If we pay our New Mexico withholding tax on time but file the return a couple of days late, can the state still charge the full late-filing penalty?

Plain-English summary

A school district that paid its withholding tax on time but filed the return two days late owed the full 2 percent late-filing penalty — filing and paying are separate obligations, the penalty is the greater of the statutory amounts (not the $5 minimum), the lapse was negligent, and being a public entity is no excuse. Protest DENIED.

Moriarty Municipal Schools reports New Mexico withholding tax on Form CRS-1. Its March 2000 return and payment were due April 25, 2000. A new pay manager, Priscilla Stidham — handling her first reporting period on her own — mailed the $31,481.69 payment (received April 4) but forgot to include the CRS-1 return. When she realized the omission, she called the Department, played "telephone tag" for several days, and only after finally reaching an employee mailed and faxed the return on April 27 — two days late. The Department assessed a $629.63 late-filing penalty. The district protested on four grounds; the hearing officer rejected all four.

1. Late filing is penalized even when payment is on time

The district argued the statute does not authorize a penalty for a late return when the tax was paid on time. The hearing officer called this "clearly incorrect." Section 7-1-69(A) imposes a penalty for failure "to pay when due any amount of tax required to be paid...or to file by the date required a return regardless of whether any tax is due." Written in the disjunctive, the late-filing penalty is independent of the late-payment penalty (State v. Dunsmore). The district's reading of Section 7-1-30 — that no penalty can be collected once the tax is paid — was also rejected; that statute (using the permissive "may," per Montano v. Los Alamos County) merely spares the Department from issuing separate assessments and cannot be read to let a taxpayer dodge the penalty by paying only the principal.

2. The penalty is the greater amount, not the $5 minimum

The district argued it should owe only the $5 minimum. But Section 7-1-69(A) sets the penalty as the greater of three amounts: the late-payment amount (here $0, because payment was timely), the late-filing amount (2 percent of the tax reported = $629.63), or the $5 minimum. The greatest was the $629.63 late-filing amount, so that controlled.

3. The late filing was negligent

Negligence, as defined in Regulation 3 NMAC 1.11.10, includes inadvertence and inaction where action is required. The failure resulted from Stidham's inadvertent omission of the return and her failure to correct it promptly — and, the hearing officer noted, from her not consulting her supervisor, plus at least some negligence by the supervisor in not ensuring a new employee followed the proper procedures. The "telephone tag" excuse was hearsay (Stidham did not testify) and, in any event, did not negate the original negligence.

4. A public school gets no special exemption

The district asked for abatement or reduction based on its status as a public school. The hearing officer explained the Department must enforce the law as written and cannot rewrite it (State ex rel. Taylor v. Johnson). Section 7-1-69(A) does not exempt government or nonprofit entities or provide reduced penalties for them.

Result: protest DENIED — the $629.63 late-filing penalty stood.

What this means for you

Filing the return and paying the tax are two separate deadlines

Paying on time does not protect you if the return itself is late. The penalty for a late return applies "regardless of whether any tax is due," so send the return even when the money has already gone out — and confirm both actually arrived.

The penalty is the greater of the statutory amounts

Do not assume a small or "minimum" penalty. New Mexico charges the greater of the late-payment amount, the late-filing amount (2 percent per month of the tax reported, up to 10 percent), or $5. When tax was reported on the late return, the 2 percent late-filing figure can be substantial even if the tax was paid.

An honest mistake by a new employee is still negligence

Forgetting to enclose the return, and not fixing it quickly or escalating to a supervisor, meets New Mexico's definition of negligence. Train and supervise new payroll staff, and build a check that the return and payment were both filed.

Being a government or nonprofit entity does not lower the penalty

The Department cannot waive or reduce a statutory penalty based on the taxpayer's public or charitable status. The same late-filing rules apply to school districts, governments, and nonprofits as to private businesses.

Common questions

Q: We paid the New Mexico tax on time but filed the return late. Do we still owe a penalty?
A: Yes. The late-filing penalty under Section 7-1-69(A) applies independently of payment, "regardless of whether any tax is due." A timely payment does not excuse a late return.

