Were receipts from caring for two to four children in a residential apartment subject to New Mexico gross receipts tax when a Department employee had orally said the home day care was not taxable?

Plain-English summary

Sharon Hamby's home child-care receipts were subject to New Mexico gross receipts tax, but the Department had to abate the ten-percent negligence penalty. Caring for children for income qualified as engaging in business even though she had no employees, worked in a rented apartment, and did not need a City of Albuquerque business license.

Hamby began caring for children in her home in 1989. After registering for CRS taxes, she received a filer kit and called the Department because she found the instructions confusing. An unidentified employee asked about her activities, told her that she was not subject to gross receipts tax, and canceled her CRS number.

Hamby also asked H&R Block about the receipts when filing income-tax returns and was told they were not subject to gross receipts tax. She therefore paid no gross receipts tax until an IRS information match led the Department to assess periods from January 1997 through December 2001.

Small-scale home care was still engaging in business

Section 7-9-4 imposed gross receipts tax on persons engaging in business in New Mexico. Section 7-9-3(E) broadly defined engaging in business as carrying on any activity for direct or indirect benefit.

Hamby cared for children to earn income for her family. The statute did not distinguish a small sole proprietor from a large company and did not require employees or a separate commercial location.

The City's decision not to require a municipal license did not control state tax treatment because licensing and tax laws served different purposes.

Child-care service receipts were taxable

Section 7-9-3(F) included money received from performing services in New Mexico in gross receipts, and Section 7-9-5 presumed business receipts taxable.

Regulation 3.2.1.18(P) stated that day-care receipts were receipts from performing services and were subject to gross receipts tax. Its examples did not create an exclusive list or exempt care for a small number of children in a home.

Hamby identified no statute, deduction, or exemption removing her receipts from the general rule.

Oral advice did not estop tax collection

Section 7-1-60 allowed statutory estoppel when a taxpayer acted according to a regulation or a revenue ruling addressed to that taxpayer. Hamby had no taxpayer-specific written ruling, and the regulation she cited did not exempt her services.

Equitable estoppel against the state required exceptional circumstances and reasonable reliance. The hearing officer accepted that the Department employee gave erroneous advice, but the employee was unidentified and there was no way to reconstruct the facts or questions presented in the call.

There was also no evidence that the employee knowingly concealed the law or intended Hamby to avoid tax. Under New Mexico's self-reporting system, oral advice could not substitute for reviewing the governing statutes and regulations.

The misleading advice defeated negligence penalty

Although the oral advice did not eliminate tax or interest, Regulation 3.1.11.11 recognized affirmative misinformation by a Department employee and reasonable reliance on competent tax advice as circumstances indicating nonnegligence.

The decision found enough evidence of both circumstances to abate the penalty. Across the ten assessments, the stated penalties totaled $275.67.

Result: protest GRANTED IN PART and DENIED IN PART. Hamby remained liable for the assessed $2,756.71 of gross receipts tax and $1,530.18 of interest, while the ten-percent negligence penalties were abated.

What this means for you

Home-based child-care providers

Operating from a residence, serving only a few children, or lacking a city license does not by itself remove state gross receipts tax.

Small sole proprietors

New Mexico's definition of engaging in business is broad. Check for an express exemption or deduction rather than assuming small scale makes receipts nontaxable.

Taxpayers receiving oral agency advice

Ask for a written ruling or identify the regulation being applied. Oral advice may help with penalty but may not prevent collection of tax and interest.

Businesses seeking penalty relief

Preserve evidence of the advice received, the facts disclosed, and any professional guidance. Good-faith reliance can matter even when the underlying tax remains due.

Common questions

Q: Was Hamby's home day care considered a business?
A: Yes. She performed child-care services for income, which met the broad statutory definition.

Q: Did she need employees or a commercial office to owe tax?
A: No.

Q: Did the Department employee's advice eliminate the tax?
A: No. It was oral advice from an unidentified employee, not a regulation or written taxpayer-specific ruling.

Q: Why was the penalty removed?
A: The evidence showed she had been affirmatively misled and had also sought tax-preparer advice, supporting nonnegligence.

