Can I get a negligence penalty refunded if I underpaid tax because I misunderstood a general answer a state employee gave me?

Plain-English summary

A pharmacy underpaid gross receipts tax because its treasurer assumed Medicare sales were tax-free "sales to the government." She had asked the Department only a general question — and gotten a correct general answer — so she was not "affirmatively misled," and the negligence penalty could not be refunded. Protest DENIED.

R&R Professional Pharmacy in Santa Fe filed monthly CRS returns for 1994–1997. Its treasurer, Judy Paynter, called the Department several times and asked whether sales to government agencies were tax-exempt and whether there were exceptions. She was correctly told that sales of tangible personal property to state and federal agencies are deductible and not subject to gross receipts tax (Section 7-9-54). Believing that Medicare-patient sales were sales to the federal government, the pharmacy did not pay gross receipts tax on them. Critically, Paynter never asked whether sales to Medicare patients were sales to the government, or whether they were taxable.

In October 1997 the Department sent pharmacies a letter stating that receipts from Medicare and other insurers — and insurance co-payments — are fully taxable. The pharmacy did not receive it directly but got a copy from another pharmacy. Paynter promptly amended the 1994–1997 returns to include the Medicare sales. The Department assessed $1,203.89 in interest and a $361.52 negligence penalty (waiving penalty for the 12 months before the voluntary amendment, per Regulation 3 NMAC 1.11.11.5). The pharmacy paid, then filed a refund claim for the penalty only, saying it had been "ill advised." The Department denied the claim, and the pharmacy protested.

The penalty is presumed correct — and applies to negligence

A penalty assessment is presumed correct (Sections 7-1-17(C) and 7-1-3(U)), so the pharmacy had to prove it was wrong. The negligence penalty under Section 7-1-69(A) applies when a taxpayer fails to pay due to "negligence or disregard of rules," which the regulations define to include acting on an "erroneous belief" (Regulation 3 NMAC 1.11.10). The pharmacy did not dispute that the Medicare receipts were taxable — it contested only the penalty.

"Affirmatively misled" requires more than a misunderstood general answer

Penalty can be abated if a taxpayer "proves the taxpayer was affirmatively misled by a Department employee" (Regulation 3 NMAC 1.11.11.1). But there was no evidence the employees misled Paynter. She asked only whether government-agency sales were exempt, and the correct answer is yes. She never asked the specific question — whether Medicare-patient sales count as government sales or are taxable — and had she asked, she would have been told they are fully taxable. (The Department had taken that position since at least 1992 in several published rulings and the 1997 letter.) A correct answer to a general question is not "being misled."

It is the taxpayer's job to ask the right question

The pharmacy also argued the Department should have done more to warn the industry. The hearing officer noted the Department runs workshops, publishes guidance, and offers written rulings, but "is not omniscient" and acted as soon as it learned of the industry-wide error. In New Mexico's self-reporting system, taxpayers — who best know their own business — must determine and report their liabilities (Section 7-1-13(B); Tiffany Construction). An erroneous belief that no tax is owed, without specific advice from the Department or a competent tax adviser supporting it, is negligence. The penalty stood.

Result: protest DENIED — the negligence penalty was not refunded.

What this means for you

Ask the specific question, and keep a record of the specific answer

A correct answer to a broad question ("are government sales exempt?") does not protect you if your real issue is narrower ("are sales to Medicare patients government sales?"). To rely on the Department later, you must have asked — and be able to show you asked — the precise question that matches your situation.

"Affirmatively misled" is a high bar

Penalty relief for bad advice requires proof that a Department employee actually gave you wrong information about your liability. Drawing your own incorrect conclusion from an accurate general answer does not qualify. When the stakes are meaningful, get the answer in writing — the Department issues written rulings for exactly this purpose.

Self-reporting means the duty to get it right is yours

New Mexico expects the taxpayer, who knows the business best, to determine and report the correct tax. An honest but mistaken belief that something is not taxable can still be negligence and support a penalty, unless it rests on specific advice from the Department or a competent tax professional.

Voluntary correction limits, but does not erase, the penalty

Amending your returns before an assessment can cut off penalty for recent periods (here, the prior 12 months were penalty-free), which is worth doing. But it does not automatically wipe out penalty on the earlier underpayment, and it does not remove interest, which is mandatory on any late tax.

Common questions

Q: I misunderstood what a state employee told me and underpaid. Can I get the penalty refunded?
A: Not on these facts. Penalty is abated only if you prove you were affirmatively misled by a Department employee. A correct answer to a general question that you then misapplied is not being misled, so the penalty stands.

