If you didn't pay New Mexico income tax because you genuinely believed you were exempt, can the interest on the unpaid tax be waived?

Plain-English summary

Wilbe Antone (a member of the Oneida Tribe, married to a member of the Navajo Nation) lived and worked on the Navajo Reservation, and his income came from that reservation work. No New Mexico income tax was withheld from his pay, and — believing that as an Indian working on an Indian reservation he wasn't subject to New Mexico income tax — he paid none for tax years 1987 through 1993. In 1995 the Department issued six assessments for those years' personal income tax, plus penalty and interest. Mr. Antone agreed the tax was owed and paid it (in full on some assessments, partially on others), and the Department abated the penalties. His only remaining challenge was to the interest, which he argued was unfair given his good faith.

The Hearing Officer denied the protest:

• Interest is mandatory and has no good-faith exception. Section 7-1-67 says interest "shall" be paid on unpaid tax at 15% a year until it's paid, with no exceptions. "Shall" is mandatory (§ 12-2-2(I); State v. Lujan).
• Interest is not a punishment. It compensates the state for the time-value of the money it didn't have when the tax was due. It may feel unfair to owe interest on a debt you didn't know you had, but that doesn't change the result.
• Good faith cut against the penalties, not the interest. Because there was no suggestion Mr. Antone acted culpably or tried to evade tax, the Department abated the penalties (which are fault-based). But neither the Department nor the Hearing Officer has authority to reduce the statutory interest rate or waive the interest.

Note: because Mr. Antone did not contest the income tax itself, the Hearing Officer did not decide whether his reservation income was actually taxable by New Mexico — that question wasn't before her. The decision is only about interest.

What this means for you

A sincere belief that you're exempt doesn't stop interest

Even a genuine, reasonable belief that your income isn't taxable — including a belief rooted in a real legal doctrine — won't get interest waived if it turns out tax was owed. Interest runs from the original due date regardless of your state of mind. If you're unsure whether income is taxable in New Mexico, the safe course is to get a determination or pay under protest, because being wrong in good faith still costs interest.

Good faith helps with penalties, not interest

New Mexico draws a sharp line: penalties are fault-based and can be abated when you acted reasonably and without negligence (as happened here). Interest is not fault-based — it's the price of the state not having its money on time — so it is mandatory at the statutory rate and cannot be abated on fairness or good-faith grounds. Expect to pay it even when the penalties are dropped.

The interest rate is set by the Legislature

The Hearing Officer noted the rate may "seem high," but it's fixed by statute (15% a year at the time), and neither the Department nor the Hearing Officer can lower it. Don't expect to negotiate the rate down; the way to limit interest is to pay the underlying tax as soon as possible.

If exemption is your real issue, contest the tax — not just the interest

Mr. Antone conceded the tax and challenged only interest, so the exemption question was never decided. If you believe income genuinely isn't taxable (for example, certain income earned by a tribal member in Indian country), that's an argument about the tax itself and must be raised directly. Conceding the tax and fighting only the interest leaves you owing both the tax and mandatory interest.

Common questions

Q: I honestly believed I didn't owe the tax. Why do I still owe interest?
A: Because interest isn't a penalty for being wrong — it compensates the state for the time it went without the money. Section 7-1-67 makes it mandatory with no good-faith exception. Your good faith is why the penalties were abated, but it doesn't reach the interest.

Q: The rate seems really high. Can it be reduced?
A: No. The 15% rate was set by the Legislature. Neither the Department nor the Hearing Officer has authority to lower it or waive the interest.

Q: The penalties were dropped — why not the interest too?
A: Penalties are based on fault, so they can be abated when you acted in good faith. Interest is based on time, not fault, so it applies regardless and cannot be abated.

Q: Wasn't his reservation income exempt from New Mexico tax?
A: The decision doesn't answer that. Mr. Antone agreed the tax was owed and challenged only the interest, so the Hearing Officer never decided whether the income was taxable. If exemption is your issue, you have to contest the tax itself.

Q: Does this decision apply to my situation?
A: Not directly. A Decision and Order resolves one taxpayer's protest on its specific facts and the law in effect at the time. It illustrates New Mexico's mandatory-interest rule, but your facts may differ.

