Was Tom Growney Equipment liable for negligence penalty after its manager selected ACH instead of electronic check, failed to initiate the transfer, and did not verify two large online CRS payments?

Plain-English summary

Tom Growney Equipment remained liable for negligence penalty after two attempted online CRS payments failed because its general manager selected ACH, did not initiate the transfers, and never verified success. The Department's instructions clearly distinguished ACH from an electronic check and warned that timely receipt remained the taxpayer's responsibility.

The company's average monthly gross receipts, compensating, and withholding tax payment exceeded $25,000, so Section 7-1-13.1 required a special payment method. Before February 2002, the company used ACH by calling National Data each month to initiate the transfer.

After successfully paying Texas tax online, the general manager tried New Mexico's CRS website. The February New Mexico liability exceeded $50,000.

ACH and electronic check used different initiation rules

The website said an electronic check authorized the Department to debit the taxpayer's account. An ACH transfer, by contrast, required the taxpayer to make special arrangements and initiate the payment.

The manager intended to use electronic check but clicked ACH. He assumed the Department would initiate the debit because that was how the Texas system worked, even though he had always personally initiated New Mexico ACH transfers through National Data.

The manager did not read or verify

The manager did not read the New Mexico instructions, review the referenced success screen, or check with accounting to confirm that the first online payment went through.

The March 2002 bank statement showed no February tax debit, but accounting did not alert him. On April 18, he selected ACH again for the March payment and again failed to verify it.

Only after the Department issued assessments did the manager call National Data on May 10 and initiate payment of the February and March tax principal.

The failures met the negligence standard

Section 7-1-69 imposed penalty when negligence caused late payment. Regulation 3.1.11.10 defined negligence to include lack of ordinary business care, inaction, inadvertence, carelessness, erroneous belief, and inattention.

The manager was new to New Mexico online payment and uncomfortable with computer technology. Those circumstances called for greater attention to the instructions and verification, especially for a payment over $50,000.

The instructions also provided ways to confirm submission and a telephone number for questions. Assuming the systems were identical without checking was not ordinary care.

Reporting history could not authorize waiver

At the hearing, the company no longer disputed statutory interest and challenged only penalty. It asked for leniency based on an exemplary reporting history and the substantial CRS taxes paid over the years.

The Legislature required penalty when negligent conduct caused late payment and did not give the Department or hearing officer authority to waive it based on prior compliance.

Result: protest DENIED. Penalties on the late February and March 2002 CRS payments remained due.

What this means for you

Businesses switching electronic payment methods

Confirm who initiates the debit. ACH, electronic check, wire transfer, and portal payment may use materially different workflows.

Large taxpayers making first-time online payments

Read the instructions, save the transaction number, capture the success screen, and independently confirm the bank debit before the deadline.

Accounting teams monitoring tax accounts

Reconcile expected tax debits promptly and escalate missing transactions. The first failed payment should have prevented repetition the next month.

Taxpayers with strong prior compliance

Past history did not eliminate penalty when the current late payment resulted from negligence.

Common questions

Q: Which option did the manager mean to select?
A: Electronic check.

Q: Which option did he select?
A: ACH transfer.

Q: Who had to initiate the ACH transfer?
A: Tom Growney Equipment, through the payment service it had used in prior months.

Q: Did the company verify the online submission or bank debit?
A: No, for either the February or March payment.

Q: Was interest still disputed at the hearing?
A: No. The company limited the remaining dispute to negligence penalty.

Citations and references

Statutes and regulation:

• NMSA 1978, § 7-1-13.1 — special payment methods for taxpayers whose average monthly payment exceeds the statutory threshold
• NMSA 1978, §§ 7-1-3 and 7-1-17 — tax definition and assessment presumption
• NMSA 1978, § 7-1-69 — negligence penalty
• Regulation 3.1.11.10 NMAC — taxpayer negligence definition

Cases cited:

• El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989)
• Arco Materials, Inc. v. Taxation & Revenue Department, 118 N.M. 12, 878 P.2d 330 (Ct. App. 1994)
• State ex rel. Taylor v. Johnson, 1998-NMSC-015, 961 P.2d 768

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Tom Growney Equipment, Inc.
• Decision PDF: D&O 03-05

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
TOM GROWNEY EQUIPMENT, INC. No. 03-05
ID NOS. 01-136687-00 7 and 01-723611-00-8
ASSESSMENT NOS. 2775926, 2776653,
3866896 and 3861992

DECISION AND ORDER

A formal hearing on the above-referenced protest was held May 8, 2003, before Margaret B.

