Could a New Mexico securities broker avoid penalty and interest because he did not know commissions were taxable, could not pass the tax to clients, and believed enforcement was unfair?

Subject

Gary & Feliz Tixier (D&O 98-27)

Plain-English summary

Gary Tixier worked as an independent contractor selling securities and insurance in 1994-1996. He reported the commissions on federal Schedule C but did not pay New Mexico gross receipts tax because it never occurred to him that securities commissions were taxable. His accountant prepared the federal returns, but they never discussed gross receipts tax.

An IRS-state computer match led the Department to assess $2,011.92 gross receipts tax, $201.24 penalty, and $574.76 interest on Tixier's securities commissions. The assessment did not include his separate art-display income or insurance-sale income. Tixier paid the tax principal and protested penalty and interest.

Hearing Officer Margaret B. Alcock rejected his fairness arguments. New Mexico imposed gross receipts tax directly on the seller, not as a sales tax legally charged to the consumer. A seller could choose to pass the cost on, but inability to separately add it to a regulated commission did not affect the seller's duty to pay.

The assessment was not selective enforcement. The Department used a computer match for every New Mexico taxpayer whose federal Schedule C business income exceeded income on which gross receipts tax was reported. Tixier had no comprehensive evidence that large firms or similarly situated brokers were treated differently. The assessment was also within the statutory three-year period.

Interest was mandatory under Section 7-1-67(A), and financial hardship was not a basis for compromise. Penalty also stood. Tixier never asked his accountant about state gross receipts tax, so he had not relied on professional tax advice on that issue. His good-faith but erroneous belief and failure to investigate were negligence under the regulation. The protest was DENIED.

What this means for you

• Gross receipts tax is the seller's legal obligation. Whether industry rules let the seller separately charge a customer does not change liability.
• Computer matching was not selective enforcement. The process compared Schedule C income with reported state gross receipts across taxpayers.
• New Mexico's system is self-reporting. The Department did not have to warn Tixier before the statutory assessment period expired.
• Hiring an accountant is not enough by itself. The professional-reliance defense failed because Tixier never asked for advice about gross receipts tax and received none.
• Good faith and hardship did not remove statutory penalty and interest. The decision treated inattention and an erroneous belief as negligence, while interest was mandatory regardless of fault.

Key questions answered

Did Tixier dispute that the commissions were taxable?
No. He conceded the law imposed gross receipts tax and focused his protest on penalty, interest, fairness, and hardship.

Did inability to pass the tax through to customers matter?
No. Gross receipts tax was imposed on Tixier as the seller; customer reimbursement was a pricing issue, not a condition of liability.

Was he singled out for enforcement?
No evidence showed that. The assessment resulted from an automated federal-state income comparison applied generally.

Why didn't the accountant's involvement excuse penalty?
The accountant only prepared federal returns. Tixier did not ask about New Mexico gross receipts tax, so there was no advice on which he could reasonably rely.

Verbatim citations

The seller's obligation:

Although it is a common practice for sellers to pass the cost of the gross receipts tax on to the buyer, the seller’s ability to separately charge or obtain reimbursement of the tax does not affect the seller’s legal obligation to pay tax to the state.

The self-reporting rule applied to Tixier:

In this case, it was Mr. Tixier's responsibility to determine whether his business activities created a tax liability to the state, and he cannot shift this responsibility to the Department.

The penalty analysis:

Although Mr. Tixier acted in good faith, with no intention to avoid the payment of taxes, he was negligent in failing to take such action as was required to determine his tax liability to the state.

The holdings:

Pursuant to Section 7-1-67(A) NMSA 1978, interest was properly assessed against Mr. Tixier on his underreporting of gross receipts tax during the period January 1994 through December 1996.

Pursuant to Section 7-1-69(A) NMSA 1978, Mr. Tixier was negligent in underreporting gross receipts tax during the period January 1994 through December 1996 and penalty was properly assessed.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Gary & Feliz Tixier
• Decision PDF: D&O 98-27

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 GARY AND FELIZ TIXIER 98-27
ID. NO. 02-341719-00 6
ASSESSMENT NO. 2155190

DECISION AND ORDER

This matter came on for formal hearing on April 21, 1998, before Margaret B. Alcock,

Hearing Officer. Gary and Feliz Tixier were represented by Gary Tixier. The Taxation and Revenue

Department ("Department") was represented by Monica M. Ontiveros, Special Assistant Attorney

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

AS FOLLOWS:

FINDINGS OF FACT

1. During the years 1994, 1995 and 1996, Gary Tixier worked as an independent

contractor selling securities and insurance. Mr. Tixier received a commission on his sales.

