If a bank wrongly bounces a business's tax check and the tax department doesn't resubmit it, does the business still owe interest on the resulting late payment?

Plain-English summary

A dental practice, Rachelle L. Shaw, DDS, PC, paid its October 2001 CRS taxes with a $10,150.12 check, but the bank mistakenly bounced it. The bank later admitted its error and asked the Department to resubmit the check. The Department didn't, and eventually assessed the tax plus penalty and interest. After the practice protested, the Department abated the penalty, so the only thing left in dispute was the interest. The practice's argument was that the Department should have resubmitted the check, and its failure to do so should excuse the interest.

The Hearing Officer denied the protest, on two independent grounds.

First, evidence. The only thing the practice offered was a sworn affidavit from its office manager, and the Department objected. The Hearing Officer excluded it: admitting it would deny the Department the right to cross-examine, and under New Mexico's legal residuum rule, an administrative decision can't rest solely on inadmissible hearsay. With no admissible evidence, the practice couldn't meet its burden to show the interest was wrong.

Second, the law. Even taking the practice's story as true, Section 7-1-13.4(C) says that when a check is dishonored, neither the Department nor the state's fiscal agent is obligated to resubmit it, and if that makes the payment late, the interest and penalty statutes apply. Interest under Section 7-1-67 is mandatory ("shall") and compensates the state for the time value of money it was owed. Because the $10,150.12 stayed in the practice's account and was never available to the state, interest was properly assessed — even though the late payment wasn't the practice's fault.

What this means for you

Businesses paying tax by check or electronic transfer

If your payment bounces or reverses — even through your bank's error — the Department is not required to try again, and the tax is treated as unpaid until it actually clears. Interest runs in the meantime. Confirm that tax payments actually post, and if one fails, resend it immediately rather than assuming the Department will retry.

Anyone protesting a tax assessment

You carry the burden of proof, and you have to bring admissible evidence — not just a signed affidavit. An affidavit alone is hearsay that the other side can't cross-examine, and New Mexico's legal residuum rule means a ruling can't be based only on it. Bring live witnesses, or evidence both sides accept. Also file any supplemental grounds for your protest on time (at least ten days before the hearing under Section 7-1-24(A)); new arguments raised later may not be considered.

Practices and offices that delegate tax filing

Because interest is fault-neutral, a bank's mistake or a staff oversight won't get it waived. The penalty may be abatable, but the interest generally is not — so the practical protection is prompt confirmation that payments clear.

Common questions

Q: My bank wrongly bounced my tax check — do I still owe interest?
A: Yes. The tax is not paid until it clears, and interest runs until then. Under Section 7-1-13.4(C) the Department isn't obligated to resubmit a dishonored check, so the resulting lateness still carries interest.

Q: The Department abated my penalty — why not the interest too?
A: A penalty can be waived for reasonable cause, but interest is mandatory and fault-neutral. It compensates the state for the time it was without the money, so an innocent cause doesn't remove it.

Q: Can I win a protest on just an affidavit?
A: Generally no. An affidavit alone is hearsay the other side can't cross-examine, and New Mexico's legal residuum rule bars a decision based solely on inadmissible hearsay. Bring admissible evidence or live witnesses.

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 illustrates how New Mexico treats dishonored payments and hearing evidence, but your facts may differ.

Citations and references

Statutes and regulations:

• Section 7-1-13.4(C) NMSA 1978 — Department/fiscal agent need not resubmit a dishonored check; interest and penalty statutes then apply
• Section 7-1-3; 7-1-17; 7-1-24(A), (G); 7-1-67 NMSA 1978
• Regulation 3.1.8.8 NMAC — right of cross-examination and a fair hearing

Cases cited:

• Chavez v. City of Albuquerque, 1997-NMCA-111 (legal residuum rule)
• Young v. Board of Pharmacy, 81 N.M. 5 (hearsay cannot alone support an agency finding)
• Bransford v. State Taxation and Revenue Dep't, 1998-NMCA-077 (hearsay generally admissible in administrative hearings)
• State ex rel. Battershell v. City of Albuquerque, 108 N.M. 658; El Centro Villa Nursing Center, 108 N.M. 795; State v. Lujan, 90 N.M. 103