Alcock, Hearing Officer. The Taxation and Revenue Department ("Department") was represented by

Bruce J. Fort, Special Assistant Attorney General. Tom Growney Equipment, Inc. (“Taxpayer”) was

represented by Bruce Higgins, its general manager. Based on the evidence and arguments presented,

IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer is engaged in business in New Mexico and is registered with the

Department for payment of gross receipts, compensating, and withholding taxes, which are required

to be paid monthly under the Department’s combined reporting system (“CRS”).

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

and withholding taxes exceeds $25,000, the Taxpayer is required to pay these taxes using one of the

special payment methods set out in Section 7-1-13.1 NMSA 1978.

3. Prior to the February 2002 reporting period, the Taxpayer elected to make its

monthly CRS tax payment by means of an automated clearing house (“ACH”) transfer.

4. ACH transfers must be initiated by the Taxpayer. Each month, the Taxpayer’s

general manager called National Data, a company providing ACH electronic debit services, with
instructions concerning the amount and date on which the ACH payment should be made to the

Department.

5. The Taxpayer also maintains a business location in Texas, and in January 2002, the

Taxpayer began paying taxes it owed to Texas electronically over the internet.

6. Texas provided the Taxpayer with a booklet that the Taxpayer’s general manager

studied and used to successfully complete electronic payment of taxes owed to Texas for the

December 2001 reporting period.

7. The Taxpayer’s accounting staff encouraged the general manager to start filing the

Taxpayer’s New Mexico CRS taxes electronically. One staff member went to the Department’s web

site and obtained the password needed to electronically report and pay CRS taxes due to New

Mexico.

8. On March 20, 2002, five days before the statutory due date, the Taxpayer’s general

manager accessed the Department’s web site in order to electronically report and pay CRS taxes due

for the February 2002 reporting period.

9. The Department’s web site includes instructions on making electronic payments over

the internet. Under the heading “How are payments made?” the instructions state:

You may also pay by electronic check whereby you authorize the State of
New Mexico Taxation and Revenue Department to debit your checking
account in the amount you specify.

The Automatic Clearing House Deposit and Federal Wire Transfer payment
methods are only for taxpayers who make special arrangements with their
bank to have funds transferred electronically to the Taxation and Revenue
Department on a specified date. You must initiate this Payment.
(Emphasis in the original.)

The instructions also contain the following warning:

Please note that CRS-NET transactions are subject to unavoidable internet
connection failure. As with paper returns, it is the taxpayer’s responsibility to

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ensure that reports and payments are received in a timely fashion. Always
retain your transaction number. If you are unsure or wish to verify the
successful submission of your return, use the View Summary Button from the
Success Screen or the Review Prior Report Option from the Password Entry
Screen.

10. Although the Taxpayer’s general manager intended to pay the Taxpayer’s February

2002 taxes by electronic check, he clicked on the box for ACH payments.

11. The general manager did not read the Department’s instructions and did not

understand that in order to make an ACH payment, he would have to initiate the payment with

National Data in the same way he had in each previous month. Instead, the general manager

assumed the Department would initiate the ACH transaction because this was the way it was done in

Texas.

12. The general manager did not check the “Success Screen” referenced in the

Department’s instructions, even though the Taxpayer’s liability exceeded $50,000 and this was the

first time the general manager had attempted to pay New Mexico taxes using the internet.

13. The general manager did not check with the Taxpayer’s accounting department to

insure that the electronic payment had gone through successfully.