Q: Shouldn't the penalty just be the $5 minimum?
A: Only if the $5 minimum is the greatest of the three statutory amounts. Here the 2 percent late-filing amount ($629.63) was larger, so it controlled and the $5 minimum did not apply.

Q: The delay happened because we couldn't reach anyone at the Department. Isn't that a defense?
A: No. The original negligence was omitting the return from the payment. Difficulty reaching the Department afterward — and, here, uncorroborated hearsay about it — did not negate that negligence, and the employee could have consulted her supervisor.

Q: We're a public school. Can the Department reduce the penalty for us?
A: No. The Department must apply the statute as written, which does not exempt or give reduced penalties to government or nonprofit entities. Only the Legislature could create such an exception.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-1-69(A) — penalty for failure to pay on time or to file a return on time; the penalty is the greater of a 2%-per-month late-payment amount, a 2%-per-month late-filing amount (each capped at 10%), or a $5 minimum
• NMSA 1978, § 7-1-17(C) — an assessment of tax is presumed correct
• NMSA 1978, § 7-1-3(U) — "tax" includes civil penalty and interest, so the presumption of correctness extends to penalties
• NMSA 1978, § 7-1-30 — civil penalty and interest "may" be collected in the same manner as, and concurrently with, the tax (permissive)
• NMSA 1978, § 7-1-24 — protest procedure
• Regulation 3 NMAC 1.11.8.2 — penalty is collected concurrently with the tax to which it relates
• Regulation 3 NMAC 1.11.10 — defines negligence (failure of ordinary business care, inaction where action is required, inadvertence/inattention)

Cases cited:

• State v. Dunsmore, 119 N.M. 431, 891 P.2d 572 (Ct. App. 1995) — the disjunctive "or" means a statute may be violated by any of the listed methods
• Montano v. Los Alamos County, 1996-NMCA-108, 926 P.2d 307 — "shall"/"will" are mandatory; "may" is permissive
• State ex rel. Taylor v. Johnson, 1998-NMSC-015, 961 P.2d 768 — an administrative agency may not alter, modify, or extend the reach of a law created by the Legislature

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Moriarty Municipal Schools
• Decision PDF: D&O 00-31

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
MORIARTY MUNICIPAL SCHOOLS No. 00-31
ID NO. 01-505589-00-2
ASSESSMENT NO. 2525829

DECISION AND ORDER

A formal hearing on the above-referenced protest was held October 30, 2000, before

Margaret B. Alcock, Hearing Officer. Moriarty Municipal Schools (“Taxpayer”) was represented by

Dr. Elna Stowe, its Superintendent. The Taxation and Revenue Department ("Department") was

represented by Lewis Terr, Esq. Based on the evidence and arguments presented, IT IS DECIDED

AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer is a New Mexico school district registered with the Department for

payment of withholding taxes, which are reported to the Department on Form CRS-1.

2. The Taxpayer was required to report and pay withholding taxes for the March 2000

report period on or before April 25, 2000.

3. On February 7, 2000, the Taxpayer hired Priscilla Stidham as its pay manager.

4. The departing pay manager worked with Ms. Stidham to file the Taxpayer’s February

2000 withholding taxes. The March 2000 reporting period was the first reporting period Ms.

Stidham handled on her own.

5. On March 31, 2000, Ms. Stidham filled out the Taxpayer’s CRS-1 return for the

March reporting period and took it to Ellen Gove, her supervisor. Ms. Gove signed the return in her

capacity as Director for Business and Finance.

6. When Ms. Stidham mailed the Taxpayer’s March tax payment to the Department, she

failed to include the CRS-1 return with the payment. The Department received the Taxpayer’s

payment in the amount of $31,481.69 on April 4, 2000.

7. Some time in April 2000, Ms. Stidham realized she had not included the CRS-1 form

with the Taxpayer’s March payment.

8. Ms. Stidham called the Department to ask what she should do. Ms. Stidham did not

seek the advice of her supervisor, Ms. Gove, nor did Ms. Gove check to be sure Ms. Stidham had

properly reported and paid the Taxpayer’s March withholding taxes.

9. After several days of “telephone tag”, Ms. Stidham finally spoke with a Department

employee who told Ms. Stidham to send the March CRS-1 form to the Department.

9. On April 27, 2000, two days after the due date, Ms. Stidham both mailed and faxed

the Taxpayer’s March CRS-1 return to the Department.

