I used H&R Block and paid my income tax, but nobody told me about New Mexico gross receipts tax. Do I still owe the penalty and interest?

Plain-English summary

An independent contractor who used H&R Block for her income taxes but never paid gross receipts tax — because no one told her it applied — still owed the negligence penalty and mandatory interest. Using a preparer is not a defense when you never asked about the tax you missed. Protest DENIED.

Debbie Garcia (Ingram) worked as an independent contractor for the Cibola County DWI Program in 1996, 1997, and 1998, receiving a Form 1099 each year. Unfamiliar with 1099 income, she had H&R Block prepare her state and federal income tax returns, which reported the income on Schedule C. She did not know New Mexico also imposes gross receipts tax on an independent contractor's receipts, and she never paid it. After an IRS tape match, the Department assessed gross receipts tax, penalty, and interest in February 2000. She did not dispute the tax itself but protested the penalty and interest, arguing it was unfair that neither the Department nor H&R Block had warned her — and that co-workers had not paid either. The hearing officer rejected both parts.

Interest is mandatory

Section 7-1-67 says interest "shall" be paid on any tax not paid when due, and the word "shall" makes it mandatory, with no exceptions (State v. Lujan). Interest is not a punishment; it compensates the state for the time value of revenue it received late. The hearing officer found Garcia to be "an honest person who had no intent to cheat the state," but the tax was due and paid late, so interest was owed.

The penalty: lack of knowledge is negligence

The negligence penalty under Section 7-1-69(A) applies when a taxpayer fails to pay on time due to negligence, defined in Regulation 3 NMAC 1.11.10 to include inaction where action is required and an erroneous belief that no tax is due. New Mexico is a self-reporting system; the Department cannot know when someone starts an income-producing activity, so every individual has a duty to ascertain the tax consequences of their actions (Tiffany Construction). A taxpayer's lack of knowledge or mistaken belief that no tax is due has itself been held to be negligence.

Reliance on H&R Block did not excuse the penalty

The harder question was whether relying on H&R Block defeated the penalty. Regulation 3 NMAC 1.11.11 recognizes "reasonable reliance on the advice of competent tax counsel or accountant... after full disclosure of all relevant facts" as a possible sign of non-negligence. But Garcia only had H&R Block prepare her income tax returns; she never asked whether other taxes might apply to her business income, and H&R Block volunteered nothing. She did not get advice about the gross receipts tax until after the assessment. So her failure to file was not an informed decision based on a tax advisor's advice, and the reliance exception did not apply. (This is the recurring lesson that preparer reliance protects you only when you fully disclose the issue and actually ask.)

"Others didn't pay" is no defense

Finally, Garcia argued it was unfair to penalize her when other DWI Program workers had not paid. She offered no evidence of that, and cited no authority that one taxpayer is excused because others break the law. Absent a well-defined scheme of discrimination or fraud, a taxpayer assessed no more than the law allows has no complaint (Appelman v. Beach). She was welcome to report anyone she believed had evaded the tax.

Result: protest DENIED — both the interest and the negligence penalty stood.

What this means for you

Independent contractors owe gross receipts tax on top of income tax

Reporting your 1099 income for income tax is not the whole picture. In New Mexico, an independent contractor's receipts are also subject to gross receipts tax. If you do contract work, register and file — do not assume income tax is your only obligation.

Interest is automatic and cannot be waived

Interest on late-paid tax is mandatory, compensates the state, and applies even to an honest taxpayer who made a genuine mistake. There is no good-faith exception to interest, so pay as soon as you learn tax is due to stop it from growing.

A preparer only shields you if you disclose the issue and ask

Reliance on a tax preparer can defeat the negligence penalty — but only if you fully disclose the relevant facts and actually get advice on the specific tax. Having someone prepare your income tax return, without ever asking about other taxes, is not the informed reliance the rule protects. Ask your preparer directly whether gross receipts (or other) taxes apply.

"Other people didn't pay" is not a defense

You cannot avoid tax, penalty, or interest by pointing to others who did not comply. Without proof of a deliberate discriminatory scheme, being correctly assessed under the law gives you no grievance.

Common questions

Q: I paid income tax on my 1099 income. Why do I owe gross receipts tax too?
A: New Mexico's gross receipts tax is separate from income tax and applies to an independent contractor's receipts. Reporting the income for income tax does not satisfy the gross receipts tax, which you must register for and pay.