Q: I asked whether government sales were exempt and was told yes. Doesn't that cover Medicare sales?
A: No. That answer is about sales to government agencies. Whether Medicare-patient sales qualify is a different, specific question. If you did not ask it, you cannot claim you were misled about it.

Q: Shouldn't the Department have warned my industry sooner?
A: The hearing officer rejected that argument. The Department offers workshops, publications, and written rulings but is not expected to anticipate every industry's reporting errors, and it acted once it learned of this one. The duty to report correctly is the taxpayer's.

Q: Does amending my returns voluntarily help with the penalty?
A: Somewhat. Here the Department waived penalty for the 12 months before the voluntary amendment. But penalty on earlier periods, and interest generally, still applied.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-1-69(A) — penalty for failure to pay due to negligence or disregard of rules (2% per month up to 10%)
• NMSA 1978, § 7-1-17(C) — a Department assessment is presumed correct
• NMSA 1978, § 7-1-3(U) — "tax" includes related interest and civil penalty, so the presumption of correctness reaches penalty
• NMSA 1978, § 7-1-13(B) — taxpayers must determine and accurately report their own liabilities
• NMSA 1978, § 7-9-54 — deduction for sales of tangible personal property to government agencies (correctly described to the taxpayer)
• Regulation 3 NMAC 1.11.10 — defines negligence to include inaction, carelessness, and erroneous belief
• Regulation 3 NMAC 1.11.11.1 — penalty is abated if the taxpayer proves it was affirmatively misled by a Department employee
• Regulation 3 NMAC 1.11.11.5 — no penalty for the twelve months immediately preceding a voluntary amendment

Cases cited:

• Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976) — in a self-reporting system, an erroneous belief that no tax is owed can constitute negligence
• El Centro Villa Nursing Center v. Taxation and Revenue Dep't, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989) — the taxpayer bears the burden to overcome the presumption that an assessment (including penalty) is correct

Source

• Listing: New Mexico Decisions & Orders
• Decision post: R & R Professional Pharmacy, Inc.
• Decision PDF: D&O 00-14

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
R & R PROFESSIONAL PHARMACY, INC. No. 00-14
I.D. No. 02-253882-00 8
DENIAL OF CLAIM FOR REFUND

DECISION AND ORDER

A formal hearing on the above-referenced protest was held May 11, 2000 before Margaret B.

Alcock, Hearing Officer. R & R Pharmacy, Inc. (“Taxpayer”) was represented by Judy M. Paynter,

one of its owners. 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. During the period 1994-1997, the Taxpayer operated a pharmacy located in Santa Fe,

New Mexico.

2. The Taxpayer was registered with the Department for payment of gross receipts,

compensating and withholding taxes and filed monthly CRS-1 returns with the Department.

3. On several occasions, Judy Paynter, a shareholder and treasurer of the Taxpayer,

called the Department with the following questions: Are all sales to government agencies tax

exempt? Are there any exceptions? Ms. Paynter was consistently told that receipts from sales of

tangible personal property to all government agencies were deductible and not subject to gross

receipts tax.

4. Because Ms. Paynter believed that sales to patients covered by the federal Medicare

program were sales to the federal government, the Taxpayer did not pay gross receipts tax on its

receipts from these sales.

6. Ms. Paynter never asked the Department whether sales of tangible personal property

to patients covered by Medicare were sales to the government, nor did she ask whether receipts from

sales to patients covered by Medicare were subject to gross receipts tax.

7. In October 1997, the Department sent a letter to many New Mexico pharmacies

which read, in pertinent part:

The New Mexico Taxation and Revenue Department Tax Compliance Bureau has
completed an investigation of the pharmacy industry. The investigation has revealed
gross receipts reporting errors within your industry.

Please review your records to ensure that the following gross receipts items have been
reported correctly:

1. Receipts received from Medicare or other insurance providers are fully taxable.

2. Receipts received as insurance co-payments from individuals are fully taxable.

3. The Taxpayer did not receive this advisory letter from the Department, but Ms.

Paynter was provided a copy by another pharmacy located in Santa Fe.

9. As soon as she read the letter, Ms. Paynter amended the Taxpayer’s CRS-1 returns

for the period 1994-1997 to include receipts from sales of tangible personal property to patients

covered by Medicare.

10. The Taxpayer was subsequently assessed $1,203.89 of interest and $361.52 of

penalty on the underpaid gross receipts tax reflected on the Taxpayer’s amended returns. Pursuant to

Department Regulation 3 NMAC 1.11.11.5, no penalty was assessed for the twelve months

immediately preceding the date the Taxpayer voluntarily filed its amended returns.