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Rachelle Shaw, DDS, PC
• Decision PDF: D&O 02-28

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
RACHELLE L. SHAW, DDS, PC No. 02-28
ID NO. 02-428382-00 7
ASSESSMENT NO. 2768421

DECISION AND ORDER

A formal hearing on the above-referenced protest was held November 13, 2002, before

Margaret B. Alcock, Hearing Officer. Rachelle L. Shaw, D.D.S., P.C. (“Taxpayer”) was represented

by its attorney, Daniel M. Faber. 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. On March 29, 2002, the Department issued Assessment No. 2768421 to the Taxpayer

for $10,150.12 of CRS taxes, plus penalty and interest, due for the October 2001 reporting period.

2. On April 24, 2002, the Taxpayer filed a written protest to the assessment of penalty

and interest.

3. As grounds for its protest, the Taxpayer stated that its bank had mistakenly

dishonored the Taxpayer’s $10,150.12 check in payment of the October 2001 taxes. The bank had

subsequently explained its error to the Department and asked the Department to resubmit the check.

The Taxpayer maintained that the Department’s failure to resubmit the check absolved the Taxpayer

of liability for interest and penalty on its late payment.

4. No supplemental statement of grounds for the protest was ever filed by the Taxpayer.
5. After the protest was filed, the Department abated the penalty assessed against the

Taxpayer.

6. On July 16, 2002, the Department filed a request for hearing on the Taxpayer’s

protest of the assessment of interest.

7. On July 17, 2002, a certified letter was mailed to the Taxpayer notifying the

Taxpayer that a formal hearing to consider its protest was scheduled for November 16, 2002 at 9:00

a.m. in the offices of the New Mexico Taxation and Revenue Department in Santa Fe.

8. On July 18, 2002, a second certified letter was mailed to the Taxpayer changing the

date of the hearing to November 13, 2002.

9. On July 25, 2002, Daniel M. Faber entered his appearance on behalf of the Taxpayer.

10. The administrative hearing on the Taxpayer’s protest convened on November 13,

2002, at 9:00 a.m. Daniel M. Faber appeared on behalf of the Taxpayer. Mr. Faber did not bring any

witnesses with him to the hearing. Bridget A. Jacober appeared on behalf of the Department, with

her witness, Sylvia Sena.

11. At the outset of the hearing, Mr. Faber stated that the only evidence he had to present

on behalf of the Taxpayer was the sworn affidavit of the Taxpayer’s office manager.

12. Ms. Jacober objected to admission of the affidavit, stating that Mr. Faber had not

discussed the affidavit with her and had not provided her with a copy of the affidavit until

immediately before the hearing. Ms. Jacober said the Department would not stipulate to the facts set

out in the affidavit or agree to its admission.

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DISCUSSION

The sole issue presented is whether the Taxpayer is liable for the interest assessed by the

Department for the October 2001 reporting period. 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 Department’s assessment of interest is presumed to be correct and it is the

Taxpayer’s burden to come forward with evidence and legal argument to establish that interest is not

due.

The only evidence the Taxpayer tendered at the November 13, 2002 hearing was the sworn

affidavit of the Taxpayer’s office manager. The Department’s attorney objected to the admission of

the affidavit, stating that the Taxpayer had never asked the Department to stipulate to the facts in the

affidavit and had not provided the Department with a copy of the affidavit until immediately before

the hearing.

The Department’s objection to admission of the affidavit was sustained for two reasons. The

first reason was that admitting the office manager’s affidavit would deprive the Department of its

right to cross-examination. Section 7-1-24(G) NMSA 1978 states that administrative tax hearings

“shall be conducted so that both complaints and defenses are amply and fairly presented.”

