Did interest stop while a taxpayer disputed an other-state tax credit that exceeded the tax she actually paid to Arizona?

Plain-English summary

Linda Lombardo owed interest throughout the period she disputed an other-state tax credit that exceeded the tax she had actually paid Arizona. Her accountant's worksheet errors and continued disagreement with the Department did not suspend mandatory interest on the unpaid New Mexico tax.

Lombardo moved from New Mexico to Arizona in October 2003. She filed a part-year Arizona return showing $1,953 of Arizona tax, then filed a New Mexico return claiming a $4,335 credit for tax paid to Arizona.

Her accountant entered Arizona gross income instead of taxable income in the credit worksheet and treated income reported on both states' returns as though it had actually been taxed by both states. He also treated Lombardo as a New Mexico part-year resident, while the returns showed she had been physically present in New Mexico for more than 185 days and was a full-year resident under the 2003 law.

The Department first assessed $4,005 of additional New Mexico tax, penalty, and interest. After reviewing the Arizona return, it allowed the $1,953 credit and reduced the New Mexico tax principal to $2,052, with $469.28 of penalty and $776.78 of interest then due.

The Department later abated the penalty. The remaining dispute concerned interest until Lombardo paid the tax on October 13, 2005.

The credit could not exceed Arizona tax actually paid

Section 7-2-13 allowed a credit in the amount of tax paid to another state on income allocated or apportioned to New Mexico. The Department's instructions repeatedly described the benefit as a credit for tax owed or paid to the other state.

The hearing officer found that the worksheet itself did not cause the excessive credit. The accountant used the wrong Arizona income figure, misread the line for income subject to tax in both states, and used the wrong New Mexico residency status.

The Department's December 2004 letter clearly stated that the maximum credit was the $1,953 shown on the Arizona return. The later delay resulted from the accountant's refusal to accept that position, not a failure by the Department to explain it.

A dispute did not stop interest

Section 7-1-67(A) required interest from the first day after tax became due until payment. The statute was mandatory, and even a formal extension would not eliminate interest from the original due date.

New Mexico's self-reporting system placed the duty to calculate and pay tax on Lombardo. She retained the use of the $2,052 that should have reached the state in April 2004 until she paid it in October 2005.

The right to contest a tax did not stay interest if the tax was ultimately found due. The Department's conduct provided no legal basis to pause accrual.

Result: protest DENIED. Interest ran from April 15, 2004, through October 13, 2005.

What this means for you

Taxpayers claiming an other-state credit

Start with the tax actually imposed and paid to the other state on income also taxed by New Mexico. A worksheet result did not support a credit greater than the Arizona liability here.

Preparers completing credit worksheets

Distinguish gross income from taxable income and income merely reported from income actually taxed by both states. Multiple input and interpretation errors produced the wrong credit in this case.

Taxpayers disputing an assessment

A protest does not necessarily stop interest. If the principal is ultimately due, statutory interest may continue until payment.

Taxpayers relying on professional help

The accountant's errors were attributed to Lombardo for purposes of the unpaid tax and interest. The state did not lose interest because a preparer made the calculation.

Common questions

Q: How much Arizona tax had Lombardo actually paid?
A: Her Arizona return showed $1,953 of tax.

Q: Why did she claim a $4,335 New Mexico credit?
A: Her accountant used Arizona gross rather than taxable income, misread income subject to tax in both states, and treated her as a part-year New Mexico resident.

Q: What New Mexico tax principal remained after the allowed credit?
A: The Department reduced the principal to $2,052.

Q: Did the Department keep the penalty?
A: No. It later abated the penalty, leaving interest as the only issue at the hearing.

Q: When did interest stop?
A: On October 13, 2005, when Lombardo paid the additional tax.

Citations and references

Statutes:

• NMSA 1978, § 7-1-13 — self-reporting obligation
• NMSA 1978, § 7-1-13(E) — interest despite an extension
• NMSA 1978, § 7-1-67(A) — mandatory interest on late-paid tax
• NMSA 1978, § 7-2-2(S) — 2003 resident definition based on physical presence
• NMSA 1978, § 7-2-13 — credit for tax paid to another state
• NMSA 1978, § 12-2A-4(A) — "shall" and "must" express a duty

Cases cited:

• State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977)
• Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Linda Lombardo
• Decision PDF: D&O 06-15

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 LOMBARDO TO THE INTEREST No. 06-15
ASSESSED UNDER LETTER ID L2123112960

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on September 12, 2006,

before Margaret B. Alcock, Hearing Officer. The Taxation and Revenue Department

(“Department”) was represented by Susanne Roubidoux, Special Assistant Attorney General.

