Could a Texas speech pathologist limit New Mexico penalty and interest to the month after assessment when she did not know her 1999 independent-contractor work for a New Mexico school district was taxable?

Plain-English summary

Linda Duran owed penalty and interest from the original 1999 gross receipts tax due dates, not merely from the Department's October 2002 assessment. Her Texas residency, lack of knowledge, prompt post-assessment payment, and financial hardship did not alter the statutory accrual rules.

Duran lived in Texas and worked as a speech pathologist in both Texas and New Mexico. In 1999, her prior employee relationship with an Anthony, New Mexico school district changed to independent-contractor status, allowing her to earn more.

She had registered her independent business in Texas but did not register in New Mexico, consult an accountant or the Department, or report New Mexico gross receipts tax. She simply assumed services for a public school district were not taxable.

Tax was due as the services occurred

Section 7-9-11 required gross receipts tax by the 25th day of the month after the taxable event. Section 7-1-13 likewise made taxpayers liable from the transaction giving rise to tax until payment.

The Department's later assessment did not create the liability or reset its due date. The 1999 tax had already become due under the monthly filing rule.

Interest ran from each original due date

Section 7-1-67 and Regulation 3.1.10.18 required interest from the day after payment was legally due until payment.

Duran argued that because she paid principal within a month of the October 2002 assessments, interest should cover only that month. The decision rejected that position: interest compensated the state for the entire period it lacked use of the unpaid 1999 revenue.

The two assessments stated $1,610.33 of interest.

The Department's audit delay was within the statute

Duran said she would have paid earlier if the Department had notified her sooner and objected that penalty had reached its ten-percent maximum before assessment.

New Mexico's self-reporting system placed the first duty to identify, report, and pay tax on the taxpayer. IRS information matches were delayed, and Section 7-1-18(C) allowed seven years to assess periods for which required returns were not filed.

The October 2002 assessments for 1999 were within that period.

Ignorance of the law supported negligence penalty

Section 7-1-69 imposed penalty for negligent failure to pay. Regulation 3.1.11.10 included inadvertence, erroneous belief, and lack of knowledge of tax law.

Duran had not researched the rule or sought advice. Her assumption that school-district service receipts were exempt therefore met the negligence standard.

The two assessments stated $354 of penalty.

Financial hardship did not authorize compromise

Duran asked the Department to consider that she was a single mother with limited resources. Regulation 3.1.6.14 prohibited compromise solely because a taxpayer could not pay, and the hearing officer lacked authority to create personal-hardship relief.

Result: the decision's conclusions upheld the penalty and interest. The assessments totaled $3,540 tax, $354 penalty, and $1,610.33 interest, or $5,504.33.

What this means for you

Nonresident contractors working in New Mexico

State residency does not eliminate New Mexico gross receipts tax on independent services performed in New Mexico.

Former employees moving to contractor status

Reevaluate registration, gross receipts tax, estimated payments, and recordkeeping when the relationship changes.

Contractors serving public schools or agencies

Do not assume government-related receipts are exempt. Identify an express exemption or deduction and its documentation requirements.

Taxpayers discovered through federal data matching

Interest and penalty can accrue from original due dates while an unfiled period remains undetected.

Common questions

Q: What services did Duran perform?
A: Speech-pathology services as an independent contractor in Texas and New Mexico.

Q: When did New Mexico gross receipts tax become due?
A: Under the monthly rule, after the taxable services occurred—not on the later assessment date.

Q: Did paying within a month of assessment limit interest?
A: No.

Q: Why was penalty upheld?
A: She assumed the receipts were exempt without researching the law or seeking advice, which the regulation treated as negligence.

Q: How much penalty and interest were assessed?
A: $354 of penalty and $1,610.33 of interest.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-1-3 and 7-1-17 — tax definition and assessment presumption
• NMSA 1978, § 7-1-67 — interest on tax from the original due date
• NMSA 1978, § 7-9-11 — monthly gross receipts tax due date
• NMSA 1978, § 7-1-13(A)-(B) — taxpayer liability and self-reporting duty
• NMSA 1978, § 7-1-18(C) — seven-year assessment period when required returns are not filed
• NMSA 1978, § 7-1-69 — negligence penalty
• Regulation 3.1.10.18 NMAC — interest begins after the legal payment date
• Regulation 3.1.11.10 NMAC — negligence includes erroneous belief and lack of legal knowledge
• Regulation 3.1.6.14 NMAC — no compromise based on inability to pay

Cases cited:

