I wrongly accepted exemption certificates but I'd asked the state about it several times — can the penalty be abated even though I owe the tax?

Plain-English summary

Roadrunner Industrial Works is a small, family-owned company that rents and sells equipment (including construction equipment) and provides services like welding and equipment operation. When it rented equipment to construction contractors and government entities, it accepted non-taxable transaction certificates (NTTCs) from the customers, didn't collect gross receipts tax, and didn't remit any. The problem: New Mexico's NTTC deductions (§§ 7-9-51, 7-9-52, 7-9-54) cover the sale of property or construction services to a contractor, or property to a government entity — not leases. Because these were rentals, they were taxable (Regulation GR 52:18).

The Department assessed the tax, plus penalty and interest. Roadrunner conceded it owed the gross receipts tax, so the only issue left was whether the penalty and interest were proper. Hearing Officer Ellen Pinnes split the decision:

• Interest stands (denied). Section 7-1-67 says interest "shall" be paid at 15% per year on any unpaid tax, with no exceptions (State v. Lujan; § 12-2-2(I)). Interest isn't a penalty; it compensates the state for the time-value of money it didn't have. It applies "particularly where the taxpayer is for some time unaware of the existence of the debt," and neither the Department nor the Hearing Officer can lower the rate.
• Penalty is abated (granted). The penalty requires negligence or disregard of rules (§ 7-1-69(A); Regulation TA 69:3). Roadrunner didn't ignore the question — it recognized the uncertainty, received conflicting advice from some customers and from another rental yard, and contacted the Department three separate times (through the president, the secretary, and their son) to ask whether it could accept the NTTCs. The Department's own answers "varied somewhat." Roadrunner reasonably, and in good faith, believed the transactions were deductible.
• A written ruling would have been better — but its absence wasn't negligence. The Department argued Roadrunner should have submitted a written request for a ruling. The Hearing Officer agreed that was the better practice, but noted these were equipment-rental people, not attorneys, unlikely to document every phone call or think to request a formal ruling. Roadrunner "misinterpreted the applicable rules and regulations" but "did not disregard them," so the penalty didn't apply.

What this means for you

Resale/exemption certificates for sales usually don't cover leases

New Mexico's NTTC deductions here (§§ 7-9-51, 7-9-52, 7-9-54) are written for sales — of property or construction services to a contractor, or of property to a government body. A lease or rental of the same equipment is a different transaction that generally doesn't qualify (Regulation GR 52:18), so accepting an NTTC on a rental can leave you owing the tax. Confirm that the specific deduction matches whether you're selling or renting.

Actively trying to resolve a tax question can defeat the penalty

The difference between owing tax with a penalty and owing tax without one is often diligence. A taxpayer who spots the issue and genuinely tries to resolve it — even imperfectly — may be found non-negligent, while one who simply never looks into it is negligent. Roadrunner's repeated inquiries are what saved it from the penalty.

But interest is mandatory no matter how diligent you were

Even a good-faith taxpayer who did its best pays interest in full. Interest compensates the state for money it should have had, so it applies regardless of the reason the tax went unpaid, and the rate is fixed by statute. Budget for interest separately from any penalty argument.

Get tax advice in writing — ideally a written ruling from the Department

Roadrunner won on the penalty despite relying on oral phone calls, but the Hearing Officer was clear this was the harder path and that a written request for a ruling is the better practice. Oral advice from Department staff is inconsistent and unrecorded; a written ruling both protects you and can support estoppel if the Department later changes position. When a deduction is genuinely uncertain, ask in writing and keep the answer.

Common questions

Q: I took an exemption certificate but the transaction turned out to be taxable. Do I still owe the tax?
A: Generally yes. Here the NTTC deductions applied only to sales, not leases, so Roadrunner's rentals were taxable and it conceded the tax. Whether you also owe penalty and interest is a separate question.

Q: Can an exemption certificate cover a rental as well as a sale?
A: Not these ones. Sections 7-9-51, 7-9-52, and 7-9-54 deduct receipts from the sale of property or construction services to contractors or property to government entities; leases don't qualify (Regulation GR 52:18). Match the certificate to the actual transaction type.

Q: I asked the Department about my situation. Does that get the penalty removed?
A: It can. The penalty requires negligence, and a taxpayer who recognizes the issue and genuinely tries to resolve it — as Roadrunner did with three inquiries — may be found non-negligent even if it reached the wrong conclusion. Diligence is the key.

Q: If I wasn't negligent, why do I still owe interest?
A: Because interest isn't a penalty. Under § 7-1-67 it's mandatory on any unpaid tax at the statutory rate, regardless of good faith or diligence, to compensate the state for the delayed payment. Only the penalty can be abated for lack of negligence.