10. On May 5, 2000, the Department issued Assessment No. 2525829 to the Taxpayer,

assessing a late-filing penalty for report period March 2000 in the amount of $629.63.

11. On May 23, 2000, Ms. Stidham filed a written protest to the assessment of penalty.

DISCUSSION

The sole issue to be decided is whether the Department correctly assessed a late-filing

penalty against the Taxpayer. While the Taxpayer does not dispute that its March 2000 CRS-1

return was filed two days after the statutory due date, it protests the Department’s assessment of

penalty on the following grounds: (1) the statutes do not authorize imposition of penalty for late

filing when the tax payment was received on time; (2) the penalty should be limited to the mini-mum

five-dollar penalty; (3) the Taxpayer was not negligent in failing to file its return on time; and (4)

penalty should not be assessed against a public entity.

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Burden of Proof. 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. 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.

Statutory Authority to Impose Penalty. The imposition of penalty is governed by Section

7-1-69(A) NMSA 1978, which states:

A. Except as provided in Subsection B of this section, 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, to pay in
accordance with the provisions of Section 7-1-13.1 NMSA 1978 when required to do
so or to file by the date required a return regardless of whether any tax is due, there
shall be added to the amount as penalty the greater of:

(1) two percent per month or any fraction of a month from the date the
tax was due multiplied by the amount of tax due but not paid, not to exceed ten
percent of the tax due but not paid;

(2) two percent per month or any fraction of a month from the date the
return was required to be filed multiplied by the tax liability established in the late
return, not to exceed ten percent of the tax liability established in the late return; or

(3) a minimum of five dollars ($5.00), but the five-dollar ($5.00)
minimum penalty shall not apply to taxes levied under the Income Tax Act or taxes
administered by the department pursuant to Subsection B of Section 7-1-2 NMSA
1978.

The Taxpayer argues that this language does not authorize imposition of a penalty for late filing

when the tax payment has been received on time. This is clearly incorrect. The statute imposes

penalty in the case of failure “to pay when due any amount of tax required to be paid...or to file by

the date required a return regardless of whether any tax is due” (emphasis added). The statute is

written in the disjunctive: the imposition of penalty for late filing is independent of the penalty for

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late payment. See, State v Dunsmore, 119 N.M. 431, 433, 891 P.2d 572, 574 (Ct. App. 1995) (the

use of the disjunctive “or” indicates that the statute may be violated by any of the enumerated

methods).

The Taxpayer also relies on Regulation 3 NMAC 1.11.8.2, which states that penalty “shall be

collected in the same manner as and concurrently with, the amount of tax to which it relates, in

accordance with Section 7-1-30.” Section 7-1-30 NMSA 1978 states:

Any amount of civil penalty and interest may be collected in the same manner as, and
concurrently with, the amount of tax to which it relates, without assessment or
separate proceedings of any kind.

The Taxpayer reads these provisions to mean that no penalty may be collected if the underlying tax

has already been paid. This is too narrow a reading of the statute. Section 7-1-30 NMSA 1978 is

simply intended to relieve the Department from the administrative burden of issuing separate

assessments to reflect each month’s accrual of interest and penalty on unpaid taxes. It also provides

that interest and penalty may be collected in the same manner and at the same time as the underlying

tax. The word “may” is permissive, not mandatory. See, Montano v. Los Alamos County, 1996-

NMCA-108, ¶5, 926 P.2d 307 (it is a canon of statutory construction that the words “shall” and

“will” are mandatory and “may” is permissive or directory). Section 7-1-30 NMSA 1978 cannot be

construed to deprive the Department of the ability to collect penalty once the tax principal has been

paid. To do so would mean that any taxpayer could avoid the statutory penalty for late payment or

late filing by making immediate payment of just the principal portion of an assessment. This would

lead to an absurd result and is clearly not the intent of the statute.