Department Regulation 3.1.8.8 NMAC provides: “Every party shall have the right of due notice,

cross-examination, presentation of evidence, objection, motion, argument and all other rights

essential to a fair hearing....” See also, State ex rel. Battershell v. City of Albuquerque, 108 N.M.

658, 662, 777 P.2d 386, 390 (Ct. App. 1989):

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In conducting quasi judicial hearings an administrative body is not required
to observe the same evidentiary standards applied by a court, nevertheless
administrative adjudicatory proceedings involving substantial rights of an
applicant must adhere to fundamental principles of justice and procedural due
process.

Hearsay is generally admissible in an administrative hearing. Bransford v. State Taxation and

Revenue Department, 1998-NMCA-077 ¶ 18, 25 N.M. 285, 960 P.2d 827 (Ct.App. 1998). In this

case, however, where hearsay was the only evidence presented, the prejudice to the party deprived of

the right to cross-examination outweighed any probative value that evidence might have.

Which leads to the second reason for refusing admission of the Taxpayer’s affidavit. New

Mexico follows the legal residuum rule, which holds that an administrative decision based solely on

inadmissible hearsay cannot stand. Chavez v. City of Albuquerque, 1997-NMCA-111, ¶ 5, 124 N.M.

239, 947 P.2d 1059. As stated in Chavez, 1997 NMAC-111 ¶ 4:

Although an administrative agency may consider evidence that would not
be admissible under the rules of evidence, the legal residuum rule requires
that the agency's decision be supported by some evidence that would be
admissible under the rules. Otherwise the agency's decision is not
considered to be supported by substantial evidence.

See also, Young v. Board of Pharmacy, 81 N.M. 5, 9, 462 P.2d 139, 143 (1969) (hearsay evidence is

not competent to support a finding in an administrative agency hearing). Here, the only evidence

tendered by the Taxpayer was the sworn affidavit of its office manager, which is inadmissible

hearsay. This affidavit, standing alone, could not support a decision in the Taxpayer’s favor.

Admission of the affidavit would serve no evidentiary purpose in the absence of other, admissible

evidence that would meet the requirements of the legal residuum rule.

In any event, based on a review of the argument raised in the Taxpayer’s protest, there

appears to be no legal basis for granting the relief requested. The Taxpayer’s written protest was

filed on April 24, 2002. Section 7-1-24(A) NMSA 1978 provides that a taxpayer may supplement

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the statement of grounds supporting its protest “at any time prior to ten days before any hearing

conducted on the protest or, if a scheduling order has been issued, in accordance with the scheduling

order.” The Taxpayer in this case never filed a supplemental statement of grounds for its protest.

Accordingly, the only issue before the hearing officer is the issue set out in the Taxpayer’s April 24,

2002 protest, i.e., that the Department’s failure to resubmit the Taxpayer’s dishonored check relieved

the Taxpayer of any liability for accrued interest.

Even assuming the Taxpayer’s allegations concerning its bank’s wrongful dishonor and the

Department’s failure to resubmit the check are true, the argument raised in the Taxpayer’s protest is

answered by the following provisions of Section 7-1-13.4 NMSA 1978:

C. When an electronic payment transaction is reversed...or a check is
dishonored by the taxpayer’s financial institution, neither the department nor
the fiscal agent of New Mexico is obligated to resubmit the transaction or
check for payment. If the reversal or dishonoring causes the final payment of
taxes to be not timely, then the provisions of Section 7-1-67 and 7-1-69
NMSA 1978 apply.

Section 7-1-67 NMSA 1978 is the statute governing the imposition of interest and states, 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 make

timely payment of CRS taxes due for the October 2001 reporting period. Although this failure was

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not intentional, the fact remains that the $10,150.12 tax payment was still in the Taxpayer’s account

and was not available to the state during the period at issue. For this reason, interest was properly

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

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment No. 2768421, and

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

2. The Taxpayer failed to meet its burden of proving that the Department’s assessment of

interest for the October 2001 reporting period was incorrect.

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

DATED: November 14, 2002.

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