A contractor says a state tax employee's phone advice led it to pay its gross receipts tax late. Can that phone call get the interest excused?

Subject

Lauren Constructors, Inc. (D&O 98-50)

Plain-English summary

Lauren Constructors is a Texas-based construction company that took on a project for Navajo Refining in Artesia, New Mexico, starting in January 1996. It is an accrual-basis taxpayer. Rather than pay New Mexico gross receipts tax on each progress payment as it received money during the job, the company waited until the project ended and reported the gross receipts tax on the total all at once.

When the Department audited in 1997, it determined that gross receipts tax was due on the progress payments as they came in — so by waiting, the company had paid late and owed penalty and interest. The January 1998 assessment included $17,941.17 in penalty and $18,338.78 in interest on the late-paid tax. The company protested both; the Department abated the penalty, leaving the interest as the only issue.

The company's defense was an estoppel argument: its controller, Alan Davis, said he had phoned the Department in January 1996 and been told the company would owe gross receipts tax when the project was completed — so the state shouldn't be able to charge interest for following that advice. Hearing Officer Margaret B. Alcock denied the protest on every branch:

• Interest is mandatory. Section 7-1-67 says interest "shall" be paid on tax not paid when due; it compensates the state for the time value of money, not a punishment, and has no exceptions.
• Statutory estoppel didn't apply. Section 7-1-60 only estops the Department when a taxpayer relied on a regulation or a written ruling addressed to it. The company sought no ruling, and a regulation in effect since 1975 (2 NMAC 2.11.11) already required contractors to report progress payments as gross receipts.
• Equitable estoppel didn't apply. Estoppel against the state requires exceptional circumstances and reasonable reliance. The rules were publicly available in a self-reporting system, so a taxpayer can't substitute the oral advice of an unidentified employee for its own review of the law. It wasn't even clear the advice was wrong — Davis kept no notes, and the employee may have reasonably assumed a single end-of-project payment.

What this means for you

• Construction contractors must pay gross receipts tax on progress payments as they are received, not at the end of the job. For an accrual-basis contractor, receipts are reported when earned or billed. Deferring the tax to project completion creates late-payment interest even if the total is eventually paid.
• A phone call to the tax department is not a shield. Oral advice from an unnamed employee generally cannot estop the state. If you need advice you can rely on, get a written ruling addressed to you or point to a specific regulation — those are the only footing Section 7-1-60 recognizes.
• Document any advice you do get. The taxpayer here had no employee name and no notes, which let the Hearing Officer question whether the advice was even incorrect. Undocumented oral advice is nearly worthless in a protest.
• Interest is still mandatory even when the penalty is forgiven. The Department dropped the ~$18,000 penalty but the ~$18,000 interest stood. Penalty punishes fault; interest just prices the delay, so good faith removes one but not the other.
• New Mexico is a self-reporting system — the duty to know the rules is yours. The statutes and regulations are readily available, so "I relied on what someone told me" rarely excuses noncompliance.

Key questions answered

Why did the contractor owe interest if it eventually paid all the tax?
Because the tax on each progress payment was due when the payment was received, and the company waited until the end of the project. That made the payments late, and interest runs from each original due date until paid.

Doesn't a phone call to the Department protect the taxpayer?
No. Section 7-1-60 only allows estoppel when a taxpayer relies on a regulation or a written ruling addressed to it. Oral advice from an unidentified employee is not enough, and courts (e.g., Bien Mur) have held such reliance is not reasonable given New Mexico's self-reporting system.

Was the advice actually wrong?
The Hearing Officer couldn't tell. The controller took no notes and couldn't recall exactly what he told the employee. If he never mentioned that Navajo would make progress payments, the employee's answer that tax was due at completion could have been correct.

Why was the penalty removed but not the interest?
A penalty punishes negligence and can be abated for good faith, which the Department did. Interest merely compensates the state for the time value of unpaid tax; Section 7-1-67 makes it mandatory with no exceptions, so it could not be waived.

Verbatim citations

Interest is mandatory (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... (emphasis added).

The regulation requiring progress payments to be reported as gross receipts (2 NMAC 2.11.11, in effect since 1975):

A contractor who receives progress payments or other consideration for services performed on and materials provided for a construction project as defined in Section 7-9-3(C) must report such payments or other consideration as gross receipts.... If the contractor is an accrual basis taxpayer, any amounts which the contractor earned or billed or to which the contractor became entitled during a particular month must be reported as receipts for that month as required by Section 7-9-11.

