Did a later Department overpayment notice excuse JDAP's penalty for an unfiled August 2007 CRS return and unpaid gross receipts and withholding tax?

Plain-English summary

JDAP, Inc. remained liable for penalty after filing and paying its August 2007 CRS return nearly ten months late. A Department letter showing an apparent overpayment for a later reporting period did not excuse JDAP's failure to investigate an older check that it knew had never been deposited.

The August 2007 assessment included two taxes:

• Gross receipts tax: $8,449.87 principal, $1,521 penalty, and $578.14 interest.
• Withholding tax: $636.94 principal, $114.66 penalty, and $43.58 interest.

JDAP admitted that it did not timely file the CRS return or pay either tax. It eventually filed and paid on or about June 11, 2008.

JDAP knew the 2007 check had not cleared

By April 2008, JDAP knew that the check intended for the August 2007 gross receipts and withholding taxes had not been deposited by the Department.

It nevertheless took no steps to determine why the check had not cleared, whether the return had been received, or whether the older liability remained outstanding.

The decision held that the late filing and payment resulted from inadvertence, carelessness, erroneous belief, or inattention—the regulatory definitions of negligence. Promptly correcting the problem after later discovery did not remove the earlier failure.

A later overpayment letter did not verify the older period

On April 24, 2008, the Department sent a letter stating that JDAP had a $6,323.51 overpayment for the February 2008 reporting period.

JDAP interpreted the letter as evidence that the Department had reviewed its CRS account and that prior returns and payments were in order. The hearing officer found that interpretation understandable but unreasonable because JDAP already knew the 2007 check was still outstanding.

The apparent overpayment also resulted from a processing error. Once corrected, JDAP had no February 2008 overpayment.

Tax payments had to be assigned to the correct month

Even a real later overpayment would not automatically pay an earlier reporting period. The cited statutes required a refund or credit request, and the decision relied on Amoco Production for the rule that money deposited with the state was not enough by itself.

Each payment had to be identified to the reporting month in which the taxable transaction occurred. Section 7-1-29 authorized refunding an overpayment or crediting it against future liabilities, not silently reallocating it to past periods.

The 20% penalty cap applied on this timing

The August 2007 liability began accruing penalty under the former 10% maximum, but the decision's footnote states that the prior maximum had not been reached by January 1, 2008, when the cap increased to 20%.

The amended rule therefore supplied five additional months of penalty until the new maximum was reached. This timing differed from decisions where a pre-2008 liability had already exhausted the former cap before the amendment.

Result: protest DENIED. JDAP remained liable for the assessed penalty and interest.

What this means for you

Businesses paying CRS liabilities by check

Reconcile every tax check. If it does not clear, confirm both return receipt and payment posting immediately; mailing or preparing a check does not establish payment.

Taxpayers receiving an overpayment notice

Treat the notice as period-specific. Verify the reporting month and use the formal refund or credit process rather than assuming the amount cures an earlier liability.

Accountants reviewing penalty caps around 2008

Determine how much monthly penalty had accrued by January 1, 2008. This decision applied the new cap because the former 10% maximum had not yet been reached.

Common questions

Q: When did JDAP finally file and pay the August 2007 taxes?
A: On or about June 11, 2008.

Q: Why didn't the April 2008 overpayment letter excuse the delay?
A: JDAP already knew the older check had not been deposited, and the letter concerned a different reporting period.

Q: Was the February 2008 overpayment real?
A: No. It disappeared after the Department corrected a processing error.

Q: Could a later overpayment be moved to the older month automatically?
A: No. Payments had to be properly identified, and the cited law allowed refund or future credit rather than automatic past-period reallocation.

Q: Was the protest granted?
A: No. Penalty and interest were upheld.

