If a business fails to pay New Mexico gross receipts tax for years because a tax-department employee wrongly told it no tax was due, can it get the penalty and the interest waived?

Plain-English summary

Micro-Treat is a Texas company that treats oil wells with a naturally occurring bacteria to boost production. When it started servicing wells in New Mexico in 1994, owner Greg Murray called the Department to ask whether he owed New Mexico tax. The employee asked whether his contracts were with Texas companies; he said yes, and she wrongly told him no New Mexico tax was due. Relying on that, Micro-Treat paid no gross receipts tax on its New Mexico work for six years. In 2000 a friend tipped him off, a Department supervisor confirmed the receipts were taxable, and Murray filed 75 back returns (April 1994–June 2000). The Department then assessed penalty and interest on the late payments, and Micro-Treat protested.

The Hearing Officer granted the protest in part: the penalty was abated, but the interest stood.

On the penalty, Regulation 3.1.11.11 says a taxpayer is not negligent when it "was affirmatively misled by a department employee." That's exactly what happened here. The Department argued Murray needed documentary proof of the call, but the regulation requires no such thing — credible sworn testimony is evidence too. The Hearing Officer found Murray credible, so the negligence penalty was removed.

On the interest, the result was the opposite. Interest under Section 7-1-67 is mandatory ("shall") and is not a penalty — it compensates the state for the time value of taxes it was owed but didn't have. Whether the taxpayer was negligent is irrelevant to interest. Because Micro-Treat, not the state, had the use of that money for six years, interest was properly assessed.

What this means for you

Businesses that got wrong answers from the tax department

If a Department employee affirmatively gave you incorrect advice and that's why you didn't pay, you may be able to get the negligence penalty abated under Regulation 3.1.11.11. Note the limits: this is about being affirmatively misled — actively told the wrong thing — not merely getting no answer or making your own assumption.

You don't necessarily need a paper trail — but it helps

The Department wanted documents; the Hearing Officer held that credible sworn testimony about the call is enough. Still, contemporaneous notes, names, dates, and follow-up letters make a "misled by the Department" defense far easier to win. Murray's account was believed in part because the facts hung together.

Bad advice does not erase interest

Even a clean win on the penalty leaves interest in place. Interest is not fault-based; it runs from the original due date until you pay. The only reliable way to limit interest on taxes you didn't pay is to pay them (or pay the disputed principal) sooner.

Common questions

Q: A tax-department employee told me I didn't owe the tax — can I avoid the penalty?
A: Possibly. If you were affirmatively misled by a Department employee and that caused your failure to pay, Regulation 3.1.11.11 can support abating the negligence penalty, as it did here.

Q: Do I need written proof of what the employee told me?
A: No. Credible sworn testimony counts as evidence and can carry the same weight as documents. But specifics — names, dates, and any confirming letters — make your account more believable.

Q: If the penalty is waived because I was misled, is the interest waived too?
A: No. Interest is mandatory and is not tied to fault; it compensates the state for the time it was without the money. It is assessed even when the failure to pay was entirely innocent.

Q: Does this decision apply to my situation?
A: Not automatically. A Decision and Order resolves one taxpayer's protest on its own facts and the law in effect at the time. It shows how New Mexico treats penalties versus interest when a taxpayer is misled, but your facts may differ.

Citations and references

Statutes and regulations:

• Section 7-1-3 NMSA 1978 — "tax" includes related interest and civil penalty
• Section 7-1-13(E) NMSA 1978 — interest runs from the original due date
• Section 7-1-17 NMSA 1978 — assessment presumed correct
• Section 7-1-67 NMSA 1978 — mandatory interest on late-paid tax
• Section 7-1-69(A) NMSA 1978 — 10% negligence penalty; Regulation 3.1.11.10 NMAC (negligence); Regulation 3.1.11.11 NMAC (not negligent when affirmatively misled by a department employee)

Cases cited:

