Does mailing a New Mexico gross receipts tax return and check count as timely payment when the Department never receives either one?

Subject

James C. Ellis (D&O 98-42)

Plain-English summary

Albuquerque attorney James C. Ellis had an excellent history of filing and paying gross receipts tax on time. For January 1995, his accountant prepared the monthly CRS return, and Ellis's office wrote a $657.09 check dated February 20, 1995 and mailed both to the Department using its normal procedure.

The Department never recorded receiving the return or check, and the check never cleared Ellis's bank account. Monthly account reconciliations listed it as outstanding, but the list did not identify the payee. More than a year later, Ellis's accountant called the old check to his attention. Ellis voluntarily sent a duplicate return and replacement check without any demand from the Department. The Department then assessed $65.70 penalty and $131.42 interest for late payment; it later abated the penalty, leaving only interest in dispute.

Hearing Officer Gerald B. Richardson believed that Ellis's office had mailed the original return and check. But mailing was not enough when neither item was received. Under 3 NMAC 10.2.2, if the Department does not receive a mailing, its contents are not timely. Because the assessment was presumed correct and Ellis had no proof the Department actually received the payment, the tax was unpaid when due.

Interest was therefore mandatory under Section 7-1-67(A). Ellis's strong compliance history and forthright self-correction could not create an exception the statute did not provide. The separate ten-day rule in Section 7-1-67(A)(3) only stops interest from accruing after the Department makes a demand when the taxpayer pays within ten days; it does not forgive interest that accumulated before a demand. No demand was made here, so the exception did not apply. The protest was DENIED.

What this means for you

• A mailed tax payment is not timely if the Department never receives it. The Hearing Officer accepted that Ellis mailed the check, but delivery — not merely sending — was necessary for payment.
• An uncleared tax check is an important warning. Ellis's reconciliations showed the check outstanding for more than a year, but they did not name the payee, and the problem was not escalated until May or June 1996.
• A good filing history may support penalty relief but does not remove statutory interest. The Department abated Ellis's penalty, yet interest remained because the tax was not received when due.
• Voluntarily fixing the problem can stop additional interest, but it does not erase interest already accrued. Ellis paid before the Department demanded payment and potentially prevented more interest from accumulating.
• The ten-day demand rule is narrow. It protects a taxpayer from post-demand interest when payment is made within ten days. It is not a rule that interest begins only after a demand.

Key questions answered

Did the Hearing Officer believe Ellis mailed the original return and check?
Yes. The decision said there was no doubt that Ellis wrote and mailed the check with sufficient funds. The problem was the lack of evidence that the Department actually received it.

Why did the assessment still stand?
Assessments, including assessed interest, are presumed correct. The check never cleared, the Department had no record of either the return or payment, and Ellis could not prove delivery.

Why was the penalty abated but interest upheld?
The Department removed the penalty, consistent with Ellis's excellent payment history and apparent good faith. Interest was governed by Section 7-1-67(A), which said interest "shall" be paid when tax is not paid on time and gave no compliance-history exception.

Did paying before a Department demand eliminate interest?
No. Section 7-1-67(A)(3) forgave interest only for the period after a demand when tax was paid within ten days. It did not forgive interest accrued before a demand, and the Department had made no demand in this case.

Verbatim citations

The rule for an unreceived mailing:

If a mailing is not received by the department, the contents of the mailing are not timely.

The mandatory-interest rule in Section 7-1-67(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....

The ten-day demand exception:

if demand is made for payment of any tax including accrued interest, and if such tax is paid within ten days after the date of such demand, no interest on the amount so paid shall be imposed for the period after the date of the demand.

The holding on receipt and timeliness:

Because the Department never received the Taxpayer’s original payment of its taxes for the January, 1995 reporting period, those taxes were not paid when they were due.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: James C. Ellis
• Decision PDF: D&O 98-42

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
JAMES C. ELLIS, ESQ.
ID. NO. 02-096130-00 8, PROTEST TO NO. 98-42
ASSESSMENT NO. 2044140

DECISION AND ORDER

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

Officer, on July 6, 1998. James C. Ellis, Esq., 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 arguments presented, IT IS DECIDED AND ORDERED

AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer is an attorney whose law offices are located in Albuquerque,

New Mexico.

