A café couple paid their back gross receipts tax late after years of Department delay and family illness. Could New Mexico waive the interest that piled up?

Subject

Socorro Cattlemans Café (D&O 00-12)

Plain-English summary

Ronald and Nima Cornwell ran a café in Socorro, New Mexico, and closed it in May 1990 while still behind on their gross receipts tax. They did not file the written registration-change form telling the Department the business had stopped, so the Department's computer kept treating them as an active, non-filing business and, by mid-1992, issued estimated assessments of about $30,000 in tax, penalty, and interest. The Cornwells never filed a formal protest, but talked with Department staff by phone, acknowledged owing some tax, and insisted the estimate was far too high.

It took years to sort out. In 1994 the Department finally fixed the actual liability for April 1989 through May 1990 at just $692.15 in tax (plus penalty and interest). But starting in 1994 the couple suffered severe illnesses and family tragedies with large medical bills, and couldn't pay. They finally paid the balance — $1,573.15, including $788.96 of accrued interest — in 1997, then asked for a refund of the interest, blaming the Department's delay and their own hardship.

The Hearing Officer denied the protest. Under Section 7-1-67, interest on unpaid tax "shall be paid" from the day after it was due until paid — the word "shall" makes it mandatory, with no exceptions. Interest is not a penalty; it compensates the state for the time value of money it was owed, so the reason a payment is late is irrelevant. New Mexico runs a self-reporting system: it was the Cornwells' job to determine and pay the right amount, and had they kept good records they could have paid the true tax while working out the closure confusion. And New Mexico law simply provides no mechanism to suspend interest for personal or financial hardship. The Department also cannot second-guess the interest rate the legislature set (the decision notes the state's 15% was still below many credit-card rates).

What this means for you

• Interest in New Mexico is automatic and essentially unforgivable. Unlike a penalty, which can sometimes be abated for reasonable cause, interest under Section 7-1-67 is mandatory. It runs from the original due date until you pay, and the Department has no authority to waive it — no matter how sympathetic the circumstances.
• The reason you paid late does not matter for interest. Serious illness, family tragedy, financial hardship, even long delays caused by the Department — none of these stops interest from accruing. The theory is that you had the use of money that belonged to the state, so you owe for that time.
• Close a business the right way: file the registration-change form. The Cornwells' whole ordeal grew from not formally notifying the Department they had shut down. Until the Department has written notice, its system will keep expecting returns and generating estimated assessments.
• Pay what you know you owe, even while you dispute the rest. Because you can't stop interest, the way to limit it is to pay the undisputed tax promptly and keep records to prove the real number — then argue about the excess separately. Waiting for the dispute to resolve only lets interest grow.

Key questions answered

Can New Mexico waive interest because the Department took years to fix the bill?
No. Interest under Section 7-1-67 is mandatory and has no exception for departmental delay. The Hearing Officer also noted the taxpayers shared responsibility for the delay by not keeping records and not notifying the Department of the closure.

What about the couple's illnesses and financial hardship?
That did not help either. New Mexico law provides no mechanism to suspend interest for personal or financial hardship; interest compensates the state for the time value of money, not as punishment.

Why is interest treated so differently from a penalty?
Because interest is not punitive. It reflects the state's loss of the use of funds it was owed, so the taxpayer's good faith or reason for lateness is irrelevant — whereas penalties can turn on negligence or reasonable cause.

Could the Department at least lower the interest rate?
No. The rate is set by the legislature, and the Department cannot substitute its own judgment. (The decision observed the 15% rate was still lower than many credit cards charged.)

Verbatim citations

Interest is mandatory:

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 legislature's use of the word "shall" indicates that the assessment of interest is mandatory rather than discretionary.

Why the reason for lateness is irrelevant:

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.

No relief for delay or hardship:

Unfortunately, New Mexico law does not provide a mechanism for suspending the accrual of interest during periods of personal or financial hardship. ... Here, the Taxpayers failed to pay over funds that belonged to the state, and they are required to pay interest for the period they had the use of this money.

The holding:

Neither the delay in determining the Taxpayers' liability for gross receipts tax nor the personal and financial hardships suffered by the Taxpayers justify abatement of interest. For the foregoing reasons, the Taxpayer's protest IS DENIED.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Socorro Cattlemans Café
• Decision PDF: D&O 00-12

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
SOCORRO CATTLEMANS CAFE No. 00-12
ID # 02-07916400-0
TO DENIAL OF CLAIM FOR REFUND

DECISION AND ORDER

A formal hearing on the above-referenced protest was held April 13, 2000, before Margaret

B. Alcock, Hearing Officer. Socorro Cattlemans Cafe was represented by its owners, Ronald and

Nima Cornwell (“Taxpayers”). The Taxation and Revenue Department ("Department") was

represented by Bridget A. Jacober, Special Assistant Attorney General. Based on the evidence and

arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. Prior to 1990, the Taxpayers owned and operated a cafe in Socorro, New Mexico.