2. Mr. Tixier was also involved in a separate business involving art displays.

3. During the years at issue, Mr. Tixier reported his commissions from selling securities

and insurance to the Internal Revenue Service on a Schedule C to Federal Form 1040, Profit or Loss

from Business. Mr. Tixier filed a separate Schedule C to report the income from his art display

business.

4. It did not occur to Mr. Tixier that he should be paying gross receipts tax on the

commissions he received from selling securities.

5. Mr. Tixier hired an accountant to prepare his 1994, 1995 and 1996 Federal Forms

6. Mr. Tixier did not have any discussions with the accountant concerning the New Mexico
   gross receipts tax, nor did the accountant inform Mr. Tixier that he should be paying gross receipts

tax on his commissions.

6. On July 7, 1997, as a result of information obtained from Mr. Tixier's Schedule C to

his 1994, 1995 and 1996 income tax returns, the Department issued Assessment No. 2155190 for the

period January 1994 through December 1996 in the amount of $2,011.92 gross receipts tax, $201.24

penalty and $574.76 interest. The Department's assessment represents gross receipts tax on Mr.

Tixier's income from selling securities but does not include his income from his art display business

or from selling insurance.

7. On July 21, 1997, Mr. Tixier filed a letter protesting the Department's assessment of

penalty and interest. Mr. Tixier has paid the assessment of tax principal.

DISCUSSION

At issue is whether Mr. Tixier is liable for interest and penalty assessed on his underpayment

of gross receipts tax during the period January 1994 through December 1996. Mr. Tixier protests the

assessment on several grounds, including his belief that the gross receipts tax on commissions earned

by securities brokers is unfair, that securities brokers are at a disadvantage because they are unable to

pass the tax on to their customers, and that the tax is unevenly enforced. More specifically, Mr.

Tixier argues that he should not be liable for penalty and interest because he was not notified of his

tax liability in a timely manner and payment of penalty and interest will create a hardship on himself

and his wife.

Fairness of Gross Receipts Tax. Mr. Tixier's primary concern with the Department's

assessment is his belief that the gross receipts tax on securities brokers is unfair. This issue must be

addressed by the legislature. Mr. Tixier concedes that he owes the gross receipts tax under the law

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as it is now written. The Department is charged with enforcing New Mexico's tax laws as passed by

the legislature. The Department has no authority to ignore or modify the law.

Inability to Separately Charge Gross Receipts Tax. Mr. Tixier also argues that the tax on

securities brokers is unfair because they are not able to pass the cost of the gross receipts tax on to

their clients.1 Mr. Tixier's argument is based on a misunderstanding of New Mexico’s tax system.

New Mexico does not have a sales tax that is charged to and collected from the final consumer. New

Mexico has a gross receipts tax that is imposed directly on the seller of goods and services. Section

7-9-4 NMSA 1978 imposes an excise tax on the gross receipts of any person engaging in business in

New Mexico. As a practical matter, the tax is simply part of the seller’s cost of doing business.

Although it is a common practice for sellers to pass the cost of the gross receipts tax on to the buyer,

the seller’s ability to separately charge or obtain reimbursement of the tax does not affect the seller’s

legal obligation to pay tax to the state.

Selective Enforcement. Mr. Tixier believes that the gross receipts tax is being selectively

enforced and that he was unfairly singled out by the Department. Tom Dillon, an auditor in the

Department's protest office, testified that Mr. Tixier was assessed as the result of a tape match that

compared the business income Mr. Tixier reported for federal income tax purposes with the business

income Mr. Tixier reported for New Mexico gross receipts tax purposes. Mr. Dillon testified that

every New Mexico taxpayer whose federal Schedule C income exceeds the income on which gross

receipts tax has been paid will receive an inquiry from the Department. The Schedule C tape match

is performed by computer. There is no indication that anyone at the Department selectively targeted

Mr. Tixier for assessment.

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Mr. Tixier maintains that tax cannot be added to his commission because the securities industry is federally
regulated, but did not provide the specific federal statute or regulation that pertains to this issue.

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Mr. Tixier also questions whether large brokerage houses are being asked to pay gross

receipts tax on their commissions. Although Mr. Tixier has the impression that only small

independent securities brokers are being assessed the tax, he admitted that he has not conducted a

comprehensive survey. In fact, the only securities firm that he knows has not been paying gross

receipts tax is the securities firm for which he works. This testimony does not present a basis for a

finding of discrimination or selective enforcement.