• El Centro Villa Nursing Center v. Taxation and Revenue Dep't, 108 N.M. 795 (presumption of correctness)
• State v. Lujan, 90 N.M. 103 ("shall" is mandatory)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Micro-Treat, Inc.
• Decision PDF: D&O 02-27

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
MICRO-TREAT, INC. No. 02-27
ID NO. 02-442270-00 3
ASSESSMENT NOS. 2672560 through 2672631,
2673370, 2674225, and 2674226

DECISION AND ORDER

A formal hearing on the above-referenced protest was held October 23, 2002, before

Margaret B. Alcock, Hearing Officer. Micro-Treat, Inc. was represented by its president, Greg

Murray. The Taxation and Revenue Department ("Department") was represented by Bruce J. Fort,

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

DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. In 1993, Greg Murray formed a partnership with one of his friends in Midland,

Texas.

2. The partnership engaged in the business of treating oil wells with a naturally

occurring bacteria that breaks down the build up of substances in oil wells and increases the

production of oil.

3. In April 1994, the partnership was terminated and the business was incorporated in

Texas under the name Micro-Treat, Inc. The business continued to operate out of Midland, Texas.

4. At the time Micro-Treat began business, Greg Murray met with the Texas

Comptroller to determine whether the company would have any liability for Texas sales tax. Mr.

Murray was told that there was a special deduction for his type of business and no sales tax would be

due.

4. In 1994, Micro-Treat began servicing a few oil wells in Oklahoma, and Mr. Murray

called the tax authorities in Oklahoma to determine whether Micro-Treat had any liability for sales

tax in that state.

5. Mr. Murray was told that he would owe both state and county taxes on his activities

in Oklahoma. Based on this information, Micro-Treat began reporting and paying taxes on its

Oklahoma sales.

6. In 1994, Micro-Treat began servicing oils wells in New Mexico, and Mr. Murray

called the New Mexico Taxation and Revenue Department to determine whether the company had

any liability for tax in New Mexico.

7. Mr. Murray gave the Department the same information he had provided to the tax

authorities in Texas and Oklahoma, i.e., that Micro-Treat was a Texas company engaged in treating

oil wells to increase the production of oil from those wells. Mr. Murray told the Department

employee who took his call that he had a contract to treat two oil wells in New Mexico and asked

whether he would owe any taxes to New Mexico.

8. The Department employee then asked Mr. Murray whether Micro-Treat’s sales were

made to other Texas companies. Mr. Murray told her that all of Micro-Treat’s contracts were with

companies located in Texas.

9. Based on this response, the Department employee incorrectly advised Mr. Murray

that he would not owe any taxes to New Mexico. As a result, Micro-Treat did not report or pay gross

receipts taxes on its receipts from treating oil wells in New Mexico.

10. Sometime in the summer of 2000, Mr. Murray was discussing his business with a

friend who was also engaged in the oilfield service business. The friend advised Mr. Murray that

receipts from treating oil wells in New Mexico were subject to New Mexico gross receipts tax.

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11. After this discussion, Mr. Murray called the Department to determine whether he

should be paying tax on his New Mexico receipts. The employee who took Mr. Murray’s call said

she did not know the answer to his question but would have a supervisor call him back.

12. Three days later, Mr. Murray still had not received a response from anyone at the

Department. Mr. Murray called the Department again and spoke to another employee who told him

that she did not know whether his receipts from treating oil wells were subject to tax in New Mexico.

13. Mr. Murray was finally transferred to a supervisor who correctly informed him that

Micro-Treat’s receipts from treating oil wells in New Mexico were subject to New Mexico gross

receipts tax. The supervisor subsequently sent Mr. Murray a letter confirming her advice.

14. Upon learning that his business was subject to tax in New Mexico, Mr. Murray began

filing gross receipts tax returns with the Department. After retrieving his records for earlier years,

Mr. Murray filed 75 separate returns reporting back taxes due for reporting periods April 1994

through June 2000.

