Can New Mexico waive a late-payment penalty when a business's ACH tax transfer posted one day late because its office closed for Thanksgiving and its clearing house gave it wrong advice?

Plain-English summary

Gencon Corporation, a Las Cruces commercial construction company, had to pay a negligence penalty for paying its October 2001 CRS taxes one day late — even though a clearing house gave it wrong advice and it had an exemplary filing record. New Mexico's late-payment penalty is mandatory when the lateness results from negligence, and a hearing officer cannot waive it on fairness grounds.

Because Gencon's monthly CRS (gross receipts, compensating, and withholding) tax payments exceeded $25,000, it had to use one of the special payment methods in Section 7-1-13.1 and had elected ACH bank transfer. Its October 2001 return was due Monday, November 26, 2001. Gencon filed the return online on November 20 but did not initiate the ACH payment on Friday, November 23, because its office was closed for Thanksgiving. An employee called the clearing house on Saturday, November 24; the clearing house wrongly said the payment would post on Monday. It actually posted Tuesday, November 27 — one day late. The Department assessed penalty and interest; Gencon paid the interest on February 11, 2002, and protested only the penalty.

The penalty is mandatory for a negligent late payment

Section 7-1-69 imposes a penalty of 2% per month (up to 10%) when a taxpayer fails to pay on time "due to negligence or disregard of rules and regulations." Regulation 3.1.11.10 NMAC defines negligence to include carelessness, inattention, and inaction where action is required, and New Mexico courts uphold the penalty even for inadvertent, unintentional late payments (Arco Materials; El Centro Villa Nursing Center).

A taxpayer is bound by its payment agent's mistake

Gencon blamed the clearing house for wrongly saying a Saturday transfer would post Monday. The hearing officer held that a principal is bound by the acts of its agent (Marchman v. NCNB Texas National Bank), so the agent's bad advice was no defense.

Gencon's own employees were also negligent

The Department's Publication FYI-401 explains that an ACH transfer must be authorized at least one banking day before the due date and that Saturdays, Sundays, and bank holidays do not count — so a Saturday transfer would not post until Tuesday. Gencon's staff forgot to start the transfer on Friday and then failed to read the instructions carefully enough to catch the clearing house's error.

Waiting until the last day is not prudent

The hearing officer noted that taxpayers get a 25-day grace period to report and pay (Sections 7-1-13 and 7-9-11). Gencon knew the tax due when it filed on November 20 but chose to keep the funds a few more days. Cutting it that close leaves no margin if a problem arises — not a prudent business practice given the penalties a late payment can trigger.

A good record is not a legal defense

Gencon asked for relief as a "good corporate citizen" with an exemplary history. The hearing officer held that only the Legislature can create equitable exceptions; the agency has no authority to waive a penalty on those grounds (State ex rel. Taylor v. Johnson).

Result: protest DENIED. The penalty stood.

What this means for you

Businesses that pay New Mexico taxes by ACH or other electronic transfer

An electronic payment is timely only if the state has access to the funds by the due date. For ACH, authorize the transfer at least one banking day ahead, and do not count weekends or bank holidays. The Department's FYI-401 spells out the exact timing.

Large filers required to use special payment methods

If your average monthly CRS payment tops $25,000, Section 7-1-13.1 requires a special payment method, and you are responsible for making sure the funds arrive on time.

Anyone who relies on a bank, payroll service, or clearing house

You are bound by your agent's mistakes. Erroneous advice from the company that moves your money will not excuse a late payment.

Taxpayers who pay at the last minute

Waiting until the due date leaves no room to fix a glitch. Initiating payment a few days early is the simplest protection against an automatic penalty.

Common questions

Q: How late was the payment?
A: One day — due Monday, November 26, 2001; the ACH posted Tuesday, November 27.

Q: Didn't the clearing house cause the problem?
A: It gave wrong advice, but a taxpayer is bound by its agent's acts (Marchman v. NCNB), and Gencon's own staff had also missed the Friday deadline and misread the ACH rules.

Q: Gencon paid the interest — why fight the penalty?
A: It conceded the interest (paid February 11, 2002) and protested only the negligence penalty, which the hearing officer upheld.

Q: Could the exemplary record excuse the penalty?
A: No. A hearing officer cannot waive a statutory penalty for a good history; that is a policy choice reserved to the Legislature.

Q: What is the lesson on ACH timing?
A: Authorize the transfer at least one banking day before the due date and do not count weekends or holidays; a Saturday transfer posts the next business day.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-1-69 — negligence penalty (2% per month, up to 10%)
• NMSA 1978, § 7-1-13.1 — special payment methods for large taxpayers (including ACH)
• NMSA 1978, § 7-1-13 — due date for tax returns and payments
• NMSA 1978, § 7-9-11 — CRS taxes due the 25th of the following month
• NMSA 1978, § 7-1-67 — interest on late-paid taxes (paid and not contested here)
• NMSA 1978, § 7-1-17 — a Department assessment is presumed correct
• NMSA 1978, § 7-1-3 — "tax" includes related interest and civil penalty
• Regulation 3.1.11.10 NMAC — definition of taxpayer negligence
• Department Publication FYI-401, Special Payment Methods — ACH timing rules