Q: What remained due?
A: The assessed tax principal and interest; only the ten-percent negligence penalty was abated.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-9-4 — tax on persons engaging in business in New Mexico
• NMSA 1978, § 7-9-3(E)-(F) — engaging in business and gross receipts definitions
• NMSA 1978, § 7-9-5 — presumption that business receipts are taxable
• NMSA 1978, § 7-1-60 — statutory estoppel based on regulations or taxpayer-specific revenue rulings
• NMSA 1978, § 7-1-13 — taxpayer responsibility in the self-reporting system
• NMSA 1978, § 7-1-69 — negligence penalty
• Regulation 3.2.1.18(P) NMAC — day-care service receipts
• Regulation 3.1.11.11 NMAC — circumstances indicating nonnegligence

Cases cited:

• Rauscher, Pierce, Refsnes, Inc. v. Taxation & Revenue Department, 2002-NMSC-013, 132 N.M. 226, 46 P.3d 687
• Kerr-McGee Nuclear Corp. v. Property Tax Division, 95 N.M. 685, 625 P.2d 1202 (Ct. App. 1980)
• Taxation and Revenue Department v. Bien Mur Indian Market, 108 N.M. 228, 770 P.2d 873 (1989)
• Wisznia v. State of New Mexico, Human Services Department, 1998-NMSC-011, 125 N.M. 140, 958 P.2d 98
• Gonzales v. Public Employees Retirement Board, 114 N.M. 420, 839 P.2d 630 (Ct. App. 1992)
• Johnson & Johnson v. Taxation and Revenue Department, 123 N.M. 190, 936 P.2d 872 (Ct. App. 1997)
• Vivigen, Inc. v. Minzner, 117 N.M. 224, 870 P.2d 1382 (Ct. App. 1994)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: In Home Day Care for Children
• Decision PDF: D&O 03-17

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
IN HOME DAY CARE FOR CHILDREN No. 03-17
ID NO. 02-132493-00 0
ASSESSMENT NOS. 3936928 through 3936930,
3936932 through 3936934, 4066071 through 4066074

DECISION AND ORDER

A formal hearing on the above-referenced protest was held July 10, 2003, before Margaret

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

represented by Jeffrey W. Loubet, Special Assistant Attorney General. In Home Day Care for

Children was represented by its sole proprietor, Sharon Hamby (“Taxpayer”). Based on the

evidence and arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. In 1989, the Taxpayer began taking care of children in her home as a means of

making extra income.

2. The Taxpayer initially provided child care to one child and then expanded to two

or three children.

3. The Taxpayer was not required to be licensed by the City of Albuquerque.

4. When the Taxpayer applied to a federal food program to obtain reimbursement for

the cost of food for the children, she was told that she needed to register her business with the

Taxation and Revenue Department.

5. The Taxpayer went to the Department’s Albuquerque district office and registered

her business for payment of gross receipts, compensating, and withholding taxes, which are

reported under the Department’s combined reporting system (“CRS”).

6. In September 1989, the Taxpayer received a CRS Filer’s Kit in the mail which

contained tax forms and instructions concerning payment of the gross receipts tax.

7. The Taxpayer was confused by the information in the Filer’s Kit and called the

Albuquerque district office to find out whether she needed to file CRS returns.

8. The Department employee who took the call asked the Taxpayer a series of

questions concerning her child care activities and then told the Taxpayer that she was not subject

to gross receipts tax.

9. As a result of the call, the Taxpayer’s CRS number was cancelled and she did not

receive any further CRS Filer’s Kits, nor did she pay any gross receipts tax on her receipts from

providing child care services.

10. When the Taxpayer filed her income tax returns, her child care receipts were

reported as business income on Schedule C to her federal return. The Taxpayer asked H&R

Block whether these receipts were subject to gross receipts tax and was told that they were not.

11. In 2002, the Department received information from the Internal Revenue Service

concerning business income reported on Schedule C to the Taxpayer’s federal income tax returns.

When the Department investigated, it found that the Taxpayer had not paid New Mexico gross

receipts tax on this income.

