I didn't know about New Mexico's gross receipts tax and my tax preparer never mentioned it — do I still owe the penalty and interest, or just the tax?

Plain-English summary

Steven R. Bone ran a small, one-person home-remodeling business. He had moved to New Mexico about five years earlier and simply didn't know the state's gross receipts tax existed — a tax on the privilege of doing business. He used H&R Block every year to prepare his state and federal returns, and they even prepared a federal Schedule C reporting his business income and expenses, but they never mentioned gross receipts tax or asked why he had no expense for it.

Through an IRS information-sharing agreement, the Department discovered the unreported business income and, on September 26, 1996, assessed $3,091.74 in gross receipts tax, $309.12 penalty, and $1,085.29 interest for January 1993 through December 1995. Bone paid the tax (he had to borrow to do it) and did not dispute it — but he protested the penalty and interest, arguing it was unfair given that he never knew and that the Department took years to tell him.

Hearing Officer Gerald B. Richardson denied the protest:

• Not knowing is negligence. New Mexico's tax system is self-reporting: the duty to find out your own tax consequences rests on you, not the Department. "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). The right time to ask is when you start the business — after which he could have passed the tax on to customers.
• The Department has no duty to notify you (or to do it sooner). In a self-reporting system there aren't resources to audit everyone, and the penalty exists precisely so taxpayers have an incentive to learn and report — otherwise it would always pay to underreport and settle up only if caught.
• Using an income-tax preparer wasn't reliance on advice about this tax. Reliance on a tax advisor or accountant can defeat a penalty (Regulation TA 69:4) — but only if you actually got advice on the tax at issue. Bone consulted H&R Block for income taxes and received no advice about gross receipts tax, so there was nothing to rely on. (The Hearing Officer added, in a footnote, that it was fair to question the preparer's diligence for never asking why there was no gross-receipts-tax expense.)
• 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 penalty — it compensates the state for the time-value of money it didn't have — so it applies regardless of why the tax was late, and neither the Department nor the Hearing Officer can lower the rate.

What this means for you

The duty to learn about a tax is yours, not the state's

New Mexico won't send you a welcome letter listing every tax you owe. In a self-reporting system, you're expected to identify your own obligations, and "no one told me" is treated as negligence rather than an excuse. If you start a business, ask the Department up front what taxes apply — before receipts start coming in.

Gross receipts tax is separate from income tax — and easy to miss

Bone paid his income taxes correctly; the gap was gross receipts tax, a different tax on the act of doing business. Many small operators who only think about income tax get caught this 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

The reliance-on-a-professional defense is real, but narrow: it protects you only where you actually received (and reasonably relied on) advice about the specific tax. An income-tax preparer who was never engaged on gross receipts tax — and never raised it — doesn't give you that shield. If you want protection, make sure your advisor is actually addressing your business taxes, and get it in writing.

Interest almost never gets waived — even in a sympathetic case

Bone borrowed money just to pay the tax, and the Hearing Officer was plainly sympathetic, but the interest still stood. Because interest compensates the state for money it should have had, it's mandatory and rate-fixed by the Legislature. Plan on paying it in full whenever tax is paid late.

Common questions

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

Q: Shouldn't the Department have told me sooner, before penalty and interest piled up?
A: The Department has no duty to notify you of your obligations, and the delay doesn't excuse the penalty or interest. The responsibility to identify and report the tax was yours from the start.

Q: I use a tax preparer. Doesn't that protect me from the penalty?
A: Only if you actually received advice about the tax in question. Using H&R Block for income taxes gave no advice about gross receipts tax, so the reliance defense didn't apply. Make sure your advisor is engaged on your business taxes specifically.

Q: Can the interest be reduced because paying it is a hardship?
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 or lowered, even in a hardship situation.

Citations and references

Statutes and regulations:

• § 7-1-69(A) NMSA 1978 (1995 Repl. Pamp.) — negligence penalty of 2% per month, up to 10%, for failure to pay due to negligence or disregard of rules
• Regulation TA 69:3 — definition of taxpayer negligence; Regulation TA 69:4 — reliance on the advice of a tax advisor or accountant can be a defense to penalty
• § 7-1-67(A) NMSA 1978 — interest on unpaid tax, "without regard to any extension of time or installment agreement"
• § 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 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 unless a contrary legislative intent is clearly shown

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Steven R. Bone
• Decision PDF: D&O 96-29

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 STEVEN R. BONE, No. 96-29
ID. NO. 02-318402-00 7, PROTEST
TO ASSESSMENT NO. 2073732

DECISION AND ORDER

This matter came on for formal hearing before Gerald B. Richardson, Hearing Officer, on

December 20, 1996. Mr. Steve Bone, hereinafter, "Taxpayer," represented himself at the hearing.

The Taxation and Revenue Department, hereinafter, "Department," was represented by Gail

MacQuesten, 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 operated a small, one-person business, which performed home

remodelling services.

2. The Taxpayer moved to New Mexico five years ago and until the assessment under

protest was issued by the Department, the Taxpayer was not aware of New Mexico's gross receipts tax

which is imposed upon the privilege of engaging in business.