Cases cited:

• Marchman v. NCNB Texas National Bank, 120 N.M. 74, 898 P.2d 709 (1995)
• State ex rel. Taylor v. Johnson, 1998-NMSC-015, 961 P.2d 768
• Arco Materials, Inc. v. Taxation & Revenue Department, 118 N.M. 12, 878 P.2d 330 (Ct. App. 1994), rev'd on other grounds by Blaze Construction Co. v. Taxation & Revenue Department, 118 N.M. 647, 884 P.2d 803 (1994)
• El Centro Villa Nursing Center v. Taxation & Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Gencon Corporation
• Decision PDF: D&O 02-16

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
GENCON CORPORATION No. 02-16
ID NO. 01-857270-00 7
ASSESSMENT NO. 2722846

DECISION AND ORDER

A formal hearing on the above-referenced protest was held July 17, 2002, before Margaret B.

Alcock, Hearing Officer. Gencon Corporation (“Taxpayer”) was represented by Michael Clute, its

president. The Taxation and Revenue Department ("Department") was represented by Javier Lopez,

Special Assistant Attorney General. Based on the evidence and arguments presented, IT IS

DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer is a commercial construction company located in Las Cruces, New

Mexico.

2. Because the Taxpayer’s average monthly payment of gross receipts, compensating and

withholding taxes, which are reported under the Department’s combined reporting system (“CRS”),

exceeds $25,000, the Taxpayer is required to pay these taxes using one of the four payment methods

set out in Section 7-1-13.1 NMSA 1978. These payment methods are designed to insure that tax

funds are immediately available to the state on or before the due date.

3. The Taxpayer has elected to make its monthly CRS tax payment by means of an

automated clearing house (“ACH”) transfer. The Taxpayer is responsible for making the

arrangements necessary to insure that its ACH payment is received by the Department on or before

the due date.

4. Department Publication FYI-401, Special Payment Methods, informs taxpayers that in

order for an ACH payment to be timely, the taxpayer must authorize the transfer at least one banking

day before the due date. The publication warns taxpayers that Saturdays, Sundays and national bank

holidays are not banking days.

5. The tax return and payment of CRS taxes for the October 2001 reporting period were due

on or before Monday, November 26, 2001.

6. On Tuesday, November 20, 2001, the Taxpayer filed its CRS-1 tax return for the October

2001 reporting period on line.

7. Pursuant to its normal procedures, the Taxpayer should have initiated the ACH payment

of these taxes on Friday, November 23, 2001.

8. Because the Taxpayer’s office was closed for the Thanksgiving holiday on Thursday,

November 22, 2001 and Friday, November 23, 2001, the payment was not initiated on time.

9. On Saturday, November 24, 2001, one of the Taxpayer’s employees realized that the

Taxpayer’s October 2001 CRS taxes needed to be paid by the following Monday and called the

Taxpayer’s clearing house to initiate the ACH transfer.

10. The person handling the transaction for the clearing house incorrectly advised the

Taxpayer that the payment would be posted on Monday, November 26, 2001.

11. The Taxpayer’s ACH payment was not posted to the Department’s account until

Tuesday, November 27, 2001.

12. As a result of the late payment of taxes for the October 2001 period, the Department

issued Assessment No. 2722846 assessing the Taxpayer penalty and interest pursuant to Sections 7-

1-67 and 7-1-69 NMSA 1978.

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13. On December 5, 2001, the Taxpayer filed a written protest to the assessment of penalty

and interest.

14. On February 11, 2002, the Taxpayer paid the interest due on the late payment, but stated

that it wished to continue with its protest of the assessment of penalty.

DISCUSSION

The sole issue to be determined is whether the Taxpayer is liable for the penalty assessed on

its late payment of CRS taxes for the October 2001 reporting period. The Taxpayer does not dispute

that its tax payment was late, but maintains that it should be excused from the penalty because (1) it

was misled by an employee of the clearing house the Taxpayer used to make its ACH payment; and (2)

because the Taxpayer has an exemplary reporting history and has always made every effort to insure

that its taxes are paid on time and in full.

Section 7-1-17 NMSA 1978 provides that any assessment of taxes made by the Department

is presumed to be correct. Section 7-1-3 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 presumption of

correctness applies to the assessment of penalty at issue in this case, and it is the Taxpayer’s burden

to present evidence and legal arguments to support an abatement.

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

penalty of two percent per month or any fraction of a month, up to a maximum of ten percent, that a

taxpayer fails “due to negligence or disregard of rules and regulations” to pay taxes or file required

tax reports in a timely manner. Taxpayer negligence for purposes of assessing penalty is defined in

Regulation 3.1.11.10 NMAC as:

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

B. inaction by taxpayers where action is required;

C. inadvertence, indifference, thoughtlessness, carelessness,
erroneous belief or inattention.

New Mexico case law confirms that penalties may properly be assessed even when a taxpayer’s late

payment is based on inadvertent error or unintentional failure to pay the tax due. Arco Materials,

Inc. v. Taxation & Revenue Department, 118 N.M. 12, 16, 878 P.2d 330, 334 (Ct. App. 1994) rev'd

on other grounds by Blaze Construction Co. v. Taxation & Revenue Department, 118 N.M. 647, 884

P.2d 803 (1994); El Centro Villa Nursing Center v. Taxation & Revenue Department, 108 N.M. 795,

797-798, 779 P.2d 982, 984-985 (Ct. App. 1989).