14. The Taxpayer’s March 2002 bank statement indicated that the February tax payment

had not been debited from the Taxpayer’s account, but no one on the Taxpayer’s accounting staff

alerted the general manager to this fact.

15. On April 18, 2002, the general manager attempted to pay the Taxpayer’s March 2002

CRS taxes online. Again, the general manager erroneously clicked “ACH” as the method of

payment and again, failed to verify the payment on the Success Screen or check with the Taxpayer’s

accounting department to insure that the payment went through.

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16. On April 26 and April 30, 2002, the Department issued Assessment Nos. 2775926

and 2776653 to the Taxpayer for CRS taxes, penalty and interest reported but not paid for the

February 2002 reporting period.

17. On May 10, 2002, the Taxpayer’s general manager called National Data and initiated

an ACH transfer of the tax principal due for the February and March 2002 reporting periods. The

same day, the Taxpayer filed a written protest to the penalty and interest assessed for February 2002.

18. On June 10, 2002, the Department issued Assessment Nos. 3866896 and 3861992 to

the Taxpayer for penalty and interest due on the late payment of CRS taxes due for the March 2002

reporting period.

19. On June 20, 2002, the Taxpayer filed a written protest to the assessment of penalty

and interest for the March 2002 reporting period.

20. At the May 8, 2003 hearing on the Taxpayer’s protest, the Taxpayer’s general

manager stated that the Taxpayer was no longer disputing its liability for the interest assessed by the

Department and that the only matter remaining to be decided was the assessment of penalty.

DISCUSSION

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

late payment of CRS taxes for the February and March 2002 reporting periods. 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

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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:

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 penalty is properly 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’s late payment of CRS taxes was attributable to negligence. First,

the Taxpayer’s general manager failed to read the Department’s instructions concerning electronic

payments. Instead, the general manager simply assumed that the New Mexico system for electronic

payments was the same as that used by Texas. Given the general manager’s acknowledgment that he

is not entirely comfortable with today’s computer technology, and the fact that he had never tried

using New Mexico’s electronic payment system prior to March 2002, his failure to carefully read the

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instructions or to verify the success of the transaction by accessing the “Success Screen” referenced

in the Department’s instructions was negligent.

At the administrative hearing, the general manager argued that the Department’s instructions

concerning electronic payments are not clear and would not have helped him in any event. This

argument is refuted by the instructions themselves, which clearly state that while payment by

electronic check authorizes the Department to initiate the transaction, payment by ACH transfer

must be initiated by the Taxpayer. At a minimum, this should have put the general manager on

notice that there is a distinction between electronic checks and ACH transfers and caused him to

clarify that distinction by calling the telephone number provided in the Department’s instructions.

The general manager’s argument concerning the Department’s instructions also fails to

address the additional indications of negligence in this case, i.e., the general manager’s failure to

check with his accounting department to insure the electronic payment went through (which would

have alerted him to the problem prior to the due date for the February reporting period) and the

accounting staff’s failure to notify the general manager that the February tax payment never cleared

the Taxpayer’s bank account (which would have alerted him to the problem prior to his April 18,

2003 attempt to pay taxes due for the March reporting period). Again, the fact that March 2002 was

the first time the Taxpayer had attempted to make payment over the internet should have led the

general manager to proceed with more care, particularly in light of the explicit warning in the

Department’s instructions that “it is the taxpayer’s responsibility to ensure that reports and payments

are received in a timely fashion.”

Finally, the Taxpayer asks the hearing officer to waive or reduce the penalty based on the

Taxpayer’s exemplary reporting history and the substantial amount of CRS taxes it has paid to the

state over the years. These are not factors the hearing officer can consider. In State ex rel. Taylor v.

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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

officer authority to waive the penalty based on a taxpayer’s past reporting history. Because the

Taxpayer’s late payment of its February and March 2002 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 Assessment Nos. 2775926, 2776653,

3866896 and 3861992, and jurisdiction lies over the parties and the subject matter of this protest.

2. The Taxpayer’s failure to timely pay its February and March 2002 CRS taxes was due

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

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

DATED May 13, 2003.

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