15. At the time the returns were filed, Mr. Murray paid some, but was unable to pay all,

of the tax principal due to New Mexico.

16. In June 2001, the Department assessed Micro-Treat for the amount of unpaid tax

principal, plus penalty and interest on its late payment of gross receipts taxes for reporting periods

April 1994 through June 2000.

17. On July 12, 2001, Micro-Treat filed a written protest to the assessment of penalty and

interest.

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DISCUSSION

The issue to be decided is whether Micro-Treat is liable for penalty and interest on its late

payment of gross receipts tax for reporting periods April 1994 through June 2000. Mr. Murray

believes his company should be excused from payment of penalty and interest because its failure to

pay tax to New Mexico was based on incorrect advice Mr. Murray received from a Department

employee.

Burden of Proof. Section 7-1-17 NMSA 1978 provides that any assessment of tax 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 assessment of

penalty and interest paid by Micro-Treat is presumed to be correct, and it is the taxpayer’s burden to

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

Assessment of 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 report or pay taxes in a

timely manner. Taxpayer negligence for purposes of assessing penalty is defined in Regulation

3.1.11.10 NMAC as:

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.

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Regulation 3.1.11.11 NMAC sets out several situations that may indicate a taxpayer has not been

negligent, including the situation where “the taxpayer proves the taxpayer was affirmatively misled

by a department employee.”

Based on the evidence presented at the hearing in this case, a Department employee gave Mr.

Murray incorrect advice concerning his company’s liability for gross receipts tax. Although there is

no indication that the employee intended to mislead the taxpayer or acted with any malice, the fact

remains that her incorrect advice was the cause of Mr. Murray’s failure to file timely gross receipts

tax returns. The Department maintains that taxpayers cannot meet the requirements of Regulation

3.1.11.11 NMAC without some documentary proof of their conversations with the Department. The

regulation does not require this type of proof. A taxpayer’s sworn testimony is evidence and, if

credible, carries just as much weight as documentary evidence. I found Mr. Murray to be a credible

witness and accept his testimony that he was affirmatively misled by a Department employee. For

this reason, the negligence penalty assessed against Micro-Treat should be abated.

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.

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The fact that Micro-Treat is entitled to an abatement of penalty because it was misled by a

Department employee does not mean that Micro-Treat also is entitled to an abatement of interest.

Interest and penalty are not the same. Section 7-1-69(A) NMSA 1978 imposes a penalty whenever a

taxpayer’s failure to pay tax is due to negligence or disregard of the Department’s rules and

regulations. In contrast, the imposition of interest pursuant to Section 7-1-67(A) NMSA 1978 is not

a penalty designed to punish taxpayers, but is a means of compensating the state for the time value of

unpaid revenues. The issue of negligence is not relevant to the taxpayer’s liability for 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. See, Section 7-1-13(E) NMSA 1978.

Here, the taxpayer failed to pay gross receipts tax due to the state. Although this failure was

clearly not intentional, the fact remains that Micro-Treat—not the state—had use of those tax funds

during the six-year period at issue. Section 7-1-67 NMSA 1978 requires interest to be paid for any

period of time during which the state is denied the use of the funds to which it is legally entitled.

Accordingly, interest was properly assessed against Micro-Treat and there is no basis for abatement.

CONCLUSIONS OF LAW

1. Micro-Treat filed a timely, written protest to Assessment Nos. 2672560 through

2672631, 2673370, 2674225, and 2674226, and jurisdiction lies over the parties and the subject matter

of this protest.

2. Micro-Treat was affirmatively misled by a Department employee and was not negligent

in failing to report gross receipts tax during the period at issue.

3. Micro-Treat was late in paying gross receipts taxes due to the state, and interest was

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

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For the foregoing reasons, Micro-Treat’s protest IS GRANTED IN PART AND DENIED IN

PART. The Department is ordered to abate the penalty assessed against the taxpayer. Micro-Treat

remains liable for the payment of interest.

DATED November 4, 2002.

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