Citations and references

Statutes:

• § 7-1-67 NMSA 1978 — interest on a tax deficiency "shall" be paid to the state at 15% per year from the day after the tax becomes due until it is paid; no exceptions are provided
• § 12-2-2(I) NMSA 1978 — in construing statutes, "shall" and "must" are mandatory unless inconsistent with manifest legislative intent

Case cited:

• State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977) — the word "shall" is mandatory rather than discretionary unless a contrary legislative intent is clearly demonstrated

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Wilbe Antone
• Decision PDF: D&O 97-22

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
WILBE ANTONE No. 97-22
PROTEST TO ASSESSMENT NOS. 613871,
613872, 613873, 614053, 614107, 614112

DECISION AND ORDER

This matter came on for hearing on May 12, 1997, before Ellen Pinnes, Hearing Officer.

Wilbe Antone ("the Taxpayer") appeared on his own behalf. The Taxation and Revenue

Department ("the Department") was represented by Bruce J. Fort, Special Assistant Attorney

General.

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

ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The assessments at issue in this matter are for personal income taxes plus penalty and
   interest. Assessment Nos. 613871, 613872, and 613873 are for tax years 1987 through 1989 and

were issued by the Department on March 26, 1995. Assessment No. 614053, for 1991, was issued
on April 3, 1995. Assessment Nos. 614107 and 614112 are for 1992 and 1993 and were issued on

April 6, 1995.

2. By his letter dated April 10, 1995, the Taxpayer filed a timely protest to the foregoing

assessments.

3. The Taxpayer is a member of the Oneida Tribe. His wife is a member of the Navajo

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Nation. The Taxpayer and his wife reside on the Navajo Reservation and did so during the time

relevant to the assessments at issue.

4. The Taxpayer's income was received from work on the Navajo Reservation.

5. New Mexico income tax was not withheld from the Taxpayer's pay.

6. As an Indian working on an Indian reservation, the Taxpayer believed that he was not

subject to New Mexico income tax.

7. Upon receiving the assessments, the Taxpayer acquiesced in the assessment of income

tax, but challenged imposition of penalty and interest.

8. The Taxpayer has made payments to the Department to satisfy the liability for income

tax included in the assessments. The tax due under several of those assessments has been paid in

full. The Taxpayer has partially paid the tax due under the remaining assessments.

9. The Department has agreed to abate the penalties assessed against the Taxpayer.

DISCUSSION

The Taxpayer does not contest the assessment of income tax for the years at issue, and the

Department has abated the penalties included in the original assessments. Thus, the only issue

remaining for decision is the propriety of interest imposed on the tax deficiencies. The Taxpayer

challenges assessment of interest on the grounds that it is unfair to charge interest when he acted in

good faith and believed that he was not liable for tax.

The New Mexico Tax Administration Act 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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§7-1-67 NMSA 1978.

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.

The Taxpayer here apparently sees interest as a punishment and believes that it should not

be imposed when he acted innocently and in good faith. However, interest is not a penalty for late

payment. 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. But interest is

not intended as a punishment. 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.

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There is no contention here that the Taxpayer acted otherwise than in complete good faith,

or that he was in any way trying to evade his tax obligation. The Department apparently agrees

that the Taxpayer's conduct was in no way culpable, as it has abated the penalties originally

assessed. However, the interest assessed is mandated by statute and cannot be abated.

CONCLUSIONS OF LAW

1. By his letter of April 10, 1995, The Taxpayer filed a timely protest of Assessment

Nos. 613871, 613872, 613873, 614053, 614107 and 614112. Jurisdiction thus lies over the parties

and the subject matter of this protest.

2. The Taxpayer does not contest the assessment insofar as it is for personal income taxes

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

3. The Department has abated penalties assessed against the Taxpayer. The validity of the

penalties therefore is not before the hearing officer for decision.

4. The Taxpayer failed to pay New Mexico personal income tax owed for the years at issue

and interest was properly imposed on the deficiency at the statutory rate of fifteen percent per year.

For the foregoing reasons, the Taxpayer's protest of interest assessed on the tax deficiency

IS HEREBY DENIED.

DONE, this 9th day of June, 1997.

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