2. The Taxpayer has been in practice since 1981.

3. The Taxpayer is conscientious about ensuring that gross receipts taxes are

reported and paid in a timely manner every month and has an excellent record of timely

payment with the Department.

4 The process followed every month by the Taxpayer with respect to the

payment of gross receipts taxes is that the Taxpayer’s Certified Public Accountant
prepares the taxpayer’s monthly CRS return, which is the return upon which gross

receipts tax, compensating tax and withholding tax are reported to the Department. The

return is prepared to leave ample time for Mr. Ellis to sign and mail in the return before

the due date. The accountant sends the prepared return together with an envelope pre-

addressed to the Department to the Taxpayer’s office manager. A check in the amount of

the tax due is prepared and after Mr. Ellis has signed the return, the return and check are

mailed to the Department. The mailing is accomplished in one of two ways. Either the

mail is picked up by the postman when he makes his daily mail delivery to the Taxpayer’s

office in the morning or it is taken by Mr. Ellis’ secretary and deposited in a post office

drop box.

5. The Taxpayer followed these same procedures when filing its CRS report

for the January, 1995 reporting period. That return reported that the Taxpayer owed

$657.09 in gross receipts tax for that period. The Taxpayer enclosed check no. 6742,

dated February 20, 1995, in the amount of $657.09 with its return and mailed it to the

Department.

6. The Department has no record of receiving the Taxpayer’s original return

and payment for the January, 1995 reporting period.

7. Check no. 6742 never cleared the Taxpayer’s checking account.

8. The Taxpayer’s accountant reconciles the Taxpayer’s checking account on

a monthly basis and provides copies of those reconciliations to the Taxpayer.

9. On March 13, 1995, the Taxpayer’s accountant provided the Taxpayer

with a reconciliation of the Taxpayer’s checking account showing that check no. 6742

had not cleared the Taxpayer’s account. The listing of check no. 6742 was included with

2
the listing of all outstanding checks. The listing provides the check number, the date

written and the amount, but does not list who the payee of the check is or otherwise point

out that the check was to the Department for payment of taxes.

10. The Taxpayer continued to receive monthly checking account

reconciliations which listed check no. 6742 as outstanding for the next year. Sometime in

May or early June, of 1996, the Taxpayer’s accountant brought it to the attention of the

Taxpayer that the check to the Department remained outstanding. The Taxpayer then

prepared a duplicate return, issued another check in the amount of $657.09 and mailed

them to the Department.

11. After receiving the Taxpayer’s duplicate return and payment for the

January, 1995 reporting period, on June 27, 1996 the Department issued Assessment no.

2044140, assessing $65.70 in penalty and $131.42 in interest for the late payment of taxes

for the January, 1995 reporting period.

12. Although the Taxpayer had an excellent reporting history with the

Department, the Department never notified or attempted to notify the Taxpayer that it had

not received a return and payment from the Taxpayer for the January 1995 reporting

period.

13. The Department has a policy to notify Taxpayers under the Combined

Reporting System (“CRS”) who fail to file returns after they fail to report for two or more

reporting periods.

14. On July 1, 1996, the Taxpayer filed a written protest of Assessment no.

2044140 with the Department, protesting the imposition of penalty and interest.

3

15. The Department has abated the penalty portion of Assessment no.

2044140.

DISCUSSION

The sole issue to be determined herein is whether the Taxpayer is liable for the

interest assessed for the late payment of taxes. The Taxpayer argues that no interest

should be owing on several grounds. First, the Taxpayer relies upon its history of timely

payment of taxes and the fact that it handled the payment of taxes for the January 1995

reporting period in the same manner as it always has for other reporting periods as

evidence that it did send the payment to the Department along with its return, which

should be treated as a timely payment of tax. Secondly, the Taxpayer relies upon the fact

that it discovered the fact that its check had never cleared itself, with no notice from the

Department, and took it upon itself to submit an additional return and payment to the

Department. Since the Department would not have issued the subject assessment but for

the Taxpayer’s own actions, the Taxpayer argues that it should not be assessed interest.