Delay in Assessment. Mr. Tixier argues that he should not be penalized for the Depart-ment's

failure to notify him of his gross receipts tax liability in a timely manner. Under the Tax

Administration Act, the Department has three years from the end of the calendar year in which a tax

is due to issue an assessment. Section 7-1-18(A) NMSA 1978. The Department’s July 16, 1997,

assessment of gross receipts tax, penalty and interest for the period January 1994 through December

1996 was well within this three-year assessment period. Mr. Tixier has not cited any authority that

would preclude the Department from enforcing a timely assessment on the basis of unfair delay.

New Mexico has a self-reporting tax system that relies upon taxpayers, who have the most

accurate and direct knowledge of their activities, to determine their tax liabilities and accurately report

those liabilities to the state. There are insufficient government resources to audit every taxpayer

periodically to assure tax compliance. Every person is therefore charged with the reasonable duty to

ascertain the possible tax consequences of his action. 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). In this

case, it was Mr. Tixier's responsibility to determine whether his business activities created a tax liability

to the state, and he cannot shift this responsibility to the Department.

Hardship. Mr. Tixier asks the Department to consider that the assessment of interest and

penalty will create a financial hardship on himself and his wife, who has been ill for several years.

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While unfortunate, this fact does not provide the Department with a basis for abating the assessment.

Section 7-1-20 NMSA 1978 provides that the Secretary of the Department may compromise an

assessed tax when he has a good faith doubt as to the taxpayer's liability for payment of the tax. The

Secretary may not abate an assessment based on the taxpayer's inability to pay the tax. Regulation 3

NMAC 1.6.14.

Statutory Basis for the Department's Assessment of Interest and Penalty. Section 7-1-

17(C) NMSA 1978 provides that any assessment of taxes made by the Department is presumed to be

correct. Section 7-1-3(U) NMSA 1978 defines tax to include not only the amount of tax principal

imposed but also, unless the context otherwise requires, “the amount of any interest or civil penalty

relating thereto." Thus, the presumption of correctness of an assessment of taxes also applies to the

assessment of interest and penalty. See also, El Centro Villa Nursing Center v. Taxation and Revenue

Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989).

Assessment of Interest. Section 7-1-67 NMSA governs the imposition of interest on

late payments of tax and provides, in pertinent part:

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).

The legislature’s use of the word “shall” indicates that the assessment of interest is mandatory rather

than discretionary. State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977). The legislature has directed the

Department to assess interest whenever taxes are not timely paid and has provided no exceptions to the

mandate of the statute. The assessment of interest is not designed to punish taxpayers, but to

compensate the state for the time value of unpaid revenues. The reason for a late payment of tax is

irrelevant to the imposition of interest. Even taxpayers who obtain a formal extension of time to pay

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tax are liable for interest from the original due date of the tax to the date payment is made. Section

7-1-13(E) NMSA 1978. While it could be argued that the rate of interest is excessive in comparison

with current market rates, that is a matter within the sound discretion of the legislature. The

Department does not have authority to substitute its own judgment for that of the legislature in

setting the rate of interest to be imposed.

Assessment of Penalty. Section 7-1-69 NMSA 1978 (1995 Repl.Pamp. and 1996

Supp.) governs the imposition of penalty during the periods at issue in this protest. Subsection A

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...

Taxpayer "negligence" for purposes of assessing penalty is defined in Regulation 3 NMAC 1.11.10

(formerly GR 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, Mr. Tixier's failure to pay gross receipts tax was based on his inattention to the

requirements of New Mexico's tax laws and his erroneous belief that commissions on the sale of

securities were not subject to tax. Although Mr. Tixier hired an accountant to prepare his federal

income tax returns, he did not make any inquiry as to whether there might be other taxes due in

connection with the income reported as business income on Schedule C of his Federal Forms 1040.

Thus, although reliance on the advice of a competent tax advisor can be a defense to the imposition of

penalty under Regulation 3 NMAC 1.11.11(4), there is no evidence that Mr. Tixier sought or received

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any advice with regard to his gross receipts tax liability for the years in question. Although Mr. Tixier

acted in good faith, with no intention to avoid the payment of taxes, he was negligent in failing to take

such action as was required to determine his tax liability to the state. For this reason, penalty was

properly imposed under Section 7-1-69(A).

CONCLUSIONS OF LAW

1. Mr. Tixier filed a timely, written protest to Assessment No. 2155190, and jurisdiction

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

2. Pursuant to Section 7-1-67(A) NMSA 1978, interest was properly assessed against Mr.

Tixier on his underreporting of gross receipts tax during the period January 1994 through December

1996.

3. Pursuant to Section 7-1-69(A) NMSA 1978, Mr. Tixier was negligent in underreporting

gross receipts tax during the period January 1994 through December 1996 and penalty was properly

assessed.

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

DONE, this 29th day of April 1998.

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