• El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989)
• Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976)
• State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977)
• Arco Materials, Inc. v. Taxation & Revenue Department, 118 N.M. 12, 878 P.2d 330 (Ct. App. 1994)
• Vivigen, Inc. v. Minzner, 117 N.M. 224, 870 P.2d 1382 (Ct. App. 1994)
• State ex rel. Taylor v. Johnson, 1998-NMSC-015, 961 P.2d 768

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Linda Duran
• Decision PDF: D&O 03-12

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
LINDA DURAN No. 03-12
ID NO. 02-498464-00 7
ASSESSMENT NOS. 3952406 and 3952407

DECISION AND ORDER

A formal hearing on the above-referenced protest was held July 2, 2003, before Margaret B.

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

Jeffrey W. Loubet, Special Assistant Attorney General. Linda Duran (“Taxpayer”) represented

herself. Based on the evidence and arguments presented, IT IS DECIDED AND ORDERED AS

FOLLOWS:

FINDINGS OF FACT

1. During the period January through December 1999, the Taxpayer was a resident of

Texas and worked as speech pathologist in both Texas and New Mexico.

2. Prior to 1999, the Taxpayer worked as an employee for a school district in Anthony,

New Mexico. In 1999, the Taxpayer’s status changed to that of independent contractor, which

allowed the Taxpayer to receive more money for her services than she could receive as an employee.

3. Although the Taxpayer had worked as an independent contractor in Texas for several

years and had registered her business in Texas, it did not occur to her that she should register her

business with New Mexico after she began working as an independent contractor in New Mexico.

4. The Taxpayer did not realize that she was required to pay New Mexico gross receipts

tax on her receipts from performing services as an independent contractor in New Mexico and did

not report or pay gross receipts tax on this income.

5. The Taxpayer did not consult with an accountant or with the Department concerning

her liability for taxes, but just assumed that receipts from services performed for a school district

would not be subject to tax.

6. As part of an information-sharing program with the Internal Revenue Service, the

Department was notified of the business income reported on Schedule C to the Taxpayer’s 1999

federal income tax return. When the Department investigated, it found the Taxpayer was not

registered with the Department and had not reported or paid gross receipts tax on this income.

7. On October 31, 2002, the Department mailed two assessments to the Taxpayer in the

following amounts:

Assessment Report Period Tax Penalty Interest

3952406 01/99-06/99 $1,770.00 $177.00 $871.57
3952407 07/99-12/99 $1,770.00 $177.00 $738.76

8. On November 21, 2002, the Taxpayer filed a written protest to the assessments.

DISCUSSION

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

on her late payment of gross receipts taxes for the period January through December 1999. The

Taxpayer maintains that penalty and interest should be abated or reduced for the following reasons:

(1) she paid the tax principal within one month of the date she received the Department’s

assessment, and her liability for penalty and interest should be limited to that one-month period; (2)

the Department was at fault for waiting almost three years to notify her of her liability; (3) she was a

Texas resident in 1999 and did not know that receipts from performing services as an independent

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contractor for a New Mexico public school district was subject to gross receipts tax; and (4) she is a

single mother and payment of the assessment will be a financial hardship.

Burden of Proof. NMSA 1978, § 7-1-17 provides that any assessment of tax by the

Department is presumed to be correct. NMSA 1978, § 7-1-3 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 penalty and interest is presumed to be correct, and it is the Taxpayer’s burden to

present evidence showing she is entitled to an abatement.

Accrual of Interest and Penalty. NMSA 1978, § 7-1-67 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....

The Taxpayer argues that gross receipts tax on her 1999 receipts did not “become due” until October

31, 2002, the date the Department issued its assessment. This is clearly incorrect. Department

Regulation 3.1.10.18 NMAC under NMSA 1978, § 7-1-67 states that “interest on the unpaid portion

of a tax indebtedness shall begin to accrue on the day following the date on which payment of the tax

is required by law.” NMSA 1978, § 7-9-11 requires taxes imposed by the Gross Receipts and

Compensating Tax Act “to be paid on or before the twenty-fifth day of the month following the

month in which the taxable event occurs.” See also, NMSA 1978, § 7-1-13(A) (“Taxpayers are liable

for tax at the time of and after the transaction or incident giving rise to tax until payment is made”).

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The assessment of interest is not designed to punish taxpayers, but to compensate the state

for the time value of unpaid revenues. Here, the state was entitled to receive payment of the

Taxpayer’s gross receipts taxes on the statutory due date. By failing to make timely payment of

those taxes, the Taxpayer retained the use of money that legally belonged to the state. For this

reason, interest was properly assessed from the original due date of the tax until the date it was paid.