Why reliance on the employee's oral advice was not reasonable:

A taxpayer is not entitled to rely on the oral advice of an unidentified Department employee as a substitute for making its own independent review of the statutes and regulations or consulting with a qualified tax professional.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Lauren Constructors, Inc.
• Decision PDF: D&O 98-50

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 LAUREN CONSTRUCTORS, INC. No. 98-50
ID NO. 02-033970-00 4
ASSESSMENT NO. 2214130

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on September 18, 1998, before

Margaret B. Alcock, Hearing Officer. Lauren Constructors, Inc. ("Taxpayer") was represented by

Alan Davis, its controller. The Taxation and Revenue Department ("Department") was represented by

Bridget A. Jacober, Special Assistant Attorney General. Based on the evidence in the record and the

arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer is a corporation with its principal offices in Abilene, Texas.

2. The Taxpayer performs construction services throughout the southeastern United

States and in portions of the southwest.

3. The Taxpayer pays taxes on an accrual basis.

4. In January 1996, the Taxpayer began a construction project for Navajo Refining

("Navajo") in Artesia, New Mexico.

5. When the Taxpayer submitted its bid to Navajo, the Taxpayer did not include the cost

of New Mexico gross receipts tax.

6. Navajo informed the Taxpayer that it would be subject to payment of gross receipts

tax on its construction receipts at the time the construction project was completed.

7. On January 22, 1996, Alan Davis, the Taxpayer's controller, called the Department

and spoke with a Department employee.

8. Mr. Davis explained that the Taxpayer was performing construction services in New

Mexico and that Navajo had told the Taxpayer it would owe gross receipts tax on its construction

receipts when the project was completed. The Department employee told Mr. Davis this information

was correct.

9. Mr. Davis did not obtain the employee's name or take any notes of the January 22,

1996, telephone conversation.

10. Mr. Davis did not review New Mexico's tax statutes and regulations himself, nor did

he consult with a professional tax advisor concerning the Taxpayer's liability for gross receipts tax on

the New Mexico project.

11. During the construction project, the Taxpayer reported and paid withholding taxes to

the State of New Mexico.

12. The Taxpayer did not report or pay gross receipts tax when it received progress

payments from Navajo. Instead, the Taxpayer waited until the end of the project to report gross

receipts tax on its total receipts from the project.

13. In 1997, the Taxpayer was audited by the Department.

14. Following the audit, the Department informed the Taxpayer that it should have paid

gross receipts tax on progress payments when received. As a result of waiting until the end of the

project to pay tax on these payments, the Taxpayer became liable for penalty and interest for late

payment of tax under Sections 7-1-67 and 7-1-69 NMSA 1978.

15. On January 30, 1998, the Department issued Assessment No. 2214130 for

withholding, compensating and gross receipts tax due for the audit period, plus penalty and interest.

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The assessment included $17,941.17 of penalty and $18,338.78 of interest attributable to the

Taxpayer's late payment of gross receipts tax on its progress payments.

16. On February 6, 1998, the Taxpayer filed a written protest to the assessment of penalty

and interest.

17. The Department subsequently abated the $17,941.17 penalty assessment.

DISCUSSION

The sole issue presented is whether the Taxpayer is liable for interest on its late payment of

gross receipts tax on progress payments received in connection with construction services performed

for Navajo Refinery in Artesia, New Mexico.

Burden of Proof. Section 7-1-17(C) NMSA 1978 provides that any assessment of tax by the

Department is presumed to be correct, and it is the taxpayer's burden to overcome this presumption.

Archuleta v. O'Cheskey, 84 N.M. 428, 431, 504 P.2d 638, 641 (Ct. App. 1972). 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."

Accordingly, the presumption of correctness of an assessment of tax also applies to the assessment of

interest. 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).

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The reason for a late payment of tax does not affect the imposition of interest. Unlike the assessment

of penalty, the assessment of interest is not designed to punish taxpayers, but to compensate the state

for the time value of unpaid revenues. 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, 105, 560

P.2d 167, 169 (1977). Even taxpayers who contact the Department before a tax is due and obtain a

formal extension of time to pay the 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. 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.

Estoppel. The Taxpayer argues that it should be excused from paying interest attributable to

its late payment of tax on progress payments because the Taxpayer reasonably relied on erroneous

advice received from the Department. In effect, the Taxpayer is raising the argument of estoppel,

i.e., that the error of the Department's employee estops the Department from assessing the interest

required by Section 7-1-67 NMSA 1978.