Linda Lombardo (“Taxpayer”) was represented by John Provost, certified public accountant.

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

FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer was a resident of New Mexico at the beginning of the 2003 tax

year.

2. In October 2003, the Taxpayer changed her residence to the State of Arizona.

3. The Taxpayer filed a 2003 Arizona “Part-Year Resident Personal Income Tax

Return,” reporting Arizona adjusted gross income of $59,971 and Arizona taxable income of

$55,319, resulting in an Arizona tax liability of $1,953.

4. On October 15, 2004, the Taxpayer filed a 2003 New Mexico income tax return as

a part-year resident and claimed a credit for taxes paid to Arizona in the amount of $4,335.

5. The Department’s instructions to the 2003 PIT-ADJ Schedule to New Mexico’s

2003 personal income tax form PIT-1 advises taxpayers as follows:
A resident of New Mexico who must pay tax to another state on income that is
also taxable in New Mexico may take a credit against New Mexico tax for tax
owed to the other state.

This credit is for tax that another state imposes on any portion of income that by
law is included in New Mexico net income.... If the specific item of income is not
subject to taxation in both states, no credit is available. The credit may not be
more than the New Mexico tax liability on line 15 of the Form PIT-1, or more
than 5-1/2% of the income taxable in the other state. Attach a copy of the
complete income tax return(s) from the other state(s). See the worksheet on this
page.

6. The instructions also contain a “Worksheet for Computation of Allowable Credit

For Taxes Paid to Other States by New Mexico Residents.” Line 1 of the worksheet states:

“Enter amount of tax paid to the other state.” Line 2 states: “Enter taxable income on which the

tax on line 1 was figured.” Line 3 instructs taxpayers to divide Line 1 by Line 2 to obtain the

average effective tax rate on other state income. Line 4 directs taxpayers to enter the smaller of

Line 3 or 5½%, which is the maximum that can be claimed against New Mexico taxes.

7. When completing the worksheet, Mr. Provost incorrectly entered Arizona gross

income on Line 2 instead of Arizona taxable income. As a result of this error, the effective tax

rate entered on Lines 3 and 4 of the worksheet was also incorrect.

8. Line 5 of the worksheet states: “Enter that portion of income that is subject to tax

in both New Mexico and the other state.” Line 6 then instructs taxpayers to multiply Line 5 by

the effective tax rate calculated on Line 4.

9. Mr. Provost entered the figure of $132,972 on Line 5, which represented the

Taxpayer’s capital gain from the sale of her New Mexico residence, and applied the effective tax

rate he had calculated on Line 4, resulting in a claimed credit of $4,335.

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10. In completing Line 5 of the worksheet, Mr. Provost interpreted the phrase

“income that is subject to tax in both New Mexico and the other state” to mean the amount of

income reported on both states’ returns, rather than the amount of income actually taxed by both

states. As a result, the $4,335 credit the Taxpayer claimed exceeded the $1,953 of tax she

actually paid to Arizona.

11. Upon receipt of the Taxpayer’s return, the Department determined that she had

incorrectly filed as a part-year resident. Because the Taxpayer was physically present in New

Mexico for more than 185 days, she was a full-year resident under NMSA 1978, § 7-2-2(S) and

was required to report all of her income as New Mexico income on her 2003 return.1

12. The Department recomputed the Taxpayer’s New Mexico income tax and also

disallowed the credit claimed for taxes paid to Arizona because the Taxpayer failed to provide a

copy of her Arizona return as required by the Department’s instructions.

13. On October 27, 2004, the Department assessed the Taxpayer for additional New

Mexico income tax in the amount of $4,005, plus penalty and interest.

14. On November 22, 2004, Mr. Provost sent the Department a letter stating that the

Taxpayer “is in disagreement with your re-computation notice” and enclosing a copy of the

Taxpayer’s 2003 Arizona tax return.