Finally, as will be explained in more detail below, the Taxpayer argues that Section 7-1-

67(a)(3) requires that interest can only be imposed for periods after the Department has

made a demand for payment, and since there was no such demand in this case, the

assessment of interest is invalid.

Prior to addressing these arguments, it should be noted that Section 7-1-17(C)

NMSA provides that there is a presumption of correctness which attaches to any

assessment of tax. “Tax” is defined at Section 7-1-3(U) to include, “the amount of any

interest or civil penalty relating thereto”, unless the context of the statute construed

requires otherwise. Because there is nothing in Section 7-1-17(C) to suggest that interest

4
assessed was not included in the presumption of correctness of an assessment, the

presumption attaches to the assessment of interest. This means that the burden of proof is

on the Taxpayer to show that the assessment of interest is improper or incorrect.

Section 7-1-67(A) NMSA 1978 (1993 Repl. Pamp.)1 imposes interest, “[I]f any tax

is not paid on or before the day on which it becomes due,....” Section 7-1-13(B) provides

that “the payment of any tax or the filing of any return may be accomplished by mail.” The

definitions of “paid”, “pay” and “payment” found in the Tax Administration Act are

singularly unhelpful. “Paid” is defined to include the term “paid over”, “pay is defined to

include the term “pay over” and “payment” is defined to include the term “payment over”.

Section 7-1-3 (J)(K) and (L), respectively. A common sense approach to the issue of

payment would indicate that a payment must be delivered in order to be considered to be

made. Thus, the delivery of a negotiable instrument, such as a check, with sufficient funds

such that the check will be honored, would constitute payment. This approach is supported

by Regulation 3 NMAC 10.2.2 which provides that “If a mailing is not received by the

department, the contents of the mailing are not timely.” In this case, there was no timely

payment of tax because although I do not doubt that the Taxpayer wrote a check for which

sufficient funds for payment existed and mailed that check to the Department, the Taxpayer

has not met its burden of proving that the check was actually delivered to and received by

the Department. The Taxpayer’s excellent record of timely payment notwithstanding, it is

undisputed that the check was never cashed, and the Department has no record of receiving

the check or the Taxpayer’s original return. All of this is consistent with the fact that the

1
The 1993 version of the statute is cited because that was the one in effect at the time the interest began to
accrue based upon the nonpayment of tax. The statute has not been amended in any way material to the

5
Department never received the check. We will probably never know what happened to the

Taxpayer’s original check. It might have been lost by the Department, but it is equally

possible that it was lost by the postal authorities who the Taxpayer entrusted to deliver the

check and return. Because the burden of proof is upon the Taxpayer and we have no proof

of delivery to the Department, it must be concluded that the taxes owing were not paid

when they were due, thus providing the basis for the assessment of interest.

The Taxpayer asks that its excellent record of timely payment of taxes be taken into

account with regards to the imposition of interest for this one incident of late payment.

While the Taxpayer’s record of timely payment is laudable and as mentioned before, I have

no doubt that the Taxpayer also mailed the payment in issue in a timely manner, the

imposition of interest is governed by statute and this decision maker does not have the

discretion to disregard the dictates of the statute. Specifically, Section 7-1-67(A) provides

that:

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 with only three exceptions to the imposition of interest

countenanced by the statute. Those are provided for in subparagraphs 1, 2 and 3 of Section

issues raised in this matter since that version. Unless otherwise noted, all statutory citations herein will be

6
7-1-67(A). The applicability of exception 3 will be discussed below, but none of the

exceptions allow for the consideration of a taxpayer’s payment record for other reporting

periods.

The Taxpayer argues that it falls within the exception to the imposition of interest

provided at Section 7-1-67(A)(3), which provides:

if demand is made for payment of any tax including accrued
interest, and if such tax is paid within ten days after the date
of such demand, no interest on the amount so paid shall be
imposed for the period after the date of the demand.

The Taxpayer argues that this exception is applicable because it brought to the

Department’s attention the fact that its first check had never been cashed and that the

taxes had not been paid, with no demand for payment ever coming from the Department,

itself. The Taxpayer then argues that this exception requires that no interest be charged

because the statute should be read to forgive the imposition of interest whenever taxes are

paid without the necessity of a demand for payment from the Department.