Citations and references

Statutes and regulation:

• NMSA 1978, § 7-1-17 (2007) — presumption that an assessment is correct
• NMSA 1978, § 7-1-69(A)(1) (2007) — negligence penalty and amended 20% cap
• NMSA 1978, §§ 7-1-26 and 7-1-29 — refund and overpayment-credit procedures
• NMSA 1978, § 7-9-11 (1966) — due date for gross receipts and withholding tax
• Regulation 3.1.11.10 NMAC — definition of negligence

Cases cited:

• Amoco Production Co. v. New Mexico Taxation and Revenue Department, 118 N.M. 72, 878 P.2d 1021 (Ct. App. 1994)
• El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: JDAP, Inc.
• Decision PDF: D&O 09-06

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 No. 09-06
OF JDAP, Inc.
TO ASSESSMENT ISSUED UNDER
LETTER ID NO. L1281599872

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on July 14, 2009, before

Monica Ontiveros, Hearing Officer. The Taxation and Revenue Department (“Department”) was

represented by Cordelia Friedman, Special Assistant Attorney General. JDAP, Inc. was

represented by Roland Richter, President of JDAP, Inc. Based on the evidence and arguments

presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. JDAP, Inc. (“Taxpayer”) is a New Mexico corporation and was incorporated on

July 25, 2002.

2. Roland Richter is President of JDAP, Inc., and is hereinafter also referred to as

Taxpayer.

3. The Department assessed Taxpayer on June 16, 2008, in gross receipts tax in the

amount of $8,449.87 in principal, $1,521.00 in penalty and $578.14 in interest for a total of

$10,549.01 for tax period ending August 31, 2007.

4. The Department assessed Taxpayer on June 16, 2008, in withholding tax in the

amount of $636.94 in principal, $114.66 in penalty and $43.58 in interest for a total of $795.18 for

tax period ending August 31, 2007.

5. On December September 15, 2008, Taxpayer filed a written protest to the assessment

issued on June 16, 2008 in gross receipts and withholding taxes on the combined reporting system

return (“CRS”) for tax period ending August 31, 2007, which was accepted by the Department under a

retroactive extension of time granted pursuant to NMSA 1978, Section 7-1-24 (2003).

6. Taxpayer testified that he failed to timely file the CRS return and the payment for

tax period ending August 31, 2007.

7. Taxpayer filed the CRS return and paid the gross receipts and withholding taxes for

tax period ending August 31, 2007 on or about June 11, 2008.

8. In April 2008, Taxpayer was aware that the check for gross receipts and

withholding taxes, made payable to the Department, had not been deposited by the Department.

9. In his protest letter, Taxpayer protested the assessment of penalty and interest, but

at the hearing Taxpayer testified that he was only protesting the assessment of penalty. Audio

Recorder 5:50-5:58; 8:46-9:10.

10. Taxpayer received a letter from the Department dated April 24, 2008,

L1135413632, stating that there was an overpayment of taxes paid for tax period ending February

29, 2008. Taxpayer Exhibit 1.

11. There was an error in the processing of the CRS return and payment of tax for tax

period ending February 29, 2008, which led to the overpayment.

12. Once the error was corrected, Taxpayer did not have an overpayment of tax for tax

period ending February 29, 2008.

DISCUSSION

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

the late filing of his CRS return and failure to pay the withholding and gross receipts tax for tax

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period ending August 31, 2007. Taxpayer maintains that penalty should not be imposed because

the Department notified him that he had an overpayment for a later tax reporting period. Taxpayer

argues that the April 24, 2008 letter from the Department misled him into believing that his prior

returns were in order. Taxpayer also argues that the penalty should be abated because as soon as

he became aware that he had not paid his taxes, he filed the CRS return and paid the taxes

promptly.

Burden of Proof. NMSA 1978, Section 7-1-17 (2007) provides that any assessment of

taxes made by the Department is presumed to be correct. NMSA 1978, Section 7-1-3 (2009)

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, 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 assessment of principal tax, but

also to penalty and interest, and it is Taxpayer’s burden to present evidence and legal arguments to

justify an abatement.

The relationship between the presumed overpayment and the failure to timely file the

CRS return and timely make the payment.

Taxpayer argues that he interpreted the April 24, 2008 letter from the Department to mean

that the Department had completed a thorough review of his CRS returns, and determined that

Taxpayer’s gross receipts and withholding taxes were properly paid and were in order. Because of

this understanding, Taxpayer argues that he is not liable for the penalty. While it is

understandable that the April 24, 2008 letter could be interpreted to mean that Taxpayer had no

liabilities, only an overpayment; Taxpayer should not have interpreted the letter in this manner

since he was aware, as of April 2008 that the check for the 2007 tax period had not been

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deposited. Taxpayer took no steps to ascertain why the check had not been deposited or whether

he had a tax liability for the tax period ending August 31, 2007.