Q: Can the interest be waived because I didn't know and made an honest mistake?
A: No. Interest under Section 7-1-67 is mandatory and compensates the state for late revenue. It applies regardless of intent, so there is no good-faith exception.

Q: I used H&R Block. Doesn't relying on a preparer protect me from the penalty?
A: Only if you fully disclosed the issue and actually received advice about that tax. Here the taxpayer never asked H&R Block about gross receipts tax, so there was no informed reliance to excuse the negligence penalty.

Q: Other contractors didn't pay either. Isn't it unfair to penalize just me?
A: Not a defense. Without evidence of a deliberate scheme of discrimination or fraud, a taxpayer assessed only what the law requires has no complaint. You can report others you believe evaded the tax.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-1-67 — interest "shall" be paid on any tax not paid when due; mandatory, to compensate the state for the time value of unpaid revenue
• NMSA 1978, § 7-1-69(A) — negligence penalty (2% per month, up to 10%) for failing to pay on time due to negligence or disregard of rules
• NMSA 1978, § 7-1-17(C) — an assessment of tax is presumed correct
• NMSA 1978, § 7-1-3(U) — "tax" includes related interest and civil penalty
• Regulation 3 NMAC 1.11.10 — defines negligence (failure of ordinary business care, inaction where action is required, inadvertence, erroneous belief)
• Regulation 3 NMAC 1.11.11 — situations indicating non-negligence, including reasonable reliance on competent tax counsel or an accountant after full disclosure of all relevant facts

Cases cited:

• State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977) — the word "shall" makes the assessment of interest mandatory
• El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989) — the presumption of correctness extends to penalty and interest
• 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) — every individual has a duty to ascertain the tax consequences of an income-producing activity; lack of knowledge is negligence
• Appelman v. Beach, 94 N.M. 237, 608 P.2d 1119, cert. denied, 449 U.S. 839 (1980) — a taxpayer assessed no more than the law provides has no complaint absent a scheme of discrimination or fraud

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Debbie Garcia (Ingram)
• Decision PDF: D&O 00-35

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
DEBBIE GARCIA (INGRAM) No. 00-35
ID NO. 02-404284-00 6
ASSESSMENT NO. 2488014

DECISION AND ORDER

A formal hearing on the above-referenced protest was held November 20, 2000, before

Margaret B. Alcock, Hearing Officer. Debbie Garcia Ingram (“Taxpayer”) represented herself. The

Taxation and Revenue Department ("Department") was represented by David C. Iglesias, the

Department’s Chief Counsel. Based on the evidence and arguments presented, IT IS DECIDED

AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. During 1996, 1997 and 1998, the Taxpayer worked as an independent contractor for

the Cibola County DWI Program.

2. At the end of each year, the Taxpayer received a Form 1099 reporting her income

from working for the DWI program.

3. The Taxpayer was not familiar with Form 1099 and did not know how her income

should be reported on her state and federal income tax returns. For this reason, the Taxpayer went to

H&R Block to prepare her returns.

4. H&R Block completed the Taxpayer’s income tax returns for the years at issue,

reporting her 1099 income on Schedule C to federal Form 1040.

5. The Taxpayer was not aware that New Mexico law required her to pay gross receipts

tax, as well as income tax, on her receipts from working as an independent contractor.

6. The Taxpayer never asked the person at H&R Block who prepared the Taxpayer’s

income tax returns whether she owed any other type of tax on her income, nor did H&R Block

volunteer any information concerning the New Mexico gross receipts tax.

7. In 1999, the Department received information from the Internal Revenue Service

concerning the business income reported on the Taxpayer’s federal income tax returns. When the

Department investigated, it found the Taxpayer was not registered with the Department and had

never paid gross receipts tax on this income.

8. On February 5, 2000, the Department assessed the Taxpayer gross receipts tax,

penalty and interest on her receipts from performing services as an independent contractor during the

period January 1996 through December 1998.

9. After receiving the assessment, the Taxpayer went back to H&R Block and asked

why she was being assessed tax on income she had already reported on her state and federal income

tax returns.

10. The person she spoke with told her that in addition to income tax, she should have

been paying gross receipts tax on the business income reported on Schedule C to her Form 1040.

11. On February 14, 2000, the Taxpayer filed a written protest to the Department’s

assessment of penalty and interest.