The same rationale applies to the assessment of penalty. NMSA 1978, § 7-1-69(A) imposes penalty

“in the case of failure due to negligence or disregard of rules and regulations...to pay when due the

amount of tax required to be paid....” As set out in NMSA 1978, § 7-9-11, quoted above, gross

receipts tax is required to be paid on or before the twenty-fifth day of the month following the month in

which the taxable event occurs, and this is the date from which penalty begins to accrue.

Delay in Assessment. The Taxpayer questions why the Department took so long to notify

her of her gross receipts tax liability. By the time she received the Department’s assessment in

October 2002, the penalty had reached its statutory maximum of 10 percent and substantial interest

had accrued. The Taxpayer testified that she would have paid the gross receipts tax if she had been

alerted sooner, and believes the Department is at fault for the accrual of additional penalty and

interest.

This argument is based on a misunderstanding of New Mexico’s self-reporting tax system. It is

the obligation of taxpayers, who have the most accurate and direct knowledge of their activities, to

determine their tax liabilities and accurately report those liabilities to the state. See, NMSA 1978, § 7-

1-13(B); Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 17, 558 P.2d 1155, 1156 (Ct.

App. 1976), cert. denied, 90 N.M. 255, 561 P.2d 1348 (1977). There are insufficient government

resources available for the Department to continually audit every citizen to determine whether he or she

has fully complied with state tax laws. Although the Department performs periodic "tape matches"

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that compare information reported to the IRS with information reported to New Mexico, there is

some delay before the federal tape match information is made available to the Department. Section

7-1-18(C) NMSA 1978 gives the Department seven years to assess taxes relating to any period for

which required returns were not filed. The October 2002 assessment issued to the Taxpayer was

well within the time limits provided by the New Mexico Legislature.

Lack of Knowledge of New Mexico Law. The Taxpayer testified that she was a Texas

resident in 1999 and did not realize that she was subject to New Mexico gross receipts tax on her

receipts from performing services as an independent contractor in New Mexico. The Taxpayer also

admitted that she did not consult with an accountant or with the Department concerning her liability

for taxes, but just assumed that receipts from services performed for a school district would not be

subject to tax.

Lack of knowledge of the state’s tax laws is not a defense to the assessment of interest or

penalty. NMSA 1978, § 7-1-67 states that when any tax is not paid on or before the day on which it

becomes due, “interest shall be paid to the state.” 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.

New Mexico law also holds that penalties are properly imposed in cases where the taxpayer’s

failure to pay tax is based on negligence, which is defined to include inadvertent error, erroneous

belief, or a lack of knowledge of the law. See, Regulation 3.1.11.10 NMAC; 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) (penalties may be assessed based on the taxpayer’s inadvertent error or unintentional failure

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to pay the tax due.); Vivigen, Inc. v. Minzner, 117 N.M. 224, 231-232, 870 P.2d 1382, 1389-1390

(Ct. App. 1994) (penalty was properly imposed when taxpayer’s failure to pay the tax resulted from

CFO’s lack of knowledge of state tax law). In this case, the Taxpayer testified that her failure to pay

tax was attributable to her lack of knowledge of New Mexico’s tax laws and her erroneous belief that

receipts from services performed for public school districts was not subject to tax. This constitutes

negligence for purposes of NMSA 1978, § 7-1-69.

Financial Hardship. Finally, the Taxpayer asks the Department to consider the fact that she

is a single mother and has limited financial resources to pay the assessment. These factors are not

something the Department can consider. Regulation 3.1.6.14 NMAC specifically states that the

Secretary “may not compromise a taxpayer’s liability because of the taxpayer’s inability to pay.” Nor

does the Hearing Officer have authority to relieve a taxpayer of his or her statutory liability for tax,

penalty or interest. 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....

The Legislature has not granted the Department or its Hearing Officer the authority to abate or adjust

tax assessments based on the personal situations of individual taxpayers.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment Nos. 3952406 and 3952407,

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

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2. The Taxpayer’s payment of gross receipts taxes for the period January through

December 1999 was late, and interest was properly assessed from the original due date of the tax to the

date payment was made.

3. The Taxpayer’s lack of knowledge of New Mexico’s tax laws comes within the

definition of negligence in NMSA 1978, § 7-1-69, and penalty was properly assessed on the Taxpayer’s

late payment of gross receipts taxes from the original due date of the tax to the date payment was made.

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