Civil Penalty. NMSA 1978, Section 7-1-69 (2007), governs the imposition of penalty. Sub-

sections A and A(1) of the statute imposes a penalty of two percent per month, up to a maximum of

twenty percent, if a taxpayer fails due to negligence or disregard of rules and regulations to pay taxes

in a timely manner. The Department’s regulation defining negligence for purposes of assessing

penalty is Regulation 3.1.11.10. NMAC. It states as follows:

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.

Whether a taxpayer has acted negligently for purposes of the penalty imposed by §7-1-69

(2007), is determined as of the date the taxes were due. At the time the gross receipts taxes were due,

Taxpayer believed, although erroneously, that he had mailed the CRS return and the accompanying

payment to the Department. Even thought Taxpayer eventually filed the CRS return and paid his

taxes, it was inadvertence, carelessness or erroneous belief or inattention that caused him not to do so

in a timely manner. This falls within the definition of negligence. 1

Overpayment.

In addition, the issue of applying overpayments to earlier tax liabilities is well settled in

law. As the Department stated in its April 24, 2008 letter, if the taxpayer wanted the overpayment

applied to a tax liability, the taxpayer was required to fill out the Application for Tax Refund.

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Effective January 1, 2008, paragraph (A)(1) of §7-1-69 (2007) was amended to state that the penalty amount shall
“not exceed twenty percent of the tax due but not paid.” Prior to the amendment, §7-1-69 (2003) stated that the
penalty amount shall “not exceed ten percent of the tax due but not paid.” Because the maximum amount of penalty
had not accrued as of January 1, 2008, the new provision applying an additional five months of penalty applies.
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Taxpayer did not fill out the Application for Tax Refund because he did not believe that he had an

overpayment of $6,323.51 for tax period ending February 29, 2008. Taxpayer believed that the

Department’s letter was sent to him in error. Indeed, after further research the Department

correctly applied the overpayment to the tax period ending February 29, 2008.

NMSA 1978, Sections 7-1-26 (2007) and 7-1-29 (2003) requires taxpayers to request a

refund of any overpayments made. Taxpayers are generally not permitted to correct reporting

errors in earlier months by adjusting the gross receipts or withholding tax reported on a later

month’s return. The New Mexico Court of Appeals addressed this issue in Amoco Production Co.

v. New Mexico Taxation & Revenue Department, 118 N.M. 72, 75, 878 P.2d 1021, 1024 (Ct. App.

1994). The Court stated that “a tax is not paid simply when monies are deposited with the State.”

Each tax payment must be properly identified to the month in which the taxable transaction

occurred. This is the only way the Department can determine whether tax on that transaction was

paid correctly and on time. The court noted that NMSA 1978, Section 7-1-29 (2003) only

authorizes the Department to either refund overpayments of tax, or to credit them against future

tax liabilities, not past tax liabilities. Amoco, 118 N.M. at 75, 878 P.2d at 1024. Accordingly, the

gross receipts and withholding tax liability resulting from the failure to file the CRS return and

pay the taxes is subject to the negligence penalty imposed by §7-1-69(A) (2007).

CONCLUSIONS OF LAW

A. JDAP, Inc. filed a timely written protest to the penalty and interest assessed under

Letter ID L1281599872, and jurisdiction lies over the parties and the subject matter of this protest.

B. JDAP, Inc. failed to timely pay the gross receipts and withholding tax due and

owing on the due date as set forth in NMSA 1978, Section 7-9-11 (1966), and it is liable for the

interest assessed by the Department.

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C. JDAP, Inc. was negligent in failing to timely file the CRS return and failed to timely

pay the gross receipts and withholding tax due and owing on the due date as set forth in NMSA

1978, Section 7-9-11 (1966), and it is liable for the penalty assessed by the Department.

For the foregoing reasons, JDAP, Inc.’s protest IS DENIED.

DATED: November 3, 2009

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