12. On September 18, 2002, the Department issued the following assessments to the

Taxpayer:

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Assessment Report Period Tax Penalty Interest

3936928 1/99-6/99 $175.92 $ 17.59 $ 83.74
3936929 7/99-12-99 $168.75 $ 16.88 $ 67.67
3936930 1/98-6/98 $340.11 $ 34.01 $212.65
3936932 7/98-12/98 $340.11 $ 34.01 $187.27
3936933 1/97-6/97 $437.60 $ 43.76 $399.46
3936934 7/97-12/97 $456.18 $ 45.62 $319.27

13. On November 21, 2002, pursuant to a retroactive extension of time granted by the

Department, the Taxpayer filed a written protest to the assessments.

14. On May 15, 2003, the Department issued the following assessments to the

Taxpayer:

Assessment Report Period Tax Penalty Interest

4066071 1/00-6/00 $205.53 $ 20.55 $ 87.22
4066072 7/00-12/00 $205.53 $ 20.55 $ 71.71
4066073 1/01-6/01 $213.49 $ 21.35 $ 58.65
4066074 6/01-12/01 $213.49 $ 21.35 $ 42.54

15. On May 17, 2003, the Taxpayer filed a written protest to the Department’s

assessments.

DISCUSSION

The issue to be decided is whether the Taxpayer is liable for gross receipts tax on her

receipts from taking care of children in her home during the period January 1997 through

December 2001. The Taxpayer raises the following arguments in support of her protest: (1) she

is not engaged in business; (2) her receipts are not taxable because the type of care she provided is

not covered by Department Regulation 3.2.1.18(P) NMAC; and (3) she should not be required to

pay tax on her receipts because a Department employee advised her that her receipts were not

subject to gross receipts tax.

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Engaging in Business. The Taxpayer argues that she cannot be treated as a business

because she had no employees and was not required to be licensed by the City of Albuquerque.

She also maintains that she had no business location because she worked out of a rented

residential apartment.

NMSA 1978, § 7-9-4 imposes an excise tax on the gross receipts of any person engaging

in business in New Mexico. The definition of “engaging in business” is quite broad and includes

“carrying on or causing to be carried on any activity with the purpose of direct or indirect

benefit.” (emphasis added). NMSA 1978, § 7-9-3(E). The statute makes no distinction between

activities engaged in by large corporations and activities engaged in by small “mom and pop”

operations or by individuals acting as independent contractors. A person may be engaging in

business for tax purposes even when that person has no employees or separate place of business.

In this case, the Taxpayer took care of children in her home in order to earn additional income to

support her family. Because child care comes within the broad classification of “any activity,”

her work meets the statutory definition of engaging in business. The Taxpayer’s licensing

argument fails to recognize that state tax laws and municipal licensing laws have different

objectives and operate independently. The fact that the City of Albuquerque did not license the

Taxpayer’s child care activities does not preclude those activities from being subject to the state

gross receipts tax.

Taxation of Receipts from Child Care. "'Gross receipts' means the total amount of

money or the value of other consideration received from selling property in New Mexico,...or

from performing services in New Mexico." NMSA 1978, § 7-9-3(F). In this case, the Taxpayer

had receipts from performing child care services in New Mexico. There is a presumption that all

persons engaging in business in New Mexico are subject to the gross receipts tax. NMSA 1978, §

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7-9-5. For this reason, “taxation is the rule and the claimant must show that his demand is within

the letter as well as the spirit of the law." Rauscher, Pierce, Refsnes, Inc. v. Taxation & Revenue

Department, 2002-NMSC-013, ¶ 11, 132 N.M. 226, 46 P.3d 687 (quoting Kewanee Industries,

Inc., v. Reese, 114 N.M. 784, 791, 845 P.2d 1238, 1245 (1993).