15. On December 14, 2004, the Department sent a letter to Mr. Provost notifying him

as follows: “After reviewing the Arizona return, the maximum credit allowed is the amount of

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At the administrative hearing, John Provost claimed that he made a mistake in filling out the dates of the
Taxpayer’s New Mexico residency and that she was not present in the state for more than 185 days. Mr.
Provost’s unsupported assertions are not sufficient to overcome the evidence of residency set out on the 2003
New Mexico and Arizona income tax returns filed by the Taxpayer.

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$1,953.00 shown on the Arizona return. The tax liability for New Mexico was decreased to

$2,052.00 plus penalty of $469.28 and interest of $776.78 that is still due.”

16. The Taxpayer and her accountant disagreed with the Department’s position that

the credit allowed on Line 17 of the 2003 PIT-ADJ Schedule, which reads: “Credit for taxes

paid to another state,” was limited to the amount of tax actually paid to another state.

17. Between January and September 2005, Mr. Provost wrote, telephoned and met

with a number of Department employees in an attempt to convince them that the Taxpayer was

entitled to claim a tax credit of $4,335, even though the tax she owed—and paid—to Arizona

was only $1,953.

18. In September 2005, a Department employee provided Mr. Provost with a copy of

NMSA 1978, § 7-2-13 of the New Mexico Income Tax Act, which states that New Mexico

residents who owe tax to another state on income that is also included in New Mexico net

income are entitled to “a credit against the tax due this state in the amount of the tax paid the

other state with respect to income that is required to be either allocated or apportioned to New

Mexico.”

19. After reading the statute, Mr. Provost conceded that the credit was limited to the

$1,953 of tax paid to Arizona, and on October 13, 2005, the Taxpayer paid the amount of tax

principal assessed by the Department. The Taxpayer continued to dispute the assessment of

penalty and interest.

20. The Department subsequently abated the penalty, leaving the Taxpayer’s liability

for interest as the only issue in dispute.

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DISCUSSION

John Provost, the Taxpayer’s certified public accountant, concedes that the Taxpayer is

liable for payment of interest that accrued between April 2004 (the original due date of her 2003

personal income taxes) and December 2004 (the date the Department notified her that the credit

for taxes paid to Arizona was limited to the amount of taxes actually paid). Mr. Provost argues,

however, that the Department is responsible for the accrual of interest between January and

October 2005 and that the Taxpayer should not be required to pay this additional interest. As

grounds for his argument, Mr. Provost maintains that the computation worksheet set out in the

Department’s 2003 instructions led him to the wrong result and that for nine months he was

unable to obtain an explanation of the Department’s position concerning taxes paid to other

states. The evidence does not support Mr. Provost’s assertions.

Department Instructions. On December 14, 2004, the Department notified the Taxpayer

that: “After reviewing the Arizona return, the maximum credit allowed is the amount of

$1,953.00 shown on the Arizona return.” This clearly states the Department’s position that the

credit the Taxpayer could claim on Line 17 of New Mexico’s PIT-ADJ Schedule was limited to

the amount of tax she actually paid to Arizona.

Mr. Provost testified that he needed additional information from the Department because

the worksheet in the instructions indicated the Taxpayer could claim a credit in excess of the tax

paid to another state. The evidence shows, however, that the error was not in the worksheet itself

but in Mr. Provost’s completion of the worksheet. First, Mr. Provost incorrectly entered Arizona

gross income on Line 2 instead of Arizona taxable income. As a result, the effective tax rate

entered on Lines 3 and 4 of the worksheet was also incorrect. When completing Line 5 of the

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worksheet, Mr. Provost interpreted the phrase “income that is subject to tax in both New Mexico

and the other state” to mean the amount of income reported on both states’ returns, rather than

the amount of income actually taxed by both states. In addition, he treated the Taxpayer as a

part-year resident instead of a full-year resident, which affected the amount of income attributed

to New Mexico. Due to this combination of errors, Mr. Provost came up with a credit of $4,335

instead of the $1,953 of tax his client actually paid to Arizona.