2. The Taxpayers closed the cafe in May 1990.

3. At the time the cafe was closed, the Taxpayers were behind in payment of their gross

receipts taxes.

4. The Taxpayers did not realize they had to file a written registration change form to

notify the Department they had stopped doing business..

5. Because the Department had no written record showing the business was closed, the

Department’s computer system continued to indicate the Taxpayers were delinquent in filing

monthly gross receipts tax returns for periods after May 1990.

6. By mid-1992, the Department had issued assessments totaling approximately

$30,000 in gross receipts tax, penalty and interest against the Taxpayers. The assessments were

based on estimates of tax due for all nonfiled periods shown on the Department’s system.

7. The Taxpayers did not file a written protest to the assessments.

8. The Taxpayers did have a number of telephone conversations with Department

employees. The Taxpayers acknowledged their liability for some unpaid gross receipts tax, but told

the Department the business was now closed and the amount assessed was much too high.

9. It took several years to resolve the matter. In 1994, the Department made a final

adjustment to reflect a total gross receipts tax liability for reporting periods April 1989 through May

1990 of $692.15, plus penalty and interest.

10. Beginning in 1994, the Taxpayers suffered a series of severe illnesses and family

tragedies resulting in large medical bills and an inability to pay their gross receipts tax obligation.

11. In 1997, the Taxpayers were finally able to pay the outstanding assessment of

$1,573.15, representing $692.15 tax principal, $92.04 penalty, and $788.96 accrued interest.

12. On July 22, 1997, the Taxpayers filed a claim for refund of the penalty and interest,

claiming undue delay on the part of the Department and financial hardship.

13. On August 20, 1997, the Department denied the Taxpayers’ claim for refund.

14. On September 1, 1997, the Taxpayers filed a written protest to the Department’s

denial of their claim for refund of interest in the amount of $788.96.

DISCUSSION

At issue is whether the Taxpayers are liable for the full amount of interest accrued on their

liability for unpaid gross receipt taxes for reporting periods April 1989 through May 1990. The

Taxpayers maintain the Department took too long to determine the actual amount of their gross

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receipts tax liability and they should be excused from the payment of interest during this period of

delay. The Taxpayers also ask that the accrual of interest be suspended for the three-year period they

were unable to make payment due to illness and other family misfortunes.

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. See also, El Centro Villa Nursing Center v.

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

Section 7-1-67 NMSA 1978 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

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.

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In this case, the Taxpayers fell behind in their payment of monthly gross receipts taxes.

Although it is clear the Taxpayers are honest people and had no intent to cheat the state, it is also

clear the taxes were due and owing. New Mexico has a self-reporting tax system. It was the

obligation of the Taxpayers, not the Department, to determine the amount of gross receipts tax due to

the state and make timely payment. See, Section 7-1-13(B) NMSA 1978; 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). Had the Taxpayers kept accurate records of their business, they could have paid the

amount of tax actually owed while continuing to work with the Department to clear up the confusion

concerning the termination date of the business. The Taxpayers share responsibility for the delays in

this case and cannot shift their duty to timely report and pay gross receipts tax to the Department.

The accrual of interest was partly attributable to the personal illnesses and other misfortunes

suffered by the Taxpayers. Unfortunately, New Mexico law does not provide a mechanism for

suspending the accrual of interest during periods of personal or financial hardship. As noted above,

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

time value of unpaid revenues. Here, the Taxpayers failed to pay over funds that belonged to the

state, and they are required to pay interest for the period they had the use of this money. While it

could be argued that the rate of interest is high in comparison with current market rates, that is a

matter within the discretion of the legislature.1 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.

CONCLUSIONS OF LAW

1. The Taxpayers filed a timely, written protest to the Department’s denial of their claim

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

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

Taxpayers on their underreporting of gross receipts tax for the period April 1989 through May 1990.

3. Neither the delay in determining the Taxpayers’ liability for gross receipts tax nor the

personal and financial hardships suffered by the Taxpayers justify abatement of interest.

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

DATED April 17, 2000.

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It should be noted that the 15 percent interest rate charged by the state is still less than the interest rate charged on
many credit cards.

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