3. The Taxpayer went to H&R Block every year to have his state and federal taxes

prepared. As part of preparing Mr. Bone's federal income tax return, H&R Block prepared a Federal

Schedule C, reporting the Taxpayer's income and expenses from his remodelling business.

4. H&R Block never informed the Taxpayer about New Mexico's gross receipts tax and

never inquired of the Taxpayer why there was no expense reported for gross receipts taxes paid to

New Mexico.

5. The Taxpayer never contacted the Department, prior to the issuance of the assessment

at issue, to determine whether there were any tax consequences beyond the responsibility for income
taxes, which arise as a result of engaging in business in New Mexico.

6. The Department and the Internal Revenue Service have entered into an agreement

which allows the two taxing agencies to share information they possess about taxpayers.

7. As a result of information the Department received from the Internal Revenue

Service, the Department determined that the Taxpayer had gross income from engaging in business in

New Mexico upon which the Taxpayer had not reported or paid gross receipts taxes.

8. The Department does not contend that there was any underpayment of New Mexico

income taxes by the Taxpayer.

9. As a result of the information received from the Internal Revenue Service, on

September 26, 1996 the Department issued Assessment No. 2073732 to the Taxpayer, assessing

$3091.74 in gross receipts taxes, $309.12 in penalty and $1,085.29 in interest for the period of

January, 1993 through December, 1995.

10. In response to the assessment, the Taxpayer promptly contacted the Department to

determine its basis and to find out what remedies were available.

11. On October 22, 1996 the Taxpayer filed a timely, written protest to Assessment No.

2073732.

12. The Taxpayer has paid the tax principle portion of Assessment No. 2073732 and does

not dispute his liability for that portion of the assessment. The Taxpayer does dispute his liability for

the penalty and interest portion of the assessment.

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DISCUSSION

The issues to be determined are whether the Department's assessment of penalty and interest

in the circumstances of this case was proper. The Taxpayer is upset because he never knew about

New Mexico's gross receipts tax and that by engaging in business, he was liable for gross receipts tax

upon the receipts generated by his business activities. The Taxpayer had to borrow money in order to

pay the tax principle portion of the assessment and to pay penalty and interest as well would be a great

hardship. The Taxpayer also feels that it is unfair to be assessed penalty and interest because it took

the Department so long to bring it to his attention that he was subject to gross receipts taxes on his

business activities.

The imposition of penalty is governed by the provisions of NMSA 1978, § 7-1-69(A) (1995

Repl. Pamp.), which imposes a penalty of two percent per month, up to a maximum of ten percent:
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 or to file by
the date required a return regardless of whether any tax is due,....

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

Thus, there is no contention that the failure to report and pay taxes was based upon any conscious

attempt by the Taxpayer to underreport taxes. 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 the Taxpayer'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

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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 NMSA 1978, § 7-1-69. 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).

The Taxpayer's argument that the Department should have notified him about his obligation

to pay gross receipts taxes, or at least notify him sooner than it did, fails to understand that our

self-reporting tax system places the burden of knowledge about the tax consequences of our actions

upon taxpayers rather than on the taxing authorities. A self-reporting tax system relies upon

taxpayers, who have the most accurate and direct knowledge of their activities so as to make a

judgment about taxability, to accurately report 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, Mr. Bone failed to inquire of the tax authorities if he might have any tax liability

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

commencement of a business. If that had been done, the Taxpayer would have understood his tax

obligations and he could have done what most businesses do with respect to the gross receipts tax,

which is to pass the cost of the tax on to the customer at the time the goods or services are invoiced.

Although Mr. Bone did consult with a tax advisor, H&R Block, this was not done until year end.

Because Mr. Bone was not aware of gross receipts taxes, he did not know to inquire of H&R Block

about any business tax liability and he received no advice from them about any taxes other than

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income taxes.1 Thus, although reliance upon the advice of tax counsel or an accountant can be a

defense to the imposition of penalty under TA Regulation 69:4, there was no evidence in this case that

Mr. Bone received any advice with regard to gross receipts taxes so as to obviate the imposition of

penalty.

In this case, although the Taxpayer acted in good faith, with no intention to avoid the payment

of taxes, the Taxpayer was negligent in failing to take such action as was required to determine his

business tax liability. Because the Taxpayer was negligent, penalty was properly imposed.

NMSA 1978, § 7-1-67(A) 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 § 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

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H&R Block is widely known as an income tax preparation service. In all probability, it was
H&R Block's understanding that they were being engaged only for purposes of preparing the
Taxpayer's income tax returns. Nonetheless, it makes one question the competency of their service
that they failed to inquire of the Taxpayer why he had no business expense for gross receipts taxes
given the broad applicability of the gross receipts tax to nearly all business activities in New Mexico.

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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

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. Because the Taxpayer was late in making payment of the

gross receipts taxes assessed in this case, interest was properly imposed.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment No. 2073732, pursuant to

NMSA 1978, § 7-1-24 and jurisdiction lies over both the parties and the subject matter of this protest.

2. The Taxpayer was negligent in failing to determine the tax consequences of engaging

in business in New Mexico and penalty was properly imposed for failing to timely report and pay

gross receipts taxes.

3. The Taxpayer was late in paying gross receipts taxes upon his receipts from engaging

in business in New Mexico and interest was properly imposed.

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

DONE, this 27th day of December, 1996.

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