Even assuming that the phrase “income that is subject to tax” on Line 5 of the worksheet

is ambiguous, the remaining text of the instructions to PIT-ADJ should have alerted Mr. Provost

to the fact that the credit cannot exceed the amount of tax paid. For example, the instructions

state that a New Mexico resident “who must pay tax to another state on income that is also

taxable in New Mexico may take a credit against New Mexico tax for tax owed to the other state”

and that “[t]his credit is for tax that another state imposes on any portion of income that by law

is included in New Mexico net income.” (emphasis added). The title of the worksheet itself

reads: “Worksheet for Computation of Allowable Credit for Taxes Paid to Other States by New

Mexico Residents.” (emphasis added). Finally, Line 17 of the PIT-ADJ Schedule identifies the

amount to be entered as a “Credit for taxes paid to another state.” (emphasis added). There is

simply no support for Mr. Provost’s contention that “no where in the published instructions ...

does it state the credit is limited to the actual taxes paid the other state.” (See, October 18, 2005

letter to the Department).

There was a ten-month delay between the date Mr. Provost received the Department’s

December 14, 2004 letter and the date the Taxpayer paid the additional tax due on her 2003 New

Mexico personal income taxes. This delay cannot be attributed to the Department’s failure to

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explain its position, but to Mr. Provost’s unwillingness to accept that position. Had Mr. Provost

taken the time to carefully re-read the Department’s instructions, or the section of the Income

Tax Act governing the credit for taxes paid to other states, he could easily have verified the

Department’s advice. NMSA 1978, § 7-2-13 clearly states that upon filing satisfactory evidence

of the payment of tax to another state, a taxpayer may “receive a credit against the tax due this

state in the amount of the tax paid the other state with respect to income that is required to be

either allocated or apportioned to New Mexico.” (emphasis added). Having been a certified

public accountant for over ten years, Mr. Provost should have been able to locate a copy of the

New Mexico Income Tax Act, which is readily available in any library as well as on the

Department’s web site.

Imposition of Interest. NMSA 1978, § 7-1-67 governs the imposition of interest on late

payments of tax and provides, in pertinent part:

A. If a tax imposed is not paid on or before the day on which it becomes
due, interest shall be paid to the state on that 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 provisions of the statute are mandatory

rather than discretionary. State v. Lujan, 90 N.M. 103, 105, 560 P.2d 167, 169 (1977). See also,

NMSA 1978, § 12-2A-4(A) of the Uniform Statute and Rule Construction Act (the words “shall”

and “must” express a duty, obligation, requirement or condition precedent). With limited

exceptions that do not apply here, the New Mexico legislature has directed the Department to

assess interest whenever taxes are not timely paid. Even taxpayers who obtain a formal extension

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of time to pay tax are liable for interest from the original due date of the tax to the date payment

is made. See, NMSA 1978, § 7-1-13(E).

The assessment of interest is intended to compensate the state for the time value of

unpaid revenues. In this case, the Taxpayer failed to properly report and pay her 2003 personal

income taxes. If those taxes had been computed correctly, the State of New Mexico would have

received an additional $2,052 in tax revenues in April 2004. As a result of her errors (or the

errors of her accountant) the Taxpayer—rather than the state—had the use of this money for the

period between the original due date and the date the taxes were paid in October 2005.

Finally, it must be recognized that New Mexico has a self-reporting tax system, and the

law places the duty on taxpayers to accurately determine and pay their taxes by the statutory due

date. NMSA 1978, § 7-1-13; See also, 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). While

a taxpayer has the right to dispute her liability for any tax, this does not stay the accrual of

interest in the event the tax is ultimately found to be due and owing to the state. NMSA 1978, §

7-1-67 clearly states that interest accrues “from the first day following the day on which the tax

becomes due...until it is paid.” In this case, interest on the Taxpayer’s late payment of 2003

personal income taxes is due for the period beginning on April 15, 2004, the original due date of the

tax, and ending on October 13, 2005, the date the additional tax was paid.

CONCLUSIONS OF LAW

A. The Taxpayer filed a timely, written protest to the assessment issued under Letter ID

L2123112960, and jurisdiction lies over the parties and the subject matter of this protest.

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B. Pursuant to NMSA 1978, § 7-1-67(A), the Taxpayer is liable for payment of the

interest that accrued from the first day following the day on which her 2003 personal income tax

became due in April 2004 until the date the underreported tax was paid in October 2005.

C. There is no legal basis for staying the accrual of interest against the Taxpayer based

on any action or inaction of the Department.

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

DATED September 14, 2006.

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