(a) Estoppel Based on Statute. Section 7-1-60 NMSA 1978 provides for estoppel

against the Department in two circumstances: where the taxpayer acted according to a regulation or

where the taxpayer acted according to a revenue ruling addressed to the taxpayer. The Taxpayer in this

case did not seek a ruling from the Department. Nor is there a regulation advising construction

companies not to pay gross receipts tax on progress payments. To the contrary, Regulation 2 NMAC

2.11.11, which has been in effect since 1975, states:

REPORTING OF PROGRESS PAYMENTS.

A contractor who receives progress payments or other consideration for
services performed on and materials provided for a construction project as
defined in Section 7-9-3(C) must report such payments or other
consideration as gross receipts.... If the contractor is an accrual basis

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taxpayer, any amounts which the contractor earned or billed or to which the
contractor became entitled during a particular month must be reported as
receipts for that month as required by Section 7-9-11.

There is no statutory basis for estoppel under Section 7-1-60.

(b) Estoppel Based “Right and Justice”. Estoppel is rarely applied against the

state and then only in exceptional circumstances where there is "a shocking degree of aggravated and

overreaching conduct or where right and justice demand it." Wisznia v. State of New Mexico, Human

Services Department, 37 N. M. St. B. Bull. 20, 958 P.2d 98, 102 (1998). For estoppel to apply, the

party seeking it must show: (1) lack of knowledge of the true facts in question; (2) detrimental reliance

on the other party's conduct; and (3) that its own reliance was reasonable. Johnson & Johnson v.

Taxation and Revenue Department, 123 N.M. 190, 195, 936 N.M. 872, 877 (Ct. App.), cert. denied,

123 N.M. 167, 936 P.2d 337 (1997).

In this case, Mr. Davis testified that he did not know New Mexico's gross receipts tax

reporting requirements and relied on the Department to provide him with that information. For

purposes of equitable estoppel, however, the requirement of lack of knowledge includes the lack of

means by which knowledge might be obtained by the party asserting estoppel. See, Continental

Potash, Inc. v. Freeport-McMoran, Inc., 115 N.M. 690, 698, 858 P.2d 66, 74 (1993). Here, the

Department's regulations provided specific instructions concerning payment of gross receipts tax on

progress payments received by construction contractors. Although Mr. Davis testified he did not

have copies of New Mexico's gross receipts tax statutes and regulations, copies are readily available

from the Department.

New Mexico has a self-reporting tax system and taxpayers have a statutory obligation to

determine their tax liabilities and accurately report and pay those liabilities to the state. See, Section 7-

1-13 NMSA 1978. While the Department makes every effort to give correct advice to taxpayers who

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contact the Department, the ultimate responsibility for payment of tax remains with the taxpayer. A

taxpayer is not entitled to rely on the oral advice of an unidentified Department employee as a

substitute for making its own independent review of the statutes and regulations or consulting with a

qualified tax professional. Taxation and Revenue Department v. Bien Mur Indian Market, 108 N.M.

228, 231, 770 P.2d 873, 876 (1989) (in light of New Mexico’s statute providing for estoppel, taxpayer’s

reliance on the oral representations of a Department employee was not reasonable).

There is also some question as to whether the advice received by the Taxpayer was really

incorrect. It is impossible to evaluate the accuracy of advice without knowing what information was

provided by the Taxpayer. Mr. Davis did not have any notes to refresh his memory, and there was no

testimony concerning the details of his conversation with the Department's employee. There is no way

to know whether Mr. Davis specifically told the employee that Navajo would be making progress

payments during the course of the project. Without this information, the employee could have assumed

that payment would be received upon completion of the project. Given that scenario, the advice

received by the Taxpayer would have been correct.

Based on the evidence, the Taxpayer has not met its burden of showing that the Department's

assessment was incorrect or that the doctrine of equitable estoppel should be applied to estop the

Department from enforcing collection of interest due on the late payment of gross receipts tax.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment No. 2214130 and

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

2. Interest was properly assessed against the Taxpayer pursuant to the provisions of

Section 7-1-67 NMSA 1978.

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3. The Taxpayer's reliance on the oral advice of an unidentified Department employee

does not support a finding of estoppel under Section 7-1-60 NMSA 1978 to estop the Department from

collecting interest due to the state under Section 7-1-67 NMSA 1978.

4. The Taxpayer's reliance on the oral advice of an unidentified Department employee

does not support application of the doctrine of equitable estoppel to estop the Department from

collecting interest due to the state under Section 7-1-67 NMSA 1978.

The Taxpayer's protest is DENIED.

DONE, this 23rd day of September 1998.

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