Here, the Taxpayer has not identified any statutory exemption or deduction that would

remove her receipts from the general rule of taxation. Her only basis for arguing that these

receipts are not taxable is the fact that her services do not come within the examples set out in

Department Regulation 3.2.1.18(P) NMAC under NMSA 1978, § 7-3-9. The regulation, which is

entitled “Day care centers”, states that “[r]eceipts from providing day care are receipts from

performing a service and are subject to gross receipts tax.” The regulation then sets out several

examples of day care activities that are subject to tax. The Taxpayer argues that she did not

operate a “day care center” and that the examples set out in the regulation do not cover her

specific circumstances. There is nothing in the regulation, however, to indicate that these are the

only circumstances in which a person caring for children is subject to tax. In the absence of a

specific provision stating that the type of services performed by the Taxpayer are not taxable, the

general rule of taxation set out in NMSA 1978, § 7-1-5 applies.

Estoppel. The Taxpayer argues that she should be excused from payment of gross

receipts tax because a Department employee told the Taxpayer during a 1989 telephone

conversation that her receipts were not subject to gross receipts tax. In effect, the Taxpayer is

raising the argument of estoppel, i.e., that the erroneous advice given by the Department's

employee estops the Department from enforcing collection of gross receipts tax, interest, and

penalty otherwise due to the state. As a general rule, courts are reluctant to apply the doctrine of

estoppel against the state. This general rule is given even greater weight in cases involving the

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assessment and collection of taxes. Kerr-McGee Nuclear Corp. v. Property Tax Division, 95 N.M.

685, 625 P.2d 1202 (Ct. App. 1980). In such cases, estoppel applies only pursuant to statute or

when “right and justice demand it.” Taxation and Revenue Department v. Bien Mur Indian Market,

108 N.M. 228, 231, 770 P.2d 873, 876 (1989).

Estoppel Based on Statute. NMSA 1978, § 7-1-60 provides for estoppel against the

Department in two circumstances: where the taxpayer acted according to a regulation or where the

taxpayer acted according to a revenue ruling addressed to the taxpayer. Here, the Taxpayer has not

identified any regulation that would exclude her receipts from tax, nor is there any evidence that she

obtained a written ruling concerning her tax liability. Although the Taxpayer relied on Department

Regulation 3.2.1.18(P) NMAC in making her legal arguments at the administrative hearing,

nothing in that regulation states that providing child care services for two to four children in a

residential apartment is exempt from gross receipts tax (see discussion in previous section). In

addition, the Taxpayer acknowledged that she only became aware of the regulation when she was

researching the tax statutes after her protest was filed. There is no evidence that the Taxpayer’s

decision not to pay gross receipts tax during the periods at issue was made in reliance on this or

any other regulation.

Estoppel Based “Right and Justice”. Equitable estoppel is rarely applied against the

state and then only in exceptional circumstances where there is "a shocking degree of aggravated

and overreaching conduct or where right and justice demand it." Wisznia v. State of New Mexico,

Human Services Department, 1998-NMSC-11, ¶17, 125 N.M. 140, 958 P.2d 98. In determining

whether estoppel is appropriate, the conduct of both parties must be considered. Gonzales v.

Public Employees Retirement Board, 114 N.M. 420, 427, 839 P.2d 630, 637 (Ct. App.), cert.

denied, 114 N.M. 227, 836 P.2d 1248 (1992). The following elements must be shown as to the

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party to be estopped (i.e., the Department): (1) conduct that amounts to a false representation or

concealment of material facts, (2) actual or constructive knowledge of the true facts, and (3) an

intention or expectation that the other party will act on the representations. As to the party

claiming estoppel (i.e., the Taxpayer), the following must be shown: (1) lack of knowledge of the

true facts, (2) detrimental reliance on the adverse party's representations or concealment of facts,

and (3) that such reliance was reasonable. Id. See also, Johnson & Johnson v. Taxation and

Revenue Department, 123 N.M. 190, 195, 936 N.M. 872, 877 (Ct. App.), cert. denied, 123 N.M.

167, 936 P.2d 337 (1997). The facts presented in this case do not support a finding of estoppel.

At the hearing, the Taxpayer testified that she called the Department’s Albuquerque office

in September 1989 after receiving a CRS Filer’s Kit. The Taxpayer was confused by the

information in the kit and called to ask whether she was required to file a return. The Department

employee who took the call asked the Taxpayer a series of questions concerning her child care

activities and then told the Taxpayer that she was not subject to gross receipts tax. As a result of

the call, the Taxpayer’s CRS number was cancelled and she did not receive any further CRS

Filer’s Kits. The Taxpayer does not know the name of the Department employee with whom she

spoke.