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11. The Taxpayer paid the penalty and interest assessed and then filed a claim for refund,

stating that its non-compliance was unintentional and that it had been “ill advised” by the

Department regarding the deductibility of Medicare revenues.

12. On April 6, 1998, the Taxpayer’s claim for refund was denied by the Department.

13. On April 20, 1998, the Taxpayer filed a written protest to the denial of its claim for

refund of penalty in the amount of $361.52.

DISCUSSION

The sole issue to be determined is whether the Taxpayer is entitled to a refund of the penalty

assessed on its underpayment of gross receipts tax on receipts from selling tangible personal property

to patients covered by Medicare. 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." Accordingly, the presumption

of correctness applies to the Department’s assessment of penalty, and it is the Taxpayer’s burden to

come forward with evidence to show that the assessment was incorrect. See, El Centro Villa Nursing

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

The penalty the Taxpayer seeks to recover was assessed pursuant to Section 7-1-69(A)

NMSA 1978, which 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 evade or defeat any tax, to pay when due any amount of
tax required to be paid...

The term "negligence" is defined in Regulation 3 NMAC 1.11.10 as:

1) failure to exercise that degree of ordinary business care and prudence
which reasonable taxpayers would exercise under like circumstances;

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2) inaction by taxpayers where action is required;

3) inadvertence, indifference, thoughtlessness, carelessness, erroneous belief
or inattention.

The Taxpayer’s underreporting of tax in this case was due to Ms. Paynter’s belief that receipts from

sales of tangible personal property to patients covered by Medicare were deductible as sales to the

federal government. The Taxpayer has not challenged the Department’s determination that Medicare

receipts are subject to gross receipts tax. The Taxpayer has only challenged the imposition of penalty,

arguing that Ms. Paynter was ill advised by Department employees and is entitled to a refund under

Regulation 3 NMAC 1.11.11.1, which authorizes abatement of penalty when a taxpayer “proves the

taxpayer was affirmatively misled by a Department employee.”

Although Ms. Paynter testified that she called the Department several times and spoke with

three different employees in the Tax Policy and Information Office, there is no evidence these

employees misled Ms. Paynter as to her liability for tax on receipts from sales to Medicare patients.

The only question Ms. Paynter asked was whether sales to government agencies were exempt from tax.

In response, she was correctly advised that receipts from sales of tangible personal property to state and

federal agencies were deductible and not subject to gross receipts tax. See, Section 7-9-54 NMSA

1978. Ms. Paynter never asked the Department whether sales of tangible personal property to

patients covered by Medicare were sales to the government, nor did she ask whether receipts from

sales to patients covered by Medicare were subject to gross receipts tax. Had she done so, she would

have been told these receipts were fully taxable. Since at least 1992, it has been the Department’s

position that receipts from providing goods and services to Medicare patients are no different than

receipts from providing goods and services to patients covered by other insurance providers. See,

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Department Rulings 405-92-1, 401-93-1, 401-97-2, 405-97-3, and the October 1997 letter referenced

in Finding of Fact No. 7, above.

The Taxpayer also argues that it should be excused from the negligence penalty because there

was a general misunderstanding as to the taxability of Medicare payments and the Department should

have done more to inform pharmacies of their tax obligations. In fact, the Department makes a

continuing effort to educate taxpayers concerning New Mexico’s tax laws. The Department holds

regular workshops at its district offices; it has a variety of publications addressing issues of concern to

various businesses; it issues regulations and gives taxpayers the opportunity to ask for written rulings on

issues not specifically covered in the Department’s regulations and publications. The Department is not

omniscient, however, and cannot be expected to know what misunderstandings or reporting errors exist

within every industry. Here, there is evidence the Department took action to notify the state’s

pharmacies as soon as it became aware of the underreporting of gross receipts tax on Medicare and

other insurance payments.

New Mexico has a self-reporting tax system. It is the obligation of taxpayers, who have the

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

those liabilities to the state. 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). A taxpayer’s erroneous belief that it does not owe taxes may constitute negligence for purposes

of Section 7-1-69 NMSA 1978. Id. In this case, the Taxpayer’s belief that it did not owe gross receipts

tax on Medicare payments, without a showing that its belief was based on specific advice received from

the Department or from a competent tax advisor, fails to establish a basis for refunding the penalty

assessed.

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CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to the Department’s denial of its claim for

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

2. The Taxpayer has failed to meet its burden of showing that the Department’s

assessment of the negligence penalty imposed by Section 7-1-69 NMSA 1978 was incorrect.

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

DATED May 15, 2000.

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