Citations and references

Statutes and regulations:

• § 7-1-69(A) NMSA 1978 — penalty (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 negligence (failure of ordinary care, inaction where action is required, inadvertence/erroneous belief/inattention)
• § 7-1-67 NMSA 1978 — interest "shall" be paid at 15% per year on any unpaid tax, with no exceptions; § 12-2-2(I) NMSA 1978 — "shall" and "must" are construed as mandatory
• §§ 7-9-51, 7-9-52, 7-9-54 NMSA 1978 — deductions for receipts from the sale of tangible personal property or construction services to a construction contractor, or of tangible personal property to a government entity
• TRD Regulation GR 52:18 — the deductions apply to sales, not leases; leased equipment does not qualify

Cases cited:

• 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: Roadrunner Industrial Works, Inc.
• Decision PDF: D&O 96-26

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
ROADRUNNER INDUSTRIAL WORKS, INC.
I.D. No. 02-208406-00 1 No. 96-26
Assessment Nos. 2011493 and 2011494

DECISION AND ORDER

This matter came on for hearing on October 15, 1996 before Ellen Pinnes, Hearing Officer.

Roadrunner Industrial Works, Inc. ("the Taxpayer") was represented by Merrill Robinson, its

president and part owner, and Carol Robinson, its secretary and part owner. The Taxation and

Revenue Department ("the Department") was represented by Frank D. Katz, Special Assistant

Attorney General.

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

ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer, a corporation, is a small family-owned business that rents and sells

equipment, including equipment used in construction, as well as selling services for use in

construction.

2. On March 9, 1996, three assessments (Nos. 2011492, 2011493, and 2011494) were

issued to the Taxpayer. Assessment No. 2011494 was for corporate franchise taxes for 1992 and

1993. Assessment Nos. 2011492 and 2011493 were for gross receipts taxes for the periods of

January through June 1992 and June 1992 through June 1995, respectively. Interest and penalties

on unpaid taxes were included in each assessment.

3. The Taxpayer filed a timely protest of the assessments by a letter from its attorney
   dated March 28, 1996.

4. The Department acknowledged receipt of the protest of Assessment Nos. 2011493

and 2011494 by letter dated April 16, 1996. By a separate letter on or about the same date (not

included in the record here), the Department advised the Taxpayer's attorney that the protest of

Assessment No. 2011492 was not being accepted because the taxpayer had substantially paid that

assessment, and that the appropriate procedure as to that assessment was to submit a claim for

refund.

5. The Taxpayer has paid Assessment No. 2011494, for franchise taxes, and has

withdrawn its protest of that assessment.

6. In the course of its business, the Taxpayer rented equipment to persons engaged in

the construction business and to governmental entities. In some instances, the rental of equipment

included the services of an equipment operator. In the latter situation, a higher fee was charged per

unit of time, to cover the services of the operator as well as the rental of the equipment itself.

7. The Taxpayer accepted non-taxable transaction certificates (NTTCs) from the

lessees, did not collect from the lessees the amount of the applicable gross receipts tax on the

transactions at issue, and did not remit the tax to the Department.

8. Representatives of at least some of the governmental entities to which the Taxpayer

leased equipment advised the Taxpayer that it could accept NTTCs for the transactions at issue.

9. A representative of another equipment rental yard advised the Taxpayer that it could

not accept NTTCs for the transactions at issue.

10. The Taxpayer was uncertain as to whether receipts from these transactions were

deductible for purposes of the gross receipts tax. It therefore contacted the Department on three

separate occasions to inquire as to whether it could properly accept NTTCs for these transactions.

These contacts were made by Merrill Robinson, the president of the company, by Carol Robinson,

his wife and the secretary of the company, and by their oldest son.

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11. The advice received by the Taxpayer from the Department pursuant to these inquiries

varied somewhat. The contradictory nature of the information prompted the Taxpayer to make

repeated inquiries.

12. All of these contacts were oral. No written record of any of the contacts was made

by the Taxpayer.

13. The Taxpayer did not at any time submit a written inquiry to the Department

regarding the circumstances in which it could properly accept NTTCs and deduct receipts from gross

receipts for tax purposes.

14. The Department was not asked for and did not issue any written ruling or other

written response to the Taxpayer's inquiries.

15. Based on the information received from the Department, the Taxpayer believed that

it could properly accept the NTTCs for the transactions at issue and that the transactions were not

subject to gross receipts tax.

16. The Taxpayer at all times acted in good faith.

17. The Taxpayer does not challenge the assessment for gross receipts taxes. Although

the Taxpayer believed that it could accept the NTTCs and that the transactions were not subject to

the tax, it now concedes that the transactions were taxable.

18. The only remaining issue presented by this protest is whether interest and penalties

were properly assessed against the Taxpayer.

DISCUSSION

Interest

Section 7-1-67 NMSA 1978 provides for the imposition of interest on tax deficiencies:
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 ... until it is paid ... .

B. Interest due to the state under Subsection A ... shall be at the rate of fifteen
percent a year ... . (Emphasis added.)

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It is a well settled rule of statutory construction that the word "shall" is mandatory rather than

discretionary, unless a contrary legislative intent is clearly demonstrated. State v. Lujan, 90 N.M.