While it is undisputed that in this case, the Department never made a demand for

the payment of the tax prior to its payment by the Taxpayer, the language of the statute

does not support the construction given it by the Taxpayer. There is no language in the

provision which forgives the imposition of interest before a demand for payment has been

made. What the statute does, by its unambiguous wording, is to forgive the imposition of

interest after a demand for payment has been made. Section 7-1-67(B) provides that:

Interest due to the state under Subsection A or D of this
section shall be at the rate of fifteen percent a year,
computed at the rate of one and one-fourth percent per
month or any fraction thereof. (emphasis added)

to the 1993 replacement pamphlet.

7
By imposing interest calculated on a monthly basis, or any fraction of a month, even a

payment that is a fraction of a month late, such as even one day or one thirtieth of a

month, carries an entire month’s interest. What the third exception to the imposition of

interest under Section 7-1-67 does is to prohibit the imposition of interest for what, at

most, is a ten day period, running from the date the demand for payment is made until ten

days thereafter. This tax policy basis underlying such an exception to the imposition of

interest is obvious. It encourages taxpayers to promptly pay their taxes after a demand for

payment is made and it protects such conscientious taxpayers from the imposition of an

additional month’s interest if they act quickly to pay their liability. It has no applicability

in this case, however, because no demand for payment was ever made by the Department.

While it may be small consolation to Mr. Ellis, who has acted forthrightly in how he has

handled the payment of taxes for his business, by paying the taxes when he did, without

demand from the Department, he has potentially saved himself from the accrual of even

more interest which would have accrued had the Department ever gotten around to

questioning the absence of a payment and return for the January, 1995 reporting period

and assessed the tax within the seven year statute of limitations which would apply.2

The Taxpayer also relies upon a confidential Decision and Order issued by this

hearing officer on February, 14, 1992 which granted a taxpayer’s protest of the

assessment of interest where the Department had no record of receiving the taxpayer’s

check which the taxpayer claimed to have mailed to the Department. In that case, the

2
Section 7-1-18 (C) provides that in the case of the failure by a taxpayer to file any required return, the tax
relating to the period for which the return was required may be assessed within seven years from the end of
the calendar year in which the tax was due, which in this case would have given the Department until
December 31, 2002 to assess tax and applicable interest.

8
Taxpayer testified that it mailed both its check and return to the Department in a timely

manner and provided evidence to establish that the check had been written to the

Department and that sufficient funds were in place for the check to be honored, just as the

facts in this case established. What distinguished that case from this case, however, was

that although the Department had no record of receiving the check, its records did reflect

that it received the Taxpayer’s return. Additionally, because the tax involved was

personal income tax, the Taxpayer was also able to establish that it mailed both its federal

return and check to cover those taxes on the same day its state return was mailed. The

fact that the Department had received the return eliminated the possibility that the return

had been lost in the mail and not received by the Department. The fact that the federal

return and payment had also been mailed in an identical and timely manner corroborated

the Taxpayer’s testimony about its payment of its New Mexico liability. Under those

facts, I concluded that it was more likely than not that the Department had received, but

lost the Taxpayer’s check. Thus, the Taxpayer was able to meet its burden of proving

timely payment. As noted earlier, while I do not doubt that Mr. Ellis’ office mailed the

return and payment to the Department in a timely manner in this case, I had no proof to

indicate that the Department had received the payment and return.

CONCLUSIONS OF LAW

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

NMSA 1978, to Assessment No. 2044140 and jurisdiction lies over both the parties and

the subject matter of this protest.

9

2. Because the Department never received the Taxpayer’s original payment

of its taxes for the January, 1995 reporting period, those taxes were not paid when they

were due.

3. Because the Taxpayer’s taxes for the January, 1995 reporting period were

not paid when due, interest was properly imposed pursuant to Section 7-1-67(A) NMSA

1978.

4. The exception to the imposition of interest for unpaid taxes found at

Section 7-1-67(A)(3) has no applicability to the facts of this protest.

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

DONE, this 6th day of August, 1998.

10