Five Dollar Minimum Penalty. The Taxpayer maintains it should have been assessed the

minimum five-dollar penalty under Subsection (A)(3) of Section 7-1-69 NMSA 1978, rather than the

two percent late-filing penalty under Subsection (A)(2). The statute provides that in the case of

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failure to either pay tax on time or file a return on time there shall be added as penalty the greater of

three alternative amounts. The first penalty amount, set out in Subsection (A)(1), applies to late

payment and is equal to two percent of the unpaid tax multiplied by the number of months, or

fraction thereof, the payment is late. The second penalty amount, set out in Subsection (A)(2),

applies to late filing and is equal to two percent of the tax reported on the late return multiplied by

the number of months, or fraction thereof, the return is late. The third penalty amount, set out in

Subsection (A)(3), is a minimum amount of five dollars. Applying the statute to the facts of this

case, the three alternative penalties that could have been assessed against the Taxpayer are:

Penalty for Late Payment (2 percent of unpaid tax): $ -0-
Penalty for Late Filing (2 percent of tax reported): $629.63
Minimum Penalty $ 5.00

The greater of the three penalty amounts is the two percent late-filing penalty imposed by Sub-

section (A)(2) of Section 7-1-69 NMSA 1978, not the five dollar minimum penalty imposed by

Subsection (A)(3).

Negligence. The Taxpayer argues that it should not be liable for the penalty assessed

because its failure to file the March 2000 return on time was not due to negligence. 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;

2) inaction by taxpayers where action is required;

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

The Taxpayer’s failure to file a timely return was due to Ms. Stidham’s inadvertent failure to include

the return with the payment and her inaction in failing to timely correct the oversight. At the hearing,

Dr. Stowe suggested that Ms. Stidham’s failure to mail the return as soon as she discovered the problem

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was attributable to her inability to reach someone from the Department until two days after the filing

deadline. First, I note that Ms. Stidham did not testify at the hearing, and Dr. Stowe’s account of Ms.

Stidham’s efforts to reach the Department is hearsay. Ms. Stidham’s protest letter states that once she

realized she had not sent the CRS-1 form with the payment, “I contacted the Taxation and Revenue

Department. After playing ‘telephone tag’ for many days, finally I was able to speak with Andre.” The

fact that Ms. Stidham was not immediately able to make personal contact with someone from the

Department does not negate her original negligence in failing to include the return with the payment.

Nor does it explain why Ms. Stidham did not consult with her supervisor, Ms. Gove, especially after

Ms. Stidham’s initial attempt to reach the Department was unsuccessful. I also believe there was at

least some negligence on the part of Ms. Gove in failing to insure that Ms. Stidham, a new employee,

followed the proper procedures in reporting and filing the Taxpayer’s March withholding taxes. The

various actions and inactions underlying the Taxpayer’s failure to file its March 2000 return in a timely

manner support a finding of negligence.

Imposition of Penalty Against a Public Entity. Finally, the Taxpayer asks the Department

to either abate or reduce the penalty based on the Taxpayer’s status as a public school. The Taxpayer

misunderstands the scope of the Department’s authority. The Department is charged with enforcing

the laws as written by the Legislature and has no authority to change or override those laws. In State

ex rel. Taylor v. Johnson, 1998-NMSC-015 ¶ 022, 961 P.2d 768, 774-775, the New Mexico Supreme

Court made the following observations concerning the power of administrative agencies:

Generally, the Legislature, not the administrative agency, declares the policy and
establishes primary standards to which the agency must conform. See State ex rel.
State Park & Recreation Comm'n v. New Mexico State Authority, 76 N.M. 1, 13,
411 P.2d 984, 993 (1966). The administrative agency's discretion may not justify
altering, modifying or extending the reach of a law created by the Legislature.

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In this case, Section 7-1-69(A) NMSA 1978 governs the imposition of penalty. The statute does not

exempt government or nonprofit entities, nor does it provide for reduced penalties against these

entities. The Department may not rewrite the language of the statute to excuse the Taxpayer from

payment of the statutorily-mandated penalty for failure to file a timely return..

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment No. 2525829 pursuant to

Section 7-1-24 NMSA 1978, and jurisdiction lies over the parties and the subject matter of this protest.

2. The Department’s assessment of penalty against the Taxpayer was properly issued in

accordance with the provisions of Section 7-1-69(A) NMSA 1978.

3. The Department does not have authority to abate or reduce the penalty assessed against

the Taxpayer based on the Taxpayer’s status as a public school.

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

DATED November 13, 2000.

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