103, 560 P.2d 167 (1977). The New Mexico legislature has expressly reiterated this general rule in

§ 12-2-2(I) NMSA 1978 (in construing statutory provisions, the words "shall" and "must" are to be

construed as mandatory unless this would be inconsistent with manifest legislative intent or

repugnant to the context of the statute).

Section 7-1-67 requires that interest, at the rate of 15% per year, be imposed on the amount

of any unpaid taxes. No exceptions to this rule are provided for. Interest is intended to compensate

the state for the time-value of money which was not paid when it was due. It may be unpleasant to

pay interest on monies owed, particularly where the taxpayer is for some time unaware of the

existence of the debt, as was the case here. However, interest is not a penalty for late payment. It

is, rather, a means of making a creditor whole through reimbursement for not having had the use of

the money during the time it remained unpaid. While the interest rate imposed here may seem high,

that rate has been set by the legislature in the statute, and both the Department and the hearing

officer lack the authority to reduce it.

Penalties

The Tax Administration Act calls for the imposition of penalties where a taxpayer, "due to

negligence or disregard of rules and regulations, but without intent to defraud", fails to pay tax.

§ 7-1-69(A) NMSA 1978. The penalty is at the rate of two percent per month, up to a maximum of

10% of the unpaid tax.

The Department's regulations state that "negligence" within the meaning of § 7-1-69 means:
1) failure to exercise the degree of ordinary care and prudence that a reasonable
taxpayer would exercise in similar circumstances,
2) inaction where action is required,
3) inadvertence, indifference, thoughtlessness, carelessness, erroneous belief, or
inattention.

The Taxpayer here was aware that a question existed as to whether it could accept NTTCs

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for the transactions at issue.1 The Taxpayer itself was uncertain as to whether the receipts from

these transactions were properly deductible. It received conflicting information from some of its

lessees and from at least one other taxpayer in the same type of business. When the Taxpayer

contacted the Department for clarification, it apparently was given varying advice by the

Department's representatives who responded on the three separate occasions on which the Taxpayer

requested clarification.2 Although the information received by the Department was somewhat

inconsistent, the Taxpayer believed that the Department's position was that the transactions were

properly deductible for gross receipts tax purposes.

The Taxpayer did not simply ignore the issue of its possible tax liability. Rather, it

attempted to resolve the uncertainty about its acceptance of NTTCs by repeatedly contacting the

Department for clarification.

Counsel for the Department argued that the Taxpayer should have submitted a written

request and sought a written ruling on its situation. This, of course, would have been the better

course of action. However, the Taxpayer and its representatives here are not attorneys. They are

and have been in the business of renting construction equipment and providing services, such as

welding and equipment operation, on construction projects. It is unlikely that the usual procedure in

operations such as the Taxpayer's is to document scrupulously all interactions either among its

personnel or with outside entities, or to ensure that the substance of telephone conversations is

reduced to writing. The submission of a written request for a tax ruling, while good practice, would

no doubt not spring immediately to the Taxpayer's mind as a way of addressing the uncertainty

regarding its tax liability.

1
Deductions from gross receipts are permitted for receipts from the sale of tangible personal
property or construction services to a construction contractor or the sale of tangible personal property
to a government entity. §§7-9-51, 7-9-52, 7-9-54 NMSA 1978. The transactions here were leases
rather than sales and thus did not qualify for the deductions. See TRD Regulation GR 52:18.
2
It has not been shown that any advice given by the Department was erroneous. Each inquiry
was made by a different person acting on the Taxpayer's behalf, and the questions may have varied
sufficiently that Department personnel interpreted them differently and thus gave dissimilar answers.

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The Taxpayer was not negligent in failing to pay the tax at issue. While it misinterpreted the

applicable rules and regulations, it did not disregard them. The penalty provided for by § 7-1-69(A)

therefore does not apply here.

CONCLUSIONS OF LAW

1. By its attorney's letter of March 28, 1996, the Taxpayer filed a timely protest of

Assessment Nos. 2011493 and 2011494. Jurisdiction thus lies over the parties and the subject

matter of the protest.

2. The Taxpayer does not contest Assessment No. 2011493 insofar as it is for gross

receipts taxes owed. The validity of those taxes therefore is not before the hearing officer for

decision.

3. The Taxpayer failed to pay gross receipts taxes owed for the period at issue and

interest was properly imposed on the deficiency at the statutory rate.

4. The Taxpayer's failure to pay the taxes owed was not due to negligence or disregard

of rules and regulations, and penalties should be abated.

5. The Taxpayer has withdrawn its protest of Assessment No. 2011494, and the validity

of those taxes is not before the hearing officer for decision.

For the foregoing reasons, the Taxpayer's protest IS HEREBY GRANTED IN PART AND

DENIED IN PART. The Department IS HEREBY ORDERED TO ABATE THE PENALTY

PORTION OF ASSESSMENT NO. 2011493.

Done this 13th day of November, 1996.

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