-1-67(A) NMSA 1978 — interest "shall" be paid on any tax not paid when due, without regard to any extension of time or installment agreement, until it is paid
• § 7-1-24 NMSA 1978 — protest procedure and jurisdiction

Cases cited:

• Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976), cert. denied, 90 N.M. 255, 561 P.2d 1348 (1977) — every person has a reasonable duty to ascertain the tax consequences of his actions; failing to do so is negligence
• State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977) — "shall" in a statute is mandatory rather than discretionary unless a contrary legislative intent is clearly shown

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Hydro Clean
• Decision PDF: D&O 96-25

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
HYDRO CLEAN, ID. NO. 02-155809-00 8
PROTEST TO DENIAL OF CLAIM No. 96-25
FOR REFUND

DECISION AND ORDER

This matter came on for hearing on October 24, 1996 before Gerald B. Richardson, Hearing

Officer. Hydro Clean, hereinafter, "Taxpayer," was represented by its owner, Ms. Elke Foster. The

Taxation and Revenue Department, hereinafter, "Department," was represented by Bridget A.

Jacober, 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 operates a residential cleaning service as a sole proprietorship.

2. Ms. Foster began the business in 1991.

3. Although Ms. Foster was aware that she would have to pay income tax on the income

she earned through her business, she did not know or understand that New Mexico imposes a gross

receipts tax on the receipts of persons or businesses who perform services in New Mexico.

4. Ms. Foster keeps scrupulous business records of all of her receipts from performing

cleaning services.

5. After the end of 1991, Ms. Foster presented her business records to her bookkeeper,

Ms. Betty Childress (now Ms. Betty Zwilling) to prepare her taxes.

6. Ms. Childress prepared 1991 state and federal income tax returns for Ms. Foster and

her husband. The federal tax returns included a Schedule C, wherein Ms. Foster's receipts from her
cleaning business were reported.

7. When presenting her records to Ms. Childress, Ms. Foster inquired whether there was

anything else she needed to do and Ms. Childress informed her that there wasn't. Ms. Foster did not

ask about any other type of state taxes and Ms. Childress did not inform Ms. Foster about gross

receipts taxes.

8. The Department and the Internal Revenue Service (IRS) have an information sharing

agreement whereby they share tax information. Pursuant to this agreement, the IRS provides the

Department with information from the federal returns of New Mexico residents. As a result of

information received from the IRS, the Department contacted Ms. Foster in May of 1995 to inquire

about the discrepancy between the fact that business receipts were reported for 1991 to the IRS, but

the Department had no record that Ms. Foster's business had reported gross receipts tax on its receipts

that year.

9. Ms. Foster promptly contacted the Department and met with its representatives. This

was the first time that she was informed about New Mexico's gross receipts tax and that she was liable

for such tax on her receipts from her cleaning business.

10. The Department issued an assessment to the Taxpayer for gross receipts taxes, penalty

and interest for 1991 and the Taxpayer paid this assessment.

11. On November 27, 1995 the Taxpayer submitted a claim for refund, requesting a

refund in the amount of $453.92 in penalty and interest paid on the assessment of taxes for 1991.

12. On January 11, 1996, the Department denied the Taxpayer's claim for refund.

13. On January 26, 1996 the Taxpayer filed a written protest to the Department's denial of

its claim for refund.

DISCUSSION

The Taxpayer is a scrupulously honest taxpayer who simply did not understand that it was

subject to gross receipts tax, failed to inquire of the Department about applicable taxes when the

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business was started, and was not informed by its bookkeeper about gross receipts taxes when it

requested the bookkeeper to prepare its income tax returns. The Department imposed penalty and

interest due to the Taxpayer's failure to timely file returns reporting and paying gross receipts taxes on

its receipts. Ms. Foster is protesting the penalty and interest because she does not feel that it is fair to

be penalized for something she didn't know.

I have no doubt that Ms. Foster would have accurately and timely paid her gross receipts taxes

had she been aware of her obligation to do so. However, Ms. Foster's contentions misapprehend the

nature of the imposition of interest and fail to account for the tax policy reasons behind the legislative

determination to impose penalty when taxes are not reported and paid when they are supposed to be.