In this case, the Taxpayer argues that it should be excused from the negligence penalty

because an employee of the clearing house the Taxpayer used to make its ACH payment advised the

Taxpayer that the payment would be posted to the Department’s account on Monday, November 26,

2001. The fact that the Taxpayer received erroneous advice from the agent it chose to make the ACH

transfer does not provide a basis for abating penalty. The law is clear that a principal is bound by the

acts of its agent. Marchman v. NCNB Texas Nat'l Bank, 120 N.M. 74, 92, 898 P.2d 709, 727 (1995).

In addition, the evidence in this case shows that the Taxpayer’s late payment was also attributable to

the errors of its own employees.

The first error occurred as a result of the Thanksgiving holiday. The Taxpayer closed its offices

on both Thursday, November 22nd and Friday, November 23rd, and none of its employees remembered

that the ACH transfer to pay the Taxpayer’s October CRS taxes had to be made that Friday. The

second error occurred when an employee of the Taxpayer attempted to correct the first error by

initiating the ACH transfer on Saturday, November 24th. The Department’s Publication FYI-401 sets

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out detailed instructions on the special payment methods required by Section 7-1-13.1 NMSA 1978.

Page 9 of the publication states as follows:

Timely Filing and ACH Payments. For the ACH payment to be timely, the
Department must have access to the funds on or before the tax return’s filing
due date. This means you must authorize the transfer at least one banking day
before the tax return’s filing due date.

Remember to consider Saturdays, Sundays and bank holidays when you
determine the filing due date.... For example, if Christmas falls on a Monday,
the due date for November CRS taxes becomes Tuesday, December 26th. To
ensure timely payment you need to initiate the ACH deposit no later than
Friday, December 22.

These instructions should have put the Taxpayer’s employees on notice that an ACH transfer initiated

on Saturday would not post to the Department’s account until the following Tuesday, which is what

happened in this case. While the Taxpayer places the blame for its late payment on incorrect

information provided by its clearing house, the Taxpayer’s employees were equally negligent in

forgetting to make the ACH transfer in the first place and in failing to carefully read the Department’s

instructions, which would have alerted them to the fact that the information received from the clearing

house was wrong.

It must be noted that it is the Taxpayer’s practice to wait until the last possible day to make the

ACH transfer necessary to pay its monthly CRS taxes. Although taxpayers become liable for tax at the

time the taxable transaction occurs, they are not required to pay that tax until the statutory due date.

Section 7-1-13 NMSA 1978. With regard to CRS taxes, the due date is the 25th day of the month

following the end of the month in which the taxable transaction occurs. Section 7-9-11 NMSA 1978.

In effect, taxpayers are given a 25-day grace period to report and pay taxes due for the previous month.

While it is certainly permissible for a taxpayer to wait until the last possible day to make its tax

payment, thereby retaining use of the tax funds for its own benefit, this strategy does not leave any

margin for error. If a problem occurs in transmitting the payment, there is often no time left to take

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corrective action and insure the payment is delivered to the Department by the statutory due date.

Given the substantial amounts of penalty and interest that can result from a late payment of tax, this

strategy does not qualify as prudent business practice.

Here, the Taxpayer filed its CRS-1 tax return for the October 2001 reporting period on

Tuesday, November 20, 2001. At that point in time, the Taxpayer knew the amount of tax due to the

state and could have initiated the ACH transfer necessary to pay the tax that same day. Instead, the

Taxpayer chose to hold on to the tax funds for a few extra days. It failed, however, to make

arrangements to insure that the ACH transfer would be made on Friday, even though the office was

closed for the Thanksgiving holiday. When attempting to correct this oversight, the Taxpayer’s

employee failed to read the Department’s instructions carefully enough to realize that an ACH transfer

initiated on Saturday would not post to the Department’s account until the following Tuesday.

Although not intentional, the Taxpayer’s late payment of its October 2001 CRS taxes was negligent and

justifies imposition of penalty under Section 7-1-69 NMSA 1978.

As its final argument, the Taxpayer asks that penalty be waived based on its exemplary

reporting history and the fact that it is a good corporate citizen. These are not factors the Department

can consider. 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....

In this case, the Legislature has directed the imposition of penalty whenever a late payment results

from the taxpayer’s negligence. The Legislature has not granted the Department or its hearing

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officer authority to waive the penalty based on equitable grounds, including a taxpayer’s past

reporting history. Because the Taxpayer’s late payment of its October 2001 CRS taxes was due to

negligence, there is no basis for abating the penalty assessed.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Department Assessment No. 2722846,

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

2. The Taxpayer’s failure to make timely payment of its October 2001 CRS taxes was

negligent, and penalty was properly assessed pursuant to Section 7-1-69 NMSA 1978.

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

DATED July 18, 2002.

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