DISCUSSION

The issue to be decided to whether the Taxpayer is liable for the penalty and interest imposed

by the Department. The Taxpayer did not protest her liability for tax principal, but maintains it is

unfair to assess her penalty and interest because neither the Department nor H&R Block told her that

she was required to pay gross receipts tax on her income. The Taxpayer also contends that it is unfair

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to assess her penalty and interest when other people working for the Cibola County DWI Program have

not paid gross receipts tax on their income.

Section 7-1-17(C) NMSA 1978 provides that any assessment of tax 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." See also, El Centro Villa Nursing Center v. Taxation and Revenue

Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989). Accordingly, the assessment of penalty

and interest paid by the Taxpayer is presumed to be correct, and it is the Taxpayer’s burden to

present evidence showing she is entitled to an abatement of these amounts.

Interest. 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. In this case, the Taxpayer failed to pay

gross receipts taxes in a timely manner. Although it is clear the Taxpayer is an honest person who

had no intent to cheat the state, it is also clear the taxes were due and owing. Under the provisions of

Section 7-1-67 NMSA 1978, interest is due on the underpayment.

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Penalty. Section 7-1-69 NMSA 1978 governs the imposition of penalty. Subsection A

imposes a penalty of two percent per month, up to a maximum of ten percent, when a taxpayer fails

“due to negligence or disregard of rules and regulations” to pay taxes in a timely manner. Taxpayer

negligence for purposes of assessing penalty 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.

Here, the Taxpayer's failure to pay gross receipts tax on her receipts was due to her lack of knowledge

of New Mexico law. The Taxpayer's belief that the Department should have notified her of her liability

for gross receipts tax is based on a misunderstanding of New Mexico’s self-reporting tax system.

Although the Department makes a continuing effort to educate taxpayers through workshops,

regulations, instructions and other publications, the Department is not omniscient, and cannot be

expected to know when a particular individual starts a business or undertakes some other income-

producing activity that is subject to the gross receipts tax. For this reason, the law charges every

individual with the reasonable duty to ascertain the possible tax consequences of his or her actions.

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 lack of knowledge or erroneous belief that

no tax is due has been held to constitute negligence for purposes of Section 7-1-69 NMSA 1978. Id.

The Taxpayer’s argument that she was not negligent because H&R Block failed to advise her of

her gross receipts tax liability raises a more difficult issue. Regulation 3 NMAC 1.11.11 sets out

several situations that may indicate a taxpayer has not been negligent, including “reasonable reliance on

the advice of competent tax counsel or accountant as to the taxpayer’s liability after full disclosure of

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all relevant facts....” Although the Taxpayer relied on H&R Block to prepare her state and federal

income tax returns for the years 1996-1998, she never asked whether there might be other taxes due in

connection with the business income reported on her federal return. Given these facts, the Taxpayer

cannot claim that her failure to file gross receipts tax returns was an informed decision based on advice

received from her tax advisor. The Taxpayer neither requested nor received advice from H&R Block

concerning the gross receipts tax until after the Department’s assessment was issued. Accordingly,

there is no basis to excuse the Taxpayer from payment of penalty under Regulation 3 NMAC 1.11.11.

Finally, the Taxpayer argues that it is unfair to impose penalty and interest on her when other

people working for the Cibola County DWI Program have not paid gross receipts tax on their income.

The Taxpayer presented no evidence to support her contention that her co-workers have not paid taxes

due to the state. Nor has the Taxpayer cited to any authority which holds that a taxpayer is excused

from the legal duty to pay taxes simply because there may be other taxpayers who have failed to obey

the state’s tax laws. In the area of property taxation, it has long been the rule that a taxpayer who is not

assessed more than the law provides has no cause for complaint in the courts in the absence of some

well-defined and established scheme of discrimination or some fraudulent action. Appelman v. Beach,

94 N.M. 237, 608 P.2d 1119, cert. denied, 449 U.S. 839 (1980). There is no evidence of that here. If

the Taxpayer believes someone has unfairly avoided the payment of gross receipts tax, she is welcome

to forward that person’s name to the Department for investigation.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment No. 2488014, and

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

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2. The Taxpayer was late in paying gross receipts taxes due to the state and interest was

properly assessed pursuant to Section 7-1-67 NMSA 1978.

3. The Taxpayer was negligent in failing to determine the tax consequences of engaging in

business as an independent contractor for the Cibola County DWI Program, and penalty was properly

assessed pursuant to Section 7-1-69 NMSA 1978.

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

DATED December 4, 2000.

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