Section 7-1-67(A) NMSA 1978 addresses the imposition of interest on tax deficiencies and

provides as follows:
A. 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, without regard to any extension of time or installment
agreement, until it is paid. (emphasis added)

It is a well settled rule of statutory construction that the use of the word "shall" in a statute indicates

that the provisions are intended to be mandatory rather than discretionary, unless a contrary legislative

intent is clearly demonstrated. State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977). Applying this

rule to Section 7-1-67, the statute requires that interest be paid to the state on any unpaid taxes and no

exceptions to the imposition of interest are countenanced by the statute. Thus, it doesn't matter why

taxes were unpaid. Interest is imposed for the period of time that they are unpaid.

The Taxpayer's argument essentially conceives of interest as a penalty imposed to punish a

taxpayer for the late payment of taxes. This argument misapprehends the nature of the assessment of

interest. Interest is imposed to compensate the state for the lost value of having tax revenues at the

time they are required to be paid. Those tax revenues could have been invested by the state and

interest earned upon those revenues, until the state needed to use the money to meet its obligations.

While one may disagree with the rate of interest set by the legislature, as being excessive in

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comparison with market rates of interest, that is a matter within the sound discretion of the legislature,

and the Department is without authority to substitute its own judgment for that of the legislature in

setting the rate of interest to be imposed.

The imposition of penalty is governed by the provisions of Section 7-1-69(A) NMSA 1978

(1990 Repl. Pamp.), which provides as follows:
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 two percent per month or a fraction thereof...not to exceed ten
percent of the tax...as penalty,....

This statute imposes penalty based upon negligence (as opposed to fraud) for failure to timely pay tax.

Thus, the good faith of the Taxpayer in fairly reporting its taxes is not at issue. What remains to be

determined is whether the Taxpayer was negligent in failing to report its taxes properly. Taxpayer

"negligence" for purposes of assessing penalty is defined in Regulation TA 69:3 as:
1) failure to exercise that degree of ordinary business care and prudence which
reasonable taxpayers would exercise under like circumstances;
2) inaction by taxpayers where action is required;
3) inadvertence, indifference thoughtlessness, carelessness, erroneous belief or
inattention.

In this case, the Taxpayer's failure to report and pay taxes was based upon Ms. Foster's lack of

knowledge about New Mexico taxes. New Mexico has a self-reporting tax system which requires

that taxpayers voluntarily report and pay their tax liabilities to the state. Because of this, the case law

is well settled that every person is charged with the reasonable duty to ascertain the possible tax

consequences of his actions, and the failure to do so has been held to amount to negligence for

purposes of the imposition of penalty pursuant to Section 7-1-69 NMSA 1978. Tiffany Construction

Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976), cert. denied, 90 N.M. 255,

561 P.2d 1348 (1977).

Although the imposition of penalty is intended to penalize taxpayers who fail to report and

pay taxes in a timely manner, there are sound policy reasons behind the imposition of penalty. A

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self-reporting tax system relies upon taxpayers accurately reporting their tax liabilities to the

government. There are insufficient government resources to audit every taxpayer periodically to

otherwise assure tax compliance. The imposition of penalty provides taxpayers with an incentive to

understand the tax consequences of their actions and to accurately report their taxes. Otherwise, if

the only consequence of an audit and determination of underpayment of tax was the payment of the

tax which was owed, it would always advantage a taxpayer to simply underreport taxes and to pay

them if they were found out.

In this case, Ms. Foster failed to inquire of the tax authorities if she might have any tax

liability in addition to income tax, on her business activities. The time to make such inquiry is at the

time of commencement of a business. Although she did consult with a tax advisor, this was not done

until after the end of the first calendar year that the business was commenced, and her bookkeeper

only understood her engagement to be for the preparation of income taxes, a normal year-end activity.

Given Ms. Foster's apparent naiveté about taxes in general, her bookkeeper should have asked Ms.

Foster if she understood about gross receipts taxes, especially when Ms. Foster's records failed to

indicate that they were being charged to her customers or paid to the Department. Ms. Foster's gross

receipts taxes would still have been late, but it would have minimized the amount of interest and

penalty imposed. In spite of Ms. Foster's good intentions in this matter, she was negligent in failing

to determine her obligation for taxes on her business, and the imposition of penalty was proper.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest, pursuant to Section 7-1-24 NMSA 1978

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

2. Interest was properly imposed due to the Taxpayer's failure to timely pay gross

receipts taxes.

3. Penalty was properly imposed due to the Taxpayer's negligence in failing to ascertain

the tax consequences of its business activities, resulting in the untimely payment and reporting of

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gross receipts taxes.

For the foregoing reasons, the Taxpayer's protest IS HEREBY DENIED.

DONE, this 4th day of November, 1996.

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