Although the evidence indicates that the Taxpayer received erroneous advice from the

Department, this alone is not sufficient to meet the requirements of estoppel. Estoppel based on

the oral advice of an unidentified employee is particularly problematic because there is no way to

confirm exactly what information the employee was given or what questions were asked. From the

arguments made in the Taxpayer’s protest letter and at the administrative hearing, it is clear that the

Taxpayer was confused as to the relationship between the laws governing the licensing of businesses

and the laws governing the payment of taxes. For example, the Taxpayer erroneously believed that

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because she was not licensed by the City of Albuquerque, she could not be engaging in business for

purposes of the state’s gross receipts tax. She also believed that the tax registration certificate she

received from the Department was issued pursuant to the provisions in NMSA 1978, § 3-38-1, et

seq., dealing with municipal licenses and taxes, and argued that the state tax certificate could not be

valid since she was never asked to pay the $35.00 fee required under NMSA 1978, § 3-38-3.

Given the Taxpayer’s confusion between municipal licensing laws and state tax laws, it is

difficult to know exactly what information the Taxpayer gave to or received from the Department

employee with whom she spoke in 1989. There is no question that all of the facts on which the

employee based her advice came from the Taxpayer. Although the Department employee may

have been mistaken in her understanding of the facts (or in her interpretation of the tax law

applicable to those facts), there is no evidence that the employee acted fraudulently or intended to

induce the Taxpayer not to pay taxes the employee knew were owed to the state. Turning to the

other side of the equation, the Taxpayer had access to the information needed to make her own

determination concerning the taxability of her receipts. New Mexico’s tax laws and regulations

are a matter of public record available to all of the state’s taxpayers. The law itself provides

notice to taxpayers as to which transactions are subject to tax. See, Vivigen, Inc. v. Minzner, 117

N.M. 224, 228, 870 P.2d 1382, 1386 (Ct. App. 1994).

New Mexico has a self-reporting tax system and taxpayers have a statutory obligation to

determine their tax liabilities and accurately report and pay those liabilities to the state. See, NMSA

1978, § 7-1-13. While the Department makes every effort to give correct advice to taxpayers who

contact the Department, the ultimate responsibility for payment of tax remains with the taxpayer. A

taxpayer is not entitled to rely on the oral advice of a Department employee as a substitute for

making his or her own independent review of the statutes and regulations. See, Taxation and

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Revenue Department v. Bien Mur Indian Market, 108 N.M. 228, 231, 770 P.2d 873, 876 (1989) (in

light of New Mexico’s statute providing for estoppel, taxpayer’s reliance on the oral representations

of a Department employee was not reasonable).

Penalty. Although the evidence does not support an abatement of the tax principal and

interest assessed to the Taxpayer, there is evidence to support an abatement of the negligence

penalty. Department Regulation 3.1.11.11 NMAC sets out several situations that may indicate a

taxpayer has not been negligent, including proof that the taxpayer was affirmatively misled by a

Department employee or that the failure to pay tax was caused by reasonable reliance on the

advice of competent tax counsel or accountant. In this case, there is sufficient evidence of these

two circumstances to justify an abatement of penalty.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment Nos. 3936928 through

3936930, 3936932 through 3936934, and 4066071 through 4066074, and jurisdiction lies over the

parties and the subject matter of this protest.

2. During the period January 1997 through December 2001, the Taxpayer was engaged

in the business of providing child care services, and her receipts from those services are subject to

the New Mexico gross receipts tax.

3. The Department is not estopped from enforcing its assessments of tax against the

Taxpayer.

4. The Taxpayer was not negligent in failing to pay gross receipts tax during the

assessment periods at issue and the penalty assessed pursuant to NMSA 1978, § 7-1-69 should be

abated.

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For the foregoing reasons, the Taxpayer's protest is denied in part and granted in part. The

Department is ordered to abate the ten-percent negligence penalty assessed against the Taxpayer.

The Taxpayer remains liable for the payment of the tax principal and interest assessed by the

Department.

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